5 Top Stocks to Own in 2014: Michael Kors

In part one of this five-part series, we look at one of the best growth stories the market has seen in the last decade, Michael Kors (CPRI 0.20%). It has risen over 235% since going public in December of 2011 and analysts believe that it is headed much higher. Let's take a look at why Michael Kors could be one of the top performers in 2014.

The "affordable luxury" brand
Michael Kors is home to one of the most fashionable lines of women's and men's apparel and accessories. The most consumer attention has been placed on its watches and handbags, but it has been gaining ground in clothing, footwear, sunglasses, and other categories. There are not many brands that cater to the tastes of both women and men, but Michael Kors has found the recipe for success.

Reporting in style
In 2013, Michael Kors reported four quarters of explosive growth. All four reports exceeded analyst estimates and supported the stock's continued run higher, while showing the strength of the consumer. Check out the statistics that Michael Kors put up:

Analysts became more bullish on the stock in 2013, causing projections to rise, and this made the earnings beats a little more narrow; however, a beat is a beat, and investors did not complain for a minute. I believe the company can easily carry its earnings momentum into 2014 and support the bullish sentiment.

The two faces of expansion
In order to take full advantage of its growing popularity, Michael Kors has plans in place to bring its stores to as many markets as possible. The company currently has 477 stores, with 352 being company-owned and 125 being licensed to third parties. Over the next five years, Michael Kors expects to grow its store count to over 700 globally, an increase of at least 46.8%.

In addition to brick-and-mortar expansion, Michael Kors is focused on growing its dot-com presence. The company is no longer accepting applications from e-commerce wholesalers and I believe that current contracts with e-commerce-only companies will not be renewed when they expire; to confirm this, I contacted Michael Kors directly about opening an e-commerce site and a representative responded by saying, "We are not expanding our online presence with new accounts as we are trying to grow our own dot-com." I believe this is a smart move, as MichaelKors.com would provide the highest margin which would result in higher gross profit. 

Where could it go?
At current levels, Michael Kors trades at roughly 32.8 times earnings and 23.2 times forward earnings. According to YCharts, the average price-to-earnings ratio since the company went public has been 38.75. I believe Michael Kors could consistently trade at a multiple between 30-32, which could place the company above $100 a share by the end of 2014; this would be an increase of approximately 24.1% from current levels. I am confident Michael Kors can reach this price level and it could easily push much higher if earnings, expansion, and same-store sales continue to be better-than-expected.

Troubles for competitors

Coach (TPR -0.72%) and Tiffany (TIF), two of Michael Kors' largest competitors in the luxury goods industry, are struggling in two very different ways. Coach has had earnings problems, as its products are no longer as desirable to consumers as they once were. In Coach's most recent quarter, earnings were flat and revenue decreased 1% year-over-year, as the company's comparable-store sales declined 6.8% and the gross margin decreased 100 basis points. These are dismal numbers and management's guidance did not point toward a promising year ahead. I believe Coach is untouchable in today's market, regardless of how "cheap" its stock becomes.

Tiffany has shown no troubles on the earnings front and it was actually looking to be well-positioned going into 2014. The company showed immense strength in its most recent quarter, exceeding analyst expectations on both the top and bottom lines, with earnings per share increasing 49% and revenue rising 6.9%. However, the story changed when Tiffany lost a $449.5 million lawsuit to Swatch; this lost lawsuit caused Tiffany to lower its full-year earnings outlook to $2.30-$2.35 from $3.65-$3.75. I would stay away from Tiffany for now, until the full $449.5 million is paid off.

The Foolish bottom line
Michael Kors is arguably the best growth story in the market today. It is home to one of the most desired lines of women's and men's handbags, apparel, and accessories, and this has helped it grow into a luxury-goods powerhouse. The company will continue to take full advantage of its growing popularity through expansion, and this will keep earnings and revenue on the rise. I believe Michael Kors will be one of the top performers in 2014 and investors should strongly consider adding it to their portfolios.