May 29 Dazzled for two-and-a-half years, Wall
Street finally blinked when Michael Kors Holdings Ltd
warned that its margins might suffer from the cost of opening
stores in Europe.
A pullback in the stock on Wednesday lasted only a few
hours, investor confidence quickly restored by a revenue
forecast that reinforced Michael Kors as the pre-eminent brand
in affordable luxury.
But for a stock that has quadrupled since its New York
listing in December 2011, the hiccup betrayed investors'
uneasiness about a valuation that towers above that of its
peers. How, they ask, can breakneck growth be sustained?
"It's going to get a little bit harder from here," said
Wells Fargo Securities analyst Paul Lejuez, who has a price
target range of $86 to $90 on a stock which closed on Wednesday
Kors's shares were down about 5.5 percent at $91.68 in
afternoon trading on Thursday.
There is plenty of room to usurp luxury brands in Europe in
the same way that Michael Kors has eclipsed rivals such as Coach
Inc in the United States. At home, brand loyalty,
e-commerce and a shift into department stores also promise
For investors, the biggest risk lies in the valuation. Kors
trades at 23.69 times forward earnings, higher than an industry
median of 17.27 times, according to Thomson Reuters data. Coach
trades at 14.64 times forward earnings.
Kors's stock should be trading at $58.41, according to
StarMine's intrinsic valuation model, which takes analysts'
five-year estimates and models the growth trajectory over a
longer period of time.
"Top-line momentum can't be denied, but with margins
potentially peaking, there are fewer ways to win going forward,"
Sterne Agee retail analyst Ike Boruchow wrote in a note. He has
a "neutral" rating and a price target of $100 on the stock.
With a market capitalization of $19.8 billion, the company
founded by fashion designer Michael Kors has already grown
bigger than Coach, which is valued at about $11.2 billion.
Marketing savvy has secured a loyal following online.
Michael Kors' Facebook page has 13.8 million likes; Coach, a
brand that has been around for much longer, has 5.3 million.
One false step, though, and the stock has a long way to
fall. Jefferies & Co analyst Randal Konik bumped his price
target up to $95 on Thursday, but has a "hold" recommendation.
"History reminds us that Coach was once the 'it' brand in
accessible luxury, as KORS is today," he said.
Revenue up 39 percent or more every quarter since going
public. Sixteen straight quarters, stretching back to before the
IPO, of same-store sales growth in excess of 20 percent. Gross
margins consistently above 57 percent.
Every statistic thrown up by the company points to the
popularity of its clutches and wristlets, which can cost as
little as $100, of its watches that retail at between $150 and
$550, and of snakeskin handbags that carry a $3,000 price tag.
Wednesday's warning that gross margins are expected to fall
in the next few quarters was unusual enough to precipitate a
sudden 4 percent drop in the stock, which had been up 8 percent
before the bell. The shares recovered to close up 1.3 percent.
The short-term margin pressure, however, is part of an
expansion into Europe that could be the next pillar of growth.
Kors will open 55 stores in Europe in its financial year to
March 2015, adding to the 80 already open.
"Rather than 'overearning' in the near term and deferring
large investments and expenses, management is choosing to
re-invest some of that margin," said Janney Capital Markets
analyst Adrienne Tennant, who has a "buy" rating.
The plan, eventually, is to have as many as 200 stores in
Europe, a region where fourth-quarter sales more than doubled.
Sam Rines, equity analyst at Chilton Capital Management,
said he believed Michael Kors could create a niche of its own.
"Europe has a deeply ingrained fashion mentality with no
shortage of well-known, high-end luxury retailers," he said.
"But aside from possibly Burberry, there are few accessible
The company is also reaching more customers back home.
Familiarity helps: Kors himself, who retains a small stake in
the company, is a well-known face after a long run as a judge on
TV show "Project Runway."
The company has also been upping its presence in big
department stores such as Macy's and Nordstrom, converting
its own stores into branded shop-in-shops that sell only some of
its products, but reach a bigger audience.
At least five brokerages, including Wedbush Securities and
Goldman Sachs, raised their price targets on Thursday by as much
as $14 to within a range of $110-$134. Each maintained a "buy"
or similar rating on the stock.
"With its international growth story still in its nascent
stages," said Janney Capital's Tennant, "we believe the positive
momentum, driven by increasing brand awareness and customer
loyalty, will continue for many quarters to come."
(Editing by Robin Paxton)