Buy Michael Kors on the Pullback

Joseph 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) is arguably the most loved, fashionable brand in the world right now. Since reporting a blowout quarter and hitting its 52-week high, the stock has pulled back a significant amount. It is time to pile in and earn a high percentage return over the next several years. 

The Blowout

On Feb. 12, Michael Kors reported one of the most impressive quarters I have seen in quite some time. Here are the highlights with a year-over-year comparison:

  • Earnings per share increased 220% to $0.64
  • Revenue increased 70.4% to $636.8 million
  • 41.4% increase in comparable store sales

Analysts had only projected earnings per share to come in at $0.41, so this surpassed estimates by 56%. The stock popped from $57 to $62 and reached its high of $65.10 days later.

Raised Guidance

In the earnings report, management also raised full year guidance. This projection exceeded analyst expectations and was a catalyst in sending the stock higher. 

Management's expectations:

  • Raised full year earnings per share forecast to $1.80-$1.82 from $1.48-$1.50
  • Raised full year revenue forecast to $2.1 billion from $1.86-$1.96 billion
  • Analysts expected earnings per share of $1.57 on revenue of $2.01 billion

Michael Kors sees same store sales increasing another 20-25% in the fourth quarter. With current expectations of just $0.39 per share, they should blow past these numbers and raise fiscal 2014 guidance. This company is growing at an incredible rate.

Store Expansion

In the last year, Michael Kors has opened 66 new retail locations, bringing their total to 297. In addition, they have 91 stores operated through licensed partners. They are still expanding quickly and have their eyes set on China. In February of 2012, Michael Kors' CEO John Idol stated "Over the next three to five year, we will have 100 stores open in this market (China)." With China expected to account for 20% of the world's luxury market by 2015, this is a very smart and strategic move to make. 

The Pullback

Since reaching their 52-week high on Feb. 19, Michael Kors has fallen 13.8%. At current levels, the stock is trading at just 31 times full year earnings estimates. More importantly, the stock is trading at only 18.7 times 2014 estimates. These multiples are much too low for a high-growth company like Michael Kors. I believe a fair multiple to be around 35 for current earnings and 25 for forward earnings. 

Michael Kors > Coach

Ever since Michael Kors began dominating the luxury goods market in the United States, analysts and investors have been directly comparing them to Coach (NYSE: COH). This is unfair because Michael Kors is a stronger company with much more potential. Simply put, Kors is greater than Coach.

Here's some data to back this up:

  1. Michael Kors same store sales GROWTH was 41.4% in the last quarter compared to Coach's same stores sales DECLINE of 2.2% 
  2. In the same period, Michael Kors had North American sales increase 67% while Coach's grew just 0.6%

Since going public, Michael Kors is up 134% while Coach is down 17.6%. Coach has cited their main issue as increased competition and I do not think they have the power to turn it around within the next year. There have been rumors about the company going private, which I think would be the best move they could make at this point.

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Notable Beneficiary

Estee Lauder (NYSE: EL) is a manufacturer and distributor of skin care, makeup, hair care, and fragrance products worldwide. In 2003, they acquired Michael Kors' fragrance business for an undisclosed amount of money. Management stated, "We believe that the brand has significant growth potential..." and they were 100% correct. 

Fragrances made up 13.1% of Estee Lauder's net sales and exceeded $1.27 billion in 2012. Sales were only up 3% year-over-year, but the growth is looking better for the next 3 years. Estee Lauder made a great call acquiring Michael Kors' fragrance unit and they should continue to benefit from the growing popularity of the brand. 

The Foolish Bottom Line

Michael Kors is an incredible value play in today's market. They have unparalleled growth in their industry and will continue to take share from competitors. I believe investors should buy this stock on the pullback and hold it for many years to come. 

Joseph Solitro owns shares of MICHAEL KORS HOLDINGS LTD COM NPV. 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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