- The total return of Michael Kors has outperformed the S&P 500, Coach and Ralph Lauren.
- The stock still has a 20% upside potential at a target price of $104.86 per share.
- Michael Kors intends to expand aggressively in Europe backed by strong results from this region.
Michael Kors Holdings (NYSE:KORS) is a rapidly growing global luxury lifestyle brand with a presence in 85 countries. Over the last twelve months this stock has outperformed the S&P 500 and its competitor Coach (NYSE:COH). A year ago the stock was trading at $54 per share and now the price per share jumped 60.9% to $86.87 per share. In terms of total return to shareholders, both from price appreciation and dividends (assuming that the dividends are reinvested), the total return of Michael Kors increased 51.58% while in comparison the S&P 500 improved 16.38%, Coach declined 4.36% and Ralph Lauren (NYSE:RL) declined 11.35%.
Strong Performance Continue To Add Value
Since its IPO, Michael Kors has generated better than expected earnings. Michael Kors had an outstanding holiday season as global brand awareness continued to drive strong demand for its luxury products. The tremendous top and bottom-line growth continued to add value for Michael Kors. In the recent third quarter total revenue increased 59% to $1 billion from $646.8 million. The retail business has proven to be the growth driver that generates around 49% of total revenues followed by the wholesale business that generates around 47% of total revenues. The retail net sales improved 51.3% to $503.4 million driven by a 27.8% increase in the comparable store sales and 98 net new stores opening since the end of the third quarter of fiscal year 2013. Wholesale net sales increased 68.2% to $461.4 million and licensing revenue increased 59% to $47.4 million.
The gross profit increased 61.2% to $619.5 million and as a percentage of total revenue increased to 61.2% compared to 60.2% in the third quarter of 2013. Healthy gross margins resulted in an operating income of $343.2 million or 33.9% of total revenue compared to $204.8 million or 32.2% as a percentage of total revenue for the third quarter of 2013. Due to strong revenue growth and improved margins Michael Kors successfully generated a net income of $229.6 million or $1.11 per diluted share while in comparison net income in the third quarter was $130 million or $0.64 per diluted share. Michael Kors expanded rapidly in Europe and North America and by the end of fiscal year 2013 the company operated 395 retail stores, including concessions, compared to 297 retail stores, including concessions, at the end of fiscal year 2012. Michael Kors had an additional 138 retail stores, including concessions, operated through licensing partners. Including licensed locations there were 533 Michael Kors stores worldwide at the end of the third quarter of fiscal year 2014.
Strong Outlook Means More Growth
For the fourth quarter of fiscal year 2014 Michael Kors expects total revenue to be in the range of $790 million to $800 million. This assumes a comparable store sales increase in the range of 15% to 20%. Diluted earnings per share are expected to be in the range of $0.63 to $0.65 for the fourth quarter of fiscal year 2014. The company now expects total revenue to be in the range of $3.18 billion to $3.19 billion for the full year. This assumes a comparable store sales increase of approximately 25%. Diluted earnings per share are now expected to be in the range of $3.07 to $3.09 for fiscal year 2014.
Michael Kors to Focus On Men's Business and European Market
The company planned to expand into different markets and is also looking forward to making a significant push in the men's business. The men's business is still a small part of Michael Kors' overall business representing slightly less than 5% of sales or $150 million. However Michael Kors has to face stiff competition in this business from other giants. Coach says its men's business is on track to generate $700 million in sales this year which is a significant improvement from $100 million in 2010. However as the company has grabbed the share from Coach in the women's business it is most likely that Michael Kors will succeed in the men's business too.
North American sales, excluding new or closed stores, increased 24, while such sales in Europe increased 73%. The European market possesses growth potential in the luxury goods industry and Michael Kors plans to take advantage. Michael Kors' sales improved and more than doubled to $140.3 million during the holiday quarter in the European market accounting for 14% of its total revenues. Meanwhile, the European luxury goods industry grew just 2% last year slowing from 5% in 2012. The company plans to open 36 new stores in Europe in fiscal year 2014. In the long run the company intends to expand its store base to 200 in this region. The company's introduction of a new product line that includes fragrances and beauty products has proved to be successful and should be a catalyst for brand awareness. Michael Kors expects to generate $1 billion from this market which is almost five times what it currently generates.
Michal Kors' Flagship Store in China
In the fourth quarter the company opened nine more stores, bringing its total store count to 505 in North America, Europe, East Asia and Latin America. Since the company is almost halfway to its retail store target of 900 there still is huge potential for revenue growth from expansion alone.
Michael Kors is pushing into emerging markets by opening stores in China and Brazil. Apart from the expansion in the developed markets Michael Kors is increasing its market reach through its new flagship store in China. The luxury goods market in China is developing well as the population is now aware of more than double the amount of brand names it knew in 2008. China is the largest country for luxury buyers worldwide with purchases that make up 29% of the global market reflecting a four percentage point increase from last year. Recently growth slowed down to 2% and is expected to remain at this level in 2014 but will recover beyond that period. In China the men's business experienced a slight decline during 2013. However women's luxury goods received strong momentum with 8% to 10% growth for the year as women's spending significantly increased compared to men's spending. This is an advantage for Michael Kors due to its expertise in women's apparel and accessories and its new flagship will help increase brand recognition in China.
Michael Kors has grown stronger and has continued to support continuously improving earnings and stock price. For the next five years the growth rate may slow down due to market saturation and strong competition however that growth will be sufficient enough to attract investor attention. Keeping in mind the growth potential the average target price for this stock is $104.86 giving rise to an upside potential of 20% that is good enough to grab a buy rating.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.