A Penny a Day Keeps the Activists Away

A Penny a Day Keeps the Activists Away

What if you could predict the future or, at least, forecast a retailer’s stock performance? Predicting the future might be far-fetched but recent research at The Navio Group indicates a strong relationship between a retailer’s investments – defined as Capital Expenditures, plus Research and Development – and its stock performance over a five-year period. The analysis shows that investments are correlated to a retailer’s long-term share performance.

On the flip slide, a clear underperformer in our analysis is the CPG segment where companies reduced investments to improve their bottom line and, as a result, experienced moderate or negative stock price performance. During this time, investors flocked to growth areas in retail – such as Amazon, Lululemon and, even, Target – because of low interest rates which rewarded players with strong comparable sales.

A Penny a Day Keeps the Activists Away 1
r-value of .84 shows a strong correlation between investment change and stock price change

Lululemon is a standout example that has capitalized on the rise of athleisure clothing, as well as the at-home workout trend during the pandemic via its $500M acquisition of Mirror. The acquisition resulted in an additional annual revenue of $45M while expanding Lululemon’s suite of products beyond apparel for its customers. During the five-year period, the company also invested in eco-friendly manufacturing and bolstered its supply chain, all of which have improved the brand’s market position to appeal to a broader base. As a result, the company’s stock price has performed over four times better than the S&P 500 in the same period.

While Lululemon is the poster child from our research, we believe investments will continue to be a leading indicator of long-term stock performance even as interest rates tick up in 2022. Investments drive growth through improved customer experiences – from remodeled stores to ecommerce improvements – and will continue to be critical in such a fast-changing environment. Conversely, underinvestment in the business leaves retailers vulnerable to competitors and, in the long run, to activist investors (see Bed, Bath & Beyond in 2019 and Macy’s today) through sales stagnation or declines. With the advent of the new year – and many new fiscal calendars starting on February 1 – it’s worth considering: What opportunities exist to improve our customer experience? And what could those investments look like to help drive growth? 

The Navio Group works with retailers that want to transform their business. Interested in discussing these or other insights? Shoot us a note at carlos@thenaviogroup.com

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