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Dressed for Success

Three Reasons to Buy Michael Kors (KORS)

A few months ago, Ingrid R. Hendershot of Hendershot Investments recommended shares of Michael Kors Holdings Limited (KORS).

Ingrid’s pick was based on the company’s

• Booming accessories business and international expansion

• Double-digit growth in revenues and earnings

• Share repurchases adding to shareholder rewards

Here’s what Ingrid had to say:

“KORS is a world-renowned, award-winning designer of luxury accessories and ready to wear apparel. Established in 1981, the company currently produces a range of products including accessories, footwear, watches, jewelry, men’s and women’s ready to wear, and a full line of fragrance products.

Since launching his namesake brand over 30 years ago, Michael Kors has featured distinctive designs, materials and craftsmanship. The company has evolved from an American luxury sportswear house to a global accessories, footwear and apparel company with a presence in over 85 countries. The company’s strong brands include the Michael Kors luxury collection and the MICHAEL Michael Kors accessible luxury goods.

The business operates in three segments: retail, wholesale and licensing. As of the end of the third fiscal quarter of 2015, the retail businesses accounted for 51% of total revenues with 703 Michael Kors stores worldwide including licensed locations. The wholesale segment accounted for 46% of revenues as of 12/27/14 through nearly 4,000 leading department and specialty store doors in North America and internationally.

Its licensing business now represents about 4% of sales, including a line of watches and jewelry licensed to Fossil, fragrances to Estee Lauder and eyewear to Luxottica, which all generate royalties for Kors.

Michael Kors continues to increase its brand awareness by opening new retail stores in high-visibility locations, maintaining a strong advertising campaign and holding semi-annual runway shows that reinforce the brand.

As a result, the Michael Kors name has become synonymous with luxurious fashion that is timeless and elegant, which has built a solid foundation for continued long-term global growth.

Over the past five years, Michael Kors has grown rapidly with sales compounding at a ritzy 60% annual rate and EPS compounding at a lavish 96% annual rate. This strong growth is due to the company gaining market share in a growing global accessories market, expanding its retail stores globally and maintaining enduring relationships with premier wholesale customers.

Management believes the company can continue to generate double-digit growth in the years ahead as it capitalizes on the strength of the Michael Kors brand through multiple growth opportunities.”

And KORS has continued surpassing analysts’ estimates, posting third quarter revenues of $1.13 billion—up 6.9% over last year and significantly higher than the $1.08 billion forecast.

As well, earnings grew to $1.01 per share, handily beating the forecast of 89 cents.

For all of 2015, analysts estimate that the company will earn $4.31 per share on $4.65 billion in sales. And two analysts have increased their forecasts in the past 30 days.

Investors are Buying a Great Value Now

Yet, since Ingrid made her recommendation, the shares have given back their gains, and now trade at an unbelievably low 10 times projected earnings.

Investors have been worried that KORS had expanded its retail stores too rapidly and also fretted that—while sales volume continues to climb—margins have fallen due to the sales of smaller handbags with lower price points.

Michael Kors’ Chief Executive John Idol said sales were impacted by lower average prices for smaller handbags and other small-size products, which were in high demand.

“It’s not that we’re not selling handbags. In fact, we’re selling a lot more handbags,” he said.

He further stated that the company would reduce store inventory and decrease in-store sales for the next couple of quarters, to improve the “health of the brand.”

Analysts See 20% Growth Ahead

After the earnings announcement, investors began flocking back to the stock, sending them up more than $3 on Wednesday. And why not? The mean analyst price target for the shares is 51, almost a 20% increase from today’s closing price.

And as Ingrid says, KORS has “a reasonable valuation for long-term investors shopping for a high quality business with a strong brand, strong growth and a strong balance sheet.”

Happy investing!


Nancy Zambell
Editor, Wall Street’s Best Investments and Wall Street’s Best Dividend Stocks

Nancy Zambell has spent 30 years educating and helping individual investors navigate the minefields of the financial industry. She has created and/or written numerous investment publications, including UnDiscovered Stocks, UnTapped Opportunities, and Nancy Zambell’s Buried Treasures under $10. Nancy has worked with MoneyShow.com for many years as an editor and interviewer for their on-site video studios.