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Summary

  • The company registered a staggering increase of 43.4% in its top line during the first quarter of its fiscal year 2015.
  • Operating margin shrank by 70 bps and clocked in at 30.1%. Comparatively, the company is doing substantially better as sector’s average operating margin is reported to be 13.83%.
  • The company is actively working on enhancing its international footprint and achieving brand recognition on a worldwide basis by entering into joint ventures.
  • The luxury goods industry is envisioned to grow from nearly $277.7 billion in 2012 to in between the range of $295.6 billion and $301.3 billion during 2014.
  • The scrip upholds an upside potential of 65% based on its strategic expansion plans, market positioning and zero debt profile in a leveraged industry.

With its unique craftsmanship, materials and designs, Michael Kors Holdings Limited (NYSE:KORS) has once again managed to report outstanding quarterly performance during the first quarter of the fiscal year 2015. The share price of the stock has been moving up in an oscillating fashion following its earnings release earlier this month.

Let's take a look at the growth drivers of the company's performance and the sustenance of these remarkable results.

Recent Performance At A Glance

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Source: Michael Kors SEC Filings - 10-Q

Staggering Top Line Growth

The company registered a staggering increase of 43.4% in its top line during the first quarter of its fiscal year 2015 and posted absolute revenue of $919.2 million, up from $640.9 million, in the corresponding period last year. This increase was primarily contributed by its two main segments: retail and wholesale. Retail segment grew by 47% and clocked in at $480.2 million on the back of an incredible increase of 24.2% in comparable store sales due to higher sales of accessories and 115 additional stores openings during the quarter. Similarly, wholesale revenue had also climbed up by 40% due to an expansion in the accessories and footwear offerings followed by licensing revenue as more royalty was collected on the sale of watches and jewelry. Additionally, the company is also expanding its operations in Europe.

Source: Michael Kors SEC Filings - 10-Q and Thomson Reuters

Margins Shrink As It Expands In Europe

Despite a whopping increase in the top line, the company was unable to expand its operating income margin which experienced a dip of 70 basis points. Operating income margin of the most recent quarter was reported at 30.1%. Distribution costs showed a more than necessary increase due to the inefficiencies in the implementation of the company's material handling equipment which adversely affected its capability to ship at full capacity. On the contrary, the increment in advertising costs was genuine as the company undertook expansion in new markets, at home and abroad. Similarly, depreciation and amortization column also showed a more than proportionate increase due to additional capital investment in the retail network and information systems infrastructure.

However, on a comparative basis, the company is doing substantially better than its industry peers as the sector average operating margin "ttm" is reported to be 13.83%.

Future Outlook: Growth Drivers Highlighted

Current Focus: Brand identification And Enhancing Global Footprint

The company is actively working on enhancing its international footprint and achieving brand recognition on a worldwide basis by entering into joint ventures with its partners abroad. The company plans to achieve its objective through international licensing arrangements as well. This strategy is expected to enhance the company's penetration in the global luxury goods market, particularly in markets where the company is yet to mark its presence.

Future Demand

The company's performance is dependent on the demand trends in the luxury goods industry along with the changes in demographics and alterations that occur in customer lifestyle preferences over time. At the moment, the demand for branded apparel and accessories is forecasted to increase.

According to the estimates of Altagamma Studies, the luxury goods industry is envisioned to grow from nearly $277.7 billion in 2012 to in between the range of $295.6 billion and $301.3 billion during 2014. The company is in a good position and well prepared to leverage upon the upcoming growth in the accessories product line, as it stands to be one of the key products and the prime focus of the company.

Final Verdict

Based on the company's recent performance and its strategic plans for the future, Michael Kors seems to be well poised to deliver outstanding results in the coming periods as well. The positive stance can also be reaffirmed from the company's valuation. Based on the industry's P/E "ttm" ratio of 33.28 and the consensus analyst estimate of EPS for the fiscal year 2015 of $4.06, the company's intrinsic value is derived to be $135. However, the scrip is currently trading at a market price of $81.73 which represents an upside potential of 65%. The huge gain potential can also be traced back to the company's zero debt profile in an industry where long term debt to equity "mrq" of 34.23 is considered to be normal, thus passing all the earning gains to the investors directly without any impedance.