3 Quick Retail Picks

Includes: LB, LULU, VFC
by: Simple Qualitative

Recently the consumer discretionary space has been a hot area for investors, with the SPDR Select Sector Consumer Discretionary ETF (NYSEARCA:XLY) trading at all-time highs. However, a few retail names on my personal watchlist are off their highs. Could these pullbacks be buying opportunities for strong 2013 results? The following companies have strong brands as well as potential for high international growth in the future, which could take shares above the previous highs. Consider this a starting point for continued research.

Limited Brands (LTD)

Limited Brands is a specialty retailer which markets mostly women's intimate apparel as well as many other beauty products and accessories. Limited owns Victoria's Secret, Victoria's Secret Pink, Bath & Body Works, and C.O. Bigelow among other brands. Currently, most of revenues come from the United States and Canada. 2012 was a very good year for shareholders of the company. The stock went from 40.35 to 47.06 giving shareholders a 16.63% return. LTD also paid shareholders $5 per share in both regular and special dividends. The company started the year with a 2.5% dividend yield, but if you include another $4 in special dividends, that yield shot up to 12.39% for the year. Since the start of the new year shares have given up some of the gains and have closed at $44.38 on Friday.

Most of the pullback can be attributed to disappointing December same store sales. This pullback in my opinion is a buyable one because of possible long term expansion into new markets. In 2012, the company began slowly expanding its business into the Middle East and Europe. It's London stores have performed very well so far. On the last conference call, the company made it clear that it didn't want to expand too quickly, but is working with franchisees to build the brand internationally. In my view, LTD is doing fine in North America and should concentrate more heavily on Asia, specifically China. China seems to love Western brands, and I have no doubt they will love Victoria's Secret. I remain hopeful that 2013 is the year when LTD decides to get serious about Asia, but I am fearful that the balance sheet is holding them back. The company should hold back on paying special dividends for the time being to rebuild the balance sheet. With further expansion into international markets, Limited Brands can grow its current 12% growth rate substantially.

On the last conference call, the company announced it will continue to expand the PINK line with the addition of 40 more freestanding PINK stores. The PINK brand is targeted at younger women and offers sleepwear, loungewear, bras and panties. The PINK line will offer younger consumers an easy entry into the Victoria's Secret ecosystem. The company should then be able to transition these women into the greater Victoria's Secret brand fueling earnings growth.

Lululemon Athletica (LULU)

Lululemon Athletica is a apparel company specializing in athletic apparel such as fitness pants, shorts, tops, and jackets. The company also sell fitness related accessories such as yoga mats, socks, underwear, and bags. In December, the company reported a phenomenal quarter, beating analyst estimates. Revenues for the third quarter increased 37% to $316.5 million from $230.2 million in the third quarter of fiscal 2011. Comparable same store sales were up 18% on a constant dollar basis. I was very impressed to see the company's direct-to-consumer sales increase by 89% year-over-year. Shares moved slightly higher after the report, but since have pulled back.

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The company currently has 201 corporate-owned stores, which is up from 165 from last year. On the most recent conference call, the company discussed briefly its plans for international expansion. Over the next 24 months, the company plans to expand its business in the European and Asian major markets slowly using the showroom business model to test the markets. The company strategically hired Barbara Le Marrec, the former head of Starbucks operations in Japan, to help with international expansion. Over the next two years, the company expects to make baby steps in 15 countries. In my view, Lululemon is doing everything correctly here in North America, and I am extremely encouraged to see the company looking to take its business into Europe and Asia. Lululemon has one of those cult following brands which allows them to charge consumers very high prices and maintain very high profit margins. Brands with cult-like followings, such as Apple (NASDAQ:AAPL) and Starbucks (NASDAQ:SBUX), have done very well with Asian consumers, and I believe Lululemon will be no exception. The strong brand coupled with a great balance sheet will allow this company to thrive.

V.F. Corporation (VFC)

V.F. Corporation is a global apparel company with a diversified portfolio of brands we all know and love. The company's portfolio of brands includes The North Face, Timberland, JanSport, Kipling, Wrangler, Vans, Majestic, and Lee among many other well known consumer favorites. In October, the company reported its third quarter results above analyst estimates, yet the company sold off heavily and has since continued its decline. Even with these declines, I remain bullish as gross margins are currently at all time highs due to low cotton costs. Cotton prices have remained relatively low in the last couple of months, which should continue to help margins for the fourth quarter. The company also raised its full year earnings estimates and dividend last quarter. Earnings estimates were raise by $0.10 to $9.60 from $9.50. VFC raised its dividend 21%, and is currently paying investors an attractive dividend yield of 2.34%. VFC has a lengthy history of raising its dividend and should continue to raise it in the future. The company also plans to expand heavily into Asia with a goal of adding over $1 billion in revenues over the next five years. I believe sales in its Asia Pacific business will increase faster than expected, fueled by China's continued high growth and demand for Western brands. The international growth plan is key to increasing earnings per share for the company.


As you may have noticed in this short article and in some of my other articles recently, I look to invest in companies with high growth potential in Asia as well as strong brands. Limited Brands has one of the strongest brands in my opinion, and if the company realizes its international growth potential, shares will rise substantially. Lululemon is firing on all cylinders right now and has one of the best balance sheet on the street. V.F. Corporation is already perusing Asian growth and also has many strong brands in its arsenal. The most recent pullbacks can be bought in my opinion, because of the high international growth potential of these companies. Out of the three, Lululemon is my top pick.

Disclosure: I am long LTD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: You should not treat any opinion expressed in this article as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of an opinion.