Top Three Companies in Retail for Future Gains

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After Kohl’s showcased extreme weakness in its November sales report combined with continued weakness from Best Buy, some are starting to second guess the health of the retail space. However, like all industries, there are bright spots. In this article I am looking at what I believe are the best three companies in retail: stocks that should return large gains over the course of many years.

<table> <tbody> <tr> <td> <p><em>Company</em></p> </td> <td> <p><strong>Lululemon Athletica</strong></p> </td> <td> <p><strong>Five Below</strong></p> </td> <td> <p><strong>Michael Kors</strong></p> </td> </tr> <tr> <td> <p><em>Ticker</em></p> </td> <td> <p><strong><span class="ticker" data-id="216479">(NASDAQ: <a href="http://caps.fool.com/Ticker/LULU.aspx">LULU</a>)</span></strong></p> </td> <td> <p><strong><span class="ticker" data-id="273525">(NASDAQ: <a href="http://caps.fool.com/Ticker/FIVE.aspx">FIVE</a>)</span></strong></p> </td> <td> <p><strong><span class="ticker" data-id="270352">(NYSE: <a href="http://caps.fool.com/Ticker/KORS.aspx">KORS</a>)</span></strong></p> </td> </tr> <tr> <td> <p><em>Trailing P/E</em></p> </td> <td> <p>48.17</p> </td> <td> <p>N/A</p> </td> <td> <p>42.25</p> </td> </tr> <tr> <td> <p><em>Forward P/E</em></p> </td> <td> <p>32.04</p> </td> <td> <p>53.07</p> </td> <td> <p>26.71</p> </td> </tr> <tr> <td> <p><em>Price/Sales</em></p> </td> <td> <p>8.92</p> </td> <td> <p>4.89</p> </td> <td> <p>6.20</p> </td> </tr> <tr> <td> <p><em>Profit Margin</em></p> </td> <td> <p>18.48%</p> </td> <td> <p>3.74%</p> </td> <td> <p>14.64%</p> </td> </tr> <tr> <td> <p><em>Operating Margin</em></p> </td> <td> <p>27.27%</p> </td> <td> <p>6.83%</p> </td> <td> <p>24.49%</p> </td> </tr> <tr> <td> <p><em>Return on Assets</em></p> </td> <td> <p>28.17%</p> </td> <td> <p>N/A</p> </td> <td> <p>32.57%</p> </td> </tr> <tr> <td> <p><em>Return on Equity</em></p> </td> <td> <p>35.48%</p> </td> <td> <p>N/A</p> </td> <td> <p>46.12%</p> </td> </tr> <tr> <td> <p><em>Top Line Growth</em></p> </td> <td> <p>33%</p> </td> <td> <p>40%</p> </td> <td> <p>74%</p> </td> </tr> <tr> <td> <p><em>Bottom Line Growth</em></p> </td> <td> <p>49%</p> </td> <td> <p>75%</p> </td> <td> <p>140%</p> </td> </tr> <tr> <td> <p><em>One-Year Return</em></p> </td> <td> <p>55%</p> </td> <td> <p>36%</p> </td> <td> <p>120%</p> </td> </tr> </tbody> </table>

 

After sorting through a number of retail stocks, I realized that the best might be those that are considered momentum stocks, or those companies with explosive growth and large valuations. Much like the Internet based company market, explosively growing retail companies are given larger valuation because of their growth in a flat market.

The three companies above are priced perfect for growth and remain very attractive acquisition targets. All three have done a terrific job at keeping expectations in check to allow for consistent quarterly beats, which then pushes their stock even higher. With that being said, I will conclude with a few key points for each of my “top three” and the reasons that each company made my list. You can then take the information, perform additional due diligence, and determine if any of them fit into your portfolio.

  • Lululemon is an athletic apparel company, a must have brand among women in the growing yoga space. The company has seen explosive growth for each of the last six years as the company continues to expand globally at an alarming rate. The stock is a favorite by analysts, has continued to see increased traffic in its stores, and has managed to capture and control the large industry with women with no real competition. Therefore, the upside for LULU is based on continued margin strength, moderate expansion, new clothing lines that focus on other forms of exercise/sports, and a growing interest in yoga among its targeted audience.
  • Five Below isn’t necessarily a buy because of its current growth, but rather its future growth. The company is quickly becoming a fad among teenagers and is capitalizing on this spark with an incredible level of expansion. In the company’s last quarter it opened 17 new stores, making 243 total new stores in the last year. The company isn’t necessarily concerned with margins at this point in its growth strategy, but rather plans to expand to more than 2,000 stores in the next couple years. Therefore, revenue should continue to explode, and once expansion slows the company should see very strong margins and a nice return on investment.  Furthermore, the company has a very nice price/sales ratio which should allow for strong gains once margins begin to rise.
  • Michael Kors might be the best in the industry, a company with growth that is second to none. With a forward P/E ratio of 26.71 and strong margin growth, it looks as though the upside for this stock could trump all others. The company has done a good job at keeping expectations low, thereby delivering monster earnings. In its most recent quarter it beat expectations by more than 20%! Michael Kors is the total package: It has attractive metrics, explosive growth, a great return, and a bright future. Therefore, Michael Kors is in my opinion the clear cut favorite in the space as the best stock to own right now. 


BrianNichols is long KORS and FIVE. The Motley Fool owns shares of Lululemon Athletica. Motley Fool newsletter services recommend Lululemon Athletica. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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