Michael Kors (NYSE:KORS) stock is down by more than 23% from its highs of the year, likely because investors are concerned about slowing growth in North America. On the other hand, there are solid reasons to believe the recent dip in Michael Kors stock may turn out to be a buying opportunity. Fashion is a fickle business, so it's important to monitor performance and discern if the company is on the winning side of industry trends
Reasons for concern
Michael Kors delivered better than expected sales and earnings for the last quarter, and performance was quite strong across the board. Total sales grew by a jaw-dropping 42.7% to $1.1 billion during the quarter, on the back of 121 new store openings and a 16.4% increase in comparable-store sales. Wholesale sales grew 46.1% to $514.1 million, and licensing revenue jumped 42.8% to $46.9 million.
Despite these impressive numbers, growth in North America slowed during the quarter; Michael Kors reported a 10.8% increase in comparable sales in the region, materially below the 18.7% increase reported in the June quarter. Total sales in North America grew 29.8% to $802.2 million, and although that performance could make most competitors tremble with envy, it's reasonable to assume growth will continue decelerating over the coming quarters.
Growth tends to slow as a company gains size over time, and considering the explosive performance Michael Kors has delivered over the last several years, it would be perfectly natural to see more moderate growth from the company in the middle term.
Natural or not, Wall Street does not like decelerating growth. In addition, fears are probably exacerbated because of comparisons between Michael Kors and competitor Coach (NYSE:TPR). Coach made a serious mistake by overextending its presence and implementing too many discounts over the last several years, which ultimately diluted the company's brand value, hurting both sales and profits.
Coach now plans to reinvigorate performance by closing unprofitable stores and becoming a full lifestyle brand in order to recover the prestige and pricing power it has lost. However, turnarounds are seldom easy, and the company announced a big decline of 19% in North America sales during the last quarter.
Even if Michael Kors can deliver more moderate growth in the middle term, demand strength is clearly indicating the company will continue outperforming competitors and gaining market share in the industry. Besides, international markets are clearly firing on all cylinders and offer promising opportunities for expansion.
Sales in Europe jumped 109% to $238 million during the last quarter, on the back of a 41.1% increase in comparable-store sales in the region. Michael Kors opened 10 new stores in Europe during the period, ending the quarter with 111 retail locations across the Old Continent. Management estimates it has room for 200 locations in the region, and it believes Europe can generate $1.5 billion in revenues over the long term.
Europe is a materially important market in the fashion business, not only in terms of its size, but also because of the prestige and global recognition it holds. Booming demand for Michael Kors products in such a competitive market is a testament to the company's brand power and ability to satisfy the standards of such a demanding clientele.
Japan looks like another promising opportunity for Michael Kors. Revenues in the country increased 106% to $16 million during the last quarter, with comparable-store sales growing 52.9%. Looking at the broader picture in Asia, there are currently 116 Michael Kors retail locations in Greater China, Korea, Southeast Asia, and Australia, and management believes it can ultimately sustain 200 locations in the region.
Including both licensed and company-owned locations, management intends to have over 1,000 Michael Kors stores around the globe. This represents a potential increase of 54% versus a store base of 649 units as of the last quarter.
On growth and valuation
Wall Street analysts are, on average, forecasting an annual growth rate of 22.3% in earnings per share over the next five years. This would represent a material slowdown versus the 40.8% increase in earnings the company reported last quarter, but still an impressive financial performance for a company of Michael Kors' size.
Still, Michael Kors is trading at a forward P/E ratio of only 18.2, in line with the average valuation for companies in the S&P 500 Index (which is around 18), according to data calculated by Morningstar. Even under the assumption of slowing growth, Michael Kors will most likely outgrow the average company in the S&P 500 by a wide margin in the coming years.
Superior growth merits a higher valuation, so the recent decline in Michael Kors stock seems to be an attractive buying opportunity for investors.
Andrés Cardenal owns shares of Coach and Michael Kors Holdings. 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.