Michael Kors Offers Abundant Upside Potential

Source: Michael Kors.

Michael Kors (NYSE: KORS  ) is one of the most explosive growth stories in the fashion business over the last several years, demand has been booming for this high-end brand, and the company is growing at full speed while gaining market share versus competitors such as Coach (NYSE: COH  ) .

The stock has risen by more than 50% in the last 12 months and the run is hardly over. Michael Kors still offers plenty of upside potential for investors.

Dressed for success
Fashion can be a fickle and volatile business, but it can also be a source of extraordinary profitability for powerful brands positioned on the right side of the trend. Michael Kors sells handbags, shoes, and accessories in the affordable-luxury segment of the pricing spectrum, and management has done a great job at building a high-end aspirational brand that's generating avid demand from its customers around the globe.

The media has shown the company's designs being carried by all kinds of famous personalities, including supermodels, movie stars walking the red carpet, and even First Lady Michelle Obama. This is probably the best kind of free advertising an aspirational brand like Michael Kors can hope for.

Brand differentiation and exclusive designs are key competitive strengths for Michael Kors, and this allows the company to generate superior profitability due to its extraordinary pricing power.

Demand is truly booming for the company's products, Michael Kors has generated sales growth of 47.5% per year through the last five years, far outpacing Coach -- one of its main U.S. competitors -- which produced sales growth of 9.8% per year over the same period.

And there is no reversal in sight. Michael Kors continues accelerating while Coach is facing increased headwinds in the U.S according to the latest financial reports.

Source: Michael Kors.

While Michael Kors delivered a whopping growth rate of 51% in North American revenues on the back of a 24% increase in same-store sales for the quarter ended on Dec. 28, Coach announced a decline of 9% in total sales and a big fall of 13.6% in same-store sales in the region during the same period.    

Coach has overexpanded over the last several years, and the brand is losing strength in North America due to excessive promotions. On the other hand, demand for Coach products is remarkably strong in China, where sales increased by approximately 25% during the last quarter.

Coach is aiming to refresh its image with a renewed collection from the company's new creative director, Stuart Vevers, so the company could generate better performance if it manages to bring more fashionable products to the market.

But even if Coach stabilizes performance in the U.S., that will hardly be enough to stop Michael Kors and its explosive potential for growth.

Moving ahead
Michael Kors delivered a sales increase of 59% in the last quarter of 2013. Retail sales increased by 51.3% on the back of 98 new stores and a remarkable growth rate of 27.8% in comparable-store sales, wholesale revenues increased by 68.2%, and licensing fees jumped by 59%.

Profit margins were also on the rise during the quarter: Gross profit margin was 61.2% of sales versus 60.2% in the year-ago quarter, and operating margin expanded to 33.9% of sales from 32.2%. Net earnings per share came in at $1.11, a big annual increase of 73.4%.

Strong same-store sales performance is showing that the company is far from reaching any kind of saturation point, as new store openings are not cannibalizing sales at previously existing locations.

Source: Michael Kors.

High and growing profit margins reflect that the company still has enormous pricing power as opposed to needing to reduce prices like Coach and other competitors are doing in order to gain market share via price competitiveness.

Management believes the company has room for more than 700 global stores versus 395 retail stores currently, and Europe is looking like a promising opportunity in the medium term as Michael Kors is making successful inroads in such a relevant market for high-end fashion. Sales in the Continent increased by a whopping 144% on the back of a 73% increase in comparable-store revenues and 19 new locations during the last quarter.

Bottom line
Fashion is a cyclical and competitive business, especially when it comes to a growth company operating on the high end of the pricing spectrum like Michael Kors. On the other hand, the company offers extraordinary potential for growth in the years ahead considering demand strength, whopping profitability levels, and its relatively small store base. The trend is your friend, and Michael Kors is quite a trendy fashion company.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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8/28/2015 4:03 PM
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