The Standard & Poor's index has added a new member with plenty of style! Michael Kors Holdings (CPRI -1.67%) has joined the S&P 500, as the company continues its solid performance within the luxury sector. With a market cap in excess of $15 million, the company's share price has risen more than 215% since it went public in 2011.
Second quarter results for fiscal 2014, ended Sept. 28, 2013, saw comparable store sales up by 23%. This was the company's 30th consecutive quarter of growth. Sales were strong in both North America and abroad--in North America, sales grew 31% and in Europe sales were up 101%. The company's accessories and footwear product lines, as well as the store-within-a-store conversions implemented in many department stores, were major drivers for the second quarter's strong sales performance. Licensing revenue from watches and eye-wear, which increased by 65%, also contributed to this growth. Net income was $145.8 million, or $0.71 per diluted share, versus net income for the second quarter of fiscal 2013 of $97.8 million, or $0.49 per diluted share.
The company added 125 additional stores, bringing the total number of stores worldwide by the end of the second quarter to 477. Kors predicts a strong holiday season and estimates that third quarter fiscal 2014 comparable-store sales should increase between 15% and 20%. Diluted earnings per share is estimated to range between $0.83-$0.85. Full year estimates for fiscal 2014 total revenue are about $3 billion, assuming a same-store sales increase of 20%. Diluted EPS for the year is estimated to range between $2.77-$2.81 .
Luxury market thrives on lifestyle brands
Part of Kors' success has been its ability to sell the "jet-set" lifestyle to consumers rather than separately marketing shoes, apparel, and accessories. One of Michael Kors' rival brands, Coach (TPR -1.60%), has recently moved in this direction of promoting a variety of products that fit into a luxury lifestyle. As the company works on transitioning into more than just a handbag maker, its sales have struggled. First quarter results ended Sept. 28, 2013 saw sales drop 1% to $1.15 billion from $1.16 billion in the first quarter last year. Net income for the quarter of $218 million and diluted EPS of $0.77 were flat versus the prior period's net income of $221 million and EPS of $0.77.
The company's operating segments showed weakness during the quarter, with the exception of China. North American sales decreased 1% and comparable-store sales were down 6.8%. In Japan, dollar sales declined 22% due to a weaker yen, and on a constant-currency basis they were down 2%. In comparison, China had impressive results with sales up over 35% and same store sales had a double-digit increase. Coach's plans for the holiday season include launching a new marketing campaign and a new store concept will be unveiled soon in key stores located in New York and California.
Despite the weak sales performance in some of its segments, Coach benefits from having very low debt and a reasonable share price trading at 14 times 2015 earnings.
Kate Spade's a winner for Fifth & Pacific
Another luxury brand that's selling well is Kate Spade, owned by Fifth & Pacific (KATE). The company recently cleared its closet of Juicy Couture's velour tracksuits and, during the latest quarter, completed the sale of the business to Authentic Brands Group. Fifth & Pacific received $195 million in cash and will transition the business to Authentic Brands during the first six months of 2014. In the third quarter, the company posted a loss from continuing operations of $15 million ($0.12) per share, an improvement from the prior period's loss of $19 million and ($0.17) per share.
By letting go of Juicy Couture, the company can focus on the Kate Spade brand, which is a major revenue generator. Kate Spade posted a 76% increase in total net sales and a 31% increase in direct-to-consumer comparable sales. The brand also has a higher gross profit rate than the company's average. For comparison, Lucky Brand, also owned by Fifth & Pacific, saw its total net sales rise by 7% while direct-to-consumer comparable sales were flat in the third quarter. Lucky Brand, along with Kate Spade, are the company's top two business segments and contributed 70% of total net sales for the nine months ended Sept. 28, 2013 .
My Foolish conclusion
The success of Michael Kors speaks to how well the brand knows its customer. Kors has been able to provide a line of products of high quality that represent affordable luxury. While the market has punished Coach, the company should be able to compete effectively with Kors once it transitions into more of a luxury lifestyle brand. As the U.S. economy and the job sector continue to improve, these companies and their brands should do well along the way.
