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 (KORS), The Gap, Inc. (GPS), Nordstrom Inc. (JWN), Urban Outfitters, Inc. (URBN) and lululemon athletica inc. (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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
