3 Innovating Retail Companies You Should Note

3 Innovating Retail Companies You Should Note

The retail environment is harsh, as competitive pricing has created weakness in margins. Yet, three companies in particular are showing few signs of weakness, and are operating beyond the industry's norm.

How to profit from a dollar?
In a five year period, shares of Dollar Tree have rallied 300%. The company's philosophy: Sell everything for $1. While the company has racked up $7.54 billion in $1 transactions over the last year, the most impressive part of its business might be its operating margin of 12.59%.

Just in case you've never been in a Dollar Tree, they sell really good and essential products, such as brooms, cleaning supplies, décor, batteries, etc. These are products that sell for 5-10x more at competitors like Dollar General or Family Dollar.

Unbelievably, Dollar Tree has higher margins than both noted competitors. In many ways, this fact seems impossible, as it's difficult to fathom the manufacturing, transportation, and the sale of $1 products that still produce a profit. Yet, Dollar Tree has found a stable business in this space, and has developed a loyal following.

During the company's most recent quarter, revenue rose 8.8% year over year, as comparable store sales increased 3.7%. At 1.5 times sales and 19 times earnings, Dollar Tree is closely valued to the S&P 500, but is growing significantly faster than the overall economy. Thus, I consider the company to be a great retail investment, especially in a market where consumers constantly seek value.

The lifestyle of the rich
While home improvement companies Home Depot, Lowe's, and Lumber Liquidators get most of the glory, Restoration Hardware is where the growth lies.

The company offers remodeling products to its luxury clientele, which is historically a trendy group of people. Therefore, it should serve as no surprise that revenue for the company is expected to grow at 25% year over year in 2013, and grew comparable sales by 41% during its last quarter.

Surprisingly, while other companies expand to create this level of growth, Restoration Hardware gets ALL of its growth from comparable store sales. Restoration Hardware, which offers a catalogue of individual room makeovers, simply expands into new areas of design (i.e. kitchen, office, even coat racks) and its loyal following flock to remodel with the newest designs.

Restoration Hardware really does have the perfect business model for its wealthy consumers: They offer new products, existing consumers buy, then they tell their friends, and new consumers come in the doors. This domino effect has led to Restoration Hardware exceeding analyst expectations in each of its quarters since its IPO last year.

Currently, the stock is trading at just 1.8 times next year's expected sales, and is exploring 20 potential markets to expand its stores. With all things considered, it doesn't appear that this stock's one-year 120% gain has come to an end, but rather appears that Restoration Hardware is just gaining momentum.

Gotta get those handbags
In reality, there's nothing too innovating about Michael Kors' business model. They aren't squeezing profits from $1 products, or creating a new space within a segment such as home improvement, but they are the hottest brand among luxury apparel, and don't appear to be losing any steam.

In an industry where retail companies such as Aeropostale, American Eagle, and Coach are all struggling to stay relevant with declining comparable sales, Kors has produced comparable store sales growth of 27.3% in its most recent quarter.

Like Restoration Hardware expands into new rooms of a house, Kors has expanded beyond the traditional high-end handbags, excelling in shoes, watches, and even with men. Looking ahead, this is a company that's hard not to like.

They have revenue growth over 50%, operating margins near 30%, and continue to see explosive growth in both North America and in Europe. At 32 times earnings the stock may appear expensive to some, but when you consider its growth, Kors looks to be a good long-term value.

Final thoughts
The key with these three companies is strength in a struggling retail space. Due to the products and strategy of these companies, none miss a beat regardless of the economy. More importantly, each company still has space to grow, whether it be domestic or globally.

With that said, I do like Restoration Hardware the best of the bunch. They have the greatest comparable store growth and are yet to expand. Thus, I see great growth potential once the company penetrates additional markets. Nonetheless, I see great upside in each of these companies, as all are innovating in their own respect.

The article 3 Innovating Retail Companies You Should Note originally appeared on Fool.com.

Brian Nichols is long RH and KORS The Motley Fool has no position in any of the stocks mentioned. 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.

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