Potential Catalysts for Michael Kors Holdings Ltd (KORS) Rally

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Michael Kors Holdings Ltd (NYSE:KORS) is one of the few shares that have traded with the significant increase in the year-to-date period despite the broader index S&P 500 remaining in the red for the same period. There are several reasons for it. One of them was the unveiling of its biggest assortment of products particularly for the spring season 2016 collection. After missing the March 2015 quarter, the company’s earnings provided a positive surprise. Also, the company has been doing exceptionally well compared to the industry average. For instance, its average revenue and net income growth for the three-year period, operating margin and net margin for the trailing twelve-month (TTM) period, and return on assets and equity were significantly wider than the industry. Despite these positives, its price to earnings ratio was nearly 43% down from the industry average. That itself is a big catalyst to drive the stock up in the current year. However, let’s also look at other factors.

Fears Allayed

One of the catalysts for Michael Kors Holdings Ltd (NYSE:KORS) was that its investors were worried that the company might push its intention to add 400 stores in North America. However, that fear was allayed by the management most recently. Investors’ concern was that if the company goes ahead with the plan of launching 400 stores in North America, then its brand would become a cheaper one. That will undoubtedly hurt its margin. However, the company indicated that it would not expand further. That should be a relief for some investors, who believe that such a move would warrant additional expenses, which could hurt its operating margin.

Michael Kors Holdings Ltd (NYSE:KORS) is a rapidly growing luxury lifestyle branded firm with a focus on the handbag as it has an award-winning and renowned designer. It has 430 stores in the region, including Latin America. In the last three decades, it has offered distinctive designs and materials along with the craftsmanship with a jet-set aesthetic, which integrated style, as well as, a sporty attitude. Its vision has enabled it to become international accessories, footwear, and apparel firm. Its presence has become wider covering 95 nations. As most retailers were closing down their operations, it would have been an unpopular move to add stores after a steady growth in online sales.

Interesting Catalysts From 3Q

There are some interesting catalysts from the third quarter results of Michael Kors Holdings Ltd (NYSE:KORS). The company operates in three primary segments. One is the dominant retail segment, and the other is wholesale division. The third and final division was the licensing. At a time when the retailers were struggling, it did well to post 6.3% growth in the third quarter, and it would have been 9.9% on a constant currency basis. Significantly, the growth came in above the Street expectations by 3% and the retailer’s estimations. The important aspect was that other retailers witnessed consumers spending less while the company witnessed opposite direction of sales.

Another important factor was that Michael Kors Holdings Ltd (NYSE:KORS) could improve its retail sales overall contributions to the top line to 54.83% in the third quarter from 52.44% in the preceding year quarter. On the other hand, the wholesale section represented 41.2% of the total revenue compared to 43.65%. The company’s licensing division remained more or less at the same level only. However, the operating margin was better in the third quarter than the nine-month period. For instance, the operating margin for retail and wholesale segments were 27.8% and 27.9% while the nine-month period data suggested 23.8% and 27.4% respectively.

Strong Three-Year Growth

Michael Kors Holdings Ltd (NYSE:KORS) growth has been consistent over the last three-year period though its results might have missed expectations in the fourth quarter of its fiscal year 2015. Its revenue for the period March 31, 2013, was $2.18 billion, which jumped more than 50% to $3.311 billion in 2014 and $4.37 billion in March 2015. Similarly, its operating income nearly doubled to $1.26 billion from $630 million while net income more than doubled to $881 million in March 2015 from $398 million in the preceding fiscal year. The London-based company hopes to extend its presence in footwear by giving a big push to menswear apart from lifting its presence in Asia, as well as, the Europe as the two regions sales represented 25% of the total revenue.

Another significant factor is the free cash flow. Michael Kors Holdings Ltd (NYSE:KORS) had the free cash flow of $226 million at the end of March 13, which jumped to $418 million in 2014 and $472 million in 2015. At the end of the third quarter, the company had free cash flow of $471 million. The company has some interesting targets for the fiscal year 2016 and revenue and profit targets. The apparel retailer is confident of generating $600 million free cash flow in the current fiscal year that will provide a yield of nearly 7%. Its Chairman and CEO, John Idol, expressed the confidence that its top line would see growth between 5 and 6% while earnings would advance 3 – 4% in the long-term.

Valuation Metrics

One of the catalysts for Michael Kors Holdings Ltd (NYSE:KORS) stock is the valuation metrics and the significant wide gap between the company, and the industry average. That supports potential upside rewards. For the trailing twelve month period, is operating, and net margin was 25.8% and 18.4% respectively compared to the industry average of 11.4% and 7.6% respectively. Its return on assets was 32.7% while return on equity was 40.9% during the last TTM. In comparison, the industry average was only 8.2% and 16.2% respectively. Similarly, its average revenue growth in the last three year was 49.7% whereas the industry’s average was only 8.9%. In the same way, its net income jumped 81.5% while the industry average was 7.2%. However, its price-earnings ratio was only 13.5 times compared to the industry’s 23.6%. According to Topeka Capital Markets’ specialty-apparel retail analyst, Dorothy Lakner, the stock could see another 30% upside potential based on its fresh initiatives, as well as, pickup in consumer spending. She expects EPS to be $5 next year, which means there is further scope for upside rewards.

Conclusion

Significantly, Michael Kors Holdings Ltd (NYSE:KORS) shares are trading at a PE less than its peers like Coach Inc (NYSE:COH). That is despite the fact the stock advanced over 40% in the current year. The growth prospects are also intact. Therefore, the valuation and growth should help to provide enough upside rewards. It could be one of the safe bets.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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