Company Name: Michael Kors Holding Limited (KORS)
- Reported EPS: $0.50
- Consensus EPS: $0.39
- Reported Revenue: $597.2M
- Consensus Revenue: 546.07M
- Gross Profits: $356.2M
- Previous Year Gross Profits: $219.2 M
- YoY increase in Gross Profits: 62.5%
- Income From Operations: $155.3M
- Previous Year Income From Operations: $78.4M
- YoY Increase in Income from Operations: 98%
- Same-Store-Sales Increase: 37.6%
Michael Kors Beats Earnings By $0.11 On The Back Of Continued Growth In All Business Segments
Reporting yesterday, Michael Kors announced Q4 EPS of $0.50 beating analyst estimates of $0.39. Higher than expected EPS was due to strong demand, growth in domestic and international markets, continued strength in all business segments and geographies around the world.
Total revenues continued to rise reaching $597.2M, an increase of 57.1% from the same time last year. Consensus revenue for the quarter was $546.07M. Same-store-sales, a key growth metric, also increased by 36.7% for the quarter.
Europe continued to be one of the strongest geographies for KORS as sales nearly doubled, even during tough economic times and same-store-sales were up 63%, proving how well the brand resonates outside the United States. The company currently has 44 retail stores operating in Europe and opened just one new store this quarter.
North American stores also continued to be successful with revenue increases of 52% and same-store-sales increases of 35%. There were 3 new store openings during the quarter, which brought the total stores in this region to 231 locations.
In Japan, KORS main Asian segment, revenues for Q4 increased by 96% to $7M with same-store sales also increasing by 14%. 3 new retail stores were opened during this quarter, which brought the total stores 29.
As can be seen from these results, KORS is a successful company that continues grow tremendously. They have established its main growth goal as being expansion in the Far East and Europe and have adjusted predictions to reflect the belief that these geographies will be a meaningful contributor to revenue and net income growth.
Analysis and Outlook
With these positive results reported, this will continue. At The Oxen Group when analyzing earnings to make a recommendation we consider three important factors that will move the company forward after earnings: future outlook, development of key sectors, and company value. As mentioned above, KORS reported positive earnings for Q42013 of $0.50 after analysts expected an EPS of $0.39. KORS also reported Q4 revenue at $597.2M against consensus of 570.31M, beating the two most important analyst metrics for earnings. KORS predicts that Q12014 revenues will be in the modest $555M- $565M range while consensus is at $570.31M. The question now on investors' minds is whether or not this growth is sustainable.
The key for KORS moving forward is continuing to provide strong growth levels, and given current valuations, the stock needs to continue to show very strong growth year/year. How are they going to maintain these numbers if their product is mostly a luxury good? Firstly, the economic recovery will aid their predictions. Yesterday stocks rallied as result of increased consumer confidence that came in at a 5-year record high of over 76. This is a very positive signal for the economy as more people are happier with the state of the economy and their personal financial situation. This increase in consumer confidence and yesterday's announcement by the Labor Department that unemployment rates in April declined in 344 of 372 largest metro areas will aid KORS as more customers will have more disposable income to spend on these luxury goods as the economy continues to improve.
If KORS wants to continue to grow, Asian market will need to continue to expand and grow to provide a lift to the top and bottom-lines. The Washington Times recently published an article stating how luxury brands are in demand in thriving economies in Asia.
"China and other emerging markets in Asia have contributed to much of the growth in the luxury sector over the past few years as "newly minted millionaires" look for ways to spend their money, said Vikram Mansharamani, a lecturer at Yale University.
"Even at slower economic growth rates, China continues to notice significant personal wealth increases," Mr. Mansharamani said. "They are generating a significant amount of very rich people in China every year. So there will be lots and lots of millionaires minted each year."
"Luxury manufacturers are benefiting from rapid growth in emerging markets, because it creates lots and lots of new customers," Mr. Kirkegaard said."
Currently, it is working on raising brand awareness through regional partnerships in this part of the world so as to ease expansion. Conference Call transcripts proved that management raised retail store growth targets in the Far East from 150 to 200 locations after noticing the potential here. KORS already has 29 stores in Japan that produced a FY2013 revenue growth of 119%. They predict another 179 stores in this region and the biggest increase is expected to come in China, Korea, Singapore, Malaysia, Indonesia and the Philippines where as of now stores are owned as partnership with local companies.
KORS current and forward PE's are currently at 36.46 and 25.40 respectively. These can be considered high and the present PE quite higher than industry average that stands at 17.4. We tend to look for a value closer to sub-15 on forward PE giving the impression that KORS is slightly overvalued. Although this is the case, KORS has continued to beat its comps over the past 6 reported earnings and this has driven up the stock price. We do not expect this change over the next 3 months allowing investors to continue to make solid gains.
- Position: KORS, Long
- Entry: $62.50 and below or on a break of $66.50
- Targets: $70, $75
Company Name: Costco Wholesale Corporation (COST)
- Reported EPS: $1.04
- Consensus EPS: $1.03
- Reported Revenue: $23.55B
- Consensus Revenue: $24.21B
- Income From Operations: $722M
- Previous Year Income From Operations: $623M
- YoY Increase in Income from Operations: 15%
- Same-Store-Sales Increase: 5%
Costco's Membership Fees But How Sustainable Will This Be?
Costco announced positive earnings today. EPS was reported at 1.04 while estimates were at 1.03. Revenues for the quarter on the other hand were at $23.55B, slightly below analyst estimates of $24.21B.
Same-Store-Sales in both the United States and internationally grew by 6% and 4%, respectively. These figures were negatively affected by gas prices and foreign exchanges. They would have both been at 7% if not for these occurrences.
COST's main highlight for earnings this quarter was an increase in revenue from membership fees, which jumped from $531M to $475M, a 12% increase. COST was able to attract new clients to its service at likely around the same level (an exact number was not given in press release).
COST currently has 627 warehouses around the world with the United States being the location with the greatest number at 449. Internationally, Canada leads with 85 warehouses. COST also has a growing presence in Asia with 15 warehouses in Japan and 9 in Taiwan and South Korea. This quarter, no new warehouses were opened, justifying our conclusion below that growth should not be a main concern when analyzing earnings, but management expects to open 9 new warehouses around the world.
Analysis and Outlook
COST's main advantage this quarter was the increased revenue as a result of higher membership numbers as mentioned above. As a result of the size and longevity of COST, growth is not expected to be a big factor when predicting future outlook, rather, the increasing or stabilization of margins would be a better measure. For the past five years, COSTCO has had gross margins at the 12% mark and operating margins at 2% for the same periods. Increasing these margins, while also growing their membership, are key to COST's continued success.
Margins increases for COST would occur with either the reduction of costs or the continued increase of total revenue as a result of membership fees as overhead remains the same once a warehouse is built. This quarter, revenue from membership fees had a big increase by 12%, which was part of a 7.9% increase in total revenues. Membership levels were able to grow from continued discounting of prices, but we have to realize that this is not a sustainable practice for COST. The company needs to continue to expand its warehouse total and work towards lowering costs outside of goods sold (energy expenses, transportation costs, and labor wages) in order to grow margins. The positive for COST, though, is that their revenue and earnings will be very consistent due to members buying in and thus shopping consistently at their stores.
Unfortunately for COST, one of its major costs, gas used for transportation of products is not expected to decrease in the coming months. Same-store-sales in the US had to be negatively adjusted from 7% to 6% to account for rising gas prices. Moving forward, COST will continue to be affected by this input, which they have little control over. The good news is that oil prices are expected to stay fairly stagnant for the next several months. Analysts have predicted ahead of OPEC's meeting on May 31 that supply will stay the same, which would not alter prices. Iraqi oil minister, Abdul Kareem al-Luaibi, also stated:
"There is balance between demand and supply, and this is reflected on prices, they are stable, We don't want any shock to the market, the stability of prices is important for the global economy."
COST currently has a TTM PE of 25.3 and forward PE of 22.37. Current PE is about the same as industry average that stands at 24.8. As mentioned with KORS, sub-15 is typically what we are looking for in Forward PE, showing slight overvaluation for COST. With this said, the last time COST has missed earnings was in December 2011. This consistency in revenue and earnings is appealing to investors looking for low volatility in their holdings, and therefore, COST receives a slightly higher price tag as a result. Even so, the stock has likely gotten a bit ahead of itself, and as we noted, the company cannot attract clients forever with continuing to cut prices. We may see some stagnation in share prices moving forward, but we do believe that any pullback is a buying opportunity.
- Position: Long, COST
- Entry: Wait for pullback to $110
- Target: $120, $130