Michael Kors - Company Remains On Course For Long-Term Growth

| About: Michael Kors (KORS)

Shares of Michael Kors (NYSE:KORS) continue to gain ground as the luxury retailer is benefiting from a recovery in global consumer spending for its high-end fashion.

Given the limited exposure in Europe and Asia, the company has plenty of growth opportunities in the year's ahead and seems determined to take advantage of them.

Fourth Quarter Results

Michael Kors generated fourth quarter revenues of $597.2 million, up an unprecedented 57.1% on the year before. Retail sales rose by 58.8% to $272.7 million, driven by 67 net new store openings over the past year. Comparable store sales grew by an impressive 36.7% as well.

Wholesale revenues, which increased 59.4% to $304.7 million, were very strong as well. On average, analysts expected Michael Kors to report fourth quarter revenues of $548.2 million.

Gross margins were up a full 200 basis points to 59.7% and positive operating leverage resulted in a 97% increase in operating income, which came in at $155.3 million.

Net income came in at $101.1 million, or $0.50 per diluted share. This compares to last year's earnings of $0.22 per share and consensus estimates of $0.39 per share.

CEO and Chairman John D. Idol commented on the strong quarter, "Fiscal 2013 was another outstanding year for Michael Kors with continued momentum into the fourth quarter reflecting advances on our key growth strategies. Our jet-set luxury accessories and ready to wear are resonating with consumers worldwide and we are excited by our prospects for future growth."

Looking Into The Fiscal 2014

The company expects first quarter revenues for its new fiscal year to come in between $555 and $565 million. Underlying this guidance is a comparable store sales increase of 20%. Diluted earnings per share are expected to come in between $0.46 and $0.48 per share.

The first quarter guidance, which assumes a decline in revenues and earnings compared to its fourth quarter results, falls short of consensus estimates. Analysts expected the company to guide for earnings of $0.48 per share on revenues of $566.3 million.

Full year revenues are expected to come in between $2.65 and $2.75 billion. Revenues will be driven by a 15-20% increase in comparable store sales, with the remainder of growth coming from new store openings. Diluted earnings per share are seen between $2.43 and $2.47 per share.

Analysts looked for a full year guidance of earnings of $2.45 per share, on revenues of $2.82 billion.

Valuation

Michael Kors ended its fiscal 2013 with $472.5 million in cash and equivalents. The company operates without the assumption of debt, for a solid net cash position.

Factoring in the 3% gains in Wednesday's trading session, the market values Kors at $12.8 billion, or its operating assets around $12.3 billion. This values the operating assets at 4.5 times 2014's expected annual revenues and 25 times annual earnings.

Despite the strong balance sheet and excellent operating results, the company does not pay a dividend at the moment.

Some Historical Perspective

Investors in the public offering of Michael Kors have seen incredible returns. Shares were sold to the general public in December of 2011, merely one and a half year ago. Shares were placed at $20 per share, after bankers set an initial pricing range of $17-$19 per share, and have more than tripled ever since, trading around all time highs at the moment.

Underlying these great returns is an incredible pace of both revenue and earnings growth. Revenues rose from merely $377 million in 2009 to $2.2 billion in 2013, growing at an annualized rate of 55%. Net earnings rose from merely $13.0 million to $397.6 million in the meantime.

Investment Thesis

Michael Kors has grown really hard in recent years, entirely driven by its US operations which generates almost 87% of total revenues in the fourth quarter.

The largest division continues to show impressive growth. Revenues in the United States were up by 52% to $517 million, driven by a 35% increase in comparable sales. Yet Michael Kors has some future growth engines ready. European revenues increased by 97% to $73 million driven by a solid 63% increase in comparable sales, despite economic woes in the continent. The Japanese division almost doubled its revenues as well to $7 million, mostly driven by new store openings.

The company aims to further grow its revenues by opening some 100 stores in the coming year, compared to 67 in the past year. Management furthermore hopes to start its e-commerce business later this year, and will aggressively move forwards with its successful shop-in-shops concept.

Still the revenue guidance is a bit soft, entirely due to the cautious guidance for comparable store sales. Comparable store sales growth for 2014 is expected to slow down to 15-20%, down from 40% over the past year. Worse, earnings growth will not outpace revenue growth due to investments in the e-commerce business. Both revenue and earnings growth is expected to slow down towards 25%.

The company's decent strategy accompanied with a rebound in luxury consumer spending has boosted results. Despite the introduction of cheaper accessories, average ticket sales came in roughly flat at $215 amidst strong traffic growth. Conversion rates of 10% are pretty decent as well.

Trading around its all time highs, shares appear to be fairly valued despite the fact that they have tripled in merely one and a half year's time. At these levels I see few reasons for either a compelling short or long positions.

Growth will slow down in the coming year, but the limited scale of the company's European and Asian activities should provide a solid platform for future growth. At the same time there appears to be little room left for positive operating leverage and the continued expansion might cannibalize sales in its US stores, as the company could lose some of its luxury appeal given the excessive exposure thanks to its shops-in-shops concept.

I remain on the sidelines for now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.