Michael Kors: The Next Global Juggernaut in Luxury Retail?

In a very challenging retail environment, Michael Kors Holdings (NYSE: KORS  ) once more proved itself invincible to price cuts and low traffic, as the company further flexed its muscles in the face of competitor Coach (NYSE: COH  ) . Now, as the company begins to enter new markets, should other luxury retailers like Louis Vuitton Moet Hennessy (NASDAQOTH: LVMUY  ) or Burberry Group (LSE: BRBY  ) be worried?

Stealing market share with ease
Back in January when Coach reported earnings, many were surprised to hear management admit that Michael Kors was in fact taking market share in the handbag space. For many, this excuse gave some satisfaction to the reason for its comparable-store sales drop of 13.6% during the holiday season in North America.

Clearly, Coach has had its fair share of problems but has insisted throughout this period that its struggles were more a result of design transitioning, new leadership, and an increased focus on emerging markets.

Yet, in Michael Kors' last quarter we saw exactly what Coach was referring to. Michael Kors announced that for its fiscal third quarter (holiday season) that comparable-store sales rose an unprecedented 28% during the period, which translates to total revenue growth of 57% year over year.

Furthermore, we already know that high margins are the norm for successful luxury retailers, which used to be a staple in the business of Coach. Yet, rarely have we seen a gross margin of 61.2%, as seen in Michael Kors' last quarter, a 100 basis point increase over the year prior.

With that said, it appears that nothing is slowing this juggernaut retailer, as management noted that weather had little effect on demand; its expenses and inventory increased at a slower rate than sales growth; and the very few markdowns were a result of late deliveries, not pressure from competitors.

Essentially, Micheal Kors is operating in autopilot while Coach searches desperately for an answer.

The entrance into new markets
Michael Kors is known for its handbags but has seen other segments such as watches and jewelry and accessories grow rapidly in the last year. As a result, Michael Kors is now entering new segments within retail, its latest being footwear.

On the company's conference call, management noted that the momentum for footwear is very strong and that the upside potential is enormous. For investors, this should paint a rosy picture of the brand power associated with Michael Kors, a company that can grow further by expanding beyond handbags, with a larger array of clothes, coats, etc., but for other retailers, this could spell trouble.

For instance, Michael Kors doesn't yet directly compete with European companies Louis Vuitton or Prada, which are staples of luxury. However, Louis Vuitton has largely been known for its handbags and leather apparel.

Louis Vuitton has seen a remarkable run of 8% compound average growth for the last decade, but sales for the company have dropped significantly of late. The company's $13.7 billion in third-quarter sales is a good reflection of how large Michael Kors could eventually become, and given Michael Kors's growth combined with Vuitton's flattening sales, one might conclude that Kors is starting to make its presence known to the European giant.

Next, Burberry is a hot name in luxury retail but, like Coach, lost a great visionary in its CEO. Burberry is really known for its coats but also has a presence in bags and shoes. Still, with a large European presence, Kors hasn't affected Burberry's growth.

In Burberry's last quarter, revenue grew 17% while comparable sales increased 13%. With that said, growth is expected to slow a bit, and who knows, maybe Michael Kors is to blame. Clearly, Kors is growing much faster in a market that lacks substantial growth and without a large presence in many of Burberry's niche markets.

Final thoughts
For investors who think Michael Kors is too expensive, just look at the size of its business relative to Louis Vuitton. This is a company that still has an opportunity to expand both in new product categories and throughout the globe.

Both Louis Vuitton and Burberry are European companies, and while neither have been negatively affected to a large degree by Kors' success, investors have to think that because of its brand power, Michael Kors could weigh on these companies as it continues to expand.

Essentially, Michael Kors is the hot brand in the luxury space, and this is evident by the decline in shares of Coach. In fact, some might suggest that Coach's global expansion plan is an attempt to run from Michael Kors, but as Kors begins to expand, many of these global powers might have to face this fast-growing machine. In the end, this bodes well for the future of Michael Kors, which in turn should mean larger gains for investors.

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