Why I'm Not Selling My Michael Kors Shares

Despite a 25% crash after earnings, I'm holding onto my investment in Michael Kors Holdings.

Bob Ciura
Bob Ciura
Jun 4, 2015 at 7:26AM
Consumer Goods

Shares of fashion company Michael Kors Holdings (NYSE:CPRI) crashed nearly 25% on May 27, after the company reported disappointing fourth-fiscal-quarter and full-year earnings. Of course, "disappointing" needs to be taken with a grain of salt, as Michael Kors barely missed analyst estimates. Another reason investors rushed for the exits was the company's outlook for the remainder of the year, which clearly didn't live up to expectations.

Michael Kors' brutal day follows a horrible year for the stock. Shares are down 51% in the past year, while the S&P 500 Index has registered solid 10% gains in the same period. With such brutal performance, one might think the company was in dire straits. But that's not the case. Michael Kors may no longer be as fashionable as it once was, but it's still growing. Once again, it appears Wall Street is in panic mode that a previously high-growth company might not grow as fast as it's expected to. While Michael Kors' slowing growth is disappointing, it's hardly cause for alarm, which is why I won't be selling my shares.

Are things really that bad?
Last quarter, Michael Kors reported $0.90 in earnings per share, on $1.1 billion of revenue. The company grew revenue and earnings per share by 17% and 15%, respectively, year over year. These are respectable numbers, and revenue matched analyst estimates, but EPS missed expectations by one penny. In addition, management's forecast for the remainder of the year calls for EPS of $4.40 per share to $4.50 per share. Analysts polled by Bloomberg projected $4.72 in full-year EPS.

There were several positive items in Michael Kors' report that didn't quite seem to match the dismay on Wall Street. First, currency effects weighed down the company's results, due to the rising U.S. dollar. Excluding currency, revenue and earnings per share would have grown 23% apiece last quarter. Nothing about these numbers signals a deterioration, in my view.

In addition, Michael Kors continues to generate cash, which it plans to use to aggressively buy back its stock. The company spent $92 million to repurchase 1.4 million of its own shares last quarter. The company announced with its earning report that it would add another $500 million to its existing repurchase authorization, to take advantage of the stock declines. In all, Michael Kors has authorized buying back $1 billion of its own stock, or roughly 11% of its current market capitalization, over the next two years. That should help grow earnings even further going forward.

Michael Kors could easily afford to return even more cash to shareholders because of its stellar balance sheet. At the end of last quarter, the company held $978 million in cash and equivalents, about 10% of its market capitalization, with virtually no long-term debt. Given that interest rates remain extremely low, I wouldn't be at all surprised to see Michael Kors tap the debt markets to leverage its rock-solid balance sheet and use the proceeds to opportunistically buy back even more of its own stock.

I'm not selling now
Consumer fashion is notoriously fickle, and investors are clearly worried that Michael Kors has lost brand strength. But while Michael Kors' results missed expectations, and the full-year forecast doesn't inspire much confidence, it hardly seems to justify the biggest stock drop in the company's history. Michael Kors' growth is slowing, but it's still growing at a respectable clip. The company remains highly profitable, and can use the stock crash to its advantage by buying back its own shares at even lower prices.

The stock now trades for just 11 times trailing earnings and 10 times fiscal 2016 EPS estimates. Selling the stock now, at such a low valuation, does not seem like a wise course to take. As long as the company continues to grow sales and profit, I'm not selling the stock.