Why Michael Kors Is Down Today

Michael Kors has been the biggest loser on the S&P 500 for two days in a row thanks to a flurry of bad news.

Jul 15, 2014 at 3:29PM

Tomorrow, Michael Kors (NYSE:KORS) is hoping to wake up to a calmer market. Maybe have a cup of coffee, reflect, and continue working on its plan for the future. Today, the market has pulled into mild panic mode, and it's hard to imagine many calm demeanors in management. The trouble started over the weekend, when The Wall Street Journal printed a piece suggesting that Kors was in danger of following in the footsteps of Coach (NYSE:COH), falling on hard times and losing brand power.

On Monday, the market took a small bite out of the company, pushing the stock down 3.5% and making Michael Kors the biggest loser in the S&P 500 for the day. That fall pushed the stock below its 200-day moving average, a basic technical flag that sometimes indicates bad news ahead. Today, a handful of analysts who took the article to heart have downgraded Kors' price target or issued cautionary notes, pushing the stock down even further. At midday, Kors had fallen another 5.8%, putting the shares down 9% in just two days.

Michael Kors in danger?
The article in the Journal expressed concern about the rapid expansion that Kors has undergone, arguing that the downfall of Coach came on the heels of its ubiquity. If everyone can have it, then no one is going to want it. Kors has said that its goal is to run close to 400 stores in North America, which would be close to a 40% increase in its current store count.

That has led other analysts to voice concern about the sustainability of Michael Kors' strong margins. If the value of the brand decreases, they argue, the company will have to run more promotions in order to bring customers through the door.

Right now, Kors is tearing the market up. Comparable sales rose 26.2% in its last quarter and operating margin was sitting at a cool 27.9%. Compare that to the difficulty Coach has been experiencing, with comparable sales falling 21% in North America. That's pushed operating margin down to 23.9% from 29.3% in the previous year.

What does it all mean for Kors' investors?
The flurry of analysis over the last few days has highlighted something that Kors' investors do need to keep in mind. On the other hand, Coach is currently running over 550 locations in North America, and its troubles are relatively new. One other point some analysts made is that Kors' wholesale business is much larger than Coach's and can be seen as counting as a huge chunk of virtual stores -- in that it drives third-party locations to buy Kors' products.

I don't think that Kors is in the same pinch that Coach is in, and I think there still is room for expansion. Kors is just now starting to push its men's line, which could be good or bad news for the brand. While Coach has suffered from a degraded brand value, the company has also suffered at its own hands, by splitting its focus between men's and women's bags -- its core business -- and doing so poorly. If Kors can keep its eye on its main customers while reaching out to new men's customers, it can sustain the momentum it's built up.

Michael Kors has been trading at a premium for a long time now, and companies flying that high get hit harder by turbulence. The ups and downs of this week should level out, but there will be more ups and down in Kors' future. I still think this is a solid business and a solid brand, but the price and volatility are going to keep many investors out.

Another highflier seeking out the sun
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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and 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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