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Executive summary:

  • The last quarterly report showed significant revenue growth acceleration, which calmed fears over the possibility of a substantial growth slowdown.
  • Kors has ample room for global expansion, and is on its way to becoming a global luxury powerhouse.
  • The stock may be trading north of $130 in the next twelve months, representing more than 30% upside from the current price.

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Michael Kors (NYSE:KORS) reported fiscal Q3 2014 earnings and revenue in early February that easily beat analyst estimates. Investors reacted quite positively, pushing shares to new all-time highs in the following days. The reaction to the report seems normal given the magnitude of the earnings and revenue beat, and the fact that growth re-accelerated after three quarters of deceleration.

I believe that Kors has more room to run, and should continue to outperform the market in the coming months and years. As of this writing, Kors' share price is 2% to 3% off its all-time highs, struggling to get over $100, which is an important psychological level, and which I believe is just a short-term obstacle for the stock.

Fiscal Q3 2014 report eases growth slowdown concerns

In my previous article, I was somewhat concerned with three consecutive quarters of slower revenue growth, and at the same time, I expressed my confidence in the company's long-term prospects. Those concerns are gone now, with a strong fiscal Q3 2014 revenue growth of 59%. It was the first time that the company's quarterly revenue surpassed $1 billion. Revenue growth slowdown was evident in prior quarters: 70.4% in Q3 2013, 57.1% in Q4 2013, 54.5% in Q1 2014 and 38.9% in Q2 2014. Earnings growth in Q3 2014 was 73.4%, also breaking the trend of three consecutive quarters of slower growth.

Gross margin expanded 140 basis points to 61.6%. Operating margin was 33.9%, compared to 32.2% in Q3 2013. What is also important is the continued strong growth in comparable store sales, which was 27.8% in the latest quarter.

Significant opportunities for global expansion

Kors saw strong growth trends across all geographies. Revenue in North America grew 51% on 24% comp growth. Europe was particularly strong with 144% revenue growth and 73% growth in comparable store sales. Since Kors derives 99% of its revenue in North America and Europe, it is evident that there is ample room for substantial growth in other regions of the world.

Kors opened seven stores in the Asia-Pacific region, bringing the total count to 94 stores. The company announced the opening of its new flagship store in China, which is intended to be the premier destination for the Michael Kors brand in China. Management expects around 200 retail locations in the Asia-Pacific region. Kors also opened two stores in Brazil, expanding its presence in Latin America. The company currently has seven locations in Latin America and expects it can support 40 retail locations over the next several years. With addition to continued strong growth in North America and Europe, we should see substantial contribution to the company's top and bottom line from the Asia-Pacific region and Latin America in the future.

Valuation

Kors' growth does not come cheap. The stock has been trading in a TTM P/E range between 25 and 35 in the last twelve months. With its P/E currently around 33, the upside may be limited if the stock is to stay in the established range. Of course, the E in the P/E will be higher in the following quarters, and we could see the stock trading above $130 in the next twelve months. If the company can keep growing at the current pace, there would be more room for the stock to grow. I believe that any pullback that brings the TTM P/E below 30 is buyable, and the stock should find strong support if the P/E is around 25 (assuming that the company's growth stays strong in the future).

Source: ycharts

Conclusion

Kors has rewarded its shareholders with strong gains since going public in late 2012. I believe that Kors has more room to run, and should continue to deliver strong growth in the next several years. The company is establishing itself as a global luxury brand, is seeing strong adoption of its products in Europe, and is on its way to successfully expand in Asia-Pacific and Latin America. Kors could be trading north of $130 in the next twelve months, representing more than 30% upside from the current price.

Source: Why Michael Kors Should Continue To Outperform