2 Bright Retailers in a Dull Industry

Since 2011 the year-over-year growth for retail sales have declined consistently.

U.S. retail sales have undoubtedly been under pressure in recent months, in part due to weather but also widespread heavy discounting. Yet, despite proof that year-over-year increases in retail sales have declined since 2011 (as shown in the chart above), along with January retail sales that declined 0.4%, two retailers continue to shine. Under Armour (NYSE: UA  ) and Michael Kors Holdings (NYSE: KORS  )  are two very different retail companies that might provide investors with a bit of brightness in a dull industry. 

Under Armour: Creating separation
Under Armour's fourth-quarter earnings are known by most who follow retail, mostly because the company crushed expectations in a period when many expected weakness. 

In its last quarter, Under Armour saw an acceleration of revenue growth to 35% year over year from a 26% increase in the quarter prior. Furthermore, the fourth quarter marked the third consecutive period in which Under Armour's year-over-year growth accelerated, which tells us the company's brand is really gaining momentum and that a weak industry can't slow down this juggernaut.

With that said, investors in the sports-retail segment had been placing their bets on either Under Armour or lululemon athletica (NASDAQ: LULU  ) ; the latter makes sports apparel for women, specifically yoga apparel. Yet the chart below shall give investors a good idea of how both companies have weathered the retail storm in recent months.

Under Armour data by YCharts.

After a five-year period of near equal growth, and trading with similar gains, Under Armour's stock has broken away, reigning superior over Lululemon. 

The fact that Lululemon's total growth has decelerated to 20% from more than 30% in the year prior and that Under Armour's has accelerated further amplifies the incredible performance of this company.

Not to mention, for those of you focused on profitability, Under Armour's gross margin rose 100 basis points to 51.3% in its last quarter, yet another testament to this company's vast improvements. Thus, such improvements more than warrant a premium valuation multiple. 

Michael Kors: Nothing can slow it down
Michael Kors is another great retailer; not a sports retailer but rather luxury.

In the company's last quarter it reported total sales growth of 57% year over year. While this is impressive by itself, what's really mind-boggling is that Kors grew its comparable-store sales by 28%. This means that more consumers were buying its products at existing locations and that Michael Kors was not affected by a retail market that was plagued by aggressive discounting. 

Coach (NYSE: COH  ) , which is Michael Kors' biggest competitor, saw its comparable-store sales decline 13.6% in North America during the holiday season. This shows the demand present for luxury handbags in the quarter but also the market share that Michael Kors is stealing on a quarterly basis.

Furthermore, on Coach's conference call the company said that rivals such as Kors had taken market share during the holiday season. And while Coach discounted its products to attract consumers, Kors did not, which, coupled with the sales figures during the period, is very telling. 

Overall, Kors is a luxury retailer that is not struggling in any facet of its business -- the company's industry-leading gross margin even increased 100 additional basis points to 61% in its last quarter -- meaning that it, like Under Armour, is deserving of a premium multiple. 

Final thoughts
Conveniently, Under Armour and Michael Kors have both seen their stocks rise 22% in 2014; while both could likely continue to soar throughout the year, a fundamental assessment might suggest which has the most upside.

With that said, both companies are highly profitable and are leaders within each industry. Yet two metrics that really stand out include the fact that Kors is growing faster on a year-over-year basis and trades at just 26 times forward earnings versus 45 for Under Armour.

Therefore, despite both being solid companies with top industry performance, Michael Kors has the least amount of downside risk and could still soar considerably higher due to being cheaper.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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