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Michael Kors Beats Big, Again

By Philip Saglimbeni – Feb 8, 2014 at 7:00AM

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In what seems like a common occurrence nowadays for Michael Kors Holdings, the company announced spectacular earnings results, which indicates it is one of the top investments in the retail space.

In the company's latest earnings release, Michael Kors Holdings (CPRI 0.65%) showed why it's one of the best companies operating in all of retail at the moment. On almost every comparative basis worth mentioning, Michael Kors excelled.

The company's success is directly tied to the immense power of the MK brand. Similar to high-growth athletic retailer Under Armour (UAA 1.60%), Michael Kors remains one of the few retailers powerful enough to buck major consumer trends.

Blowout earnings, as usual
Most of Michael Kors' reported numbers are simply staggering. The company grew revenue to $1.01 billion in the third quarter, up 59% from $636.8 million in 2013's comparable quarter. Even more impressive is the company's growth in diluted earnings per share for the quarter, which increased 73.4% to $1.11 from 2013's $0.64. 

As expected, these results from Michael Kors blew past analysts' estimates. The consensus revenue estimate called for $859.5 million and the consensus EPS estimate called for $0.86. Michael Kors' reported revenue of $1.01 billion and EPS of $1.11 represented a significant beat on both the top and bottom lines. 

Not surprisingly, shares of Michael Kors soared approximately 20% in pre-market trading past the $90 level, which would represent an all-time-high share price at the open.

What's driving the growth?
Similar to athletic apparel, footwear, and accessories maker Under Armour, incredible brand strength is driving most of the growth for Michael Kors. An effective management team is simply steering the ship well and allowing the brand to flourish among consumers around the world.

In a very recent article, I mentioned that these two companies are my top picks in the retail space. My reasoning was simple and it's as true now as it ever was: both brands are extremely popular at the moment. My perceptive friend Anna recently made me aware of the popularity of the Michael Kors brand among young women, and ever since I've been seeing the signature MK logo everywhere I look. From my own experience, I have also been familiar with Under Armour's immense popularity in athletic atmospheres for some time. I have recently begun to spot its emerging popularity among casual folks as well.

As a result of such brand popularity and pervasiveness, both Michael Kors and Under Armour have loyal consumer bases and the ability to demand a premium for product/services. Accordingly, the two companies can remain more resilient in times of weak consumer spending.

Proof of this for Michael Kors is not just in the terrific growth numbers the company recently reported, but also in the increasingly robust margins the brand is experiencing. The company's gross profit margin as a percentage of total revenue increased to 61.2% in the quarter, which compares favorably to 2013's same quarter gross profit margin of 60.2%.  This indicates that the Michael Kors brand is selling very well at premium price points and without the need to discount significantly.

Chairman and Chief Executive Officer John D. Idol explained, "Michael Kors enjoyed an outstanding holiday season, as global brand awareness continued to drive strong demand for our luxury product. Comparable stores sales increased 28% which exceeded our expectation and represents our 31st consecutive quarter of growth." 

Beyond brand strength, however, is management's drive to continue expanding the reach of the Michael Kors brand. The continual expansion of company-owned stores and retail locations operated by licensed partners should continue to drive even further growth for the foreseeable future. As of Dec. 28, 2013, the company operated 395 retail stores; this was up approximately 33% from 297 in the same time last year. 

Proof in the numbers


Michael Kors

Under Armour

Revenue Growth 2014



EPS Growth 2014



*Michael Kors fiscal 2015 shown above, which begins in March 2014

Both Michael Kors and Under Armour are projected to grow above 20% with regard to revenue and earnings per share over the following year. The former appears to have the edge in sales growth and the latter in earnings growth. However, both companies are set to grow at robust levels going forward.

Best of the best
When trying to find the best companies in the often-challenging retail space, it is usually best to not over-think things. The highest quality companies are often the ones that resonate well with consumers.

Perhaps no two brands resonate as well with their respective consumer bases than those of Michael Kors and Under Armour. Wall Street is beginning to recognize this fact, as both companies have surged higher after blow-out earnings in their most recently-reported quarters.

Considering both companies recently raised guidance for 2014, Michael Kors and Under Armour remain viable long-term growth stories and the two best investments in the retail space at the moment.

Philip Saglimbeni owns shares of Under Armour. The Motley Fool recommends Michael Kors Holdings and Under Armour. The Motley Fool owns shares of Under Armour. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Under Armour Stock Quote
Under Armour
$10.14 (1.60%) $0.16
Capri Stock Quote
$59.08 (0.65%) $0.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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