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

Michael Kors is scheduled to release first-quarter results in just a couple of days, so let's see if its gearing up to beat the estimates once again.

Jul 21, 2014 at 4:30PM

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.

Screen Shot

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:

MetricReportedExpectedYear 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. 

Screen Shot

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:

MetricExpectedYear 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

Screen Shot

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.

Could this be a more fashionable accessory than an MK watch?
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Joseph Solitro owns shares of Michael Kors Holdings. 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 fool.com.

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 www.fool.com/beginners, 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 www.fool.com/podcasts.

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