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In Monday's edition of his Mad Money program, Jim Cramer listed his five picks in the retail sector. The list included Michael Kors Holdings (NYSE:KORS), The Gap, Inc. (NYSE:GPS), Nordstrom Inc. (NYSE:JWN), Urban Outfitters, Inc. (NASDAQ:URBN) and lululemon athletica inc. (NASDAQ:LULU). In this article, I will quantitatively analyze these bullish picks to determine if following his advice makes sense at the current levels.

Michael Kors, Nordstrom and Lululemon are all similarly sized firms with a market capitalization in the $10 to $11 billion range. Gap is largest company in the group with a market cap of $16 billion and Urban Outfitters is the smallest with a market capitalization of $.5.6 billion. The table that follows provides some basic background data about these companies including the stock performance and dividend yield. It should be noted that KORS has a short trading history having gone public late last year.

Company

Symbol

Dividend Yield

Market Cap

1-Yr Return

5-Yr Return

Michael Kors

KORS

0.0%

10.3

121%

N/A

GAP

GPS

1.4%

16.9

119%

96%

Nordstrom

JWN

1.9%

11.61

31%

23%

Urban Outfitters

URBN

0.0%

5.64

59%

83%

Lululemon

LULU

0.0%

11.02

39%

326%

Next, I evaluated the historical growth rates of revenue, income, EPS and the projected growth rates. These are summarized in the table shown below:

Revenue Growth Rates

10-Year

5-Year

1-Year

KORS

-

-

62%

GPS

0%

-2%

-1%

JWN

6%

5%

12%

URBN

19%

15%

9%

LULU

-

46%

41%

Income Growth Rates

10-Year

5-Year

1-Year

KORS

-

-

101%

GPS

6%

1%

-31%

JWN

22%

0%

11%

URBN

21%

10%

-32%

LULU

-

87%

51%

Future Growth Projections

Next Yr

Next 5 Years

KORS

27%

31%

GPS

13%

10%

JWN

14%

12%

URBN

21%

17%

LULU

28%

27%

LULU and KORS are the standout performers in the group - both in terms of historical performance and predicted future growth rates. GPS reported a decline in revenues and earnings last year. Going forward, the trend is expected to reverse with the firm having a projected growth rate of 10%.

To develop fair value estimates for the five companies, relative valuation was performed using historical analysis of individual company and industry multiples. The table below presents the valuation analysis results.

Valuation

KORS

GPS

JWN

URBN

LULU

Next Yr Proj EPS

$1.72

$2.39

$3.98

$1.91

$2.21

EPS Growth Rate

31%

10%

12%

17%

27%

Future EPS (5 Yr)

$4.40

$3.34

$5.95

$3.35

$5.14

Expected P/E

27

12

13

22

27

Price 5 Yrs Out

$118.86

$40.04

$77.29

$73.78

$138.69

Unlevered Beta

0.93

0.93

0.93

0.93

0.93

D/E Ratio

0%

10%

27%

0%

0%

Current Tax Rate

35%

35%

35%

35%

35%

Levered Beta

0.93

0.99

1.09

0.93

0.93

Risk Free Rate

2%

2%

2%

2%

2%

Risk Premium

6.00%

6.00%

6.00%

6.00%

6.00%

Size Premium

0.62%

0.62%

0.62%

0.74%

0.62%

Cost of Equity

8.2%

8.5%

9.2%

8.3%

8.2%

Fair Value

$81.74

$27.12

$50.93

$50.47

$93.52

Current Price

$53.32

$35.13

$57.77

$43.66

$76.49

% Overvalued

-53%

23%

12%

-16%

-22%

As seen in the table above, KORS is significantly undervalued at current levels and offers a return potential of 53%. LULU and URBN are also undervalued and make good long candidates in my opinion. GPS and JWN are overvalued and should be avoided. In fact, GPS is grossly overvalued in my opinion and makes a good short candidate at current levels. In summary, I would buy KORS, URBN and LULU, and short sell GPS. I would avoid JWN at current levels.

Disclaimer: Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.

Source: Cramer's Retail Picks: 3 To Buy, 2 To Sell