Michael Kors: The Next Global Juggernaut in Luxury Retail?

Is Michael Kors' incredible performance reaching an end, or will new categories and global expansion lead to something even greater?

Feb 9, 2014 at 10:00AM

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.

Start investing today
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Brian Nichols owns Michael Kors. The Motley Fool recommends Burberry Group, Coach, and Michael Kors Holdings. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers