Michael Kors' Earnings Proved 1 Thing


Michael Kors Holdings  (NYSE: KORS  ) continues to prove on a quarterly basis that it remains the biggest name in North American luxury retail. However, the company's fiscal fourth quarter, more importantly, proved that it's well on its way to global power. In retrospect, Coach (NYSE: COH  ) and LVMH Moet Hennessy Louis Vuitton  (NASDAQOTH: LVMUY  ) should be very worried.

Crushing all estimates
Michael Kors is a retailer that keeps clicking on all cylinders, blowing through analyst expectations by the quarter. In its fiscal fourth quarter, the company grew revenue 53.6% to $917.5 million, which was $100 million better than the consensus.

Furthermore, this unparalleled growth was driven by comparable sales, which increased 26.2%, also far better than the 21% increase analysts expected. Notably, Michael Kors is the first retail designer of the season to report 20%-plus comparable sales growth.

Also, margins have become a staple at Michael Kors, as investors and analysts often wonder how much more profit the company can squeeze. Thus, the company's 20 basis point increase in gross margin to 59.9% was equally as impressive as its growth.

Taking Europe by storm
Essentially, you can look at any metric of Michael Kors' business and find impressive numbers, which has given its peers real headaches. The company's growth has been a nightmare for Coach, which has seen comparable sales decline 21% in North America and as a result has sought growth in international markets. After all, Michael Kors has always been primarily a North American story; and in fashion, there are no guarantees that a company's style will translate into other markets, which is what the likes of Coach and Louis Vuitton have hoped for.

Unfortunately for Coach, Michael Kors' fiscal fourth-quarter and full-year report proved one thing, which is that Michael Kors is no longer a North American growth story but rather a global powerhouse.

For fiscal year 2013, Europe accounted for 10% of Michael Kors' total revenue. But, in fiscal 2014, Europe produced sales in excess of $500 million and now accounts for more than 18% of total sales. Hence, Europe is becoming important for Michael Kors; in the company's fiscal fourth quarter, it earned $164.6 million, grew revenue 125% year over year, and saw an unprecedented 62.7% comparable-store sales growth. By all measures, Michael Kors is taking Europe by storm.

With that said, Coach in its last quarter, despite a 7% overall revenue decline, saw its international revenue increase 14%, which was primarily driven by China's 25% growth. But, with Michael Kors now entering new markets, Coach investors must fear that international growth will slow or, worse, become a repeat of what Kors has done to the company in North America.

How large can Michael Kors become?
In comparison to North America, Michael Kors' international business is still very small. Moreover, despite the company's $2.7 billion in North American revenue, it continues to grow at a 40%-plus annual rate. With that said, Michael Kors' growth rate in Europe implies that it will have success and that when it decides to enter China and the Asia/Pacific on a large scale, it has a good shot at becoming a megaretail company.

As of now, Louis Vuitton is the global luxury-retail leader, with a near $100 billion market capitalization and more than $13 billion in fiscal third-quarter revenue alone. Not to mention, Louis Vuitton has managed to create an 8% compound annual revenue growth rate for the last decade; and in looking at Michael Kors, including both its vertical and horizontal growth strategy, it seems realistic that it could replicate this performance to become the next Louis Vuitton.

Final thoughts
With that said, Louis Vuitton has not yet had to face Michael Kors on a large scale, and it'll be interesting to see if its growth rate is put to the test. Nonetheless, with a $20 billion market capitalization, Michael Kors looks like a bargain, especially given the proof of effectiveness in its global growth initiative that we saw in the fiscal fourth quarter.

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