Michael Kors Makes Its Case for a Fashionably Bright Future

Yesterday, Michael Kors  (NYSE: KORS  ) CFO Joe Parsons spoke at the Morgan Stanley Global Consumer Conference, and laid out the company's current position, along with its plan for the future. In short, it's doing well, and it plans to keep doing very well. OK... but why is it doing well? Parsons had some interesting things to say about the success of Kors, and not all of his answers point to long-term health.

Michael Kors eats up the market
Before we dive into why the brand has been so successful, let's be clear on what successful really looks like. Kors has increased revenue by 45.7% during the first six months of its fiscal year, driven by a 25% increase in comparable-store sales. The in-store success hasn't been driven by discounts, either. Kors has protected its brand, and pushed full-price sales through its business. That has increased the company's gross margin by 1.5 percentage points over last year, up to 61.3%.

During the last few quarters, many higher-end businesses have done well, but Kors has clearly been a standout, achieving a level of success that other companies have simply missed out on. Competitor Coach (NYSE: COH  )  suffered the brunt of Kors' wrath, watching its sales slip away to Kors.

Coach's last quarter showed the company's main weakness right now -- North American sales. The company's comparable-store sales fell 6.8% last quarter -- remember, Kors jumped up 25%. The difference between those two metrics is indicative of the market share that Coach is losing, and that Kors is picking up. Now on to the "how."

Kors leverages its namesake
One of the biggest drivers for Kors' sales is Michael Kors, the man. In Parsons' talk, he mentioned a "halo" effect that Mr. Kors brings to the company. His persona adds to the company's luxury appeal, and his constant presence at media events is the best sort of free advertising. So, at least part of what's driving Kors is its current appeal as the new hot thing. That's an important point for investors, because fashions change. That's not to say that Kors will drop off the face of the earth if a new company -- Tory Burch, I'm looking at you -- jumps into the mall, but sales will eventually slow.

Kors is hoping to balance the risk of resting on one man's shoulders by diversifying its offerings. The company works with Fossil, Estee Lauder, and Marchon -- an eyewear designer -- to offer shoppers a range of luxury goods. Those partnerships are also getting customers in the door, and should help keep foot traffic steady, even at times when Kors isn't at the top of the fashion list.

Michael Kors has room to expand
Parsons' main point was that Kors still has room left to run. The brand is still hot, it's developing new partnerships, and its international business is still young -- just 16.5% of revenue last quarter came from overseas.  All of that should give investors many reasons to be excited about this young brand.

The obvious downside to Kors is its cost. The stock is trading well above the market average for price-to-earnings ratio, and more than double Coach's ratio. That doesn't mean that it's a bad investment -- just that it has a lot resting on keeping up the momentum. Kors doesn't report quarterly sales again until next year, but be on the lookout for slowing comparable-store sales growth; it could be the early sign of an overall slowdown.

The long tail of popularity
Some companies have managed to keep their mass appeal alive for years on end. Kors is still in its first growth phase, but it can learn all sorts of lessons from other game-changing businesses. To learn about two retailers that shook things up, and still have great prospects, take a look at The Motley Fool's free report on "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform, and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.


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