Michael Kors Holdings Limited (NYSE:KORS) has been on an upward trajectory since its IPO in December 2011, with a recent pullback off its all-time highs. Is the pullback warranted, and are Coach (NYSE:TPR) and Kate Spade & Company (NYSE:KATE) gaining ground on Michael Kors?
Coach has been flat since Kors' IPO, and Kate Spade has seen an uptick, but not to the degree of Kors.
Kors poised to keep growing
Michael Kors has taken share from Coach during the past couple of years, but it still only commands 9% of the luxury-handbag market. Coach is still the No. 1 handbag maker, with 22% of the market, while Kate Spade's share is a little more than 2%. Coach is an established brand, while Kors is growing tremendously and still has room to run. Kate Spade is growing, as well, but it has lot of catching up to do and is not in the same financial position as Kors. Kors carries no debt and has more than $800 million of cash on hand. Kate Spade, on the other hand, carries close to $400 million in debt with a little more than $100 million of cash on hand. Kate Spade cannot afford to hit any bumps in the road, and any mishap could put the future of the company into question. Coach is in a favorable position like Kors, carrying negligible debt while having almost $800 million of cash on hand.
Michael Kors' value vs. its competitors
On a valuation basis, Kate Spade has almost twice the P/E multiple of Kors, and nearly four times the P/E multiple of Coach. Furthermore, Kate Spade's other valuation metrics, based on book value, sales, and cash flow, mostly exceed that of the industry average, and that of Kors or Coach.
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Michael Kors is a women-focused fashion business, but it is making inroads into the market for men. Its men's business is currently doing $300 million in sales, with the potential to grow to more than $1 billion. Michael Kors is also expanding overseas, but with an opportunity to grow its market share at home, as well.
The company's sales increased an impressive 59% to just more than $1 billion in its last quarter, while its net income ballooned more than 77%, to $230 million. Taking a page out of the Peter Lynch playbook, paying for growth is warranted when the company's P/E multiple meets, or is less than, its growth rate. Fortunately, Michael Kors fits that bill.
The good without the bad
Michael Kors is not only growing, but it's doing so while maintaining an envious financial position. In essence, the company possesses the best qualities of Coach and Kate Spade without carrying any of their negatives -- a lack of sales growth for the former, and a less-than-stellar balance sheet for the latter. The price Kors trades at is a fair price for a great company. Ironically, investors should do well investing in Michael Kors even though it may not be as fashionable as its products.
Andrew Sebastian has the following options: long August 2014 $105.00 calls on Michael Kors. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. 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.