Cyclical retailers, especially those in the fashion business, have been bruised as the growth in retail sales during the winter of 2013 eventually waned.
Yet, just like everything in business, retail sales move in cycles. Since we are now facing a new growth cycle in retail sales, cyclical retail stocks are set for a bullish return.
The ones which could do especially well are those that trade at a discount and have a solid business core.
Ralph Lauren(RL) and Tiffany & Co. (TIF) are both solid businesses set to outperform their weaker rivals.
RL: A Luxury Brand Trading in the Bargain Bin
Ralph Lauren stock enjoyed a massive 13% spike on Wednesday in response to the recent announcement that Ralph Lauren, the CEO and co-founder, is stepping down. And despite Thursday’s slight correction, RL stock has significant upside potential compared to other retail stocks. Here’s why.
Strong Management: Stefan Larsson, the newly appointed CEO, has been highly praised for the turnaround in Old Navy, which swung from a losing brand to one of the most profitable segments under GAP (GPS). With RL already positioned well, a CEO capable of orchestrating such a strong recovery can be a major game changer. Larsson can certainly boost the company’s ability to weather the latest weakness, slash costs and lift its bottom line. That, of course, is great for RL stock.
Strong Brand: According to Morningstar, Ralph Lauren has a unique relationship with wholesale chain stores the likes of Macy’s (M), Saks (SKS) and Kohl’s (KSS). That gives it a significant advantage in fending off smaller luxury brands from gaining market share. Moreover, Ralph Lauren has a rainbow of brands set to answer to differing consumer tastes. That has allowed the company to survive and thrive in a very competitive environment. This clearly marks the company as an industry leader among retail stocks.
Valuation: Ralph Lauren is trading at 17 times its earnings (compared to the industry average of 27), an attractive discount considering it’s both profitable and has high margins.
TIF: Strong Brand Engagement
As with Ralph Lauren, Tiffany has a strong brand presence. True, being in the business for 150 years has helped Tiffany grow its brand (ranked No. 37 in Brand Finance’s Retail 50). But the real reason that TIF is a jewel among retail stocks is a powerful strategy.
Pricing Power: Unlike smaller rivals in the jewelry space Tiffany has been able to control much of its supply chain. It accomplishes that by owning production in key segments, such as diamonds. It is also able to purchase inventories at favorable prices thanks to its size. Finally, Tiffany’s well-known brand allows TIF to charge premium prices for its jewelry.
Return on Capital: One of Tiffany’s key strategies is to open small stores at premium locations. This allows TIF to optimize the return location. Eventually, this translates into strong returns on invested capital.
Customer Experience: Tiffany and Co. knows how to create a very unique consumer experience which guarantees strong brand awareness. The highly recognizable and iconic Tiffany blue color is but one aspect of TIF’s claim to fame. The bottom line is that consumers keep coming back. This allows TIF to quickly gain momentum when consumer appetite is rising.
Valuation: Currently trading at 22 times earnings, TIF stock isn’t cheap. That is, however, in line with the industry average, and still lower than Tiffany’s five-year trailing P/E ratio of 27.
Bottom Line – Pick the Best Horses
Like in horse racing, positioning matters. Riding cyclical retail stocks isn’t just about the valuation. Rather, it’s riding on the stocks in the best position to pull ahead at the finish line.
Right now, a new growth cycle is about to begin, which should whet the appetite for retail stocks. Both Ralph Lauren and Tiffany are strong brands in an advantageous position for a rising retail cycle.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
