Two Stock Ideas in an Attractive Retail Sector for 2015

The U.S. economy is one of the lone bright spots in the increasingly muted global outlook.  In addition, the job market continues to improve which should start to stimulate wage growth.  The U.S. consumer has continued to increase spending since late 2009, and this trend could further accelerate.


There is uncertainty in many sectors in the stock market due to many stocks broader global exposure and other industry specific issues.  Many stocks in the specialty retailer sector lack exposure to broader global economic movements and are more U.S. centric.  The improving economy and relative safety they can provide puts the sector on the overweight list for 2015.

Two stocks within the space that can benefit from the macro trends and also continue to grow through expanding market share and innovation are Michael Kors (KORS) and Restoration Hardware (RH).

Michael Kors

The Michael Kors brand is one of the fastest growing accessible luxury brands in the North America.  It is well positioned, has an increasing market share, and can continue to expand in North America and internationally.  The stock pulled back in the second half of 2014, and its valuation versus historic levels and peers is attractive.

Same store sale growth at Michael Kors is industry leading.  The brand should benefit from both an improving economy and rising market share.  Piper Jaffray conducted a propriety survey prior to the holiday season of consumer’s wish lists.  Michael Kors was the top ranked fashion brand on the list.  The brand is emerging as the leading U.S. luxury brand and should continue to gain market share.  In addition, the survey from Piper also could indicate strong holiday sales numbers when KORS reports earnings.

The international market for Michael Kors has outperformed initial expectations from management and the Street.  This is an emerging driver for the stock.  Along these lines, the company could double the number of Michael Kors stores to 700 over the long-term.

Margins at the brand are also best-in-class.  It uses fewer promotions and maintains stickier pricing. Management continues to highlight its focus on margins and maintaining price integrity at all points in the economic cycle.   Margins should continue to lead the industry and could expand further behind increasing sales volumes.

Current analyst consensus forecast is for sales growth of 33.5% and 20% in FY15 and FY16 (March year end, respectively.  Current EPS is for earnings of $4.18 and $4.85, respectively, this year and in FY16.

Michael Kors trades at the bottom of historic range despite ongoing growth outlook


Analysts average target price is $92 for KORS or 19x FY16 EPS compared to its current price of $67.01.  The stock currently trades at 13.8x NTM P/E, at the bottom of its historic range noted in the preceding chart.   Its peer group average is 18.9x EPS, with competitors like Ralph Lauren trading at 18.5x earnings.

Restoration Hardware

Restoration Hardware is an established brand and that continues to increase its presence.  It is one of a few retails stores that continues to expand and achieve success.  Margins, earnings and cash flow continue to accelerate with some analysts expecting earnings to double over the few years.  The stock is at an attractive entry point for a retailer, where it has additional new store growth ahead while also having excellent same store sales growth.  Profitability tends to increase for retailers experiencing this type of growth.

Restoration Hardware has differentiated itself in the space.  The CEO stated in an interview on CNBC, “If you think about the retail stores that have been built over the last 30 to 50 years, most retail stores are archaic windowless boxes that don’t have any sense of humanity.  There are no windows, there’s no fresh air, there’s no natural light.  Plants die in a typical retail store.”  He went on to note that retail stores lack innovation and the innovation is happening online which is why it draws consumer interest.  That ignores the fact that 92% of retail purchases occur in store versus 8% online.  The ability to innovate in that model is attractive.

In addition, the store does have ties into housing since it sells furniture, home accessories, and hardware.  The slowly recovering US housing market could provide an additional boost to earnings (see following chart).

U.S. Housing Starts Continue to Rebound and Remain below Normalized Levels

Housing starts

RH was up over 40% in 2014, and it trades at 30.3x NTM EPS.  That said, the stock has pulled back to $90.80 from its high of ~98.50 in December 2014.  With an attractive growth profile, innovative approach of management, and forecasted EPS growth of 27% in FY16, it is attractive and worth watching.



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