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Where are these 2 retail stocks heading?

Kathmandu Holdings Ltd (ASX: KMD) is a designer, marketer and retailer of outdoor and adventure clothing and accessories. Since listing in 2009, the company has implemented a rapid store rollout and currently has 140 stores in Australia with a target of 180. Over the next five years an increasing store count will be a key driver of earnings growth.

Kathmandu has a number of competitive advantages which sets it apart from its competitors. The company owns the Kathmandu brand which enables the company to respond rapidly to consumer demand and changing tastes. It also gives the company greater control over pricing. Kathmandu should benefit going forward from increased demand for outdoor activities and travel.

I suspect the company’s growth will stagnate once the company has completed its store roll-out and revenue growth will be harder to achieve. However, Kathmandu has recently commenced shipping its products overseas, and according to the company has been successful to date. Time will tell if the strength of the Kathmandu brand will result in increasing demand from overseas consumers. If the company can execute its international strategy, this will be a key driver of earnings growth and share price appreciation.

JB Hi-Fi Limited (ASX:JBH) has grown significantly over the past five years and is now Australia’s sixth-largest retailer. The company’s competitive advantage comes from its low-cost business model. The company has a strong brand, customer loyalty and an extensive national network.

The company operates 182 stores in Australia and New Zealand and earnings continue to grow as a result of the rapid store roll-out. The company has stated that many locations throughout Australia are underrepresented and represent further growth opportunities.

My concern with JB Hi-Fi is how the company will continue to grow once it completes its store roll-out. Furthermore, the structural change currently underway in the retail industry will see more consumers purchasing online and result in increased competition from Australia and overseas.

Foolish takeaway

I believe Kathmandu shares are currently fairly valued and investors should wait for any pullback in the share price before buying.

I believe JB Hi-Fi will be negatively impacted from the continuing structural change to consumers purchasing retail products online and therefore long-term earnings will be hard to sustain.

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Motley Fool contributor Bradley Murphy does not own shares in any company mentioned in this article.

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