After Outstanding Earnings, There's No Reason For Michael Kors To Sell Off

Aug. 6.14 | About: Michael Kors (KORS)


After reporting outstanding earnings, Michael Kors dropped 6%.

The company is growing like a weed, both in North America and internationally.

Fortunately for long-term investors, the stock sell-off is setting up a nice buying opportunity.

After reporting earnings, fashion accessories designer Michael Kors Holdings Limited (NYSE:KORS) sunk nearly 6%, even though its underlying earnings report was extremely impressive. Its poor performance on a day in which the broader market performed well is a continuation of a longer trend. Shares of Michael Kors are well off the highs of 2014. After barely touching $100 per share, the stock has steadily drifted lower to $77 per share.

Judging by its share price performance alone, you'd naturally assume Michael Kors was shrinking. But nothing could be further from the truth. In fact, Michael Kors is an outstanding, growing business, that finally offers a valuation that investors should feel comfortable with.

Nothing to complain about

Michael Kors grew sales and earnings per share by 43% and 49%, respectively. This includes outstanding comparable-store sales growth of 24%. And yet, the stock sold off anyway, despite the fact this is outstanding performance both on an absolute basis and when stacked up against its competition.

For example, Coach (NYSE:COH) posted earnings that managed to beat expectations and its shares rose. Still, for all the hype, the underlying truth is that Coach is struggling. Net sales fell 5% last year and its diluted earnings per share dropped 17%.

From this it's clear that Michael Kors and Coach are two companies going in opposite directions. Nevertheless, investors don't seem too pleased with Michael Kors. One reason for this is that management offered a near-term outlook that disappointed some analysts. In the ensuing conference call, the company revealed it will increase investment in Europe, where it's in high-growth mode.

Revenue in Europe more than doubled last quarter, and the company will spend aggressively to keep the momentum going. Management plans to increase its store count to 200 locations over time. Doing this, of course, requires substantial investment. As a result, the company warned investors its margin will decline by approximately 200 basis points this quarter.

That's not to say Michael Kors isn't doing well in other geographies. Whereas Coach is seeing sales fall off a cliff in North America, Michael Kors is thriving here. Sales in North America jumped 30% last quarter.

Long-term opportunity in the making

It should be noted that short-term disappointment with Michael Kors' margins is irrational. The company is doing the right thing to grow its business in Europe, a key geography. Spending more now will compress margins, but the near-term pain is worth the long-term benefits. Investors will surely benefit from the company's expansion into international markets.

Plus, shares of Michael Kors are now trading at an attractive entry point. The stock trades for just 16 times forward earnings, which is actually a discount to the broader market. This seems ridiculous, considering the company's growth.

Income investors might instinctively flock to Coach instead of Michael Kors because Coach pays a dividend. Indeed, Coach's 4% dividend yield is a strong payout, considering high-yielding stocks are hard to find.

But a dividend isn't everything. Coach has serious structural problems that a dividend can't solve. Its earnings are declining and are expected to continue dropping, which means its valuation isn't what it seems.

On a forward basis, Coach is actually more expensive than Michael Kors. Coach trades for 18 times forward earnings.

The bottom line is that Michael Kors is a well-known growth stock, and now thanks to its poor stock price performance over the past few months, it's shaping up as a good value stock as well.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within 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.