Monday, July 07, 2014

Investing in Luxury Fashion Earnings Growth

Michael Kors (KORS) is continuing its fabulous run as the leading luxury fashion brand displacing peers like Coach (COH). The company delivered yet another stellar quarterly performance in late May when it reported Q4 EPS of $0.78, beating the consensus by 15% while rising 56% year over year.

Revenues of $917 million beat the consensus by 12% and grew 54% year over year. Further, the company's strong comps gain of 26% made it their 32nd straight quarter of positive same-store sales. In Europe, revenue skyrocketed 125%, with comps launching 63% higher. That's powerful growth for an $18 billion clothier.

And analysts responded across the board by raising earnings estimates and price targets. The current year EPS consensus estimate moved to $3.94 from $3.82, representing 22.5% growth. Next year was lifted to $4.70 from $4.56 indicating potential year over year growth of 19%.

Most price targets were moved slightly higher into a range of $105 to $115. Reportedly, Goldman Sachs was the outlier with a bump from $120 to $134, but I have not seen that report.

But investor reaction has been mixed as Wall Street digested information about declining gross margins. It seems there were questions about the available runway for this growth story and if investors were willing to pay more than 20X for EPS growth that might be leveling off to 20%.

A Long Bias for KORS

I think the KORS craze and market penetration globally is far from over. Especially when they work so hard to have so many fashion accessories at so many price points. Their "accessible luxury" strategy speaks to, and opens the wallets and purses of, more than the affluent.

I have traded KORS stock twice in the past year for my FTM portfolio, first buying last July at $63 and bagging 25%. Then we bought again in December in anticipation of a great holiday quarter. We were not disappointed as we caught the big February pop to new highs above $90 and grabbed 12% gains.

Though I am a big fan of the Michael Kors company, its products, and its marketing strategies and global growth opportunities, I rely on the retail analysts who focus on the industry to sort out the real potential of the stock as an investment.

What Do the Analysts See in KORS?

What made me buy the stock again in June, besides the core growth story still being strong, is that I liked the commentary from several analysts. Here's a sampling...

JPMorgan analysts revisited KORS in last June after British handbag retailer Mulberry reported dismal sales efforts in high-end bags. They raised estimates, even introducing their FY16 EPS number of $4.80 (we are currently in Q2 of KORS FY15 which ends next March). They also raised their PT from $100 to $104 based on 25-26X their FY15 estimate of $4.00, or 21-22X their FY16.

Europe, Men's, and jewelry markets/categories are considered "$1 billion opportunities" for the company by the JPM analysts and these areas will drive growth beyond women's handbags. Though the bears here could still force a test of $86 and lower, I am confident this stock will be approaching $100 again in the next six months.

Deutsche Bank analysts raised their price target from $105 to $110 and had this to say in response to the gross margin concerns...

"While there are many moving parts to this increasingly complex global company, the bottom line we believe is that Kors once again delivered on both results & guidance. Though FY15 plan came in at least in-line with expectation, even so, we believe management is being conservative. Primarily, we note that plan calls for gross margin normalization, but management made it clear that hasn’t happened yet (and we don't think that back-half of 1Q compares get more difficult)."

Piper Jaffray analyst Erinn Murphy met with management recently and had many good things to say about their plans and solid execution. She reiterated her Overweight rating and $115 price target.

"Management was bullish not only on near-term trends but also on the multi-category opportunity for further market share gains over time. We believe Q1 comps are tracking above 20% globally. The company is investing behind e-com, product, supply chain, stores and people as sales continue to grow in the range of $1B/year. We expect operating margins in the 29% range for the next two years. Our recent European checks confirm that the brand is taking significant 'white space' that exists below high-end luxury."

The big take away for me was that these analysts and others are as bullish on KORS for the longer-term as I am. They see the international opportunity as still being in the early innings and they view the handbag wars (which KORS is still winning) as only one battlefield they excel on.

The Global Opportunity

The $75 billion accessories category of the global luxury goods markets is the fastest-growing sub-sector of apparel. And this is 85% of KORS current sales.

Management sees the potential for 700 stores internationally, including 400 in North America (currently 288), 200 in Europe (80), and 100 in Japan (37), with potential to eventually acquire licensed Asian geographies. KORS plans to add 110 stores in F2015, including 45 in North America, 55 in Europe, and 10 in Japan.

According to, "KORS opened 7 stores in the Asia-Pacific region, bringing the total count to 94 stores, including a new flagship store in China. Management expects around 200 retail locations in the Asia-Pacific region. Kors also opened two stores in Brazil, expanding its presence in Latin America. The company currently has seven locations in Latin America and expects it can support 40 retail locations over the next several years."

To solidify their Asia strategy, the company created a new leadership position and filled it with some key talent. Stephane Lafay has been named to the newly created role of President of Asia, reporting to John D. Idol, the company’s Chairman and CEO. From the company's June 30 press release...

Mr. Lafay’s appointment, effective July 28th, 2014, reflects the brand’s powerful momentum in the region and its sustained focus on growth. "This is a pivotal moment for the brand as we continue to invest and work to build a strategic roadmap for the Asia region," says Mr. Idol. "Stephane has a long history of building luxury businesses in Asia. His skills and experience will be a tremendous asset for us going forward."

Mr. Lafay was most recently at Tiffany & Co., where he held the position of Senior Vice President, Asia Pacific and Japan. Lauded for his leadership and in-depth knowledge of the region, he led the brand to consistently strong results.

"The Asian market is an important region for us to develop as we continue to grow our global luxury brand," says Mr. Idol. "We’re excited to take advantage of the momentum our brand has recently generated. In the past two years we’ve been able to double our store count to over 100 locations in the region. Stephane’s experience and leadership will help enable us to capitalize on our momentum in the region."

"I’m delighted to be joining Michael Kors at such an exciting moment in the brand’s development," says Mr. Lafay. "Having worked in Asia for 25 years, and spent nearly two decades building brands in the region, it’s clear to me that there is enormous opportunity for Michael Kors there. I look forward to being part of the team that turns this potential into reality."

It sounds like they picked the right guy for that "enormous opportunity."

Multi-Channel Excellence

According to Baird Equity Research, "KORS utilizes several marketing avenues to project its 'jet-set' image, including print (three 40-page catalogs per year), increasingly online/social media, fashion shows, and editorial (strong relationships with press)." Baird analysts have a $114 price target on KORS.

Obviously, Michael Kors the man now carries the cache of a Ralph Lauren (RL) with global fashion consumers after his celebrity run on the hit show "Project Runway."

What makes KORS above-and-beyond the average retailer is their global reach and brand appeal, their diverse "accessible luxury" lines that attract middle class fashionistas too, and their multi-channel marketing strategies in retail and wholesale. The company strategy is not hit-or-miss like many retailers. They are going for the jugular as THE all-encompassing and innovative lifestyle brand for more than the jetset.

And that's why it was nice to see Steve Mandel of Lone Pine Capital increasing his stake in Q2 by 25% to 11.3 million shares, probably on those dips below $90 in April. He's a conservative fundamentally-driven investor with a long-term view and he's clearly not done watching the KORS growth story take his investment higher.

Neither am I. And that's why I was buying the dips below $90 in June and it's a Zacks Rank #1 (Strong Buy).

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