It was the best of times for Michael Kors (KORS) last week, as the company blew away their revenue and earnings numbers and gave optimistic guidance, calling for as much as $1.34 per share in profit this fiscal year 2013, for which this was the first quarter. This could be achieved if they can continue their remarkable revenue growth, powered by comparable same store sales increases expected to be in the high 20% range, which seems downright pedestrian compared to their remarkable 37% comps growth the past quarter.
This latest performance pushed the stock price past 50, over 150% higher than where it went public at the end of last year. It now trades at a forward P/E of 38.8, even considering the raised earnings guidance, which might seem reasonable if it can maintain its rapid growth rate. However, to string two Warren Buffett quotes together, "the investor of today does not profit from yesterday's growth" and "you pay a high price for a cheery consensus". The current price would scare the Dickens out of any true value investor and makes some of their luxury items seem like more of a bargain than one of their ties I bought at discount retailer Ross Stores (ROST).
In stark contrast, Perry Ellis (PERY) was going directly the other way, as they managed earnings of only a measly penny even after adjusting for some one-time costs related to shuttering some underperforming brands. However, even considering that these expenses mean that the quarter was really a loss, the company managed 47 cents per share in earnings through the first six months of their 2013 fiscal year and still expects to earn up to $1.80 for the full year. Unfortunately, this is much lower than the analysts were expecting, so the stock sold off 20% at one point the next day and finished the week barely above 18.
While this most recent performance was ugly, it may prove to be a strategic way to get all the bad news out of the way at once. Streamlining their brand offerings and reducing inventory could set the table for a return to consistent profitability. If Perry Ellis can clear the lowered earnings bar they just set, their forward P/E would be below 10, very cheap considering that their previous 5 year and expected 5 year earnings growth rates are both 13%, which equates to a PEG ratio of only 0.77.
For KORS to have the same PEG, it would need to maintain an earnings growth rate of 50%, which is unlikely for any extended period of time, especially considering that they are already a $10B company, 37 times larger than PERY's market cap despite having only twice the revenue. KORS would have to double revenue every year for the next 5 years before they traded at the same price to sales ratio as PERY.
Regardless, momentum investors will probably chase KORS up until they finally realize its meteoric rise is unsustainable and its trajectory will probably begin to resemble the more gravitationally accurate meaning of the word. Inevitably their same store sales growth will slow, much like what happened with Chipotle (CMG) recently, since unlike burritos their products are subject to the same fickle winds of fashion that blew Perry Ellis off course.
Meanwhile, I believe it would be a far, far better thing to buy PERY instead, as I think their temporary earnings hiccup was necessary to get the company back on track. It also lets intelligent long term investors buy into what has been a very steady business for a very reasonable price, allowing them a far, far better rest than being invested in a high flyer like KORS that could turn on the whims of equally capricious fashionistas or momentum investors.