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Should Michael Kors Be on Top of Your Long-Term Buy List?

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Michael Kors (NYSE: KORS  ) , one of the world's premier retailers of luxury handbags, apparel, and accessories, watched its stock soar over 21% from Jan. 2 to Feb. 25. It has fallen drastically in the months since, however, and is now underperforming the overall market year-to-date. The decline can be attributed to downgrades by research firms over concerns about the sustainability of the company's margins and the "high" valuation of its stock, but this just seems like nitpicking given the two record-setting earnings reports released in 2014.

With all of this in mind, Michael Kors is scheduled to release its first-quarter earnings on August 4. Let's take a look at its most recent report and the expectations for the upcoming release to determine if the company is about to beat the estimates for an 11th consecutive quarter. We'll also decide if it represents a long-term investment opportunity today.

Source: Wikimedia Commons

Crushing the estimates in record-setting fashion
On May 28, Michael Kors released its fourth-quarter report and the results surpassed expectations by a wide margin. Here's a summary:

Metric Reported Expected Year Ago
Earnings Per Share $0.78 $0.68 $0.50
Revenue $917.45 million $822.68 million $597.15 million

Source: Estimize

Earnings per share increased 56% and revenue increased 53.6% year-over-year, driven by global comparable-store sales increasing an incredible 26.2%. Sales rose in all of Michael Kors' regions, including 43% growth in North America, 125.3% growth in Europe, and 88.5% growth in all other regions. Comparable-store sales increased in all regions as well, including 20.6% growth in North America and an unfathomable 62.7% growth in Europe. 

Source: Michael Kors' Instagram

Michael Kors' gross profit increased an impressive 54.2% to $549.43 million and its operating increased even more, rising 58.3% to $245.91 million. In relation, the gross margin expanded 20 basis points to 59.9% and the operating margin expanded 80 basis points to 26.8%. This showed that the company's remarkable revenue growth did not come at the expense of its margins.

In terms of expansion, Michael Kors added 22 new stores during the quarter, bringing its total store count to 555 worldwide compared to 400 at the end of the same period a year ago. Of the now 555 stores, 405 are company-owned and 150 are licensed.

Overall, it was a phenomenal quarter for Michael Kors. However, its stock reacted by rising just 1.33% in the trading session. Although it appeared that this was the starting point of a rally, the company's stock has steadily declined in the weeks since. Maybe first-quarter earnings will get it back on an upward track.

What to expect when Michael Kors is expecting
First-quarter results will be released before the market opens on August 5 and the current expectations project another quarter of double-digit growth. Here's an overview:

Metric Expected Year Ago
Earnings Per Share $0.81 $0.61
Revenue $851.71 million $641.86 million

Source: Estimize

The estimates above call for earnings per share to increase 32.8% and revenue to increase 32.7% year-over-year, which seem very attainable following its incredible fourth-quarter performance. Achieving these results would result in another record-setting quarterly performance. However, it is also worth noting that these estimates are slightly above the guidance provided by Michael Kors in its fourth-quarter report, which forecasted first-quarter earnings per share of $0.78-$0.80 and revenue of $840 million-$850 million. Key metrics aside, here are four other things to watch for:

  1. Second-Quarter Outlook: It will be important for Michael Kors to provide outlook on the second-quarter that meets or exceeds analysts' expectations; the consensus estimates currently call for earnings per share of $0.88 and revenue of $951.28 million, representing year-over-year growth of 23.9% and 28.5%, respectively.
  2. Full-Year Outlook: While providing satisfactory guidance for the second-quarter, it will be also be important for Michael Kors to reaffirm its full-year outlook on fiscal 2015; this outlook, provided in its fourth-quarter report, calls for earnings per share in the range of $3.85-$3.91 and revenue in the range of $4.0 billion-$4.1 billion, which would result in year-over-year growth of 19.6%-21.4% and 20.8%-23.9%, respectively.
  3. Margins: With all of the negative vibes swirling around Michael Kors' margins and the speculation that they are headed for steep contraction, investors will want to keep a close eye on them. It would be ideal if Michael Kors put all of this to rest by showing margin expansion in the first-quarter, but simply reporting unchanged margins would be great too.
  4. Competitor Results: Investors will also want to keep an eye on Coach (NYSE: COH  ) , one of Michael Kors' largest competitors. Coach is also scheduled to release earnings results before the market opens on August 5. Coach is currently expected to report earnings per share of $0.54 and revenue of $1.10 billion, which would be year-over-year declines of 39.3% and 10.1%, respectively. According to Estimze, however, the company has failed to meet both earnings per share and revenue expectations for six consecutive quarters and I do not see the trend changing this time around either. Coach is a very troubled company right now, so investors should do nothing more than scan its results to monitor the health of the competition. 

If Michael Kors can meet or exceed earnings per share, revenue, and outlook expectations while maintaining or expanding its margins, its stock will likely see a surge of buying. I believe that this is a very likely scenario, which makes me very bullish on Coach in the short-term. Its expected growth over the next several years and expansion plans make me even more bullish in the long-term. With this being said, Foolish investors who feel the same about the company and its potential should consider buying in, or adding to current positions, immediately. 

The Foolish bottom line

Source: Michael Kors' Instagram

Michael Kors is one of the most dominant companies in any industry today, but its stock has not performed accordingly over the last few months as a result of negative comments by research firms regarding its margins and valuation. The company has proven itself time and time again, however, so a strong first-quarter report in the eyes of all the recent negativity may be what it needs to get its shares on an upward path to new all-time highs. I believe that the long-term potential of Michael Kors is far greater than that of any other company in the industry, and it also outweighs any short-term negativity. Foolish investors should take a closer look and strongly consider going long its shares right now.

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Joseph Solitro

A fan of innovation, strong fundamentals, and all things baseball. Follow on Twitter @JoeySolitro. Fool on!

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