Well, that's a big change of events for Michael Kors Holdings Ltd (NYSE: KORS ) stock. KORS stock, which has done pretty much nothing other than grind lower over the past year as mall retail fears have mounted, is soaring today.
The luxury handbag and accessories retailer posted much better than expected sales and profit numbers for the first quarter. They also substantially hiked guidance. It's a sign that the struggling mall retailer may be at an operational inflection point.
KORS stock is up more than 22% on the news to over $45. That is a level the stock hasn't seen since late last year.
While today's pop is understandable (the stock was down 14% year-to-date into the report), it also feels largely overdone. After all, revenues in America and Europe are still in free fall. Asia market growth is moderating quite quickly. Comparable store sales are still negative on a 1- and 2-year basis. Operating margins remain depressed.
From a broader perspective, Michael Kors is still a dying brand in a struggling space.
Yes, KORS stock has value, but it feels maxed out after today's rally.
Retail Narrative At a Turning Point, But KORS Still Isn't Hot
It looks like the retail narrative is changing.
Forever, conventional market wisdom said avoid anything with exposure to the mall. As Amazon.com, Inc. (NASDAQ: AMZN ) continued to scale its business model and push a new era of digital shopping, mall traffic continued to fall. As mall traffic was falling, rent prices remained higher. That put undue pressure on retailers, and it has caused an unprecedented surge in retail bankruptcies this year.
But now that narrative is changing.
Alongside Michael Kors, Ralph Lauren Corp (NYSE: RL ) also announced better than expected quarterly numbers on Tuesday morning. The common theme between the KORS and RL reports was improvement on the gross margin line.
That means that after years of a persistently promotional retail backdrop, full-price retail is back.
That is great for premium brands who want to sell goods at full-price, like Michael Kors. But that tailwind only helps on the gross margin line. It doesn't really drive sales.
And unfortunately for KORS investors, Michael Kors is a dead brand that doesn't have a clear path towards reinvigorated sales growth. The more mature American and European markets have been trailing off for some time. Those declines continued in the quarter. That really isn't good. Revenue declines in mature markets imply that the KORS brand is just a trend with a short life cycle.
That trend is on the up and up in Asia (revenues soared 62% year-over-year in Q1), but the "up-and-up" portion of that cycle is rapidly unwinding (Asia revenues jumped 95% year-over-year in the previous quarter). This dynamic implies that Asia's red-hot sales growth is simply a result of its small base. Asia revenues totaled $117.1 million in Q1, versus $201.2 million in Europe and $634.1 million in the Americas.
History says Asia growth will continue to moderate until the Asia market hits European scale, at which point revenues will start to decline.
Meanwhile, in America and Europe, there is no sign that sales growth will jump back into positive territory any time soon. Comparable store sales are still strongly negative. While the comp decline moderated on a 1-year basis, it remains down big on a 2-year basis.
Bottom Line on KORS Stock
There are no signs that comparable store sales will be positive anytime soon. Without positive comp growth, the driver of topline growth will be unit growth. That will likely drive low single-digit revenue growth over the next several years.
Gross margins are improving, but the operating expense rate will likely remain flat as any operating cost leveraging should be offset by costs related to new store openings. Thus, any operating margin expansion will be driven almost entirely by gross margin improvement.
Some margin expansion coupled with buybacks should turn low single-digit revenue growth into mid single digit earnings growth. But KORS stock is trading at 12.3-times the midpoint of management's guide for earnings-per-share this year. A 12.3-times multiple for mid single-digit earnings growth seems rich.
Especially for a dying mall retailer that is still heavily dependent on good mall traffic trends to drive growth.
I say fade the rally, and look for opportunity elsewhere in retail.
As of this writing, Luke Lango was long AMZN.
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