Since exploding onto the financial scene with its December 2011 IPO, luxury fashion company Michael Kors Holdings Ltd. (NYSE:KORS) has been one of the hottest names on the market. Kors' strength is particularly impressive because few industries in the financial world are as fickle as fashion. Brands rise and fall each season as different looks come into and go out of style. The stocks behind the labels ride enormous waves of strength with popularity, and suffer terrible bouts of selling when retailers need to discount products to get them off the shelves. Over the past couple of years Kors has been on fire, but there are warning signs that Kors could be about to lose its spot on top.
(Graph from ChartIQ Visual Earnings)
The price of KORS shares took a tumble in July, and some analysts fear that the company could be in for a relatively weak quarter. Michael Kors products have been in vogue for years, but consumers in the fashion market can change their minds on a dime. Concerns primarily stem from the ubiquity of Kors products and worry over excessive discounting. In the high end fashion market exclusivity often plays a large hand in the popularity of brands. It wasn't too long ago that Coach (NYSE:COH) was the king of the hill in handbags.
Coach has been in a tailspin for years now. The company's stock price has been deteriorating since early 2012 and the financial fundamentals have been stagnant, or worse.
Not too long ago Coach was the dominant player in the handbag industry. Then fake Coach bags started popping up on every corner of Canal Street selling for $20. Suddenly "Coach" bags were everywhere. Many of the bags you'd see people with were knock offs, but suddenly it wasn't nearly as cool to be seen rocking Coach. Discounting your products isn't quite the same as getting ripped off by imitators, but there is an important similarity. Once a brand becomes diluted, it's hard to go back to asking consumers for the luxury prices that fetch high margins. Once the market is saturated with Michael Kors' bags, it won't be nearly as desirable to have one.
The Michael Kors company is on an outstanding financial run. Michael Kors has beaten the Wall Street earnings consensus in 8 straight quarters and has at least lived up to expectations from Estimize 7 of 8 times.
This quarter the contributing buy side and independent analysts on Estimize are forecasting that Kors will keep its streak of topping the Street's consensus unblemished. However, this quarter 6 of 44 analysts on Estimize are expecting Kors to miss. There is much more uncertainty around KORS this quarter than ever before. Divided opinion is evident by the price action. Some investors are have been dumping shares ahead of the earnings report, driving the price down.
Although shares of KORS have fallen in recent weeks, contributors on Estimize also expect the company to beat sales estimates. While earnings and sales are extremely useful fundamentals to watch, there may be a more important number to look for on Monday.
As mentioned previously, luxury fashion brands such as Michael Kors rely on their image to demand high margins. The fastest way to see how healthy the Kors brand is will be to immediately look at this quarter's gross margin. Last quarter Kors reported a gross margin of 59.9%, down ever so slightly from 60.1% a year earlier.
Competing in fashion requires walking a fine line between growing sales and protecting the company's brand. So far Kors has done an excellent job in maintaining an attractive brand while offering products at a variety of price points, a very difficult balance to maintain.
At the end of the day what's been propelling Kors forward is the remarkable rate of growth in both earnings and revenue while holding onto high margins.
On Monday the Estimize community is looking for Michael Kors to post year over year earnings growth of 39% and to increase sales by 37% compared to the same quarter of last year. These numbers are both quite high, but are totally reasonable given the even faster rate of growth reported over the past year.