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Elizabeth Montgomery
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I am a former sell-side equity research analyst with +12 years experience covering apparel and footwear brands, specialty retailers, and consumer goods companies. I worked at Cowen, Robbie Stephens, Lazard and Longbow Research. I'm now a stay-at-home mom, but I continue to follow and trade... More
  • KORS: Solid 3Q Results Prove Long Growth Runway Ahead 0 comments
    Feb 12, 2013 11:23 AM | about stocks: KORS

    I'm really encouraged by Michael Kors excellent 3Q-13 results reported this morning for the Holiday period ending December 29, 2012. While there's no doubt in my mind that expectations are going to remain very high for the stock given the current valuation (closing yesterday at 37x this year's average sell-side analyst's estimate and 28x next year's estimate), I think there's still a tremendous amount of runway in terms of growth for the company ahead.

    A few quick thoughts from the results and the conference call:

    Taking market share: 3Q (Holiday quarter) comps in the company's life-style stores rose 41% vs. 38% LY, with traffic and conversion remaining similar to prior quarters (ie, traffic probably up around 20% and conversion also higher). In the wholesale channel, KORS did not see a deceleration in sales throughout the quarter and the company's promotions and markdowns to its department store partners actually decreased this year vs last year. This shows the strength of the Michael Kors brand and of the company's products--and further supports the thesis that Michael Kors (among others) is directly taking market share from Coach.

    Bringing e-commerce in-house: I'm encouraged that KORS has definite plans to bring its e-commerce operation (currently operated by Neiman Marcus) in-house. Not only should this improve the customers experience of the brand while on the web, but I think that the e-commerce site can (eventually) be a big benefit to margins and exceed management's current targets of e-commerce generating at least 10% of North American retail revenue longer-term. While management didn't want to get into specifics about the cost of bringing e-commerce in-house, they did say that it was factored into guidance for SG&A (as in, don't expect leverage any-time soon given ongoing investments in e-commerce and the start-up Japan business) and it is a very scale-able business which certainly shouldn't be a drag on margins or earnings after one year (in my opinion). US and Canada e-commerce will be in-house and operational with a new site and platform by February 2014, with Europe to follow within a 6-8 month period, and Japan and China down the road. Finally, since 40% of the e-commerce site web traffic is driven by international viewers that the company currently can't ship to, bringing e-commerce in-house and developing these capabilities creates many more opportunities for market share gains down the road.

    Leading the charge into new international markets: I'm really encouraged that they announced a new JV partnership with MK Panama Holdings to begin to open Michael Kors lifestyle retail stores in Central America, Latin America and the Caribbean. While they are currently thinking there is the potential for 40 stores in these markets, I believe this could prove conservative. We've been hearing a lot of discussion across the luxury space about the growing importance of Brazilian tourists to the business throughout Europe and in the travel retail channel. With a population of 193 MM, a median population age of 30 years, and the benefit of an investment surge ahead of Brazil's hosting of the 2016 Summer Olympics, I think Brazil will be the next new major emerging market targeted by retailers (following China).

    Continued "conservative" guidance: KORS modestly raised guidance for its 4Q and continued to target comps in the low-to-mid 20% range, with the potential to flow product to exceed this if consumer demand remains strong. While the company cycles a 36% comp in 4Q from the prior year, I think this continued focus on maintaining consistency in comps and not bloating inventory to continue to drive unsustainable 40% comp gains on top of 40% and 80% from the prior year is strategic and shows management's long-term focus on growing the business.

    In short, I think the Holiday results and consistent focus on the long-term growth story should further investor's confidence that the Michael Kors brand and company are not a fad but a legitimate long-term growth story on the global luxury goods scene. I won't be adding to my position today on the move up (which I think could be some short covering based on some concerns that I heard ahead of the call), but I will be eagerly watching the Michael Kors collection runway show tomorrow morning at 10 AM EST. Staying long and looking for lots of growth ahead.

    Disclosure: I am long KORS.

    Stocks: KORS
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