Why These Retail Stocks Will Delight You

Includes: JWN, LB, LUX
by: Fusion Research

Fashion trends are always changing and people are trying to keep up with the changing trends, thus creating a significant demand for fashion apparel. Accessories nowadays are more of a fashion statement rather than a need. Three apparel companies are opening new stores and innovating to cater to changing market trends. Let's see how the expansion plans could result in revenue growth.

Expansion of Rack stores

Nordstrom (JWN) is a fashion retailer that had 117 full line stores and 127 rack stores across the U.S. in 2012. Its full line stores offer all of its products including apparel, accessories, beauty products, etc. The rack stores offer only discounted products, which are priced 30%-70% less than standard Nordstrom stores. Rack stores are the company's growth driver because of the increasing sales activity at these stores. Rack stores net sales showed a 2.4% year-over-year increase as compared to the full line store's decrease of 0.7% in the second quarter of 2013. The Rack gives discounts on high quality, premium goods, thus attracting many customers in the U.S. Looking at the demand growth, Nordstrom decided to increase its footprint in the U.S and Canada. It has a target of operating 230 Rack stores in U.S. and five Rack stores in Canada by the end of 2016. To achieve this, it has plans to open 24 stores this year and 30 stores in 2014 in the U.S.

Consumers shopping preferences are also changing with more consumers adopting the online route to compare and shop for products. Retailers are now differentiating themselves in terms of price, convenience and personalization through e-commerce. Looking at the growing e-commerce market, Nordstrom has increased its spending to around $900 million on e-commerce and technology in the next five years. It will focus this spending on technology to improve customer experience, infrastructure and marketing. It offers personalization, easy website navigation and product recommendations to improve the customer experience. The investment in e-commerce and technology has been rightly justified as evidenced by the increase in its return on invested capital, or ROIC, as stated in the company's Management's Discussion and Analysis, which follows:

"In 2012, our ROIC of 13.9% was the highest over the last five years, a period in which we invested nearly $2 billion in our business. Our ROIC as of the end of the first quarter increased to 14.0%, and with our investments continuing in 2013, we expect ROIC to continue to grow. Our customer-driven growth initiatives are consistent with our long-term financial goals of mid-teens Return on Invested Capital ("ROIC") and high single-digit sales growth."

The company is making significant investments in e-commerce and will reap profits next year. Nordstrom's ROIC has been increasing over the years and its target of 15% ROIC shows the management's bright outlook on its earnings potential for next few years.

Boom in the optical market

The optical and eyewear market is expected to increase by 6% annually over the next five years and will reach $20 billion in revenue by 2017. The rise in demand for eye-correction and increasing awareness of dangerous ultraviolet exposure is the cause of this growth. The global eyewear market for optical products is twice the size of the sunglass market in terms of units sold. This presents a good opportunity for Luxottica (NYSE:LUX) to expand its optical product portfolio. Luxottica entered the optical market in 2003 with Ray-Ban and has been growing ever since. In 2012, this segment contributed $2.34 billion, or 25%, to total sales, and it is expected to increase to around 35%-40% in 2016 with the help of this growing demand. Going forward, we believe that optical eyewear products will bring significant revenue for Luxottica.

Luxottica is also planning to open 4,000 Sunglass Hut outlets by 2015 from 2,700 outlets in 2012 through both organic stand-alone stores and the inorganic route. The focus would be on expanding presence in emerging markets including Latin America, Asia Pacific and Mediterranean Europe since these are the high-growth markets. Sunglass Hut stores are more flexible and target multiple demographics since it can open these stores through different channels, such as retail outlets, department stores and kiosks. These stores are cheaper to open through any channel since this format requires much less space and have lower operating costs than other formats. Sunglass Hut stores have an earnings before interest and taxes, or EBIT, margin of 17.0% compared to its retail division's 12.8% in 2012. With the opening of new Sunglass Hut stores, earnings are expected to increase in the next two years due to the higher profits margins of these stores.

Victoria's Secret to reveal its new stores across the globe

L Brands (LTD) is restructuring its Victoria's Secret outlets in order to increase its store productivity. It is closing down 18 under-performing stores in 2013 and concentrating on its PINK store outlets across the U.S. The PINK brand is a part of the Victoria's Secret selection that targets the young female population. About 25% of the U.S. female population is between the ages of 15 years to 34 years. Due to significant market potential, and the limited presence of its PINK store in U.S., the company decided to open 50 new stores in 2013. It is also expanding its offering from core lingerie to shoes, swimwear, eveningwear and fragrances. In 2012, it also initiated restructuring of its Victoria's Secret stores, closing down 20 stores and opening 31 new stores, which achieved a 7% year-over-year revenue increase in this segment. Going forward we believe that its revenue growth will exceed the 7% increase registered last year.

In addition to domestic expansion, L Brands is also increasing its footprint in international markets. The company opened 26 Victoria Secrets stores in Canada in the first quarter of 2013 and plans to open eight more stores by the end of this year. International expansion will open up a new source of revenue outside the U.S. and will help company sustain long-term growth. Revenue from international sales is expected to grow by 10% year over year to $1.08 billion in 2013. The increase in revenue is expected to cause EPS growth of 33% year-over-year to $3.59.








L Brands




Source: Yahoo Finance

At first look, Luxottica's very high P/E ratio of 32.67 compared to the industry P/E ratio of 19.2 can be misleading. However, its fundamentals show that it has significant potential for growth. Due to the growing sunglass market, Luxottica is adding more stores to increase its market share. L brands also has growth prospects through its expansionary plans and received a high P/E valuation of 21.88 compared to the industry average.

On the other hand, Nordstrom has a low P/E ratio compared to the industry and gives investors a good opportunity to pick a stock at a low valuation. It is increasing its presence in U.S. and investing in e-commerce.

Looking at their valuation and sustainable growth in the future, investors should consider these three companies for their portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.