Is It Still Cold For Michael Kors?

| About: Michael Kors (KORS)

Summary

Brand Recognition and international expansion provide avenues for growth.

The recent third-quarter beat made a huge price jump in the first week of February and continues to rise.

Recent technical chart indicators are bullish.

They continue to aggressively repurchase shares to provide value back to investors.

Michael Kors Holding Limited (NYSE: KORS) is a global luxury lifestyle fashion brand. The company designs, markets, distributes, and retails branded clothing and accessories for women and men. I am optimistic on their ability to grow because of their international presence, combined with the brand recognition, their efforts to curb costs and invest into their ecommerce platform, and feel value may return to the ticker over the long-run as they capture the growth in U.S. retail consumer spending and can successfully execute in their global markets. Below I break out some favorable operating facts, strong consumer brand recognition, and board's aggressive buyback strategy show me KORS is making prudent decisions to effect long-term growth and capture more market share. Thus, I feel KORS is a value play for the long-term.

Curbing Cost, Beating on 3Q EPS, and Strong Brand Recognition

They recently announced a surprise beat in 3Q EPS of $1.59, about $0.13 above the estimated consensus. This announcement helped surged the stock price over ~29% in one week. Moreover, their 3Q operating margin fell 250bp, signaling some cost reduction strategies are starting to take hold. The company is headed to deleverage operational expenditures through F2017 by ongoing investment in the company's global ecommerce platform. The CEO recently stated that e-commerce is probably the most significant factor affecting the retail industry right now and will be vital for KORS success going forward. So it is a positive that they are continuing to invest in their e-commerce platform and subdue rising risk of costs associated to less traffic in brick and mortar stores. U.S. Retail sales grew in January despite tough economic conditions and apparel stores specifically rose following a dip in December 2015. Growth in consumer retailing may benefit them because of their strong brand recognition and the extra cash in consumers' pockets. The retail growth here at home is particularly attractive considering that in 2015 the company generated 78% of total revenue from U.S. During the recent fashion week, Michael Kors was one of the top five brands that received the most mentions on Twitter. Moreover, celebrities continue to tote their bags and this can only further favor for their brand going forward. These pop culture metrics just help to contextualize how their brand is received and communicated amongst the consumer population, and I believe are favorable to long-term growth prospects.

Recent Technical Indicators are Bullish

The technical indicators in KORS have been bullish since February. This past week they surged through a resistance price point and may now have an opportunity to increase. If good news continues to come in, which I think it shall, then the stock has a chance to keep capturing gains. Below is a table of price points to watch:

Chart Indicators

Click to enlarge

Support/Resistance

Resist

55.74

Sup

51.97

Sup

45.29

Sup

43.56

Sup

41.51

Sup

40.61

Sup

39.43

sup

38.71

Click to enlarge

Ind.

short

Inter

Long

EMA

VBu

VBu

VBu

MACD

VBu

Be

N

RSI

VBu

TDD

Bu

Fibs

VBu

VBu

VBu

Stoch.

VBu

Click to enlarge

Taken from stockta.com

The stock last traded at $52.73 on February 19, 2016. It was crucial for it to break its most recent resistance level in the mid $51 range, now the stock has some support at the $51.97 price point and price band may sit comfortable in the +$50 range, and could possible gap up if more good news comes in. They are taking active measures to lower their operating margin and increase their ecommerce revenue which I think might bode well for them on their coming announcements.

Favorable Operating Metrics

Profit Margin (TTM)

18.39%

Operating Margin

25.86%

Revenue

4.59B

Total Cash (mrq)

697M

Total Debt (mrq)

3.98M

Beta

0.51

Click to enlarge

Taken from Yahoo! Finance

Low beta plays are nice in times of market volatility, which we are in right now. Stocks with a beta under 1 means they pose less risk to volatile market swings, but the flip-side is a potential for less return from that lower risk. I am looking at a long-term time horizon for KORS.

I love to see companies that have more cash than debt. Effectively providing some psychological relief that they are not close or at a significant risk for insolvency. This bodes well to less risk in the long-term growth of KORS. Going forward through 2017 and 2018, it is my expectation that KORS will be able to rein in their capital expenditures and effectively execute in their international markets. In addition, their Return on Equity ("ROE") is pretty nice around 41%. The ROE measures a company's profitability by showing how much profit they generate with money shareholders have invested. Basically how successful they are at using investors money.

The CEO recently stated that one of the biggest challenges they are facing is the greater demand for ecommerce versus brick and mortar stores. However, the company should do well as long as they continue to invest in their ecommerce platform to meet consumer demand. More so than ever, consumers are flocking to their computers to purchase retail. A 2015 Accenture survey of 6,000 consumers, 41 percent said they practice show-rooming, or the act of looking at merchandise in store and purchasing it online later

Providing Value Back To Shareholders Through Repurchase

From a value standpoint, they continue their aggressive buyback, purchasing 4.7mn shares during the third quarter for $200mn. Their year to date buyback total is at about $950mn. The company has stated it will continue to actively buy back stock and has about $558mn still available under its repurchase authorization. Michael Kors has continuously approved and expanded a share buyback program over the past year:

Timeline of announcements for KORS share repurchase program:

  • On October 30, 2014, the Board of Directors authorized a $1.0 billion share repurchase program, which authorized repurchase of the Company's shares for a period of two years.
  • On May 20, 2015, the Company's Board of Directors authorized the repurchase of up to an additional $500.0 million under the Company's existing share repurchase program;
  • On November 3, 2015, the Company's Board of Directors authorized a further increase in the share repurchase program of up to an additional $500.0 million of the Company's ordinary shares and extended the program through March 2018.

The company is showing a significant and deliberate attempt to return wealth to shareholders by aggressively repurchasing their shares. This is a favorable factor in the argument for long-term value. Companies often use stock buybacks as an alternative for dividends, which Kors provides none. Logic dictates a rise in share price may occur due to reduced supply of shares as a result of buybacks.

Risks from a Global Market with International Expansion

Their strategy to continue international expansion is one of their biggest risks, as well potential rewards. Approximately 26% of their total revenue came from operations outside of the U.S. during Fiscal 2015. As a result, they are subject to the risks of doing business internationally, including political and economic instability in foreign countries, laws, regulations and policies of foreign governments, potential negative consequences from changes in taxation policies, political or civil unrest, acts of terrorism, military actions or other conditions. Economic instability and unsettled regional and global conflicts may negatively affect consumer spending by foreign tourists and local consumers in the various regions where they operate, which could adversely affect their revenues and results of operations. On January 1, 2016, they transitioned the previously licensed business in South Korea to a wholly owned operation. There is no guarantee or indication they may be able to achieve any cost savings or synergies from such integration. Furthermore, we may have difficulty integrating any new or reacquired businesses into their operations, hiring and retaining qualified key employees, or otherwise successfully managing such expansion.

They will consolidate their MK Panama joint venture into operations beginning with the second quarter of Fiscal 2016. As a result, they could incur additional charges, which could negatively affect the operating results or financial condition. The risks of their partner having unaligned interests, not conforming to their policies, or experiencing difficult financial conditions are certainly true but I am optimistic those problems won't arise. However, the risks are inherent in the play for more rewards from trying to capture a growing global market. If they can seize upon their strong brand recognition and translate that into the similar pop culture chatter in foreign countries, then hopefully that will trickle down to their consumer bases abroad.

Currency Fluctuations Also a Risk in Global Market

Currency fluctuations across markets are also another very real risk for this international company. The recent decline in the value of the euro relative to the U.S. dollar impacted the conversion of the results of their European operations, as they are reported, which represent approximately 20% and 21%, respectively, of their consolidated revenue for the first three quarters of 2015. During the second half of 2015 the euro experienced declines in value relative to the U.S. dollar of approximately 12%-16%. In addition, their results were negatively impacted by declines in the Canadian dollar and decline Japanese yen relative to the U.S. dollar. Japan is currently implementing negative interest rates, which will further weaken the yen. This doesn't really help the case for Michael, but this seems more like a short-term risk/setback in my opinion rather than a long-term detriment to their ability to grow and capture market share. As stated above, they are not in onerous debt so any pivots made to currency comps won't be such a setback and they already lowered the FY2016 guidance so any surprise to the positive will be recognized well into the ticker price.

Billionaires Taking the Bet

David Einhorn is in KORS. He has had a pretty stellar long-term performance since his fund's inception in 1996. However, this past year has been extremely troubling for him. I don't presume to say I am better than Kobe in basketball, and I won't presume to say I am better than Einhorn in stock picking. To see him have such a large stake at that price gives me some comfort, if not a little confirmation bias, that KORS value may grow over the long-run. In his Q3 2015 letter to investors, Einhorn stated:

"We believe KORS has multiple avenues of continued growth, including its international business and footwear. . .We established our position at an average price of $45.18, less than 9.5x March 2016 fiscal year earnings estimates net of the $4 per share in cash"

In 2004, KORS introduced the MICHAEL Michael Kors collection to address a younger demographic in the accessible luxury market segment. These retail prices are considerably lower range than their legacy Michael Kors collection. I believe that they are positioned well from brand recognition to benefit from growing millennial workforce, and younger, interested in affordable brand name footwear and accessories. So I echo Einhorn's thesis here of their potential avenue of continued growth.

Conclusion

Retail is growing in the U.S., but that is only part of the story for Michael Kors. They face a lot of exposure to global markets, which are currently in a state of flux. However, it is all relative to your definitions and time horizon, I guess. I am looking at them for a long-term perspective. I would not, however, average down here, even if I had capital to do so. I entered into KORS at a bad spot; I could cut my loss and run. An oft cited maxim of investing is to never invest with money I need, or am going to panic if I see my holding declined by 50%. I'm in it for the long haul. If the company continues to rein in operating margin, beat in their quarterly reports, and grow consumer interest, I would expect the stock price to do well. Good luck to all.

Disclosure: I am/we are long KORS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.