Michael Kors Holdings Designs A Winning Growth Plan

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For many fashion brands, it's hard enough establishing success in one distribution channel, be it retail, wholesale or licensing.

Michael Kors Holdings ( KORS ) is out to prove it can find success in all three at the same time.

Michael Kors is a global accessories, footwear and apparel company. Most of its business, about 75%, comes from accessories such as handbags, small leather goods, eyewear, jewelry, watches and footwear.

At the close of its fiscal first quarter, which ended in June, the company operated 253 of its own retail stores and licensed another 68 stores to partners. It also operates wholesale and licensing segments.

All of these channels have produced robust growth in recent quarters, no mean feat, analysts say, considering the volatile nature of the fashion industry as well as the sluggish economy.

"Among a specialty retail landscape that is desperate for growth, Michael Kors represents a highly compelling longer-term footage growth story," JPMorgan analyst Brian Tunick said in a report earlier this month. "The company is in the enviable position of being able to drive growth across all of its distribution channels and geographic regions for the foreseeable future."

Kors operates in the luxury end of the fashion and retail sector, along with companies such asCoach ( COH ),Ralph Lauren ( RL ) and Donna Karan International.

Its founder, Michael Kors, has built a reputation for fashion-forward designs, though he's probably best known to most folks as a judge on the "Project Runway" television series.

The company's products feature "innovative designs, materials and craftsmanship with a jet-set aesthetic that aims to combine stylish elegance and a sporty attitude," said Citigroup analyst Oliver Chen.

Fashionistas aren't the only ones who've taken a liking to Michael Kors Holdings. It also has earned high marks from Wall Street.

Financially, Michael Kors has consistently topped analyst expectations since going public last December.

During its first three quarters as a publicly traded company, Michael Kors has grown earnings at least 87% and sales at least 58%.

Chen reckons Michael Kors can grow its annual sales in Europe to $550 million, up from $109 million in fiscal 2012. The company also targets bigger sales in Japan.

"Michael Kors has accelerating awareness in targeted international markets," Chen noted. "(The company) has a long growth runway given its low saturation."

He projects 25% annual growth in the number of Michael Kors stores over the next few years, with a potential for 600 stores.

Meanwhile, the company's long-term wholesale revenue growth should exceed 20% a year based on new or enlarged shop-in-shops in the U.S. and Europe. "Shop-in-shop" refers to areas within department stores that are devoted to Michael Kors products.

Business has been so brisk at Michael Kors that the company recently raised its guidance for its fiscal second quarter, which ended in September.

Management now expects earnings in the range of 38 cents to 40 cents a share vs. earlier guidance of 33 cents to 35 cents. It expects sales of $510 million to $520 million, up from previous guidance of $490 million to $500 million. The company raised its retail same-store sales growth to 45% vs. prior guidance for a 30% increase.

It is due to report Q2 earnings on Nov. 13.

"Following its updated outlook, Michael Kors has now posted 26 straight quarters of positive comps and 10 straight quarters of 35%-plus comps, some of the most robust and consistent comp gains in the space," Tunick noted.

The company logged fiscal first-quarter earnings of 34 cents a share, up from 13 cents the prior year and 14 cents above Wall Street views. Revenue gained 17% to $414.9 million, well above estimates for $368.3 million.

Retail sales during the quarter climbed 76% to $215 million. Same-store sales increased 37%.

Wholesale revenue rose 66% to $182.4 million. Licensing revenue gained 61% to $17.5 million, driven by strong demand for watches.

Kors' growth strategy includes targeting a younger, affluent demographic that is often overlooked by luxury brands.

JPMorgan's Tunick points out that the company's current target customer is 25 to 54 years old, with annual income above $50,000 a year.

"The growth going forward is targeting the more aspirational luxury customer," Tunick noted. "Brand awareness is trending younger; the 18- to 24-year-old demographic is now the highest awareness group. This positions them well for future growth."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: COH , KORS , RL

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