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3 Things to Consider Before Buying Michael Kors

By Andrew Marder - Apr 2, 2013 at 5:00PM

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The fashion designer is winning hearts in the fashion world, but what do investors need to watch out for?

It's been an odd year for Michael Kors (CPRI -5.74%) investors. The stock is up 11% from the beginning of 2013, but it's down 12% from its 2013 high. Sales have continued to be strong, and there's a lot to look forward to from the high-end designer, but there are a few red flags lurking on the edges. Kors has started to make a habit of insiders selling off shares, and growth has been so high that it seems almost impossible for the company to sustain. Here are three areas to watch closely before jumping onto the Kors bandwagon.

Insiders sell the family silver
Profit-taking is a part of investing, for most people. While Warren Buffett may hold his stock until the end of time, most of us sell things when we want to lock in some gains, or get free cash for new investments. But it's hard for investors to watch insiders sell big chunks of companies, especially when those insiders are founders of companies named after them.

Over the past year, Michael Kors -- the guy -- has cut his holding down to 2.4% of the company. The most recent sale came in February, when he sold $185 million worth of stock. That should be a warning sign for any investor. Of all the people that should have faith in the brand, Kors should be at the top of the list. Add to that the sell-off that came from CEO John Idol -- 2 million shares in February  -- and the picture of internal optimism looks dismal.

Sales strength
If you had to come up with a reason for the timing of the sell-off, it would be easy to assume that sales might be nearing their apex. Last quarter, the company managed a 41% increase in comparable sales and a 70% increase in revenue. While big growth isn't unheard of, investors should be on the lookout for any weakness in that growth. Competitors like Coach (TPR -3.57%) have seen sales slow recently, in part due to their own failures -- Coach neglected its core audience -- and in part due to macroeconomic concerns. One of those is out of Kors' hands.

This is especially important for Kors, as the company is expanding into the Asian market. Recent reports out of China have indicated that the government is cracking down on luxury gift-giving among party officials. Kors is not currently in China, but it plans to expand there in the next few years. A severe slowdown in Chinese spending would bode ill for the company's long-term international prospects.

Valuation
The final kicker for Kors is the premium that investors are paying for the company. Kors is trading at 32 times earnings, in an industry that has an average P/E of 23. Any bump in the road could lead to a setback, as highlighted by the recent falls associated with insider selling. Right now, Kors is a premium retailer trading at a premium. While I think the brand is still one of the hottest in the fashion market, fashion is fickle and that could change tomorrow. Kors is an interesting company, but it requires a strong stomach to hold it for long periods of time.

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