Michael Kors (KORS) has been one of the best retail growth stories in the last couple of years. The company has grown revenue between 58% and 67% in the last three years, while earnings growth was between 82% and 152% in the last three fiscal years. And the tremendous run is not over, although a slowdown is inevitable. Kors trades at a steep premium to its main peer Coach (COH), and I believe that the premium is justified because Coach is loosing market share to Kors, and Coach's growth is far below the numbers Kors is reporting.
Growth driven by strong comps and store expansion
Kors has delivered outstanding earnings and revenue growth in the last couple of years. The growth has been driven by store expansion throughout North America, Europe, Japan and the Far East, and by excellent same store sales growth, which averaged 37% in the last six quarters. The company has been growing brand awareness and has taken market share from competitors, with Coach being hit the most, as evidenced in its substantial growth slowdown in the last several quarters. Kors is in the early stages of expansion beyond North America, which is the most mature market for the company. Europe has been an excellent performer, with same store sales and revenue growing 56% and 144%, respectively, in the first fiscal quarter of 2014. Kors has also entered two important emerging markets in the previous quarter - India and Brazil. Management believes that those two markets will be important growth drivers for the company in the future.
Growth vs. value - Kors vs. Coach
Kors is trading at a steep premium over its main competitor Coach. Kors' trailing P/E is 34, while its forward P/E is 22. On the other hand, Coach is currently trading at 13.8 trailing and 12.8 forward P/E. But a look at the quarterly earnings and revenue growth, Kors' margin expansion and Coach's margin contraction explains why the valuation is where it is, and I believe that a premium on Kors is more than justified, given its past and expected growth levels, and a severe deterioration in Coach's growth. In addition, Coach's earnings estimates have been trending down in the last 90 days, as opposed to Kors' rising estimates.
Source: Kors financial news releases
Source: Coach financial news releases
On the other hand, Coach is becoming more attractive after its latest selloff, as the company trades at very low trailing and forward multiples. Coach's EV/EBITDA is just 8, and the company may be on its way to recovery, which will primarily be driven by its expansion in Asia. Coach has also raised dividends over the last few years and has reduced its share count with constant share repurchases. Coach's comparable store sales in North America were negative in the recent quarter primarily because of Coach losing market share to Kors.
The two companies' stock charts show the money coming out of Coach and money coming into Kors, with Coach being far off its all-time highs, while Kors' strong run continues. While Coach's woes are not over, I believe that there is still money to be made on the long side. However, Kors will probably benefit far more in the future as the company's strong growth continues.
Since coming public in late 2011, Kors has delivered earnings and revenue above its own guidance and analyst expectations in every single quarter. And earnings surprises have been substantial. Kors' quarterly earnings in the last four quarters were between 22% and 56% above analyst consensus estimates. Management expects second quarter earnings to be in the range of $0.62 to $0.64 with revenue between $695 million and $705 million. They also lifted the full year revenue and earnings guidance to $2.8 billion to $2.9 billion and $2.67 to $2.69, respectively. Management has proven to be very conservative with guidance, and analyst expectations are not much higher than the company's own guidance. Given the prior earnings surprises, I believe the company will report second quarter earnings between $0.70 and $0.75, above the company's guidance and analyst consensus estimates, which currently stand at $0.67. In addition, Morgan Stanley says that channel checks indicate strong Q2 traffic patterns, while Cannacord says Kors took market share from Coach during the quarter.
Kors remains one of the best growth stories in retail. The company is primed for growth as it continues to increase brand awareness, expand into new geographies and deliver strong comp growth. The company has recognized the importance of emerging markets, and has opened its first locations in India and Brazil in the previous quarter. While Kors trades at a significant premium over its main competitor Coach, the premium is justified when you compare the growth rates of the two companies and the fact that Kors is taking Coach's market share. Kors is the strong and dominant performer fundamentally and technically, and this trend should continue in the future. Kors is slated to report earnings on 5th November, and the event should serve as a catalyst to drive the stock price higher.