How to Spot Powerful Brands That Can Transform Your Bottom Line

Two of the strongest investments in the retail space that I know of just so happen to have two of the most popular brands among consumers right now, which makes them very appealing long-term growth prospects.

Jan 29, 2014 at 11:46AM

One of the most successful tactics I can employ when it comes to investing is to perform what I refer to as the eye test, which is simply an analysis of brands from a consumer perspective. If you are a conscious consumer, much of what you see on a daily basis can provide insight into retail brands, allow you to spot influential companies, and even aid in making future investment decisions.

Recognizing powerful brands
First, it helps to know what a powerful brand is. Fortunately, these brands are not too difficult to recognize because they are often the most popular ones. Since they resonate well with consumers, powerful brands often have very loyal consumer bases, which means the companies behind the brands can demand a premium for the products/services being sold.

To start, simply look for the brands that are very popular at the moment, names that command extreme customer loyalty and that sell goods or services at elevated price points. Two brands that stand out to me at the moment belong to Michael Kors Holdings (NYSE:KORS) and Under Armour (NYSE:UA).

Michael Kors
Sometimes another person can bring a powerful brand to your attention. In my case, my friend Anna explained to me the incredible power of the Michael Kors brand among women, especially with regard to handbags and accessory items. She mentioned that the brand's signature MK logo is something of a hip status symbol among younger women, which is exactly the kind of thing you want to hear about a retail fashion brand.

Not surprisingly, Anna's assessment was spot on, and the proof is that Michael Kors has been steadily stealing away business and market share from more traditional competitors like Coach (NYSE:COH). In the most recently reported quarter, the company's total same-store sales increased 22.9%, and the gross margin as a percentage of total revenue increased to 60.8%, which indicates Michael Kors has no trouble at all selling items fast and at high price points.

While Coach saw revenue from its North American operations decline 1% in its first quarter of fiscal 2014, Michael Kors recently reported a 31% jump in North American revenue for the same time period.

Under Armour
Other times, brand power becomes evident because it is seemingly everywhere you look. Athletic-apparel, footwear, and accessories-maker Under Armour has done extremely well in recent years, thanks to an incredibly strong brand and excellent management.

The management team at Under Armour has taken what was once a male-centric athletic-apparel brand and turned it into so much more. Through extensive advertisement campaigns, clever product placement, and endorsements, Under Armour has aggressively expanded into new product categories like footwear and accessories and has successfully targeted female consumers as well as youth.

An example of management's recent success is the explosive growth among female consumers. Under Armour's female apparel business is now outgrowing its male apparel business. Chief executive officer Kevin Plank explained at a recent investor's conference, "Women's has the potential to be larger than men's."

Plank expects the company's female businesses to generate more than $1 billion in revenue by 2016, which is impressive considering the segment generated only $400 million in revenue in 2012.

The benefits of a powerful brand
One of the major benefits of creating lasting brand power is that business is usually robust and dependable as a result. The following is a breakdown of the two aforementioned companies' revenue and earnings-per-share increases for the last three years: 

Company

Michael Kors

Under Armour

Revenue 2010

$508.1M

$1.06B

Revenue 2011

$803.34M

$1.47B

Revenue 2012

$1.3B

$1.83B

EPS 2010

$0.22

$0.67

EPS 2011

$0.39

$0.92

EPS 2012

$0.78

$1.21

*Michael Kors fiscal year ends in March

As the results indicate, both companies have had no trouble growing both revenue and earnings per share in recent years. What's more is that analysts' estimates call for robust growth on the horizon.

For the year ending in March, Michael Kors is expected to report revenue growth of 39% and EPS growth of 43.7%. The following year, the company is expected to report revenue growth of 24.8% and EPS growth of 23%.

Under Armour is expected to wrap up its current fiscal year having grown revenue 23.7% and EPS 19%. In 2014, the company is expected to grow sales 22% and EPS 24.3%.

The two strongest retail investments
Not surprisingly, two companies with some of the most powerful brand name recognition among consumers are two of the strongest investments in the retail space. Michael Kors and Under Armour represent retail growth at its finest and should continue to perform well for investors.

Remember to keep your eyes open as a consumer, as you can often spot great investment opportunities without even realizing it!

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Philip Saglimbeni owns shares of Under Armour. The Motley Fool recommends Coach, Michael Kors Holdings, and Under Armour. The Motley Fool owns shares of Coach and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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