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On February 12, fast-growing retailer Michael Kors (NYSE:KORS) announced spectacular fiscal year 2013 third quarter results. Revenue surged 70% year-over-year to $637 million, exceeding consensus expectations. Earnings were also fantastic, jumping 220% year-over-year to $0.64 per share, considerably above consensus estimates.

Strength at the aspirational luxury brand hasn't slowed yet, with same-store sales jumping 41% year-over-year, even as the company added 66 net new stores - a stark departure from competitor Coach (NYSE:COH), which has struggled to compete with Michael Kors. Gross margins, while still well below those at Coach, jumped 80 basis points to 60.4%, reflecting the firm's increase in its store base (as well as fewer discounts and a favorable shift in product mix). Though we aren't planning for 70%+ gross margins because the firm has a lower-end brand (Michael by Michael Kors), we see some room for expansion in fiscal year 2014.

On a geographic basis, Michael Kors is doing a wonderful job stealing share in the global luxury market. In Europe, sales jumped 112% year-over-year to $58 million thanks to an increase in same-store sales of 58%. Such a growth pace is quite impressive given the region's weak economic landscape, and we can only imagine what expansion would have been in a strong retail environment. North American sales jumped 67% driven by a comparable store sales increase of 41%. At $573 million, North America is far and away the largest geography for the firm, and as long as its strength continues, we believe the firm's retail partners such as Macy's (NYSE:M)) and Nordstrom (NYSE:JWN) will work to promote the brand.

Although a tiny business at this point, sales in Japan doubled to $6 million, and the company sees the opportunity to increase its store footprint three-fold. Similarly, East Asia (China, Korea, Singapore, etc.) remains a fairly untapped growth venue that we think will be monetized in the coming years. Management mentioned that the firm is well-positioned to grab share in the growing global luxury market, noting:

"…according to the luxury goods worldwide market study of 2012, the global luxury goods market is estimated to grow from $251 billion in 2011 to between $314 billion and $327 billion in 2015."

Going forward, the firm is forecasting revenue of $515-$525 million during the fourth quarter, above the consensus revenue estimate of $513 million (representing a growth rate above 35%). The guidance assumes mid-20% same-store sales growth, which if achieved, would be much lower than the figure we saw in the third quarter. The company is forecasting earnings of $0.32-$0.34 per share during the quarter, with gross margins up slightly year-over-year and SG&A growing in line with the numbers posted in the third quarter.

Overall, we liked what we saw in the third quarter, though we do not expect a 70%+ growth rate to last forever. Nevertheless, the firm has a long runway in terms of geographic expansion, and it has yet to even approach the popularity of Coach in the United States. For much of Middle America, Michael Kors isn't (yet) on the radar. Since the firm is capturing market share, we do not think its sales will be as materially impacted by poor macroeconomic conditions, so we think earnings and revenue growth will remain strong. Still, we aren't interested in adding shares to the portfolio of our Best Ideas Newsletter at this time.

Source: Michael Kors's Third Quarter Reveals Strength