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How Michael Kors Did It Again

By Daniel James – Feb 10, 2014 at 8:32AM

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Michael Kors continues to put rivals such as Ralph Lauren and Coach to shame, as it once again delivers massive quarterly earnings growth on a huge comp-store sales increase. What's the secret to its success?

It's becoming a familiar story in the apparel-retail industry: Michael Kors Holdings (CPRI -0.24%) crushing estimates quarter after quarter. The most recent report was another resounding beat, sending the stock flying around 20% higher. Whereas most "luxury lifestyle" chains seem to be having trouble maintaining traffic and sales, Kors seems to be doing so without even breaking a sweat. Why is the company performing so much better than competitors such as Coach (TPR 0.30%) and Ralph Lauren (RL 2.21%)?

Blowing past estimates
Once again, Kors put the rest of the apparel-retail industry to shame. Third-quarter net income surged 77% to around $230 million, or $1.11 per share. This easily smashed the analyst consensus of $0.86 per share. Revenue for the quarter came in at about $1 billion, also easily surpassing the $860 million consensus, and was up from $636.8 million a year ago. Finally, same-store sales skyrocketed 27.8%, a massive figure for any retailer.

Also, the company once again upped its guidance for next quarter and the full year. Versus a prior expectation of full-year earnings per share between $2.77 and $2.81, Michael Kors now expects to make between $3.07 and $3.09 for the fiscal year. Revenue guidance has been upped by some $200 million.

Let's compare these growth figures to those of the competition. Coach's latest earnings report was rather a disappointment. Revenue dipped 6% as EPS declined by a hefty 14% compared to last year. According to management, the weak holiday quarter was largely due to weakness in the women's bag and accessory business, which was not compensated for by a rather good performance for the men's footwear segment and emerging markets. Many analysts believe that Michael Kors is simply pinching market share from Coach, which is resulting in decreased store traffic.

Ralph Lauren recently delivered an earnings beat, but isn't growing anywhere near as fast as Michael Kors. Third-quarter EPS grew by around 11% to reach $2.57, beating a $2.51 consensus. Revenue grew by 9.2% year over year, with sales increasing across all regions. Following these results, the company upped its guidance, now expecting sales to grow by 7%, which was at the higher end of previous guidance. While this is a decent growth figure, it's obviously nowhere near Michael Kors' expectations.

How do they do it?
How does Michael Kors maintain this ridiculous growth? Basically, it seems to all come down to product offerings, handbags in particular, seeing strong demand. Clearly, the company is displaying outstanding execution, European comp sales are up a whopping 73% despite a weak macroeconomic backdrop. The company has, according to analysts, very effectively developed a line of compelling products at attractive prices, which are obviously seeing high demand from consumers worldwide.

Chief Executive John Idol took pride in the numbers, stating in the report, "[W]e are clearly becoming the number one accessible luxury company in that market." Part of the company's European strength is that traditional European players have raised prices significantly, leaving room for a company like Michael Kors to cash in on the more budget-friendly side of things. Consumers worldwide seem to be lapping up these handbags.

The bottom line
Michael Kors is putting the rest of the apparel and accessory industry to shame, posting massive increases in overall sales as well as comp-store sales. Again, the company easily beat analyst estimates, sending the stock skyrocketing following the report. Capitalizing on a gap in affordable handbags left by other major European and American players, the company has developed a product line that is affordable as well as extremely attractive to consumers.

Daniel James has no position in any stocks mentioned. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach. 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.

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