Hiding behind luxury: 5 safe retail stocks

The sector is a risky place to make bets this summer, but the high end could provide a comfortable hideout.

By TheStreet Staff Jun 28, 2011 11:36AM

TheStreetImage: Shopping bags (© Photodisc Red/Getty Images)By Jeanine Poggi, TheStreet

 

Safety in retail stocks is a bit of an oxymoron.

 

The sector has been wrought with fear, as sales fell in May for the first time in 11 months, and companies face rising sourcing costs and shaky consumer sentiment.

 

But relatively speaking, the best place to ride out this summer's inflationary pressures is in luxury, according to analysts.

 

Goldman Sachs' (GS) U.S. luxury department store same-store sales index increased 13.2% in May, a significant acceleration for March-April trends of 7% to 8% and February's 11.8% increase.

 

"Our analysis suggests that the higher-income customer is better suited to absorb inflation across apparel, food and fuel, and the luxury premium is reflective of this," Goldman Sachs analyst Andrianne Shapira wrote.

 

1. Nordstrom (JWN) is a top-rated stock among analysts in the high-end retail space. July is typically Nordstrom's second-biggest month of the year because of its annual Anniversary Sale. The blowout sale starts on July 15 and runs until July 31, and has become a must-shop for Nordstrom loyalists who take advantage of savings on new merchandise before the start of the season.

 

Nordstrom's elevated prices and company-specific initiatives, as well as more muted inflation, are driving improved productivity and margins, says Sterne Agee analyst Ken Stumphauzer.

 

While most department stores are oversaturated, Nordstrom still has room to grow domestically. The company has been opening four or more new full-line stores a year and is aggressively expanding its Rack business, opening about 18 stores in 2010 with plans to open about 18 more this year.

 

2. Coach (COH) has strong pricing power, which should help it offset rising costs. To escape some of these rising costs, Coach also said that it plans to shift its manufacturing out of China. The company plans to cut its production in the country to a 40% to 50% range from the current 85% level over the next five years.

 

The handbag maker also plans to open 30 stores in China over the next three years and foresees sales growing 85% in the market to $185 million in 2011. It aims to record annual sales of $500 million in China within the next three years.

 

Earlier in the month, Baird raised its price target on the stock to $66 from $65, citing its expansion strategy, brand strength in China, and strong free cash flow. Coach also increased its annual cash dividend by 50% to 90 cents a share last month.

 

3. Tiffany (TIF) has increased prices, specifically in its engagement ring collection, according to KeyBanc Capital Markets analyst Edward Yruma. The price of 1-carat diamond engagement rings climbed as much as 10%, and 1.5 carats or bigger saw a 10% to 12% price hike, Yruma said. Engagement and wedding jewelry make up 28% of Tiffany's total sales.

 

In its fiscal first quarter ended in April, Tiffany earned $81.1 million, or 63 cents a share, a 25% increase over its profit in the same quarter last year. Sales grew 20% to $761 million.

 

Tiffany boosted its full-year forecast, expecting earnings to increase by 18% to 21%, which would mean a profit of $3.45 to $3.55 a share. Wall Street is currently calling for earnings of $3.33 a share.

 

4. Saks (SKS) is seeing a return of shoppers in what it calls its "best" category. During the quarter ended in April, the high-end department store improved its gross margins by selling more expensive goods and more products at full price. Gross margins increased by 100 basis points to 44.1% from 43.1% in the first quarter of 2010.

 

As a result, earnings grew more than 50% to $28.4 million, or 16 cents a share, while sales rose about 9% to $726.7 million. Same-store sales jumped 10.2%, marking the fifth consecutive quarter of higher comparable sales.  

 

Saks foresees same-store sales growth in the high single-digits for the current quarter. It also says gross margins will continue to grow throughout the year. Shares of the company are off 15% from their 52-week high, which could present a good buying opportunity.

 

5. Polo Ralph Lauren  (RL) is in a better position than many retailers to pass along cost increases because of its premium brand, analysts say.

 

"While consumer reaction to price increases in the fall remains uncertain, we do not expect most customers who were paying a premium for Ralph Lauren products to trade down," noted Wells Fargo (WFC) analyst Evren Kopelman.

 

The company's recent investments in its flagship stores in New York City and Paris, expansion of its accessories business and growth in Asia are expected to drive double-digit sales growth and margin expansion over the next several years, according to Kopelman, who predicts that sales in Asia could reach $5 billion of sales in 10 years.

Ralph Lauren is focusing on non-apparel categories like accessories, handbags and footwear, which generally command a higher margin.

 

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