Investors have been in love with Michael Kors (NYSE:CPRI) since day one. With its tremendous sales growth, strong margins, and brand that doesn't seem to stop, Kors has a wide competitive moat. And nothing entices Wall Street like dreams of rich returns to go along with rich apparel. In fact, Kors has done so well that it's now in danger of being its own worst enemy among investors. Here are three key areas that any Kors investor must watch.
3 areas investors must watch
1. The most important thing for Kors to do is to keep up demand for the brand. In light of that, the most important thing for investors to watch is the company's same-store sales growth. Right now, management has estimated that same-store sales are only going to be 30% in the next quarterly report. That's significantly lower than anything that the company has posted so far, and below the run rate that the company released in its last guidance update.
2. Kors' move into China could be a boon for the company, but it could also backfire. Analysts have predicted that the Chinese consumer market will overtake the American market in size by the end of the decade. But many companies, including Abercrombie & Fitch, Wal-Mart, and Home Depot, have found moving into Asian countries to be extremely difficult. Abercrombie, in particular, has stalled out in China, and has had severe fashion-translation issues in Tokyo, where the company has had to shut down one of its two stores.
Additionally, if Chinese consumers cut their luxury spending, then Kors is going to have a drag on its otherwise excellent results. While a slowdown would not mean the end of profitability, it would jeopardize the premium that is currently being placed on the stock.
3. The final thing that investors need to watch is the hype machine. Kors is rated a buy almost universally, and earnings estimates for the next quarterly report are at the very top of the company's forecast range. The stock is trading at a trailing P/E of 57 in a sector with an average P/E of 16. This is not a cheap stock, regardless of growth.
But the hype machine is in place for a reason. Kors has grown quickly, and management has a very good plan for moving forward. There is still a lot of room for growth in the U.S., and if China does well, the company could see some incredible gains. As long as stores can keep up a strong comparable-sales growth rate, then the company can live up to the hype. But investors need to make sure that the expectations never veer out of line with what's really happening, or else they'll be in for a nasty surprise