Michael Kors: Running Ahead Of Holiday Fashion Pack?

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Jewelry, watches, handbags, footwear, eyewear and fragrances: They're the high-margin, so-called "accessible luxury goods" that are at the core of the fast-growing retail and wholesale empire ofMichael Kors Holdings ( KORS ).

All that, plus ready-to-wear apparel from the company's namesake fashion designer and former "Project Runway" judge and his design team, have made Michael Kors and its stock one of the rising stars in retailing.

In-house designed merchandise and products from select licensees have struck a chord with customers, from teens to 50- and 60-somethings -- and from New York and Nevada to Milan and Munich -- the latter, part of the brand's successful march into European capitals.

The numbers the firm's been ticking off since its December 2011 public offering speak volumes: double-digit sales and profit growth, the most recent quarter sporting a 45% jump in per-share earnings and 23% growth in same-store sales.

An Early Sales View

Retail Metrics estimates that Michael Kors' same-store sales in December jumped 20.4%, the second highest of about 100 retailers tracked, afterRestoration Hardware ( RH ). Though even Kors discounted during the highly promotional holiday month, analysts say.

While such numbers put Michael Kors at the very high end of the retail spectrum, it has seen a deceleration from headier growth in prior quarters, when it was a smaller outfit looking to make it big -- and doing it. Revenue has more than doubled in the last two years -- it's expected to hit around $3 billion in the fiscal year ending in March.

Earnings are seen rising 44% to $2.83 a share, down from 153% growth last year.

Some moderation from nosebleed numbers should be expected due to the law of large numbers, analysts say.

"Certainly Michael Kors continues to fire on all cylinders," said David Wu, a retail analyst with Telsey Advisory Group.

What's got consumers all worked up about Michael Kors, one name on the IBD 50 list of top-rated growth stocks?

"Essentially the end product looks more expensive than what it really costs, and consumers are responding in droves," Wu said.

"The company has continued to effectively capture the key designer trends of every season and offer it to the masses," he said.

Or, at least, the masses that can afford luxury's "opening price points," as analysts put it.

"They've been able to steal market share from other luxury and aspirational luxury brands," said Marshal Cohen, chief retail analyst with the NPD Group.

One of those on the losing end appears to beCoach ( COH ), analysts say.

Michael Kors' CEO John Idol thinks Michael Kors competes with more than just one major U.S. luxury brand, though. The brand goes up against "two or three of the very largest global Italian and French luxury-goods players," he said in a conference call last month, without naming them.

"Europe is a very exciting opportunity for us," he said, noting that sales at two Michael Kors stores in fashion capital Milan, Italy, are tracking "far beyond our expectations." A number of new stores are planned elsewhere in Italy and other European locations.

New Stores In Store

The company has 57 stores in Europe, of which eight opened in the last quarter. Management expects to open 40 new stores in Europe by the end of the fiscal year and believes the firm can support 200 European stores.

In the second quarter, revenue in Europe jumped 100% over a year earlier to $114 million, with comparable-store sales up 45%. Michael Kors also sells to department and specialty stores in Europe. Idol said Europe could provide more than $1 billion in new revenue over the next few years.

The Hong Kong-based firm gets roughly half of its revenue from Michael Kors retail stores, some 477 of them at the end of September. Of those, 352 are company-owned. The rest are licensed.

Eighty-three new stores opened in the second quarter. Management has said it can ultimately support 400 stores in North America, vs. its 264 stores at the end of the second quarter.

One problem is what many retailers would love: Some stores are just too busy for their own good. As Idol complained in the call, when stores are too crowded "it doesn't really feel luxurious." So executives plan to "upsize" a number of them, especially those with sales above $3,000 per square foot.

Even at an estimated average $1,950 per square foot in sales, wrote Morgan Stanley analyst Kimberly Greenberger in a report this month, "Michael Kors enjoys industry-leading store productivity."

Upsizing some of the busiest stores would allow for a larger footwear and jewelry assortment, leading to incremental sales, she says.

Shoes Seem To Fit

Greenberger says the company is testing a full footwear assortment at a mega-store in Manhattan's Soho neighborhood, a district that has attracted a number of luxury brands including Prada.

Kors' footwear sales are running in double digits in terms of same-store sales gains. Because of accelerating footwear sales but limited space in retail stores to show off shoes, Kors plans to open "a couple hundred" footwear shop-in-shops in department stores, Idol said.

Wholesale sales from specialty and department stores such asMacy's ( M ) make up most of the other 50% of revenue. Strong growth there is being driven by accessories, footwear and branded shop-in-shop conversions.

"We believe that we are the number one brand for our department store partners," Idol said in the conference call.

He added that Michael Kors' footwear is the No. 1 designer footwear brand among "most" of its retail partners.

A Time For Men

If all that is not enough, Michael Kors plans to expand offerings to men. While the brand is women-centric now, the company believes that men could provide $1 billion in revenue from men's sportswear, leather goods and watches. A new president will be hired to head up the men's division.

"We think we have a huge men's watch opportunity," Idol said, adding that men's watches currently account for only about 10% of watch sales.

Wu of Telsey Advisory Group thinks that Michael Kors could become the nextRalph Lauren ( RL ) as the company moves into men's and potentially other "lifestyle" categories such as children's and home furnishings.

"Michael Kors is strongly positioned to be a much larger accessible luxury goods player on the likes of Ralph Lauren," he said.



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 , M , RH , RL

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