The holidays were fraught with endless babble about the fiscal cliff, and concerns about the broader economy. As investors, we're just now seeing how much impact that had on retail sales at the end of 2012. Highflier Michael Kors (NYSE:CPRI) is releasing its fiscal 2013 third-quarter earnings next Monday before the bell. With a difficult retail season and a host of competitors falling by the wayside, what can investors expect from this fast-growing apparel retailer?
In its last reported quarter, Michael Kors' management team said that it had a few goals for the end of 2012. First of all, it was looking for a strong showing from its watches over the holidays. That's good news for Kors investors as well as Fossil (NASDAQ:FOSL) investors. Fossil has been the exclusive licensee for Michael Kors' watches since 2004, and the jewelry licensee since 2010. With Kors' watches making up more than 10% of all of Fossil's revenue, this product's success over the holidays will mean a lot to both companies.
The second priority for the end of 2012 was to increase the sale of small leather goods. The company is hoping to increase those sales to eventually represent 10% to 15% of retail store sales. That's a plan to keep customers coming through the door, which should hopefully keep comparable-store sales high as well. Last quarter, comp sales increased 45%.
Finally, on that note, investors should expect that year-over-year comp sales will have tapered off at the end of the year. Management was expecting mid-20% growth for the end of 2012, due to the fact that the company posted such huge growth the year before. As a result, the earnings release that comes out next week will likely show more subdued growth.
Red flags for investors
All of those goals should be achievable, but there are a few things that could have popped up to set Kors back. First of all, the American market had a less than stellar end to 2012. All of the noise surrounding the fiscal cliff set retail sales back, and other high-end companies like Coach (NYSE:TPR) took unexpected hits. The handbag seller missed holiday sales expectations due to consumer uncertainty and a hyper-competitive environment. Investors need to watch out for macro trends, which can really affect luxury goods retailers. While the weakness at Coach won't necessarily flow over into Kors, it is important to point out that both companies feel they compete best in the $300 to $350 range, which is where Coach saw its holiday weakness.
The other concern I always have with Kors is its valuation. Right now, it's trading at a P/E of 44, compared to the retail average of around 20. To give a bit of perspective, Coach is trading at 13 and Fossil is at 21. That means that small bumps can really set the stock back, and it may also signal a more difficult road to growth.
The bottom line
Kors has a lot of things going for it, with rapid revenue growth of more than 70% in the first half of its fiscal year and long-term plans to expand its store footprint from 270 locations up to 600 stores. But all that growth comes at a premium, and means that investors are betting on no potholes along the road. The earnings release next week will be especially telling, as it will show what kind of company Kors is when the economy isn't pumping along.
In the past, I've made the mistake of worrying too much about the secondary goals of companies -- what their Asian expansion looked like, how that new line of clothes was doing, etc. -- and I've lost focus on the core business. For Michael Kors, I want to see that the holidays came with strong sales in its $300 handbags and logo merchandise. That's the company's bread and butter, and it needs to get that right to keep growing.
Having said that, I suspect Kors will come in line with expectations or slightly above. The company had positive surprises on all of its 2012 quarters, and while the consensus earnings per share estimate for this release is $0.40, I wouldn't be surprised to see closer to $0.45. Regardless of how it turns out, we're going to learn a lot about how Kors handles pressure next week.