This Apparel Company Is Crushing Estimates
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Times of economic distress are usually not good for fashion retailers, especially luxury brands, as consumers are left with considerably less money to spend on these types of goods. However, with the economic recovery gaining traction, some of these firms are showing pretty solid numbers. Michael Kors (NYSE: KORS) has a strong history of beating estimates, and recently came out with another excellent quarterly report. While this strong growth comes at a premium, the stock may be worth the money.
Introducing Michael Kors
Michael Kors, based in Hong Kong, designs and markets branded apparel. In the company’s own words, it is a ‘global luxury lifestyle brand.’ Its products include cosmetics, swimwear, watches, jewelry, fragrances, suits, and ties. The company has a market cap of $13.63 billion, and with a fairly high 2.55 beta, is up over 60% in the last year.
Since becoming a publicly-traded entity a few years ago, the company has been delivering some pretty staggering earnings and revenue growth, and has not yet missed estimates in a quarterly report. In fact, the company has delivered a string of very sizable beats throughout fiscal 2012 and 2013. Q1 and Q3 of fiscal 2013 saw beats of over 50%. Revenue growth over the same period has easily beaten the industry average.
The company’s most recent report, that of Q1 fiscal 2014, blew away analysts' expectations. EPS came in at $0.61 for the quarter, smoking the $0.49 estimate and up from $0.34 in the same period a year ago for a massive 79% increase. Total revenue of $640.9 million was up 54.5% year-over-year and came in well above the $570.5 million consensus, whereas comp store sales increased 27.3%. These are some very, very formidable numbers.
Somewhat surprisingly, the firm’s European operations performed especially well with a 144% increase in sales, driven by 56% growth in comp store sales. The licensing division also did well with a 41% revenue increase, led by a strong performance in watches and eyewear. The firm also raised its outlook for fiscal 2014, now expecting EPS in the range of $2.67-$2.69 and total revenue between $2.8 billion and $2.9 billion.
The firm has plenty of drivers to sustain continued growth. Since the first quarter of fiscal 2013, Kors has opened 75 new stores, with the company now operating 328 retail locations. Including licensed locations, this figure is up to 442. The company currently has 231 locations in the U.S., but believes a long-term goal of 400 isn't unreasonable, which means that it has room to grow even in its established markets.
The growth potential in its new market of Europe is even higher according to management, and the opening of new stores in this region should allow the company to maintain its stellar growth figures there. The firm is also committed to growing its existing locations, projecting same-store sales growth for the next quarter in the range of 15%-20%. Moreover, the company's new products, especially watches and jewelry, have enjoyed strong sales, and Kors expects further growth in these categories.
While some U.S.-based fashion companies have been doing fairly well recently, they aren’t putting up the same kind of numbers. Ralph Lauren (NYSE: RL) is one of the prime competitors in the luxury fashion space, and with a market cap of $17.1 billion, it is of comparable size. The company is growing, but nowhere near the rate that Michael Kors is achieving. The stock was recently punished on a weak sales outlook, with low single-digit numbers coming in under the 7% consensus expectation.
The company expects a better performance in the second half of its fiscal year though, as a result of investments in new stores, the e-commerce business, and international expansion, as well as a range of new products planned ahead. Additionally, the company plans to increase spending on advertising and marketing initiatives. While it remains to be seen how these new investments will play out, the company is expecting revenue growth between 4% and 7% for the fiscal year, way below Michael Kors' growth rate.
Phillips-Van Heusen (NYSE: PVH) is another competitor in the luxury fashion space. Its own brands include Calvin Klein and Tommy Hilfiger, although it also distributes licensed Michael Kors products. One of the company's main growth drivers going forward is the recent acquisition of Warnaco. This jeans and underwear business is expected to contribute quite a bit of revenue in fiscal 2013, as the company is looking at consolidated revenue of around $8.2 billion for the year, compared to around $6 billion in 2012.
Rebuilding the Warnaco business will be a key challenge for the company going forward, but its continued success relies heavily on strength in its established Calvin Klein and Tommy Hilfiger brands. So far, these names are still showing fairly solid growth, and management is optimistic about the efforts to upgrade the design and quality of its Calvin Klein jeanswear especially. The Calvin Klein business is expected to more than double to $2.75 billion in fiscal 2013. Still, with all these growth drivers intact, the company can't match Michael Kors' expected growth rate.
Valuations and metrics
Michael Kors is a bit pricey at the moment, reflecting the company’s impressive growth. The stock trades at 35.73 times trailing earnings, versus Ralph Lauren’s 23.69 and PVH’s 31.41. The industry, as a whole, actually looks a bit overpriced. Michael Kors has a price-to-sales of 6.48, which is also quite high, but an excellent return on equity of nearly 53%. The operating margin of 29% is also very strong. Moreover, the company has no debt on the books and around $472 million in cash.
The bottom line
Michael Kors has done it again for the first quarter of fiscal 2014, easily beating estimates and delivering outstanding top and bottom line growth. Even in economically troubled Europe, the company has been growing sales impressively. With a raised outlook, the company is expected to keep up this great performance. While the stock is a bit pricey at the moment, investors appear willing to pay the premium, sending the stock even higher following the report.
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