Michael Kors is a Runaway Runway Hit for 2013

Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For investors following retail stocks, one name has dominated all others over the past year: Michael Kors (NYSE: KORS). The Hong Kong-based company, which features the products of fashion designer and Project Runway judge Michael Kors, has become one of the hottest stocks in the market, climbing 145% since its market debut in late 2011. What’s even more impressive is that most analysts expect the company’s growth to continue for the next three years, as it dominates the handbag industry and possibly buries longtime market leader Coach (NYSE: COH). Let’s take a look at Kors’ key statistics and see if that bullish view is justified.

Third Quarter and Guidance

For its third quarter, Michael Kors posted earnings of $0.64 per share on revenue of $637 million. Its earnings gained 220% and its revenue rose 70% over the prior year quarter, easily topping analyst expectations.

Sales Growth

Global same-store sales surged 41.4% from the previous year. It posted incredible growth in its two largest markets, Europe and North America. The company added 66 new stores during the quarter.

<table> <tbody> <tr> <td><strong>Region</strong></td> <td><strong>Same-store Sales Growth</strong></td> <td><strong>Total Sales Growth</strong></td> <td><strong>Total Sales</strong></td> </tr> <tr> <td><strong>Europe</strong></td> <td>58%</td> <td>112%</td> <td>$58 million</td> </tr> <tr> <td><strong>North America</strong></td> <td>41%</td> <td>67%</td> <td>$573 million</td> </tr> </tbody> </table>

Source: 3Q Quarterly Report

Kors’ strength in Europe, a market which Coach has failed to scratch, is impressive, since it faces off against some of the most well-known brands in fashion - Louis Vuitton, Prada, Gucci and Burberry - which are all sold at considerably cheaper prices than in North America.

The popularity of Kors in North America, fueled by free promotion from Lifetime’s hit series Project Runway, has also been boosted by its retail partners Macy’s and Nordstrom. Although Kors still isn’t as well known in middle America as Coach, the brand’s profile has been rapidly rising as celebrities such as Jennifer Lopez, Heidi Klum and Angelina Jolie have been spotted donning his garments, handbags and accessories.

Kors’ smaller business in Japan doubled its sales to $6 million. The company expects its Japanese business to grow at least another 300% at current growth rates. It also expects to grow slowly into East Asia to expand into China, Taiwan, Korea and Singapore.

Gross margin edged up 80 basis points to 60.4%, due to fewer discounts and pricier products. The fact that Kors was able to reduce discounts and sell higher-priced products on top of such robust same-stores sales growth shows that it holds pricing power over its rivals.

Kors Kills Coach

The biggest victim in Kors’ rise is Coach, which has been increasingly seen as an unattractive, aging brand compared to the newer, trendier styles offered by Kors. The numbers for fiscal 2012 reflect this view.

<table> <tbody> <tr> <td> </td> <td><strong>Same-store Sales</strong> <br />(latest quarter)</td> <td>S<strong>ame-store sales</strong> <br />(fiscal 2012)</td> <td><strong>North American Sales Growth</strong> (latest quarter)</td> <td><strong>North American Sales Growth</strong><br />(fiscal 2012)</td> </tr> <tr> <td><strong>Coach</strong></td> <td>-2.2%</td> <td>+3.0%</td> <td>+0.6%</td> <td>+6.6%</td> </tr> <tr> <td><strong>Michael Kors</strong></td> <td>+41.4%</td> <td>+40.5%</td> <td>+67.0%</td> <td>+64.5%</td> </tr> </tbody> </table>

Source: Trefis

Although some Coach shareholders may attribute Kors’ growth to its youth, Kors is quickly catching up in its North American store count as well. At the end of 2012, Kors had 228 stores to Coach’s 356 retail stores. Yet Coach also had 189 factory stores, a common sight at North American outlets, while Kors had none.

However, Kors has much stronger backing in indirect sales, through wholesale channels. Coach’s products are offered at 990 locations, while Kors’ products are offered at over 2,000 locations. This will help Kors, which controls roughly 10% of the U.S. handbag market, chip away further at Coach’s weakening 30% share.

Looking Forward

For the fourth quarter, Kors expects to earn $0.32 to $0.34 per share on revenue between $515 to $525 million. Its top line estimate is slightly higher than the consensus estimate of $513 million, which would signify 35% year-on-year growth.

Kors’ guidance was calculated assuming same-store sales growth around 25%  - which means that if it repeats its strong performance in the third quarter, then those top and bottom line estimates would be far too conservative.

The company is expected to grow at a rapid clip for the next two years. Over the next two quarters, revenue is expected to grow at least 42% and 36%, respectively. For fiscal 2013, Kors’ earnings per share is expected to grow 137% from the previous year to $1.85 per share, on revenue of $2.12 billion - a 63% increase. By 2014, growth is expected to cool slightly, with earnings still growing 30%, while revenue is forecast to grow 33%.

The global luxury goods market is forecast to grow at a 6% CAGR (compounded annual growth rate) between 2011 to 2014 to reach sales between $307.8 billion to $314.4 billion, according to Altagamma Studies. Affordable luxury brands, such as Kors, Coach and Tiffany are expected to become increasingly popular worldwide as the middle class in emerging markets develop more expensive, but restrained, tastes.

Versus Competitors

Michael Kors has one true competitor: Coach. Both companies are targeting the same demographic - upper middle class females. Ralph Lauren (NYSE: RL) is also considered an indirect competitor, due to its price range and geographic focus, although it targets both men and women. How do these three companies measure up against each other fundamentally?

<table> <tbody> <tr> <td> </td> <td><strong>Forward P/E</strong></td> <td><strong>5-year PEG</strong></td> <td><strong>Price to Sales (ttm)</strong></td> <td><strong>Price to Book</strong></td> <td><strong>Debt to Equity</strong></td> <td><strong>Return on Equity (ttm)</strong></td> <td><strong>Profit Margin</strong></td> </tr> <tr> <td><strong>Michael Kors</strong></td> <td>24.18</td> <td>0.98</td> <td>6.02</td> <td>12.79</td> <td>No debt</td> <td>52.35%</td> <td>17.31%</td> </tr> <tr> <td><strong>Coach</strong></td> <td>11.69</td> <td>0.96</td> <td>2.75</td> <td>6.50</td> <td>1.09</td> <td>53.18%</td> <td>21.31%</td> </tr> <tr> <td><strong>Ralph Lauren</strong></td> <td>18.64</td> <td>1.65</td> <td>2.28</td> <td>4.19</td> <td>7.27</td> <td>19.65%</td> <td>10.36%</td> </tr> <tr> <td><em>Best Value</em></td> <td>Coach</td> <td>Coach</td> <td>Ralph Lauren</td> <td>Ralph Lauren</td> <td>Michael Kors</td> <td>Coach</td> <td>Ralph Lauren</td> </tr> </tbody> </table>

Source: Yahoo Finance

Michael Kors does not stand out fundamentally in any way, except for its clean balance sheet. The stock can be considered slightly overvalued, since its P/E, P/S and P/B ratios are all trading at a significant premium to its peers - but this is due to Kors’ status as a fast-growing momentum stock. Let’s compare Kors’ top and bottom line growth to these two rivals to see if that momentum is justified.

<img src="http://media.ycharts.com/charts/1e65a52fe6236f393e54ef1497f693aa.png" />

<img src="http://media.ycharts.com/charts/12c9ac80738b1f7d6983604e7033cd37.png" />

KORS data by YCharts

Kors’ higher multiples are absolutely justified at its current growth rates. The company has continually beat earnings expectations since its December 2011 IPO, and raised forecasts just as often.

The Foolish Bottom Line

If you’re searching for a fast-moving momentum stock fueled by strong growth in every metric, Kors fits the bill perfectly. If you’re a man, ask your significant other which brand they prefer - Coach or Kors - and the answer may surprise you. Kors has been gaining momentum over the past year, and is on its way to replace Coach as the “go-to” brand for affordable luxury. A clean balance sheet, strong top and bottom line growth, and snowballing publicity all make Kors a strong choice for a growth-oriented portfolio going into 2013.

Leo Sun 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!

blog comments powered by Disqus