Michael Kors Holdings Ltd. (KORS) reported third quarter earnings well ahead of expectations on Tuesday, February 12. EPS of 64 cents per share topped analyst estimates of 41 cents per share, and revenue up 70% year-over-year come in nearly $100 million ahead of estimates. Same-store sales in this important quarter ended December 31st increased 41% in North America and 58% in Europe. Gross margins in the quarter increased 80 basis points to 60.2% helping to drive revenue increases to the bottom line. Furthermore, the company gave EPS guidance for 4th quarter in the range of $0.32 to $0.34 slightly ahead of analyst estimates for EPS of $0.32 in the fourth quarter.
At the end of the quarter, the company had 65 stores in the Far East, including five new stores opened in Japan in the quarter. The company believes long term it can reach 150 stores in this region. Furthermore, the company has created a joint venture with Exclusive Brands International to create MK Panama Holdings to develop stores in South and Central America as well as the Caribbean. The company believes Latin America long term could support 40 freestanding stores. In North America, the company is planning on opening 40 new stores this fiscal year and the long-term potential in the region is for about 400 stores. Starting in February of 2014, Michael Kors will bring the North American ecommerce site in-house as the company focuses on creating an omni-channel experience.
Analysts expect the company to earn $2.06 per share in fiscal year 2014 and this forecast has increased over 6% in the past 90 days. The high estimate is for $2.50 and after this strong third quarter results, I believe average estimates for fiscal year 2014 could move closer to $2.50 per share. This would bring the company's forward P/E under 25 at current levels. There is reason to believe the company will continue to drive high growth rates. For example, jewelry is a small category today, but is a natural extension of watches; one of Michael Kors's strongest and fastest growing categories. Furthermore, the company is expanding its men's offerings and believes strongly in men's leather accessories.
When you look at Michael Kors, compared to some other luxury brands, you can see its high growth has driven up the company's multiples. Compared with Coach, Inc. (COH) Michael Kors has a significantly higher forward P/E and EV/EBITDA; however, Michael Kors's growth rate is also 31.6% versus 8.4% for Coach. One of the biggest positives for Michael Kors is the company's success in Europe. Management stated that the success is spread across Europe and that it remains excited about the prospects in Europe.
The chart of Michael Kors looks very strong with a strong long-term uptrend in place. The $5 (8.77%) move higher after earnings has put the stock even higher above this trend. At this point, it would be worth waiting for the stock to come in a little after such a big move. I believe history would indicate that the stock will likely pull back some, as it waits for the uptrend to catch back up.
Data sourced from: Company filings, and Yahoo!Finance. Chart from: Freestockcharts.com