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Michaels Kors Holdings Designs A Bullish Growth Plan

Posted
5/22/2013 2:59:00 PM
By: Investor's Business Daily
Referenced Stocks:COH;FOSL;KORS;RL

Michael Kors Holdings ( KORS ) makes no secret of its desire to become a much bigger player in the global market for high-end fashion items.

The company designs, sells and distributes accessories, footwear and apparel. It is named after founder Michael Kors, a designer perhaps best known as a judge on "Project Runway."

Most of its business comes from accessories such as handbags, small leather goods, eyewear, jewelry, watches and footwear.

Michael Kors Holdings operates through a multichannel distribution model that includes its own chain of retail stores as well as wholesale and licensing segments.

These channels have produced robust financial gains over the years, helping the company grow from roughly $500 million in annual revenue in fiscal year 2010 to around $2 billion in fiscal 2013, which ended in March.

Now Michael Kors has its sights set on $4 billion in annual sales over the next few years. Many analysts reckon the company has the brand strength, growth strategy and financial might to pull it off.

Market Share Gains

"Doubling sales doesn't sound that hard," JPMorgan analyst Brian Tunick noted in a report last month. "Management suggested that the path to about $4 billion in revenue over the next few years would come through a combination of market share gains, retail expansion and growth internationally."

During a recent meeting with Michael Kors CEO John Idol and CFO Joe Parsons, Tunick found that management sounds particularly upbeat over the company's growth potential in Europe, which it sees as a $500 million-or-greater opportunity.

"Michael Kors' strength in Europe is currently driven by only about 35% brand awareness," Tunick noted. "They believe 50% (brand recognition) represents a true inflection point for the business to take off, suggesting meaningful room ahead."

On a fiscal third-quarter conference call with analysts, CEO Idol said the company was "very pleased" with the growing acceptance of the Michael Kors brand in Europe despite a weak overall economy there.

"We continue to benefit from increasing brand awareness in this region as our strong product portfolio resonates well with the European consumer," Idol said.

During fiscal year 2012, Europe accounted for about 8% of overall revenue. North America contributed 91% and Japan 1%.

As of April 10, Michael Kors had 228 retail stores in North America, 43 in Europe and 26 in Japan. Longer term, the company sees those numbers growing to 400 North American retail locations, 100 European locations and 100 Japanese locations.

One potential growth area in Europe is Michael Kors' partnership withFossil ( FOSL ). Under terms of that deal, Fossil makes watches that Michael Kors sells under its own brand.

Citigroup analyst Oliver Chen notes that the watch brand "resonates strongly" with customers and retailers in the UK, Germany and Switzerland.

The brand is also beginning to take hold in France despite heavy competition from Louis Vuitton, Longchamp and other European watch brands.

Chen cites a number of reasons the Fossil-Kors watches are showing strength across the Atlantic.

"We believe customers are responding to color, the fashion point of view, the synthesis of ideas from multiple high-end brands and the price points," Chen noted.

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

The closest rival in terms of the business model is Ralph Lauren, which also has a multichannel distribution platform that includes a near-equal amount of sales from retail and wholesale.

During fiscal year 2012, Ralph Lauren got 50% of its revenue from retail, 47% from wholesale and 3% from licensing agreements. That same year, Michael Kors got 48% of its sales from retail, 47% from wholesale and 3% from licensing.

Recent IPO

Michael Kors had its IPO in December 2011 at an opening price of $20. Shares peaked at 65.10 this February and now trade near 61.

During its first four full quarters as a publicly traded company, Michael Kors grew year-over-year earnings at least 96% and sales at least 58%.

It is scheduled to report fiscal Q4 results on May 29. Analysts expect earnings to come in at 39 cents a share, up from 22 cents the previous year. Revenue should be in the neighborhood of $515 million to $525 million vs. $380 million a year earlier.

During its fiscal third quarter the company's earnings more than doubled from the prior year to 64 cents a share, comfortably ahead of views. Sales gained 70% to $636.8 million, also well above estimates. Same-store sales in North America climbed 41%.

Online sales represent only a tiny percentage of Michael Kors' overall business, at less than 2% of sales. JPMorgan's Tunick says the company can grow that figure to around 10% of retail sales, which would represent about a $100 million opportunity.

"At this point, we believe online traffic is driven off of Google searches and email blasts, and we would expect the company to raise their online marketing spend," Tunick noted.