Luxury Retail Has 1 Major Undervalued Player

In nearly all facets of luxury retail, premium multiples are given to companies that perform with precision and capitalize on growth opportunities. Michael Kors Holdings  (NYSE: KORS  ) and Tiffany  (NYSE: TIF  ) are two such examples in different segments of luxury retail. Restoration Hardware (NYSE: RH  ) owever, is a luxury retailer that lacks a premium valuation relative to peers like Lumber Liquidators (NYSE: LL  ) , and despite strong earnings performance since its IPO. Hence, with earnings around-the-corner, might Restoration Hardware soon trade higher?  

The standard of luxury
As with luxury products, retailers are given valuation multiples relative to the retail sector. Notably, there are various degrees of performance within luxury and also many sub-segments like jewelry or clothes and handbags.

Tiffany is likely the quintessential example of luxury, a worldwide jeweler that earned 90% of its net sales via jewelry. With that said, Tiffany is a well-established company, not a growth company, and its performance is a reflection of the luxury and jewelry space, which can be seen below.

 

Tiffany 

Retail Segment

Holiday Season

5%

2.7 %

2013

6%

3.7 %

2014 Outlook

7.7%

4.1%

Clearly, Tiffany's net sales are growing significantly faster than the overall retail segment on a year-over-year basis. Thus, shares trade at a rather lofty 18 times next year's earnings versus a 14 times multiple for the retail industry. Essentially, its growth and luxurious status makes the stock worthy of the premium.

Then, there are fast-growing momentum-like luxury retailers such as Michael Kors, perhaps the hottest name in retail. The company makes handbags, wallets, and clothing for both men and women. By market value, it's twice as expensive as Tiffany despite having 75% as much revenue.

The reason is because it's growing rapidly, including 57% in its last quarter, which was driven primarily by a 28% increase in comparable-store sales. Furthermore, the company has said on several occasions that it was not affected by promotional pricing during the holiday season and is now guiding for comparable sales growth of 15%-20% for this current year.

At 32 times earnings, Kors is expensive relative to the sector. But given its growth and luxury state, such a premium looks rather attractive.

The one exception
Of all the top-performing luxury retailers, most, if not all, trade with a premium to the overall retail sector and are given more bullish multiples based on growth and outlook. Yet Restoration Hardware, a luxury home-improvement retailer, has been a rare exception to this rule.

Restoration Hardware is yet to release earnings for the fourth quarter. It is one of the only retailers in the market with more than $1.4 billion in 12-month revenue that is growing comparable sales at a pace greater than 25%; Michael Kors is another.

During its last quarter, Restoration Hardware grew revenue 39% and did so without the addition of one new store. Hence, Restoration grows by increasing its product offerings rather than boosting its store presence. Although, the company is set to expand with new stores in the coming year, which should bode well for future revenue growth.

Yet, compared to peer Lumber Liquidators, which sells hardwood flooring, Restoration Hardware trades at a discount. In fact, Lumber Liquidators' market cap is $200 million higher despite Restoration Hardware's revenue being 50% greater. Also, Restoration Hardware is growing about 50% faster than Lumber Liquidators, and its comparable sales are nearly 100% greater.

Given this fact, it appears that Restoration Hardware is a mispriced luxury retailer or a rare exception to the premium rule within this space.

Final thoughts
As it appears, the market has simply missed Restoration Hardware, which should imply upside value looking ahead. This is a fast-growing retailer, one that has beat quarterly expectations in each of its last five earning reports, since its IPO.

Sooner or later, if a company does well, its stock usually follows; Restoration is a company that's operating exceptionally well. Thus, don't be surprised if its March 27 earnings announcement unveils this hidden treasure to the eyes of luxury-retail investors and leads to large gains.

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