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Company Description

Michael Kors Holdings Limited is a designer, marketer, distributor and retailer of women's apparel and accessories and men's apparel bearing the Michael Kors name. The Company operates its business in three segments: retail, wholesale and licensing.

Investment Thesis

Michael Kors (NYSE:KORS) is a rapidly growing global luxury lifestyle brand, is led by a world-class management team and a renowned, award-winning designer. It has clear strategic direction and is well positioned to continue growing in Europe, Asia and other regions. Downside risk to my investment thesis and price objective are emerging market volatility, economic slowdown in Europe and Asia, volatility in costs related to certain raw materials, and intense competition.

Michael Kors, the brand, was born in 1981, after designer Michael Kors launched a womenswear line at top luxury retailers in the United States. Fast forward thirty years later and the company is publicly traded and enjoying rapid growth in America, Asia, Europe, and other regions around the globe. The core customer for the Kors brand is the 30 to 40 year-old category and their second biggest is the 18 to 25. Big volume handbags for the luxury brand are in the price range of $348 and $398. Handbags priced above $400 account for twenty-five to thirty percent of revenue at KORS.

In the most recent quarter, revenue from the European business more than doubled relative to the same quarter the year before. Specifically, the company's total first quarter revenue far exceeded consensus of $367.9 million after reporting revenue increased 71% to $414.94 million. Relative to the first quarter in FY 2011, wholesales revenue increased 66%, retail 76%, and licensing 61%. Profit margins for the most recent quarter remain strong at 60.5% and EPS came in at $0.34, compared to a consensus estimate of $0.20 EPS.

For this fiscal 2013, analyst EPS consensus is at $1.34 on revenues of $1.94 billion. The following year, fiscal 2014, EPS consensus is $1.65 on revenues of $2.46 billion.

Management continues its aggressive growth strategy by adding 76 new retail stores as of the most recent quarter, bringing the total to 253 retails stores and an additional 68 licensed stores.

Management is also focused in increasing shareholder value with each passing year in comparison to two competitors, Coach (NYSE:COH) and Ralph Lauren (NYSE:RL).

2-Yr Average (FY 11-12)

MICHAEL KORS

COACH

RALPH LAUREN

ROE (%):

67.0

49.8

17.4

ROA (%):

27.5

29.7

10.9

ROC (%):

41.8

46.3

14.9

EBITDA (%):

21.5

34.5

18.6

Profit Margin (%):

10.2

21.5

10.0

Outlook

I think Michael Kors is a good long term investment because the brand has plenty of growth opportunities here in North America, but especially in Europe and Asia. In addition, management has been doing a stellar job in penetrating new markets and reaching new customers, while increasing shareholder value. Personally, I lived in France and traveled around Europe for the past 16 months, and upon my arrival the Michael Kors brand visibility was obscure. Before leaving Europe for NYC 16 months later, consumers were much more aware of the KORS brand, a testimony marketing campaigns are being effective in boosting brand awareness to the public, which has been driving more loyal customers to its retail stores. In fact, European comparable store sales (stores opened for more than 12 months) increased 24.2% over the same quarter the previous year.

In my opinion, the stock will reach $90+ within the next five years. Assuming an average EPS growth rate of 30% (much lower than the 42% analysts at Yahoo Finance project) over the next five years and a price to earnings of 25 (slightly higher than current industry average as investors seem to be willing to pay a premium for Kors), the stock could trade in the $90 range within a five-year period. The main catalysts for this price objective are strong bullish momentum, solid year-over-year growth, increase in customers as the company continues to expand successfully, and an increase in revenue from these new markets and higher licensing fees. Of course, hurdles may come across but long term, Kors' world-class management team will continue to drive shareholder value and gain market share in existing and new territories. You can buy the handbags, I will buy the stock.

Source: Michael Kors May Reach $90 In 5 Years