Weak Hands and Strong Earnings
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When it was announced recently Michael Kors would sell 3 million shares of the company he founded, Michael Kors Holdings (NYSE: KORS), in a secondary offering it wouldn't have come as a huge shock to long-time longs. But those who entered the stock recently should have been aware that the designer sold a huge stake at the first lock up expiration opportunity in March and the second in September. Kors is what some would call a "weak hand." When he sold in March it took quite a while for investors to regain confidence in the stock. This is the fourth time he will be selling shares.
Is he just nervous after his Fashion Week runway show where the models wore goofy fur hats with earflaps, a sort of Fargo meets Fifth Avenue look? Is he just greedy or is he reasonably taking some profits off the table? He will still own plenty of shares, a 2.4% stake, but with such a momentum stock he should be aware his sales have an impact on investor confidence. Before the 2011 IPO he had a 22% stake.
As Carrie Bradshaw used to write on every episode of Sex and The City, the show that was more of a paean to fashion than sex, "I can't help but wonder..." why he and his biggest investor, PE firm Sportswear Holdings Limited, were selling so much. Sportswear Holdings Limited is selling 19.7 million shares, more than half its stake. And don't forget, CEO John Idol is also planning to sell 2 million shares. Why sell, especially after reporting strong earnings... even "fierce" considering how high expectations were.
Michael Kors reported on Feb. 12 a rise of revenue of 70% year over year with $636.8 million and EPS of $0.64, more than doubling from the same quarter in 2012. Margins increased and guidance was raised with especially bullish views on global luxury sales. This handily beat expectations taking the name to an all-time high. Over 225 institutions hold shares in Michael Kors, but some hedge funds have been moving out since last quarter. Watching Kors stock perform is like watching a daredevil, peeking through the fingers covering your eyes, thrilling to watch but nerve wracking, too.
Longs would probably agree holding it feels like holding a speculative stock, but it has no debt, its growth has been phenomenal, and the PEG is just 1.07 with a forward P/E of 24.48. It even has $405.78 million total cash. If only management would cool it with the secondaries this stock would be much less volatile.
Michael Kors has certainly been outperforming closest luxury accessories rival Coach (NYSE: COH), with Coach hitting a 52-week low on Feb. 21. Part of the downbeat news hitting Coach is that longtime CEO Lew Frankfort will retire in 2014. Under his management he brought what was a small niche leather goods seller to become a publicly traded company with a market cap of $13.37 billion. He will sorely be missed but has promised a seamless transition.
One of the most noteworthy items of interest about Lew Frankfort is how much Coach stock he continues to hold -- 2,064,547 shares as of Dec. 26. The stock is down some 35% over the last year and not even the news it was branching off into apparel has helped. It's trading at a 13.14 P/E now with a 2.5% yield and a PEG of .96. The dividend payout ratio is a reasonable 31% and it has a return on equity of 53.18%.
The other news hitting the stock were the Q2 earnings. As Frankfort put it, Coach was "... disappointed by our performance in North America, where the holiday season proved challenging. Most broadly, the consumer was impacted by a muted macroeconomic environment, while in the women’s handbag category competition intensified." For competition, read Michael Kors. While international sales were up 12% and the men's accessories were gaining traction it wasn't enough to thrill the Street.
Either you pick a company whose CEO has conviction but is threatened by a strong competitor (Coach) or you have the strong company whose management is selling out (Michael Kors). You might be tempted to buy Fossil (NASDAQ: FOSL), which offers watches, accessories, and apparel under its own proprietary brands as well as licensed designer brands including Michael Kors. It has almost 200 retail and outlet stores in the US and almost 200 globally.
Fossil is sort of the monkey in the middle here with a 17.96 P/E and forward P/E of 14.46, a PEG of .95, and no yield. The stock is down over 13% over the last year. Fossil has much more debt than these other two and talk of an Apple iWatch has brought concern to shareholders. However, Fossil beat on revenues of $948 million and met expectations on EPS of $2.27 when it reported on Feb. 12. EPS grew 34% over the year ago quarter and margins increased.
Fossil received two downgrades after reporting and sentiment is turning more bearish. Despite a deal with hot designer Tory Burch for watches (which won't come to market until 2014) Fossil may just tread water barring a catalyst. But it does have CEO conviction with Kosta Kartsotis holding 6,189,530 shares as of Jan. 18.
Jumping Off the High End
Whether you think Michael Kors trading below the secondary price of $61.50 is a buying opportunity or Coach at 52-week lows is one, you'll want to be very careful with these three. Each has their strengths but the high end is seemingly out of favor with Nordstrom selling off after lowering guidance. Wait until all the weak hands shake out and there is your buying opportunity.
leglamp has no position in any stocks mentioned. The Motley Fool recommends Coach and Fossil. The Motley Fool owns shares of Coach and Fossil. 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!