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Can This Retailer Keep Up Its Stellar Performance?

By Sean Williams - Nov 5, 2012 at 9:03AM

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This stock just hit a 52-week milestone. Where will it head from here?

Shares of Michael Kors (CPRI 3.68%) hit a 52-week high on Friday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
As my Foolish colleagues Travis Hoium, Alex Planes, and I discussed recently in our analyst debate regarding Michael Kors, it's succeeded by basically kicking butt and taking names!

OK, so perhaps it's not the Chuck Norris of retailers, but it's done a remarkable job transitioning from a pure wholesaler to a company that's capable of licensing out its product to higher-end retailers, as well as operating its own bricks-and-mortar locations. One of the advantages to operating its own locations is that it gives Michael Kors greater control over inventory levels and pricing, which ultimately boosts margins.

Michael Kors has benefited in a big way from its partnership with Fossil (FOSL 5.11%) as well. Fossil has been making watches for Michael Kors that are then rebranded under the Kors label. With watch sales remaining strong despite a drop in consumer spending, this partnership has been a godsend for investors.

In the company's first-quarter results, released in August, Michael Kors recorded a 185% spike in net income as revenue rose 71%, and the company opened 68 additional stand-alone stores from the year-ago period. Furthermore, just weeks ago it raised its EPS guidance for the remainder of the year and pointed to same-store sales growth of a staggering 45% so far in the second quarter. In other words, Kors is growing by leaps and bounds everywhere -- including Europe!

What could derail Michael Kors 
It may not seem like it now, but there could be plenty of factors that could stand in the way of Kors' share price heading higher.

First and foremost is the company's valuation. Michael Kors' steady double-digit same-store sales growth and consistent earnings beats have boosted its share price into the stratosphere. However, history teaches us that growth trends like this tend not to last forever -- especially in the retail sector.

Second, apparel companies themselves are often prone to rapid changes in consumer spending and fashion habits. Handbag and accessory maker Coach (TPR 2.81%) has struggled recently in the U.S. as it's needed to turn to promotions to move some items within North America.

Third, the transition to a bricks-and-mortar retailer isn't without its own set of struggles. While it should be beneficial to Kors over the long run, we've seen from True Religion Apparel (NASDAQ: TRLG), a retailer of high-end denim products, that this transition isn't without its hiccups. Multiple earnings warnings have stymied growth at True Religion in recent quarters.

Finally, luxury retail spending is rarely consistent over the long term. Luxury jeweler Tiffany (TIF) proves this point, with two quarterly disappointments in a row. Unless the global economy is healthy, luxury retailers often can't be counted on for consistent returns.

The call
Now for the $64,000 question: What's next for Michael Kors? That depends on its ability to boost margins from its bricks-and-mortar stores, whether it can keep growing in Europe, and how consumer spending reacts domestically and overseas to global growth trends.

Our very own CAPS community gives the company a two-star rating (out of five), with 78.8% of members expecting it to outperform. As for me, just as I stated when I took part in the analyst debate in late September, I'm not ready to make a CAPScall one way or another.

There are simply too many variables for me to make a confident call on Michael Kors. On one hand, the company's growth is incredible. Its brand name merchandise is flying off shelves and it's expanding into profitable regions at a phenomenal rate. On the other hand, I know this growth can't last forever as consumer habits and fashions change, and it already boasts a very frothy valuation. If anything I'd probably lean more toward betting against Kors than betting for it, but for the sake of doubt, I'm not touching it in either direction at the moment.

In addition to Coach, our analysts at Stock Advisor recently highlighted two additional companies that look poised to rule the retail sector. Find out their identities, for free, by clicking here to get your copy of this latest special report.

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Stocks Mentioned

Capri Holdings Limited Stock Quote
Capri Holdings Limited
CPRI
$47.57 (3.68%) $1.69
Tapestry, Inc. Stock Quote
Tapestry, Inc.
TPR
$34.34 (2.81%) $0.94
Tiffany & Co. Stock Quote
Tiffany & Co.
TIF
Fossil Group, Inc. Stock Quote
Fossil Group, Inc.
FOSL
$7.40 (5.11%) $0.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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