A Few Reasons Why Michael Kors Can Continue Getting Better

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Dec 24, 2014

Michael Kors (KORS, Financial) reported decent numbers for the second quarter with year over year growth in all segments. Yet investors were disappointed as its comparable store sales lagged behind the analyst’s consensus. As a result, its stock joined the 52-week low club few days back. Although shares have risen considerably since then, but the big question is how long will this momentum continue. Starting with its numbers, let's do a detailed analysis of this stock.

Analysis of the results

Its revenue for the quarter rose 42.7% to $1.1 billion from year ago period and also topped the analysts expectations of $978 million. Earnings also increased to $1 a share from 71 cents last year, beating the consensus estimate of 88 cents per share. However, the company disappointed on comps; lagging behind the street expectations by around 3% .

The way forward

The numbers look pretty fine on a year-over-year basis yet the declining comps reinstates the fear of an underlying slowdown in its business. In fact Sportswear Holdings Ltd, which is the largest stake holder in the company, has planned to sell its stake. The weakness in its comps was mainly attributed to reduction in the mall traffic in its North American business. And as it enters the holiday season Michael Kors expects its tepid performance to continue, on the back of weak consumer spending.

But the management is taking various initiatives to reignite its growth. In this direction it has planned to relocate its headquarters from Hong Kong to London. Explaining this move Michael Kors COO Joseph Parsons said, “We believe that Europe is the center of luxury brands and this move will better align us with our peers as we continue to expand our brand and presence globally.” With such moves the luxury goods retailer plans to extend its portfolio and strengthen its business.

In addition, its new store openings will further add to its top line. During the quarter, the company added 121 new stores, which yielded encouraging results. With the end of the quarter, Kors has 473 company owned retail stores. And for the coming months, the management hopes to take this count to 700. This will also enable the retailer to more prominently present its women’s foot wear, ready-to-wear, watches and jewelry.

Further, the company is promoting its brand in all and every way possible. It plans to lure the 3.1 million people swapping photos on Instagram and turn it into a shopping site. However, this has various limitations as Instagram doesn’t allow text and links. But there are some other things that it can do.

Only time will reveal the fruit of this labor, but on the ecommerce platform Kors is determined to make significant progress. Its new website will help the company to connect with existing and new customers that will ultimately create innovative ways to keep the brand at the forefront of consumers’ minds. With all these new initiative its long term prospects seems to be good. And with its success in the U.S. it is looking forward to launch similar platforms in Canada, Europe and Japan. Going forward, the company expects its revenue for the year to be in the range of $4.3 billion to $4.4 billion.

Conclusion

All in all its growth prospects seems to be good. The company currently has a trailing P/E of 20.27, which is better than the industry P/E of 21.37. And its forward P/E looks even more impressive at 15.91. During the quarter, it performed quite well with year over year growth in all areas. However, its declining comps’ is a matter of concern and could be an indication of future slowdown. It’s hard to say anything for the moment. But looking at its future initiatives Michael Kors seems to be well on track to deliver year over year growth.