What a comment, the fashion insights by Michael Kors help explain why his company Michael Kors (KORS) stock is up 90% year to date. KORS listed late last year and is a well-known accessible luxury brand in America. The company was established in 1981 but really took off in 2004 when the face of the brand Michael Kors appeared on project runway. It was only in 2007 that KORS opened and began to roll out company owned stores.
Accessories are an investor’s best friend
We like accessory businesses as unlike apparel they sell well across borders, are great gifts and tend to sell at similar prices around the world. Michael agrees stating that accessories are a great business because “they have no size, no age.” As mentioned before Michael believes “You could feel you are having a fat day, you can still wear accessories.” In KORS latest quarterly result accessories, footwear, watches, jewelry, eyewear and related products grew to 79% of KORS product mix.
Since its December 2011 listing KORS has trounced analyst estimates and recently gave fiscal 2013 guidance for 20% comparable store sales (SSS), there are no other retailers out there giving this sort of guidance.
Earnings History
|
Dec-11
|
Mar-12
|
Jun-12
|
EPS Est
|
0.09
|
0.16
|
0.2
|
EPS Actual
|
0.2
|
0.22
|
0.34
|
Difference
|
0.11
|
0.06
|
0.14
|
Surprise %
|
122.20%
|
37.50%
|
70.00%
|
Source Yahoo Finance
In a difficult environment KORS SSS have been best in class for
retailers
Even more impressive were comments the CEO, John Idol made in regards to SSS on the last quarterly call. “When we look back at the stores that are one-year-old, two years old, five years old, there is almost very, very minor differentiation in terms of comp store performance in legacy stores versus new stores which really is a testament to first and foremost the brand.” This is an amazing comment suggesting plenty of growth potential if the old stores are growing as fast the new ones.
Source: KORS 10K
Considering KORS retail rollout only commenced in fiscal 2007
this somewhat explains the strong across the boards comps. KORS with a 600
store roll out target is still underpenetrated compared to its peers. KORS is
still predominately North American with 90% of sales coming from the region.
70% of the global luxury market is outside of the Americas suggesting a much
higher target than their 600 store rollout. As mentioned on the call management
is targeting 70 new stores this financial year. Coach (COH) their largest
competitor has over 800 stores with 500 in North America. Note KORS 600 retail
owned store target does not include China. This leads us onto our major
concern.
Fashion Faux Pas?
Company management and major shareholders Sportswear Holdings
own the exclusive rights to operate KORS in China terminating in 2041 and not
the company itself. Though KORS will receive licensing revenue and has the
first purchase right of refusal. COH had a similar structure in China buying
back the license once operations were profitable. Regardless the structure is
disappointing with KORS shareholders likely to pay up in the future to buy back
the license from insiders, never a good look.
Key person risk is minimised with Michael agreeing to a lifetime
non-compete agreement and if that was not enough an employment contract for
life. Michael also has a 6.5% shareholding in the company. I always enjoy
listening to his commentary.
"It's an unbelievably
tight race for hideous today."
Michael Kors comments on Valerie
Mayen and Ivy Higa's elements-inspired gowns (season 8)
Conclusion
In our opinion KORS has one of the best
growth profiles in the retail industry. KORS combination of high SSS and a near
tripling of its retail stores (not including China) is unique in the retail
sector. It trades on a high but appropriate multiple given the business
momentum and brand recognition.
Jason
Disclosure: Decisive is long KORS stock
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and in no way constitutes a solicitation of business or investment advice. The
material has been prepared without regard to any client's or other person's
investment objectives. Before making an investment decision you should consider
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