Mr. Market is Drastically Underestimating Michael Kors

In spite of delivering strong results for its fourth quarter and providing an upbeat outlook, Michael Kors saw its shares barely move on May 28. Given the company's strong performance, is it still a buy? Or would investors be better served picking up Coach or Ralph Lauren instead?

Jun 1, 2014 at 1:00PM


Source: Michael Kors

May 28, 2014 was both a good and mediocre day for shareholders of Michael Kors Holdings (NYSE:KORS). Prior to Mr. Market opening, the company's management team announced revenue and earnings for the fourth quarter of its 2014 fiscal year. However, despite the business handily outperforming analyst expectations and even after the company providing shareholders with a rosy forecast, shares of the retailer rose just slightly more than 1% to close at $97.01 before falling 5% to $92.28 on May 29.

Moving forward, does this negative reaction mean that shareholders should move their money to a competitor like Ralph Lauren (NYSE:RL) or Coach (NYSE:COH), or is there still plenty of room to run?

Michael Kors smashed forecasts!
For the quarter, Michael Kors reported revenue of $917.45 million. In addition to coming in 54% higher than management reported for the same quarter last year, the company's top line was 12% above the $816.15 million analysts anticipated.

By the end of its fourth quarter, Michael Kors operated 405 stores, a 33% jump compared to the 304 locations the business had last year. This, in conjunction with the 26% increase in comparable-store sales, was the primary driver behind the retailer's higher revenue.

From an earnings perspective, the company's metrics came in even stronger. For the quarter, management reported earnings per share of $0.78. This was 15% greater than the $0.68 analysts wanted to see and a jaw-dropping 56% improvement over the $0.50 the company earned this time last year.


Source: Michael Kors

One of the major contributors to Michael Kors' impressive bottom line was its strong revenue, but the company also saw modest cost reductions year over year. As an example, the business saw its cost of goods sold fall from 40.3% of sales to 40.1%, while its operating expenses declined from 33.6% of sales to 33.1%. These improvements, however, were partially offset by the company's share count, which rose almost 2% over the past year.

Next quarter, management is maintaining their bullish stance on the business, with revenue and earnings per share expected to come in between $840 million and $850 million and $0.78 and $0.80, respectively. On a revenue basis, this is slightly higher than the $826.05 million analysts expect and in line with the $0.79 in earnings per share Mr. Market hopes to see.

Should investors shop for one of its peers instead?
Over the past five years, Michael Kors has done exceptionally well. During this time frame, the retailer saw its revenue shoot up 552% from $508.1 million to $3.3 billion, while net income skyrocketed 1,588% from $39.2 million to $661.5 million. For the most part, the company's top-line growth came from a 324% aggregate comparable-store sales increase and a 282% jump in store count.

Its improved profitability can be chalked up to its higher sales but must also be attributed to significantly better operating efficiencies. This can be best illustrated by looking at the company's cost of goods sold, which fell from 47.5% of sales to 39.1%, and its operating expenses, which dropped from 37.7% of sales to 30.4%.

KORS Revenue (Annual) Chart

Michael Kors revenue (annual) data by YCharts

During a similar five-year period, neither Ralph Lauren nor Coach could keep up. According to the most recent financial statements, Ralph Lauren saw its revenue climb a more modest 50% from $5 billion to almost $7.5 billion, while Coach saw its top line increase 57% from $3.2 billion to $5.1 billion.

In the case of Ralph Lauren, the company benefited greatly from the 44% aggregate rise in comparable-store sales over this period but also saw a higher store count add to its top-line growth. Over a similar five-year period, Coach also reported higher comparable-store sales, and its number of locations in operation increased 41% from 675 locations to 953.

From a profitability perspective, Ralph Lauren and Coach did well but still could not keep pace with Michael Kors. Over the past five years, Ralph Lauren's net income jumped 62% from $479.5 million to $776 million, while Coach's bottom line grew 66% from $623.4 million to $1 billion. The largest contributor to increased profits for both businesses was an improvement in sales, but both companies also enjoyed reduced costs (in relation to sales) stemming from economies of scale.

Foolish takeaway
Based on the data provided, it's surprising why Mr. Market did not respond more favorably to the results Michael Kors posted. In addition to beating forecasts, the retailer posted a strong near-term outlook and has had a long history of explosive growth to boot. While there is no guarantee that the business can maintain its growth moving forward, the fact that it's still seeing attractive upside should incentivize the Foolish investor to consider the company as a nice prospective investment.

Top dividend stocks for the next decade
For all of its positive aspects, there is one things Michael Kors is missing: dividends. One way to virtually ensure a higher rate of return in your portfolio is to invest in a company that boasts not just any dividend but a strong dividend that will persist or even grow over the next decade or longer!

The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Daniel Jones 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers