A Few Reasons Why Michael Kors Is Still an Attractive Investment

The Michal Kors juggernaut continues to roll on, and the reasons to buy it are getting stronger.

Mar 5, 2014 at 1:36PM

Michael Kors Holdings (NYSE:KORS), the global luxury-lifestyle brand, has been on a tear since its IPO in December 2011. Kors' shares have gained more than 300% since the IPO, but it looks like the company hasn't run out of steam yet.

Despite competition from more established peers such as Coach (NYSE:COH) and Louis Vuitton Moet Hennessy (NASDAQOTH:LVMUY), Kors still continues to grow at a neck-breaking pace as its recent quarterly results suggest.

Impressive growth continues
In the third quarter, Kors' revenue rose 59% to approximately $1 billion, easily exceeding the $859.9 million analyst estimate. Sales were driven by a 27.5% jump in comparable-store sales. Also, Kors' bottom line jumped 73% year over year to $1.11 per share, easily outpacing the $0.86 consensus estimate. 

Kors' international stores also did well. In Europe, revenue rose 144% as comparable-store sales increased 73%. In Japan, revenue and comparable-store sales grew 54% and 18%, respectively. Kors' strategic moves played a big role in the company's outstanding quarterly performance.

It converted its department stores into shop-in-shops, resulting in a 68% increase in wholesale net sales. This conversion led to more demand for luxury accessories and footwear products by increasing the visibility of its products on the shelves. On the back of such strategies and growth across different markets, Kors is in a good position to continue its outstanding performance going forward.

Expansion plans
Kors is planning to open 57 new retail stores in North America. In the wholesale segment, meanwhile, the company will continue converting department doors into shop-in-shop stores for accessories, footwear, women's wear, and menswear. 

Furthermore, Kors is looking to expand more in Europe by opening additional retail stores. Its products are resonating well with customers in the European region, leading to 140% revenue growth in the third quarter. As a result, Kors plans to open 36 new stores in Europe in fiscal 2014. In the long run, management thinks that Michael Kors can support around 200 retail locations in Europe. 

The introduction of fragrance and beauty products has proved to be successful in the European market so far. Kors sees this segment as a catalyst for increasing its brand awareness in the region. Furthermore, the company is planning an expansion in the Asian and Middle Eastern markets. 

The Chinese market
Kors recently opened its 5,800-square-foot flagship store in China. The company believes that China could be one of its biggest growth drivers going forward, and it sees the potential for 200 stores in the region. The fashion-apparel industry in China is quite huge. According to Bain, the domestic luxury market in China was worth $19 billion in 2013. So, Kors is making the right move by expanding in this region.

However, Kors will come up against more established rivals in the form of Coach and Louis Vuitton in China. Coach's handbags, which cost around $400 in China, are seeing strong adoption by Chinese customers. They were one of the reasons why Coach saw a 10% jump in comparable sales in the country in the three months ending December.

Coach's designer bags have been a hit in China for a long time, and the company is looking to make the most of its presence in the nation by pricing them right to address the growing middle class' aspirations. Coach is also adding Chinese-speaking staff to its American stores in a bid to establish a connection with Asian customers. 

The Chinese account for more than $1 out of every $4 spent on luxury goods across the world, according to Bain. So, the Chinese market is a big opportunity, and Kors is aggressively expanding here to grab a piece of the pie.

Louis Vuitton, on the other hand, has been feeling the heat of the Chinese government's crackdown on corruption. The company has seen declining interest in the Louis Vuitton logo due to a shift in the luxury landscape toward American brands such as Kors and Coach, while the presence of fakes has also been damaging. To address these issues, Vuitton is promoting its vintage-style products in the country. This move from Vuitton could be counterproductive, as Kors is promoting its designer handbags and apparel in China that are more in line with the times.. 

Kors is also looking to enhance its travel business by opening more retail shops and standing shops at airports, particularly in Asia. In addition, the company is also launching a new website to enhance customer interface and interaction. Besides luxury apparel, Kors' jewelry business is also flourishing. Kors plans to expand the jewelry segment in its retail and wholesale stores going forward. 

Bottom line
Kors has been an outstanding performer so far. The company's growth initiatives suggest that it still has a long way to go in various markets across the world, primarily Europe and China. And considering the company's strong historical growth rate and annual earnings growth projection of 25% in the next five years, it looks cheap at a P/E ratio of 34. Thus, despite a very strong run in the past couple of years, Kors could still prove to be a good investment.

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Meetu Anand has no position in any stocks mentioned. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. 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.

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Jun 12, 2015 at 5:01PM

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