The Only Thing That Outperforms Kors Is Its Valuation

In the face of economic slowdowns, tepidity, and anything in between, the premium retail brands have often outperformed their less-expensive brethren. For few companies does this ring truer than for fashion house Michael Kors (NYSE: KORS  ) . Though only on the public markets for 14 months now, the stock has experienced a near vertical 135% climb. In its most recent quarter, the company again showed investors and analysts that it is a force to be reckoned with in the ultra-competitive fashion retail business. But considering its sky-high valuation, should you be interested in this top-notch retail shop?

Stay the Kors 
Since its market debut, Kors has impressed investors with remarkable growth and sound management. The cautious yet substantial expansion efforts have helped lead the company's stock performance far past competitors such as Coach (NYSE: COH  ) and Ralph Lauren. Throughout the last year, Kors grew top and bottom lines at an impressive clip, topping analyst estimates every single quarter -- and by a large margin.

For the company's quarter and full-year guidance report, the trend proved itself yet again. In a business where image is everything, Kors has about as good a rep as any other in its field. The Hong Kong-based design and retail house told investors and analysts that it would continue its focus on making and selling more accessories -- a fantastic source of growth for the company in recent quarters.

For the third quarter, Kors was able to grow revenue by a chunky 70% year over year. This compares to Coach's stumbling year -- it's slowest sales growth since the company went public 10 years ago. Kors' bottom line was nearly as impressive, with $0.64 per share over $0.20 the year before. A major difference between Kors and Coach, besides the growth and stock performance, is in strategy. Kors continues to push its core line of handbags and other accessories that resonate very well with lifestyle-brand shoppers. Coach attempted to rebrand itself after surviving a major economic downturn by sticking to its guns as a high-fashion brand. This gives definition to the phrase "The enemy of good is better."

Other numbers from the company were equally encouraging, such as comparable sales rising more than 40% year over year and very encouraging guidance.

Very encouraging guidance
Before we get to company-specific guidance, it is worth noting that the macro environment for luxury brands such as Michael Kors and Coach is looking increasingly favorable. As mentioned in a Motley Fool blog article, Altagamma  Studies predicts global demand for luxury goods will increase to $310 billion by 2014. That number was just $230 billion in 2011. While this number doesn't guarantee anything for any individual company, it does bode well for Michael Kors' seemingly unstoppable market share crusade.

What really blew the stock out of the water wasn't even the tremendous revenue and profit growth, but the future prospects. Management told investors and analysts they were expecting mid-30% comparable-store growth on an annual basis for 2013. The bottom line for fiscal 2013 could be as high as $1.82 per share, up from initial estimates in the $1.50 range.

Unsurprisingly, things are looking great for Michael Kors. But what does this mean for prospective investors?

Valuation
Regardless of the fact that this is a well-run company with amazing profit and market share potential, Michael Kors is, by no fault of its own, incredibly overpriced. Though growth investors will sure yell at me below, I just don't see the company being able to maintain its incredible growth rates for years on end. I am not commenting on whether the stock will rise or fall, as I believe the market is irrational enough to keep the valuation flying high. But for the long-term investor, this is simply too expensive a company on a forward earnings basis.

Investors may want to look back at Coach, believe it or not. At 14 times forward earnings and likely falling, Coach could become a bargain if management is able to turn the direction of the company around. It certainly has the potential.

Either way, never invest outside of your own circle of competence. Buying what you know is a great mantra and looks good in lists, but there's always a little more to the story.

Want more on Kors?
Michael Kors is one of today's hottest high-end fashion brands, and that's translated into one of the best-performing stocks in retail -- since its debut on the market in late 2011, the share price has more than doubled. But with all that growth, has the stock finally become too expensive, or is there still room left to run? The Motley Fool's new premium report on Michael Kors gives investors all the information they need to make the right decision. We cover the key must-watch areas, opportunities, and threats to the company that investors need to know. To claim your copy, simply click here now for instant access.


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  • Report this Comment On February 13, 2013, at 11:27 AM, EquityBull wrote:

    You should rethink the valuation call here. KORS is about 50% of the market cap of COH right now. Coach's growth is around 10% or less. KORS is growing and taking share away from COH at the same time.

    KORS can gobble up quite a bit of the revenue pie from Coach in their playground. Adding more fuel to KORS where COH is not even a great compare is their equal strength in shoes and accesories. Both huge markets. My wife has spent $1000's on KORS shoes, watches, etc. She also spent $1000's on KORS handbags. The difference with Coach has always been that it was primarily handbags. KORS has a much wider reach and thus a bigger market. COH realizes this and is trying to transform and copy KORS to become more like them. Will this work? Well more risk to Coach whether it will or not. We do know it IS working for KORS. Big time.

    My wife and all her friends were all about Kors everything this year. Could it change in the coming years? Sure, fashion can be a fickle beast but it seems Michael Kors has the pulse on the consumer and his core audience.

    I own both coach and Kors figuring I'll grab the pie no matter where it comes from. However I'm pretty confident in the next 3 to 5 years KORS will likely be the clear winner and today's price will seem very cheap.

    I project at least $2 for 2013. Kors and analysts have been sandbagging. This past quarter they even had the holiday with LESS earnings and revenue than the quarter before it! Pretty crazy and we saw how that worked out. I posted on Estimize.com 65 cents and missed by a penny. Analysts were at 41 cents missing by more than 50%! This was pretty easy to call as the holiday quarter had to far exceed the quarter prior.

    I think we'll see $3 to $3.50 for 2014 and $4.20 to $5 in eps for 2015. At todays price that is just about 12 times eps on '15 earnings. I also see 2015 still growing over 30% as Kors has not even touched international markets and is far from saturation in the USA.

    As you say...load up some Kors and stay the "KORS" :-)

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