Michael Kors Holdings (NYSE: KORS ) just announced a secondary stock offering that could put $1 billion-$1.3 billion worth of its stock in play. Considering the stock is up about 125% since its IPO in December, it would look like a no-brainer to pick it up. But let's not get too excited.
Could it be a nice under-the-radar play in upscale retail? Analysts seem to think so. Right off the bat, the buy recommendations piled up from Jefferies, Robert Baird, Wedbush, and ISI Group as they initiated coverage in January.
When Randy Konik initiated coverage at Jefferies a month ago with a buy rating, he set a $35 per share target price, and the stock is now trading near $47. So while the IPO insiders will make out quite nicely, those who buy the stock now may see limited upside at this price.
The company looks strong, but most of the good news looks like it's been baked in already. Along with the filing documents, Kors management also put out updated guidance, raising its earnings forecast for the fiscal year by a nickel, to $0.74-$0.81 per share. But at $47 per share, the company's P/E shows up at nearly 80 in the back of this Fool's envelope.
It takes faith that the growth will continue apace to justify such a valuation. Kors also announced that sales for the quarter are up 36% over the same time last year. And that's all good news in the short term, but for a long-term investor, a history lesson is in order.
The '90s were the high-water mark for taking fashion houses public, as designers sought more autonomy and control from their backers. But things have gone in other directions since then. Few companies remain independent, with Polo Ralph Lauren (NYSE: RL ) being one exception, and it's driven by a strong retail effort and supported by all those polo shirts and fragrances.
Most designers have found out life as a public company is hard, with investors second-guessing their decisions. Kenneth Cole just last month announced his intention to take Kenneth Cole Productions (NYSE: KCP ) private again, so he can turn it around in his own image and not have to answer to investors.
Kors does have a strong bridge business in department stores, selling mid-price clothing. But the margins at that end are razor-thin in this economy. The recent easing in cotton prices is bound to help in that regard, but that's a short-term bridge over a structural hurdle. As the other designers have found out before, it's hard to grow a fashion business built on a single brand without risking overexposure -- and cheapening that brand -- or becoming so exclusive it limits distribution.
Even with luxury retail holding out better than other consumer segments in this iffy recovery, the prospects for a single-line fashion house in the public market are not good. Most have been rolled into conglomerates such as PPR -- parent of Gucci and Yves Saint Laurent -- or LVMH Moet Hennessy Louis Vuitton (OTC: LVMUY), which owns Donna Karan and Marc Jacobs. Even Calvin Klein and Tommy Hilfiger ended up embraced by the permanent-pressed sleeves of Phillips-Van Heusen (NYSE: PVH ) .
Perhaps the ultimate happy ending would be for Kors to make a go of it until the economy recovers sufficiently to give its business a good lift, then join Donna, Marc, and the rest of the gang in one of the conglomerates. Kenneth Cole is offering a 15% premium to his investors, even though his company is not thriving, so the premium for a healthy Kors buyout could be considerable.
If you go in with that mindset and are willing to hang on until this scenario plays out, by all means work it. But if you are a growth investor expecting to see the hefty returns continue, be warned that the fashion business is fickle and one bad collection could make this investment look like last year's model.
Michael Kors is bringing American style to markets overseas, but you can find out about other companies expanding globally in our latest special report, "3 American Companies Set to Dominate the World." This report is completely free, so don't miss out!