Hiding Behind Luxury: 5 Safe Retail Stocks

NEW YORK ( TheStreet) -- Safety in retail stocks is a bit of an oxymoron.

The sector has been wrought with fear, as sales fell in May for the first time in 11 months, and the companies face rising sourcing costs and shaky consumer sentiment.

But relatively speaking, the best place to ride out this summer's inflationary pressures is in luxury, according to analysts.

Goldman Sachs' U.S. luxury department store same-store sales index increased 13.2% in May, a significant acceleration for March/April trends of 7% to 8% and February's 11.8% increase.

"The acceleration is likely a function of higher input costs being passed on to the customer, with little to no corresponding offset in units," Goldman analyst Andrianne Shapira wrote in a recent research note. "This is in stark contrast to the mid-tier, which is seeing units decline as average unit retail rises."

Luxury valuations are also at a historical premium, trading 20% above long-term averages, as the market drives a wedge between the high and low end.

"Our analysis suggests that the higher income customer is better suited to absorb inflation across apparel, food and fuel, and the luxury premium is reflective of this," Shapira wrote.

Read on for a look at the luxury stocks best positioned for the summer's headwinds.


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Nordstrom ( JWN) is a top-rated stock among analysts in the high-end retail space.

July presents a major catalyst for sales, as it is typically Nordstrom's second biggest month of the year because of its annual Anniversary Sale. The blowout sale starts on July 15 and runs until July 31, and has become a must-shop for Nordstrom loyalists who take advantage of savings on new merchandise before the start of the season.

Nordstrom's elevated price points and company-specific initiatives, as well as more muted inflation, are driving improved productivity and margins, says Sterne Agee analyst Ken Stumphauzer.

While most department stores are oversaturated, Nordstrom still has room to grow domestically. The company has been opening four or more new full-line stores a year and is aggressively expanding its Rack business, opening about 18 stores in 2010 with plans to open about 18 more this year.

E-commerce is Nordstrom's fastest growing segment, representing 7% of sales. Its recent acquisition of Haute Look, also makes the company a major player in the online private-sale marketplace.

Nordstrom has rolled out new customer-centric technologies to help it embrace multi-channel retailing, which is expected to enhance the customer experience and loyalty.

While Nordstrom targets a more affluent customer, it represents a more "affordable" store compared to rivals like Neiman Marcus and Saks, and thus services a broader customer demographic, according to Caris analyst Dorothy Lakner. As a result, she says it has the potential to benefit as the economic recovery broadens.

Shares of Nordstrom have fallen to the low $40s on overall macro fears, which Lakner says are not impacting the affluent customer it serves, making the stock more attractive than even a month ago.

"As Nordstrom continues to expand over the coming years, in its full-line stores, off-price Racks and online, we believe the shares should more fully reflect Nordstrom's growth potential amongst affluent customers," Lakner wrote in a recent note to clients. "With the recent pullback in the market having created a more attractive entry point into this high-quality name, we recommend purchase. "


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Coach ( COH) has strong pricing power, which should help it offset rising costs.

While the handbag makers margins were negatively impacted by these costs in its fiscal third quarter and are expected to be pressured over the next three quarters, at 29.4%, margins remain well above the corporate average.

"In our view, Coach has pricing power and combined with more sales from China (at a higher margin), the company is well positioned to mitigate some cost pressured," Bank of America analyst Lorraine Hutchinson wrote in a note.

Even with a significant impact on its sales because of the Japanese earthquake, Coach still managed to top estimates for its fiscal third quarter ended in March. The company reported an 18% jump in earnings to $186 million, or 62 cents a share, while revenue rose nearly 15% to $950.7 million. Analysts were calling for a profit of 60 cents a share on revenue of $946.5 million.

In an effort to escape some of these rising costs, Coach also said that it plans to shift its manufacturing out of China. The company plans to cut its production in the country to a 40% to 50% range from the current 85% level over the next five years.

Coach has been keenly focused on its international expansion, specifically in Asia. The company plans to open 30 stores in China over the next three years and foresees sales growing 85% in the market to $185 million in 2011. It aims to record annual sales of $500 million in China within the next three years.

In order to raise its brand awareness in Asia, Coach is seeking a dual listing on the Hong Kong Stock Exchange which, if approved, could occur before the end of the year.

Earlier in the month, Baird raised its price target on the stock to $66 from $65, citing its expansion strategy, brand strength in China, and strong free cash flow.

Coach also increased its annual cash dividend by 50% to 90 cents a share last month.


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Tiffany ( TIF) has been able to successfully raise prices this year, showing the strength of its brand.

The high-end jeweler has been able to increase prices, specifically in its engagement ring collection, according to KeyBanc Capital Markets analyst Edward Yruma. The price of 1 carat diamond engagement rings climbed 9% to 10% and 1.5 carats or bigger saw a 10% to 12% price hike, Yruma said.

Engagement and wedding jewelry make up 28% of Tiffany's total sales.

"We think consumers understand diamond and platinum inflation much more than cotton and labor pricing," he wrote in a note.

In its fiscal first quarter ended in April, Tiffany earned $81.1 million, or 63 cents a share, a 25% increase over its profit in the same quarter last year. Sales grew 20% to $761 million.

Tiffany boosted its full-year forecast, expecting earnings to increase by 18% to 21%, which would mean a profit of $3.45 to $3.55 a share. Wall Street is currently calling for earnings of $3.33 a share.


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Saks ( SKS) is seeing a return of shoppers in what it calls its "best" category.

In its fiscal first quarter ended in April, the high-end department store operator reported improved gross margins because of more full-priced selling and increased sales of more expensive merchandise.

As a result, earnings grew more than 50% to $28.4 million, or 16 cents a share, while sales rose about 9% to $726.7 million. Same-store sales jumped 10.2%, marking the fifth consecutive quarter of higher comparable sales.

Gross margins increased by 100 basis points to 44.1% from 43.1% in the first quarter of 2010.

Looking ahead, Saks foresees same-store sales growth in the high single-digits for the next quarter and the mid-high single-digit range for the remainder of the fiscal year. It also says gross margins will continue to grow throughout the year.

Saks has been investing in its multi-channel platform and has kept firm control over inventory levels.

But shares of the company are off 15% from their 52-week high, which could present a good buying opportunity.

Polo Ralph Lauren

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Polo Ralph Lauren ( RL) is in a better position than many retailers to pass along cost increases because of its premium brand, analysts say.

"While consumer reaction to price increases in the fall remains uncertain, we do not expect most customers who were paying a premium for Ralph Lauren products to trade down," noted Wells Fargo analyst Evren Kopelman. "The higher-income consumer is typically less affected by higher food and gas prices. In addition, Ralph Lauren has successfully raised prices in the past (summer and fall 2004) and we think the brands has a better positioning today."

The company's recent investments, which include flagship stores in New York City and Paris, expansion of its accessories business and growth in Asia, are expected to drive double-digit sales growth and margin expansion over the next several years, according to Kopelman.

Ralph Lauren is focusing on non-apparel categories like accessories, handbags and footwear, which generally command a higher margin.

Asia is expected to become a meaningful contributor to profit now that Ralph Lauren is focused on the region after taking direct ownership from licensees.

"Asia is the fastest-growing consumer market for luxury goods, driven by China, and we think Ralph Lauren can benefit from this growth by elevating its brand positioning," Kopelman wrote. He predicts that the region could grow at a 20% compound annual rate and reach $5 billion of sales in 10 years.

In 2010, Ralph Lauren generated $434 million in free cash flow and repurchased $595 million of stock.

Ralph Lauren has also been cited as a possible acquisition target for luxury group PPR.

- Reported by Jeanine Poggi in New York.

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