The Big Risk Threatening Michael Kors Stock

Michael Kors stock has been a winner for investors in the past year. However, a broad sell-off in the luxury retailer could identify a sizable risk in Kors future.

Jul 16, 2014 at 10:14AM

Michael Kors (NYSE:KORS) opened the week as the single-biggest decliner in the S&P 500 Index. The stock continued to nosedive yesterday, falling nearly 6% in midday trading. This performance stands in stark contrast to Kors' performance over the past year, in which shares had gained more than 34%. With the warm summer months in full swing now, Kors can't blame the weather for its recent underperformance. Rather, the broad sell-off in the luxury retailer could signal trouble for Kors' future. Let's take a closer look to identify the risk that might plague Kors stock in the quarters ahead.

Word on the street
Michael Kors' decline comes on the heels of The Wall Street Journal's recent "Heard on the Street" article that warned investors that Kors could fall victim to the same tragedies that currently afflict rival handbag maker Coach (NYSE:COH). The Journal cautions investors that Kors' wholesale business, which is much larger than Coach's, could undermine its high-end brand. "Kors' North American wholesale business is about twice the size of its retail business when adjusted to reflect retail prices," according to the Journal.

Kors Pic

However, the company's aggressive expansion plans are perhaps a larger threat. Michael Kors had 555 stores worldwide, including licensed locations, as of March. And the namesake brand has no plans to slow down. The company plans to add 45 new stores to its retail footprint in the U.S. in fiscal 2015, as well as 10 new locations in Japan. This seems reasonable today, because sales at existing Kors stores increased 26% in fiscal 2014.

Nonetheless, management expects comparable sales growth to slow in the year ahead. Specifically, the company said it expects a comps increase in the high teens for fiscal 2015. With a slowdown in same-store sales on the horizon, aggressively opening new stores could carry added risk for the fast-growing retail chain. Kors warned investors in its fiscal 2014 annual report that the company has "limited operating experience at [its] current scale of operations."

This is a big risk for the brand as it grows its operations both domestically and abroad. Any execution snags along the way could strain the company's existing resources. Increased competition in the space could also hurt sales at new stores if Michael Kors' products lose favor with consumers. After all, we've seen what happened to Coach when Kors started taking market share in 2011 -- Coach's stock has fallen 45% in that time, to where it trades today at around $33 a share.

Don't panic just yet
Despite the recent pullback in shares of Kors and the very real risk that the company is overextending itself, the near term remains bright. The Michael Kors brand is an international powerhouse today. That, coupled with strong revenue and same-store sales growth, should drive the business forward in the upcoming quarters.

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Tamara Rutter 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 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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