What's In A Name
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are maybe five or so contemporary designer names the average American is conversant with: Calvin Klein, Vera Wang, Donna Karan, Ralph Lauren and Michael Kors. All these designers have leveraged their names to create fashion empires and the most successful lately has been Michael Kors.
Michael Kors Holdings (NYSE: KORS) was recently called the most successful IPO of the last year. It hasn’t been quite a year since it debuted in December 2011 but it’s been quite the ride for investors, having almost doubled from the IPO price to Friday’s close at $53.95.
The big question is, five years from now are you going to say, “Wow, I can’t believe I snagged KORS under $50.00. What a bargain!” When Michael Kors Holdings reported on June 12 it surprised analysts earning $43.6 million from $17.4 million in the same pre-IPO period a year before. Investors loved the 36.1% increase in same store sales and raised guidance and the share price soared 12% intra-day. Unlike Tiffany’s, Michael Kors Holdings cited Europe as a fast growing segment contributing to better earnings. What was most interesting to me was that licensing revenues rose 27%. This is where the value of a big name really shines.
Michael Kors Holdings operates in three segments: retail, wholesale and licensing. Licensing is a sweet business as Michael Kors can lend its name to fragrances, cosmetics, men’s suits, accessories, leather goods, jewelry, coats, ties and eyewear. Have you priced designer frames recently or a bottle of cologne? Fossil makes watches for Michael Kors and this was partly responsible for the Fossil jump in share price recently. Licensing is like gravy as Michael Kors Holdings doesn’t have to actually manufacture or sell the product itself.
Names are so important. During the Guess Q2 conference call CEO Paul Marciano said, “Brand supersedes everything.” While that may not be working out for Guess it certainly is for Michael Kors and main competitor Ralph Lauren Corporation (NYSE: RL). Ralph Lauren Corporation is considered a direct competitor as is Donna Karan and Calvin Klein (owned by Philips Van Heusen). Ralph Lauren’s P/E at 21.86 is half that of Michael Kors Holdings at 54.88 and the industry average is 19.20.
Ralph Lauren also has a yield of 1.00% and founder, Chairman and CEO Ralph Lauren still owns over half a million shares. While there has been some speculation over the future of the company as Mr. Lauren is now 72 the truth is he created an aspirational lifestyle brand redolent of upper-class leisure, Kennedyesque and tasteful that will very likely outlive him. Michael Kors fashions are slightly more glitzy and glamorous, more ‘new money’. It costs plenty of new money, too.
In fact, I just got an email with a new look they’re pushing recalling vintage Hollywood glamour, the pants, fur coat, turtleneck, purse and sunglasses total slightly less than $7000. Most of the eponymous Michael Kors items are very pricey while the low end Michael apparel line costs a tenth of the high end fashion line.
Of note, Michael Kors is expanding in Japan. The company is highly dependent on continuing strength in the luxury goods sector but the Japanese love brand name shopping so that should go very well for them.
What is worrying about Michael Kors is that their market cap is $10.38 billion compared to $14.46 billion for Ralph Lauren but has $1.47 billion in revenue to Ralph Lauren’s $6.93 billion in revenue. Maybe the Michael Kors market cap should be more proportional to Ralph Lauren’s but Michael Kors has quarterly revenue growth of 70.60% and quarterly earnings growth of 184.70%. The debt load isn’t onerous at total debt of $27.67 million to $162.07 million total cash.
Things to keep in mind when comparing the two is the longevity of the Ralph Lauren brand and the lower P/E. Also, while investors have been wowed by the run that Michael Kors Holdings has had they are quick on the trigger to sell like they did in the spring. Michael Kors Holdings had a secondary offering after waiving the lock up expiration for insiders and Michael Kors, himself, founder and Creative Director sold some $160 million worth of shares. Shares sold off fast and furious as investors lost confidence in the name.
Name retailers and designers like these two have a cachet that is almost unassailable but I’d rather go classic and go for Ralph Lauren and let new money chase the Michael Kors stock. Maybe in five years you will feel it is a bargain right here but check the charts and remember investors had a very wild ride in Ralph Lauren in its first five years.
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