KORS: Earnings Have To Be "Fierce"

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Michael Kors and his eponymous company, Michael Kors Holdings (NYSE: KORS) have a huge week ahead reporting earnings on Tuesday and the Fall 2013 Runway Show Live From Lincoln Center on Feb. 13. Michael Kors Holdings has been the retail Outperformer of 2012 and it only debuted in December 2011. The affordable luxury brand has beaten estimates since its IPO with "stunning" accelerating revenue growth, 74% in the last quarter, 58% in the quarter before that. This first earnings report after a full first year as a publicly traded stock will be widely watched as will the fashion show.

What Analysts Want (besides Runway Swag Bags)

Michael Kors Holdings, with its presence in 74 countries and a very strong showing in Asia, is expected to bring in at least $525-535 million in revenues and $0.37-39 diluted earnings per share as guided in the November earnings release. In the release the same store comps grew 41.3%, wholesale net sales grew 71%, and licensing revenues improved 31%. Fierce, indeed!

However, just as Michael Kors has been known to skewer a designer or two on Project Runway (they're called Korsisms on the Project Runway site) analysts will be merciless about the entrance of competitor Coach (NYSE: COH) into apparel and whether that's a threat. Expect further questions about the torrid pace of expansion as the company opened another 66 stores last quarter for a total of 369 stores compared to 399 for rival Polo Ralph Lauren (NYSE: RL).

Analysts want to be sure all the seams are straight and the stray threads nipped off before they're willing to stick their necks on the line and upgrade yet again. China, Hong Kong, and the health of the company's relationship with Fossil which manufactures the popular Michael Kors watches will surely be raised during the Q&A.

The global lifestyle brands company trades at a luxe P/E of 45.39 with a forward P/E of 27.72 and has been the high end go to name for 2012 outshining names like Tiffany's, Saks, and JW Nordstrom. With a momentum name like Michael Kors Holdings earnings will have to be "fierce" and brilliant holiday sales are de rigeur. Ralph Lauren reported very good Q3 numbers last Tuesday on better than expected holiday sales and guided higher for 2013 taking their stock out of a six month slump. Ralph Lauren trades at almost half the P/E of Michael Kors Holdings at 23.35. It should be noted that when Michael Kors Holdings reported holiday sales a year ago they surprised by 122.20%.

"Disco Pumpkin" Growth?

Calling a bloated, poufy, glitzy design a "disco pumpkin" has become one of the more famous Korsisms. At some point the earnings whispers become a roar and then it's disco pumpkin and Heidi Klum says "You're out. Auf wiedersehn." It's getting harder to beat with the whisper number being higher than guidance at $0.41 per share and revenue at or above $540.3 million.

Fashion stocks aren't like toothpaste companies and competitor Coach learned that the hard way with an earnings disappointment of five cents per share leading to a 15% stock price decline. There are risks with a high end high flier like Michael Kors Holdings without any yield like Ralph Lauren or Coach. Coach has better gross margins of 73% to Michael Kors' 57% and a yield of 2.50%. It still didn't matter to the market.

While financial pundits keep calling Michael Kors Holdings an upstart the company was founded 32 years ago. It has an admirable return on equity of 46.12% and a five year EPS growth rate of 29.74% more than twice the rate of the sector.

Catty On The Catwalk

Whether fashion writers or retail analysts are more snarky, I don't know, but the tendency to be unforgiving pertains to both. Michael Kors' PEG is 1.23 compared to the .98 for Coach and 1.69 for Ralph Lauren meaning both Ralph Lauren and Michael Kors may be overvalued.

Any stumble on the catwalk for Kors would likely come from American sales where  Fool Andrew Marder points out it gets the lion share of revenues. He also argues that Michael Kors Holdings needs to appeal to the aspirational middle class shopper but  Michael Kors does have a very popular tier two line, Michael, with lower price points on its mens and womens apparel and accessories. The more affordable lines are also available at Macy's. Cross Ledge Investments' retail analyst Lori Wachs told Bloomberg TV on Black Friday that Michael Kors was the "must have" brand of the holidays.

Its Chinese and Asian sales should continue to be eyepopping as the glitzy brand is readily identifiable for status conscious shoppers even across a bicycle thronged street. In addition, its watches, small leather accessories, and handbags are very desirable as gifts in that culture.

Auf Wiedersehn Or Bravo!?

As growth rates rise quarter after quarter it's like seeing how high a stiletto the supermodel can wear before she totters. The key is the growth rate and guidance. Anything else is just needless adornment. If Michael Kors Holdings and CEO John Idol can bring it home one more time for Q4 earnings then the analysts will applaud and Kors can take a bow just as he will for the hot ticket runway show the next day.

 


leglamp 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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