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Summary

  • Michael Kors was able to extend the trend of its phenomenal growth to fiscal year 2014; the company posted a 51.75% surge in revenue and a 63.5% jump in EPS.
  • Expansion in Europe provided a great growth opportunity for the company; Michael Kors’s revenues in Europe were up by 125% in Q4 FY14.
  • The company’s stock is cheap at a forward P/E of 19.08x, considering the fact that its EPS is expected to grow by over 23% for the next five years.

Michael Kors Holdings Limited (NYSE:KORS) is a global provider of affordable luxury products. The company, founded by famous designer Michael Kors has produced enviable growth ever since being listed on the NYSE in Dec 2011, registering a 40% or more revenue surge each quarter, on the back of a 20% increase in comparable store sales. The company has also maintained a consistent gross profit margin of more than 57%. On May 28th, 2014 during the release of its Q4 FY14 results, the company announced its gross margins will be negatively impacted by infrastructure costs as the company plans to open 55 new stores in Europe adding to its existing 80 stores. However, I believe the profit from the European expansion will soon be realized.

Fiscal Year 2014 was a Feather in the Cap

Michael Kors continued the growth momentum in FY14 ending Mar 29th, 2014, closing the fiscal year with a fantastic revenue surge of 51.75% year-over-year. Comparable store sales grew by 26.2% while revenues were also augmented by 101 new stores opened during FY14 on top of 304 at the end of FY13. Full year diluted EPS clocked in at $3.22, up 63.5% from $1.97 for FY13.

If we solely focus on Q4 FY14, diluted EPS was at $0.78 beating analysts' expectations of $0.68. Total revenue increased by 53.6%, driven by a 26.2% rise in comparable store sales.

To put things in perspective, I have illustrated Michael Kors's phenomenal growth in revenue and EPS below on a quarterly basis for the last three years including FY14.

(click to enlarge)

Source data from Reuters

European Expansion is Good News!

The company recently announced it would open 55 new retail stores in Europe by March 2015 and that its margins will be impacted by the infrastructure costs involved. Europe is an attractive market for affordable luxury products but Michael Kors earns less than 15% of its total retail revenues from Europe. Similarly wholesale revenues from Europe make up only 18% of the company's total wholesale revenues. The table below shows Europe's contribution to Michael Kors's revenues.

(click to enlarge)

Source: FY14 10-K

The demand for Michael Kors products in Europe can be judged from the fact that European revenue increased by 125% for Q4 FY14. Michael Kors brand awareness in Europe increased from 39% to 49% during the past fiscal year. So, by expanding its foothold in such a high-growth market is sure to be accretive to earnings and the company can easily afford to give away a part of its gross margins.

During the conference call, Michael Kors's CEO, John Idol, clarified that the slight reduction in margins due to expansion costs will not last for more than a couple of quarters. Thereafter, the company expects to increase its gross margins in the next two to three years by increasing focus on the high-margin retail sales. Currently the company's sales are almost equally balanced between retail and wholesale and management plans to take the percentage of retail sales in the mix to 75% to 80%.

Valuation Remains Cheap

The stock is currently trading at a P/E multiple of 28.2 and a forward P/E multiple of 19.08. Yahoo Finance expects an EPS growth of more than 23% which assigns a PEG of 0.95 to Michael Kors's stock. I believe this is a cheap PEG multiple despite the vulnerability of the fashion industry and considering the fact that the company is conquering new heights each year.

Conclusion

Michael Kors Holdings has displayed phenomenal growth over the last three years and closed fiscal year 2014 with over 50% growth in sales and EPS. As the company expands more aggressively in the attractive European market, and focuses on increasing the percentage of high-margin retail sales in the revenue mix, the sales and earnings can be expected to continue putting up strong growth numbers in the coming years. The stock trades at a cheap forward P/E valuation of 19.08x, and presents itself as a good buying opportunity at its current levels.

Source: Is European Expansion Good News For Michael Kors Shareholders?