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Michael Kors Is Booming: Should You Buy?

By Andrés Cardenal - Feb 5, 2014 at 8:35AM

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Michael Kors is clearly firing on all cylinders, and there is no slowdown in sight for the company. Should you buy this trendy fashion stock?

Michael Kors (CPRI 8.73%) was exploding higher by nearly 17.5% on Tuesday after the company delivered a truly outstanding earnings report for the quarter ended on Dec. 28. Michael Kors has been one of the most successful growth stories in the fashion business over the last several years, and the recent release confirms that the company is still performing extraordinarily well. Should you buy this high-growth fashion company?

Firing on all cylinders
Saying that the company's earnings report was better than expected could be an understatement. Michael Kors delivered a spectacular sales increase of 59% versus the year-ago quarter to more than $1 billion during the quarter, comfortably beating analysts' expectations of $856 million.

Performance was strong across the board: Retail sales increased by 51.3% on the back of 98 new stores and a remarkable growth rate of 27.8% in comparable-store sales. Wholesale revenues increased by 68.2% during the quarter and licensing fees jumped by 59%.

Profit margins were also on the rise during the quarter: Gross profit margin was 61.2% of sales versus 60.2% in the year-ago quarter, and operating margin expanded to 33.9% of sales from 32.2%.

Net earnings per share came in at $1.11, a big annual increase of 73.4% and substantially above analysts' forecast of $0.86 per share.

For the company's full fiscal year ending on March 2014, management is expecting earnings per share to be between $3.07 and $3.09. This range represents substantial upside potential versus analysts' estimates, currently in the area of $2.83 per share.

Room for growth
Michael Kors is not only delivering remarkable growth rates for investors. It is also doing so in a challenging economic environment in which many other retailers are blaming the unusually cold weather and lackluster consumer spending for their weak results.

Importantly, the company is gaining market share versus direct competitor Coach in the key North American market. While Michael Kors delivered a whopping increase of 51% in North American revenues on the back of a 24% increase in same-store sales for the quarter ended on Dec. 28, Coach announced a decline of 9% in total sales and a big fall of 13.6% in same-store sales in the region during the same period.

The company is rapidly expanding its store base, and management believes it has room for nearly 700 global stores versus 395 retail stores currently. Same-store sales are showing no sign of cannibalization at all, so the company has the potential to continue delivering substantial growth for investors over years to come.

Should you buy?
Fashion can a be a fickle and competitive business, but it can also be enormously profitable for successful companies positioned on the right side of the trend. Michael Kors is as hot as it gets right now, and there is no slowdown at sight.

The company has done an outstanding job of building a high-end aspirational brand generating avid demand from its customers around the globe. Brand differentiation and exclusive designs are key competitive strengths for Michael Kors, and they also mean superior pricing power for its products and gigantic profit margins for investors.

Even after its explosive price jump, Michael Kors is trading at a forward P/E ratio near 26 times earnings estimates for the year ending on March 2015. Besides, Wall Street analysts will probably adjust their earnings estimates to the upside after the recent earnings beat, so the stock is moderately priced considering its outstanding growth potential.

Bottom line
Being a high-growth business in a dynamic industry like fashion, Michael Kors carries above-average risk for investors. However, the company is truly firing on all cylinders, and it still has a lot of room for further growth. Valuation is also quite reasonable for such a growth name, so the stock looks well positioned to continue delivering substantial returns for investors. The trend is your friend, and Michael Kors is clearly positioned on the right side of the trend in the fashion business.

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