Is This The Luxury Retailer To Own?

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Michael Kors (NYSE: KORS) had a stellar first quarter. The retailer is benefiting from a number of tailwinds that are driving growth and allowing the company to gain market share. Michael Kors' designs have won a legion of fans with its trendy, yet affordable, lifestyle designs that evoke a jet-setter's image. The company has conveyed this in its advertising, and it's working. The company is also making a bigger push into the watch and jewelry business worldwide.

First-quarter results

Total revenues increased 54.5% to $640.9 million. Comparable-store sales increased 27.3%. Diluted earnings per share increased 79.4% to $0.61. These numbers compare to the first quarter of last year. The gross profit margin for the quarter was 62%. The company ended the quarter with 328 retail stores, including concessions, compared to 253 locations last year with concessions. There were an additional 114 retail locations operated by licensing partners. This marked a total of 442 Michael Kors stores worldwide at the end of the first quarter.

There were a number of company tailwinds that drove growth for Michael Kors. Among them were the successful rollout of shops within department stores, strong gains in Europe, and robust sales at its own retail locations for its products. There was strong demand for Michael Kors in its wholesale business, which serves department stores such as Macy's and Nordstrom. The shop-in-shops contributed to a 59.3% rise in sales in this division. In Europe, sales grew 144% as Michael Kors expanded to 49 stores. Comparable-store sales in Europe grew 56%. The company thinks it could eventually have 200 stores in Europe. Licensing revenues grew 41%, driven by strength in watches and eyewear.

Going forward

Looking ahead to the next quarter, Michael Kors expects comparable-store sales to increase 15% to 20%. Total revenues are expected to be in the range of $695 million to $705 million. Earnings per share are expected to be in the range of $0.62 to $0.64.

Sales growth for Michael Kors is going to be driven in several ways. The first way will be through continued store expansion. The company plans to open 50 new stores in the North American market this year. On the international front, Michael Kors just opened its first store in Rio de Janeiro, Brazil. There's been strong demand for Michael Kors products from Brazilians for luxury items on their travels. The company hopes to expand to 40 locations in Central and South America. The company also opened its first store in India. The New Delhi location will be the first to tap into the growing economy of India.

Perhaps the biggest opportunity for growth is in the shop-in-shops business within leading department stores. The company hopes to expand this business with the large geographic footprint that the department stores possess. This gives Michael Kors a great avenue to sell accessories, footwear and apparel. This new business model highlights the Michael Kors brand and should drive further growth as more department stores convert to the shop-in-shops concept. In the long-term, the company hopes to have 2,000 department store locations.

Lastly, Michael Kors sees tremendous growth in its watches and jewelry business. At the end of the first quarter, there were approximately 60 shop-in-shops for both watches and jewelry. Regarding this business, CEO John Idol said:

"We believe that we will be able to open approximately 500 shop-in-shops globally for watches and jewelry."

Competition

Two of Michael Kors' chief competitors are Coach (NYSE: COH) and Ralph Lauren (NYSE: RL). Coach is best-known for its women's handbags and accessories business. Ralph Lauren is best-known for its lifestyle brands, selling men and women's clothing. In many respects, Michel Kors took the best aspects of both and instilled them in its brand. Michael Kors is known for its handbags with the MK logo and the jet-set lifestyle that goes with it.

Coach has been hurt the most from the rise of Michael Kors. Comparable-store sales have been negative in two out of the past three quarters. Contrast that with Michael Kors, where comparable-store sales have risen in the double-digits.

To keep up with Michael Kors, Coach is revamping its watch collection. Watches are a big focus for Michael Kors as well. Coach will double its watch collection to 200 items and will include watches at lower price points. It remains to be seen if this new strategy will work. My worry for the company is that it could be spreading itself too thin as it competes with Michael Kors.

While Ralph Lauren does sell handbags and watches to compete with Michael Kors and Coach, its primary business is its clothing business. Ralph Lauren, however, is still not growing as fast as Michael Kors, with revenues rising only 1% in the last quarter. Growth going forward for Ralph Lauren is expected to come from its retail stores and e-commerce sites. The company is launching a new Korean website and expanding the number of countries it can ship to in Europe and Asia. This year the company plans to open 30 new retail locations, mostly in international markets. Ralph Lauren is also planning to open Polo stores worldwide.

Foolish assessment

Michael Kors is the luxury retailer for investors to own. Competitors are having a tough time competing with its styles and brand innovations. The stock remains attractive with a PEG ratio of 0.93. The forward P/E is 21, and that's reasonable for a company with Michael Kors' growth. On the balance sheet, there's $472 million in cash and no debt. Overall, it is a well-run company with products that customers love. The customer has spoken, and the comparable-store sales growth says that Michael Kors is the place to shop and the company for investors to own.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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