May 29 (Reuters) - 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 at $97.01.
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 growth.
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 luxury brands.”
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)