In all facets of retail, any medium-sized company can post impressive year-over-year growth; it simply has to increase the number of total stores to drive revenue higher. However, this process tells us nothing about a company's longevity or consumer demand, as such growth becomes artificially inflated. However, comparable-store sales growth is a different story, as it signals that more consumers are buying at existing stores, which then increases margins. Michael Kors (NYSE:KORS) is a company that's grown in this manner, as has luxury retailer Restoration Hardware (NYSE:RH). However, despite market-leading growth in the luxury arena, both stocks have seen sizable stock losses. Hence, are either a buy, or are they too expensive?
Luxury brand power at its best
Michael Kors is not only the best-performing luxury brand in the market, but may be the most impressive of the last decade. The company is growing fast, including a whopping 28% increase in comparable-store sales during its fiscal third quarter. In addition, Michael Kors was able to produce overall revenue growth of 57% while having a very impressive operating margin of 30.7%.
Now, what makes Michael Kors so special is that it has been able to achieve this level of growth despite heavy discounting within the overall retail sector and a harsh winter. In fact, the company said in its last quarter that it felt no pressure to discount from competitors and then guided for continued comparable-store growth of 20% to 25%.
In many ways, Kors' strength and comments are a direct hit at peer Coach (NYSE:COH). Because after all, Coach did acknowledge that its competition was in large part to blame for its whopping 13.6% decline in comparable sales during the holiday quarter and that Kors had stolen market share.
As a result, Coach has taken to the global markets to find growth, essentially running from Kors, but now Michael Kors is expanding into emerging markets. Hence, this expansion is yet one more reason to anticipate additional growth for Kors and perhaps to be skeptical of Coach's growth goals.
With that said, Michael Kors has lost about 14% of its value in the last month and now trades at a very reasonable 23 times forward earnings. Hence, investors might find a solid opportunity in Kors following its recent decline.
Home improvement with a luxury twist
Restoration Hardware is not your typical home-improvement store: It caters to the wealthy, creating much of its revenue via catalog orders. And rather than growing from the creation of new stores, it continuously adds new products in its existing stores.
Restoration Hardware has thrived using this unconventional business model, including comparable-store sales growth of 27% in 2013 on top of 28% comps growth in 2012. This remarkable growth was achieved without the addition of one single new store.
However, in addition to mind-boggling growth, Restoration Hardware is also cheap, trading at only 21 times operating income following a 13% stock loss in the month of April. Also, as mentioned in the company's end-of-year earnings report, Restoration Hardware is now set to expand its total store count, adding three new stores and two additional floors to its largest location in New York this year.
Hence, Restoration is not only expected to continue its remarkable run of comparable store growth but will get an extra bump from revenue at new stores. This combined with its cheap stock -- and long-term plans to expand into 25 new locations -- suggests Restoration Hardware looks like a golden opportunity.
Both Restoration Hardware and Michael Kors look like gems in the retail space, and there are three reasons that investors should take notice.
The first reason has always been growth, or their ability to drive more consumers into existing stores to pay premium prices. However, the second reason is the fact that both companies are now planning to expand rapidly, which will drive revenue growth even higher. Lastly, the recent sell-off has given both companies an attractive valuation, especially for growth companies. Therefore, in looking throughout the retail space, it is really hard to find two better opportunities or two other companies with a brighter future.
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Brian Nichols owns shares of Michael Kors Holdings and Restoration Hardware. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. 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.