Short-Term Worries Are Overpowering Amazing Long-Term Prospects For Michael Kors

Aug. 4.14 | About: Michael Kors (KORS)


Michael Kors handily outperformed analyst estimates.

Despite strong performance, short-term concerns have outweighed the company's long-term outlook.

By investing in Michael Kors, investors are getting a company that's growing rapidly but at a Ralph Lauren-type price.

One of the most confusing companies trading on Aug. 4 was Michael Kors Holdings (NYSE:KORS). After news broke that the company's revenue and earnings smashed forecasts, shares of the luxury designer fell nearly 6% for fear that its short-term outlook may be endemic of the company's longer-term growth. Moving forward though, a strong growth forecast from the company's management team suggests that, just maybe, Mr. Market is taking the company's shares the wrong way.

Results blew away forecasts

For the quarter, Michael Kors reported revenue of $919.15 million. In addition to coming in 43% above the $640.86 million management reported during the first quarter of 2014, the company's top line blew past estimates of $851.66 million. This significant jump in revenue was driven, in part, by a 24% increase in comparable store sales, but must also be attributed to the retailer's higher store count, which soared 35% from 328 locations last year to 443 locations today.

Earnings Results
Last Year's Forecasted Actual
Revenue (millions) $640.86 $851.66 $919.15
Earnings per Share $0.61 $0.81 $0.91
Click to enlarge

On top of seeing higher sales, Michael Kors also experienced a meaningful rise in profits. For the quarter, the retailer saw earnings per share hit $0.91, 49% greater than the $0.61 seen in last year's quarter and $0.10 above what analysts anticipated. Part of this outperformance was due to higher revenue, but investors would be wise to realize that margin expansion was also a strong driver behind this improvement. Chief among these was the company's cost of goods sold, which fell from 38% of sales to 37.8% and its provision for income taxes, which declined from 11.3% of sales to 9.6%.

Mixed outlook puts long-term investors on the back seat

Although Michael Kors, for all intensive purposes, smashed forecasts for the quarter, the retailer's short-term outlook pushed shares lower. Heading into the second quarter of its 2015 fiscal year, management believes the retailer will see revenue come in between $950 million and $960 million, placing analyst estimates of $959.47 million almost out of reach. Earnings, however, are expected to miss forecasts entirely. For the quarter, management believes that earnings per share will come in between $0.85 and $0.87, between $0.02 and $0.04 lower than Mr. Market has been hoping for.

Disconnect Between Analysts and Management
Q2 2015 2015 Fiscal Year
Revenue Expected by Analysts $959.47 million $4.20 billion
Revenue Expected by Mgmt. $950-$960 million $4.25-$4.35 billion
EPS Expected by Analysts $0.89 $3.96
EPS Expected by Mgmt. $0.85-$0.87 $4-$4.05
Click to enlarge

In spite of this, though, the outlook for the company is generally strong. For its 2015 fiscal year, management now believes that revenue will come in between $4.25 billion and $4.35 billion, between 1% and almost 4% above the $4.20 billion analysts have been wanting. Earnings are supposed to follow suit, with management forecasting between $4.00 and $4.05 per share, between 1% and 2% higher than the $3.96 analysts expect.

But is Michael Kors all that great or are there better opportunities out there?

Over the past few years, Michael Kors has had a heck of a run. Between 2010 and 2014, the company's revenue soared 552% from $508.1 million to $3.3 billion. While some of this increase in sales was driven by a 335% jump in aggregate comparable store sales, a bigger contributor might be the retailer's rising store count, which skyrocketed by 282% from 106 locations in 2010 to 405 by the end of the business's 2014 fiscal year.

KORS Revenue (Annual) Chart

KORS Revenue (Annual) data by YCharts

During its most recent five-year reporting period, rival Ralph Lauren (NYSE:RL) also did pretty well for itself, but not as well as Michael Kors has. Between 2010 and 2014, Ralph Lauren's revenue grew by 50% from almost $5 billion to $7.45 billion. Although management reported a more-than 30% improvement in aggregate comparable store sales, the biggest contributor to the company's top line growth was, by far, its rising store count. Over the past five years, management increased the business's locations in operation by 48% from 631 in 2010 to 936 in 2014, with 73% of the growth taking place in the company's concession store-within-a-store setups.

In terms of revenue growth, Michael Kors smashed Ralph Lauren in recent years. But, how do these companies fare when looking at their profitability? Well, over the same timeframe as their revenue growth, Michael Kors saw its net income soar 1,588% from $39.2 million to $661.5 million, while Ralph Lauren's grew a more modest (but still very impressive) 62% from $479.5 million to $776 million.

KORS Net Income (Annual) Chart

KORS Net Income (Annual) data by YCharts

While higher revenue pushed both companies' bottom line up, it was Michael Kors that experienced greater economies of scale. Between 2010 and 2014, the retailer's cost of goods sold plummeted from 47.5% of sales to 39.1%, while its selling, general and administrative expenses dropped from 37.7% of sales to 28%. Ralph Lauren, meanwhile, saw its selling, general and administrative expenses tick down from 43.3% of sales to 42.2%, while its cost of goods sold managed to actually inch up from 41.8% of sales to 42.1%.


Right now, Mr. Market is punishing Michael Kors, perhaps unjustifiably. Yes, the company is anticipating lower growth next quarter than what investors have been hoping for, but the company's outlook for its full 2015 fiscal year exceeds expectations. Of course, it's easy to say that expectations are nice, but not concrete, but with a history of jaw-dropping growth (especially compared to Ralph Lauren), it might not be wise to sell the company short just yet.

In fact, with a forward P/E of just 19 compared to Ralph Lauren's P/E of 18 and considering that the company's earnings are expected to grow 9 times faster than its rivals' while its revenue could grow more than 4 times the rate of its peer, Michael Kors might be one of the most attractive long-term plays out there.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in KORS over the next 72 hours. 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.