Is Today's Sell-Off In Michael Kors A Long-Term Buying Opportunity?

Aug. 4.14 | About: Michael Kors (KORS)


First quarter reported diluted earnings per share increased 49.2% to $0.91.

Revenue increased 43.4% to $919.15 million.

Comparable-store sales increased 24.2%.

Michael Kors (NYSE:KORS), one of the world's leading retailers of luxury handbags and accessories, has just announced record-setting first quarter earnings that exceeded expectations and yet its shares have reacted by falling more than 7%. Michael Kors has been under a lot of scrutiny as of late, with analysts questioning its "high" valuation and whether or not its margins can be sustained, resulting in what is now a yearly decline of over 25%. Let's take a look at Michael Kors' earnings results and its outlook on the rest of the year to determine if this steep decline is our opportunity to buy or if there is more room to the downside.

The Results Are In

The first quarter report was released before the market opened on August 4th and the results surpassed expectations on both the top and bottom lines; here's a summary:

Metric Reported Expected
Earnings Per Share $0.91 $0.81
Revenue $919.15 million $850.44 million
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Earnings per share increased 49.2% and revenue increased 43.4% year-over-year, resulting in the best first-quarter performance in Michael Kors' history. These results were driven by an impressive 24.2% increase in comparable-store sales, including 18.7% growth in North America and an incredible 54.2% growth in Europe. Here's a breakdown of the company's revenue by region (in thousands):

Region Q1 2015 Q1 2014 Change
North America $718,889 $551,554 30.3%
Europe $185,497 $81,479 127.6%
All Other Regions $14,768 $7,826 88.7%
Total $919,154 $640,859 43.4%
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Gross profit increased 43.9% to $571.63 million and the company's gross margin showed fight, expanding 20 basis points to 62.2%; this growth and expansion was a very bullish sign for Michael Kors and put to rest the speculation that increased amounts of clearance items at its stores would cause margin contraction.

In terms of expansion, Michael Kors added 50 net new stores during the quarter, including 38 company-owned stores and 12 licensed stores, bringing its total count to 605 worldwide. Of the now 605 locations, 443 are company-owned and 162 are licensed, putting the company closer to its long-term goal of 700 company-owned stores worldwide.

Overall, it was a phenomenal quarter for Michael Kors and its Chairman and Chief Executive Officer, John Idol, stated, "We saw continued strength across our retail, wholesale, and licensing segments, as well as in both the North American and International markets... We remain extremely excited about our future growth potential as we continue to solidify Michael Kors' positions as a leading luxury lifestyle brand." Following this statement, Michael Kors provided updated outlook on the fiscal year.

What Should You Expect Going Forward?

Following its strong first quarter results, Michael Kors raised its full-year outlook on fiscal 2015; here's what the company now expects to accomplish versus its previous outlook:

Metric Previous Outlook Current Outlook
Earnings Per Share $3.85-$3.91 $4.00-$4.05
Revenue $4.0 billion-$4.1 billion $4.25 billion-$4.35 billion
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Michael Kors' new outlook calls for earnings per share growth of 24.2%-25.8% and revenue growth of 28.4%-31.4% from fiscal 2014 and the company added that it continues to anticipate comparable-store sales growth in the high teens percentage range.

In addition, Michael Kors provided its outlook on the second quarter and this is where the company finally stumbled, but by just one penny; here's what it expects to see versus what the consensus estimates call for:

Metric Company Outlook Expectations
Earnings Per Share $0.85-$0.87 $0.88
Revenue $950 million-$960 million $950.55 million
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Although Michael Kors' outlook came up just short of expectations, it still calls for growth of over 20% on both the top and bottom lines from the same period a year ago. Also, investors must take into account that the company only projected earnings per share of $0.78-$0.80 and revenue of $840 million-$850 million for the first quarter, which it far exceeded; with this being said, I believe Michael Kors practices the "under-promise and over-deliver" method of forecasting and it should be taken as such.

The Bottom Line - Is Michael Kors a Buy?

Michael Kors is a fast-growing force in the luxury industry and this was shown in its incredible first quarter performance. The company also put recent fears that its margins are unsustainable to rest by showing expansion of 20 basis points during the quarter, and after today's decline, it trades at just 16 times forward earnings estimates, showing that it is not trading at too rich of a valuation either. I believe Michael Kors represents a great investment opportunity today, so interested investors should take a closer look.

Disclosure: The author is long KORS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.