|New Threads Only:|
|New Threads & Replies:|
Forum List » Value Ideas and Strategies|
Share and discuss value investing ideas and investing strategies.
Kors: The Price Looks Too High
Posted by: fedezaldua (IP Logged)
Date: November 6, 2013 04:53PM
Michael Kors (KORS)'s performance is indeed remarkable. The fashion retailer said that its second quarter profit rose 49% year over year. Besides, it raised its earnings and top-line outlook for the year since it's expecting same-store-sales (probably the most significant figure for retailers) to grow at a year-over-year pace of 15% to 20%. Same-store sales grew by 21% in North America and by an outstanding 45% in Europe. That said, Kors is already up by 46.5% year to date. Is Kors too cheap or too expensive?
The Competitive Advantage Period and Kors's Price
All assets should carry a price tag related to their short- and long-term capability to produce cash flows for shareholders. Their ability will be related to their pricing power which is related to the barriers to entry a company builds around its business castle - its business motto in Buffett's words. Then, the longest a company can sustain high margins and stable or growing sales, the more valuable it will be.
The market seems to be convinced about Kors' ability to keep its high-growth and high-margins momentum going. The company now sells for 26 times forward earnings against Coach (COH)'s 15 times earnings multiple or LVMH Moet Hennessy Louis Vuitton's (LVMUY) 18 times earnings multiple. Of course this valuation gap can be justified if Kors' EPS do grow by about 30% year over year for at least the next five years. As a matter of fact, Coach's EPS will surely diminish in 2014, and LVMH is expected to grow its EPS by 11% year over year.
Nevertheless, past performance is not always a good indicator of future performance. Other fashion labels such as Abercrombie & Fitch (ANF) grew fast until one day they just did not grow anymore. The brands just came out of fashion. This, of course, had terrible effects on investors who had made a bet at high multiples. When Abercrombie & Fitch's stock was selling for $70 in 2011, most analysts gave the stock a target well above that figure. Abercrombie & Fitch now trades around $33 per share.
When you pay high multiples you are paying for future unwarranted growth that might not be there when the time comes. Kors could turn out to be a great brand that produces high cash flow yields eternally the way Louis Vuitton and Hermes do it for their shareholders. But it might also turn out to be another Abercrombie & Fitch.
Kors has been great for its early investors. The stock has returned nearly 300% to its shareholders since its 2011 initial public offering. But right now you might be paying a huge premium for growth that might not meet expectations. A great investor once told me that happiness equals reality minus expectations – not only in investing but on all life matters. With this in mind, we should all know that even a great reality like an EPS growth of 20% year over year might disappoint the market and make you lose money if you got into the company's shares at the current valuation level. If you decide to buy Kors shares now, beware. You might pay now for something that might not be what everyone seems to be expecting.
Stocks Discussed: KORS, COH, LVMUY, ANF,
Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC. Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.