Can Michael Kors Keep Up the Pace?

Michael Kors increased sales in its latest quarter, as per usual, but gross margin showed a bit of strain.

May 28, 2014 at 5:05PM

This morning, Michael Kors (NYSE:KORS) beat analysts' forecasts and turned in a solid fiscal 2014 fourth-quarter profit of $0.78 per share, a 56% increase from the fourth quarter in fiscal 2013. Investors were less impressed with pressure on the company's margins. Gross margin increased year over year, but declined from the third quarter's margin. The mixed results have kept shares basically flat at midday.

Even considering the gross margin fluctuation, Kors had an excellent quarter that showed much of the sales strength that the high-end apparel retailer has displayed historically.

Kors sales on the rise
Comparable-store sales in North America increased 20.6% year over year. Compared to the rest of the luxury market, that's a success. Comps at Coach (NYSE:COH) dropped 21% in North America in its most recent quarter, while high-flying Kate Spade (NYSE:KATE) increased comparable-store sales by 22%.

Michael Kors has continued pushing sales up by keeping its brand in the public eye. Recently, Angelina Jolie, Miranda Kerr, and Kate Middleton have been spotted wearing Kors. As a result, when the affluent and the aspiring affluent go shopping, they're pulled right into the shining Kors store.

In North America, it seems that only Kate Spade has kept pace, with its apparel also showing up on plenty of celebrities. Both companies seem to be reaching across the table and stealing from Coach's lunchbox. Coach has been adrift in North America for a year, leading one analyst to say, "Coach customers are becoming Kors customers." 

Is Michael Kors worth it?
With rising sales and profit, Kors is trading for 32 times trailing earnings. That's well above the retail average, representing the possibility -- that's a key word here -- that Kors has to keep rising. Kate Spade is trading at an even higher multiple, while Coach is deep down in discount range.

I have very little doubt that Kors, as a brand, is going to suffer as there hasn't been any sign that it's losing any of its cache. The worry is that Kors is saturating its strongest market, North America, which might mean that it may eventually resort to discounting in order to bring in new customers.

Based on the current trend, Michael Kors looks like it could be headed for a gross margin decline. If it can institute some additional operational efficiencies it may be able to keep those declines at the gross level without damaging earnings per share. Investors interested in Kors should keep a close eye on the company's promotional activity and how that trickles down to the bottom line. For the price, it seems overly risky right now.

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Andrew Marder 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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