Which of These Retailers Is the Most Rewarding Investment?

Investing in one of these three apparel retailers could make you rich. But which one?

Pratik Thacker
Pratik Thacker
Apr 30, 2014 at 7:00AM
Consumer Goods

U.S. consumer spending grew by 0.3% for the month of February, higher than the jump of 0.2% in January . Personal income in the U.S also increased 0.3% during the same time, all of which indicates that people are spending more. One of the lucrative categories in the apparel retail industry is the premium apparel segment. However, it is important to understand which player is the best pick in the space. Players such as Ralph Lauren (NYSE:RL) and Coach (NYSE:TPR) are some of the prominent options.

Performance in the past
Both of the retailers have provided good returns over the last five years. The stock price performance of each of them is shown in the chart below:

COH Chart

COH data by YCharts

Although both retailers have performed well over the years, Ralph Lauren has done slightly better with a stock price appreciation of 190.2% during the period. Lauren's higher price appreciation is due to higher growth in revenue over the last five years. Growth in quarterly revenue for the two companies is shown below:

RL Revenue (Quarterly) Chart

RL Revenue (Quarterly) data by YCharts

Clearly, Ralph Lauren's revenue growth of 96.8% is higher than that of Coach  at 82.5%. Hence, higher stock price appreciation seems to be justified.

In fact, Ralph Lauren's last quarter was also good, as it registered 9% growth in revenue over the prior year, clocking in at $2 billion. Earnings increased 11% to $2.57 per share. Sales increases in the wholesale as well as retail segments led to overall top line growth. Moreover, increased advertising and promotions helped the retailer attract more customers .

On the other hand, Coach's last quarter was a disappointing one. Its revenue fell 6% to $1.42 billion from the year-ago quarter, and earnings dropped to $1.06 per share as compared to $1.23 per share in the same quarter last year. The retailer's sales were not only hampered by harsh winter weather, which led to lower mall traffic, but also by its decision to limit access to its e-factory sales site. One of the primary problems of declining sales was lower demand in the U.S., which was partly offset by higher demand in China. Nonetheless, the company has resorted to a strategy wherein it has been adding high-end products to its portfolio. The company also plans to add handbags which are priced at $400 or higher, catering to the affluent customers in particular .

The new entrant
However, the debut of Michael Kors (NYSE:CPRI) in December 2012 affected both Coach and Ralph Lauren since customers started shifting to the newcomer's products. Michael Kors' innovative designs and attractive products lured customers to its stores. Ralph Lauren and Coach registered weak performance as a result. Each of the apparel companies' returns to investors since Kors' inception is depicted in the chart below:

RL Chart

RL data by YCharts

Michael Kors' extraordinary performance enabled the company to post great returns. On the contrary, Ralph Lauren and Coach witnessed stock price declines since then.

Kors has been growing remarkably fast, and its last quarter was a blockbuster. Its revenue jumped 59% over last year, crossing the $1 billion mark for the first time. In fact, the retailer witnessed great sales growth in the North American market, where revenue surged 51% and same store sales grew 24%. It has also expanded its footprint in the region by opening 43 additional stores during the quarter. It also marketed its products well by communicating frequently throughout the holiday season  through messages and mails.

A look at some numbers
Considering the trailing P/E ratio, Kors is the most expensive of the bunch. Its P/E multiple stands at 30.5 as compared to the multiples of 19.2 and 14.3 for Ralph Lauren and Coach, respectively. However, given its performance, Kors' premium price is justified. Additionally, the forward P/E multiples are 23.2, 16.9, and 14.4 for Kors, Ralph Lauren, and Coach, respectively. Essentially, Michael Kors is expected to earn more in the future than the other two companies.

Final Foolish thoughts
Although Ralph Lauren had been performing well and was able to outpace its peer Coach, Michael Kors has proved to be the best player. It has been able to draw customer attention, resulting in higher sales. Its exclusive designs and marketing efforts have been fruitful. Moreover, it is expected to grow much faster than other players in the industry. If premium retail is the industry that you are looking for, Michael Kors is the best pick among all other options.