Specialty retail is an investment area of interest to me because of their cash generation and ease of growth via the opening of new outlets in different geographic areas and/or countries. It’s almost a ‘cookie cutter’ way to greater revenue and profits, particularly if there is a degree of ‘moat’ as exists for companies like City Chic (CXX) or Lovisa (LOV).

 But when you look at ‘Beta’, it isn’t for the faint-hearted and in these times of higher interest rates and potentially falling discretionary income spend, one needs a decent set of tungsten cajones!

 Where a Beta of ‘1’ represents volatility akin to the overall market, my specialty retail list of some 19 companies has Beta ranging from 0.942 for Harvey Norman (HVN) to a massive 5.113 for Mosaic (MOZ) which has had its fair share of problems. The straight average is 2.355.

 Then again, there are anomalies that cannot be explained by Beta, if Beta is said to be an indicator of risk.

 Take a favourite of mine – Adairs (ADH) – which is quite volatile with a Beta of 3.824 – worst after MOZ. Is this deserving?

 Certainly not if you look at the underlying indicators of a healthy business.

 Good old ‘Hardly Normal’ (HVN) leads the pack of distinguished larger retailers with that Beta of 0.942, followed by JBH @ 1.058 and PMV with 1.271.

 HVN has had 3-year revenue CAGR of 11.37% - not bad – but ADH has had a 3yr CAGR of 16.66%. The all important 3-year EPS CAGR has them both squared away at 25% whilst ADH has a better ROE of 23.6% v HVN @ 20.7%.

 Hardly deserving of such a wide variation in the Beta and with ADH off 55% against its 52-week high and HVN off 37%.

 Yes, net debt comes into the equation and no doubt all retailers have been penalized by the market with the ludicrous accounting standard (AASB 16) of regarding the rented property as an ‘owned property’ with a HUGE nominal debt to go with it. On this basis ADH has a net gearing of 150.94% - that’s ‘pop a tablet under the tongue & sit down and relax till it passes’ stuff, but certainly not the worst for the retailers with NCK @ 223% and LOV @ 248%

 My experience in liquidations (admittedly back when Adam was booted out of the garden of Eden and claimed bankruptcy) is that even long leases can be passed on or surrendered with around a year to 18 months of rental as a penalty/incentive. So, I prefer to back out the rental/ownership bulldust and just look at net debt to equity and this brings ADH down to 50.8% - still high because of a recent large acquisition of Focus of Furniture, but very manageable.

 My conclusions here:

(1)  Beta isn’t necessarily a good indicator of risk or potential and within each industry segment there are likely to be anomalies like ADH.

(2)  ADH is a pretty-safe bet to buy under $2 and sell above $3.