Retailers: Low-end to Luxury

01/27/2014 7:00 am EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

J. Royden Ward, editor of Cabot Benjamin Graham Value Investor, sees upside potential in a pair of retailers—one a low-end "dollar" store, the other a high-end in the luxury fashion market.

Dollar General (DG) is the largest discount retailer in the US, with 11,000 neighborhood stores in 40 states. Because of its large size, Dollar General is able to offer an ample array of products from America's largest manufacturers, including Procter & Gamble, Kimberly Clark, Kellogg's, PepsiCo, and Coca-Cola.

Sales are forecast to increase 10%, EPS will climb 12%, and same-store sales will advance 4% during the 12 months ending January 31, 2014. Management's four-year-old restructuring plan is paying off.

Numerous new stores, expansive store restructuring, and the installation of additional coolers for fresh produce and frozen foods are attracting new customers.

Dollar General has launched DG Markets, which feature fresh produce. DG Markets are expected to produce four times the sales of core Dollar General stores, though profit margins will be noticeably less.

Growth will likely accelerate during the next 12 months. I expect sales and earnings to increase 12% and 16% respectively, during the 12-month period ending January 31, 2015.

The Company's planned 700 new store openings, and the remodeling of 525 stores, will ensure rapid growth during the next 12 months. At 18.7 times current EPS, DG's stock price is reasonable.

Michael Kors Holdings (KORS), founded in 1981, has evolved from an American luxury sportswear wholesaler into a global accessories, footwear, and apparel company, with operations in 85 countries.

The Michael Kors name represents luxury, with handbags and small leather goods retailing from $500 to $6,000, footwear from $300 to $1,200, and women's apparel from $400 to $4,000.

With 82% of 2013 total revenue coming from the US, Kors has extensive possibilities for international expansion. In addition, e-commerce offers huge untapped growth opportunities.

Kors is benefiting from strong consumer demand in the US for fashion handbags, small leather goods, and watches. Sales and EPS will likely climb 21% during the 12 months ending December 31, 2014.

KORS shares are not cheap, at 29.7 times current EPS, but EPS are forecast to rise 28% per year, during the next five years. The balance sheet is very strong, with no debt, and lots of cash available to fund growth initiatives.

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