Will Michael Kors Report Another Blowout Quarter?

Michael Kors (NYSE: KORS  ) showed immense financial strength in 2013, which caused its stock to soar 59.1%, far outperforming the S&P 500's 29.69% return. The popularity of its brand brought sales to all-time highs and led the company to exceed analyst expectations for all four of its quarterly reports released during the year. Michael Kors' 2014 earnings season will kick off on Feb. 4, so let's take a look at the expectations and see if the stock could continue its run higher. 

"Affordable luxury" at its finest
Michael Kors is home to one of the most fashionable lines of women's and men's apparel and accessories. The most consumer attention has been placed on its watches and handbags, but it has been gaining ground in clothing, footwear, sunglasses, and other categories. There are not many brands that cater to the tastes of both women and men, but Michael Kors has found the recipe for success.

Source: Michael Kors.

The last time out
On Nov. 5, Michael Kors released second-quarter results for fiscal 2014 that exceeded analysts' expectations on both the top and bottom lines. Here's an overview of the results and a year-over-year comparison:

Metric Reported Expected
Earnings per share $0.71 $0.68
Revenue $740.30 million $725.91 million

Earnings per share increased 44.9% and revenue rose 38.9%, driven by comparable-store sales growing 22.9%; this marked the 30th consecutive quarter of comparable-store sales growth. Gross profit increased 42.4% to $449.9 million as the company's gross margin expanded an impressive 150 basis points to 60.8%. The quarter was summed up perfectly by CEO John Idol, who said, "Our strong financial results in the second quarter underscore Michael Kors' expanding brand awareness and global presence." I believe the momentum will carry over into the holiday season and result in the best third quarter in company history.

Expectations and what to watch for
Third-quarter results are due out before the market opens on Feb. 4, and the estimates call for another quarter of top- and bottom-line growth. Here is a breakdown of the current expectations:

Metric Expected Year-Ago
Earnings per share $0.86 $0.64
Revenue $860.95 million $636.79 million

These expectations call for earnings per share to increase 34.4% and revenue to rise 35.2% year over year. I believe the estimates are attainable because of the strength in the Michael Kors brand and momentum from the second quarter. In fact, in the second-quarter report, Idol said, "We have solid momentum as we head into the holiday selling season ... We believe that 2014 will be another record year for the company as we continue to expand the Michael Kors luxury lifestyle brand globally."

Source: Michael Kors.

Other than the key metrics, it will be important to watch for the company's fourth-quarter outlook; current estimates call for fourth-quarter earnings in the range of $0.61-$0.76 per share on revenue of $745 million-$860 million. If Michael Kors can provide guidance above these estimates, or at least above the average of these estimates, the stock will likely see a run higher. Also, it will be important to watch the gross margin as most retailers were forced to offer promotions in order to compete during the holiday shopping season; if Michael Kors can expand its margin while other companies report decreases, it will add to the fact that Michael Kors is the dominant player in the industry.

Competitor? Not so much...
Michael Kors competes in the luxury goods industry with Coach (NYSE: COH  ) . Coach sells its premium handbags and accessories worldwide through Coach stores, specialty stores, and select department stores such as Macy's and Dillard's. Coach reported second-quarter earnings on Jan. 22 and the results missed estimates on both the top and bottom lines. Here's an overview of the release:

Metric Reported Expected
Earnings per share $1.06 $1.11
Revenue $1.42 billion $1.48 billion

Earnings per share decreased 13.8% and revenue fell 5.3% year over year, as a result of weaker-than-expected sales in handbags and accessories as well as slowed customer traffic in Coach stores. Gross profit declined 9.4% to $982.7 million as gross margin plummeted 300 basis points to 69.2%. This was a horrible quarter all around for Coach, which caused the stock to open the trading session down by more than 7%. I, and many others, believe Coach's troubles are a direct result of Michael Kors' growing popularity. As Kors expands, it will only get worse for Coach; for this reason, holders of Coach may want to consider moving those funds into Michael Kors.

The Foolish bottom line
Michael Kors has been one of the best growth stories in the market since it went public in December 2011. It is home to one of the most desired lines of women's and men's luxury goods, and this will result in record-setting sales during the holiday-season quarter. I believe the stock is undervalued at current levels, based on its growth rate and forward earnings, and you should consider buying it now or on any weakness going into the report.

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