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Summary

  • Allegations of increased discounting of KORS upscale products are a red flag for investors to sell or avoid KORS shares now.
  • Extensive insider sales of KORS shares since their initial public offering by company founders and top executives are a strong warning sign.
  • Even though some analysts disagree with increased discounting allegations, holding KORS shares is a risky proposition given the high price to earnings ratio of such shares.

Michael Kors (NYSE:KORS) shares have had an extraordinary run in their share price since it went public in 2011. Now, however, alarm bells are ringing as some analysts and commentators are starting to assert negative comments about KORS stock due to alleged discounting of KORS more upscale products. KORS shares are down 20 percent from their 52 week high from earlier in 2014.

Background

KORS designs, markets, distributes, and sells branded women's apparel and accessories, and men's apparel. The company has three divisions: retail, wholesale, and licensing. The retail division sells women's apparel including accessories such as handbags and small leather goods. As of March 2014, KORS had 288 retail locations in North America; and 117 international retail stores in Europe and Japan. KORS wholesale division sells accessories including handbags and small leather goods, footwear in department stores and specialty shops in North America and Europe. KORS licensing division licenses its trademarks on products, such as fragrances, cosmetics, eyewear, leather goods, jewelry, watches, coats, men's suits, swimwear, furs, and ties, as well as licenses rights to third parties to sell their products in specific geographical regions around the world.

Competitors

KORS competes with multiple companies in the handbag and accessories space. Coach (NYSE:COH) and Kate Spade (NYSE:KATE), however, are thought of as KORS' primary competitors. COH effectively created the affordable-luxury hand bag market years ago. As KORS and KATE became increasingly successful competitors, COH, failed to continue to innovate and increasingly relied on discounting to increase their sales. Discounting has damaged COH's brand in the North American market in particular and COH's share price has sunk to multiple year lows as COH is putting in place a turnaround plan to repair their brand.

Discounting on KORS' upscale products

Alarm bells for KORS are sounding as some analysts are beginning to indicate that KORS is engaging in price cuts for their more upscale products. Those analysts believe that the maker of premium hand bags and accessories may be losing its "luxury halo." In particular, those analysts continue to see the risk of brand dilution from KORS' large North American wholesale distribution network. As concerns about KORS' discounting increases, some analysts are lowering price targets for KORS shares, already about 20 percent off their 52 week high. The change in opinion of some analysts in regard to KORS from just a few months ago was so quick, a Barron's article recently featured a headline mocking such a rapid change in opinion. There are commentators that are even forecasting an imminent crash in KORS' stock price. As one commentator indicated about KORS:

...the brand is becoming ubiquitous, and that's the kiss of death for trendy fashion brands, particularly those positioned in the up-market younger consumer sectors. Its distribution is racing towards ubiquity, wholesale and retail (online, its own stores, outlet stores and internationally). Even worse, a rocket-propelled accelerant to ubiquity is its expansion into multiple product categories and sub- brands, so they can compete at all price points. Some would argue all of those segments will simply end up competing with each other, thus cannibalizing the top end of the spectrum.

There are some analysts, however, who believe that discounting at KORS is not as extensive as the other analysts believe stating that KORS:

...is one of the 'least discounted brands' around, with markdowns below its peers like COH, KATE and PVH Corp.'s (PVH) Calvin Klein brand in both mid-tier and premium department stores

Another red flag for KORS shareholders, however, is that the same commentator pointed out that since 2012, KORS founders and top executives, including Michael Kors, Silas Chou and Lawrence Stroll, have decreased their share ownership from about 52 percent of KORS just prior to the KORS initial public offering in 2011 to just over 15 percent currently.

Our views

We agree with the analysts and commentators regarding potential discounting problems on upscale KORS products hurting KORS brand. There are analysts, of course, on both sides of the KORS discounting issue as indicated. However, with KORS price to earnings ratio at such a high level, the risk in holding KORS shares is too high at the moment.

KORS current price to earnings ratio is about 25 and their forward price to earnings ratio is 20.5 for fiscal year 2015 earnings forecast. In comparison, COH, which has experienced sharp share price and earnings estimate declines in 2014, has a price to earnings ratio of about 10. COH is already suffering from damaged brand issues from discounting and has set forth a plan to repair their brand. KORS has yet to experience the problems that COH has had but such problems seem to be emerging as KORS attempts to meet Wall Street's revenue and earnings estimates through increased discounting. With the success that KORS has had, complacency arises. The high price to earnings ratio of KORS as well as sharp insider sales by KORS insiders are strong red flags for KORS shareholders to take profits now.

Source: Increased Discounting Of Upscale Products Is A Prompt To Sell Michael Kors Now