Michael Kors Holdings Ltd (KORS): Michael Kors Holdings Limited is a designer, marketer, distributor and retailer of women’s apparel and accessories and men’s apparel. The Company operates its business in three segments: retail, wholesale and licensing. Retail operations consist of collection stores, lifestyle stores, including concessions and outlet stores located primarily in the United States, Canada, Europe and Japan. Wholesale revenues are principally derived from department and specialty stores located throughout the United States, Canada and Europe. The Company licenses its trademarks on products, such as fragrances, cosmetics, eyewear, leather goods, jewelry, watches, coats, footwear, men’s suits, swimwear, furs and ties.
The brand Michael Kors was born in 1981, when designer Michael Kors launched a womens wear line at the top luxury retailers in the United States. However, it wasn’t until December 2011 that Michael Kors went public. The stock has a market cap of $8.34 billion and is currently trading just below its new all time high of $44.97.
The core customer for the Kors brand is the 30 to 40 year old category and their second biggest is the 18 to 25. Big volume handbags for the luxury brand are in the price range of $348 and $398. Handbags priced above $400 account for 25%-30% of revenue.
On the recent earnings conference call, Kors Holdings stated they are spending a lot of cash on social media to boost brand awareness. As a result, Michael Kors is the second largest designer followed on Twitter. In addition, they expect to have one million fans on Facebook by June 2012 (they currently have 783,071 fans).
As an expansion strategy, the company is quickly tapping into Europe and Asia as it has already signed 85-90% of the leases for the stores they will open in 2013, in addition to seven airport boutiques lined up to open this year. "The luxury segment continues to grow globally, and our positioning as an American lifestyle luxury brand will enable us to continue our global expansion," CEO John Idol said in a conference call with analysts.
Most recently, hedge fund billionaire Steven Cohen acquired 1.3 million shares of Kors Holdings in the fourth quarter of 2011 for his hedge fund, SAC Capital Advisors while Fidelity Investments acquired 14,065,508 shares.
At the beginning of February the stock rose about 25% after announcing strong third quarter results.
Revenue during the last four years has increased at a compound annual growth rate of 26.47% while income has increased at a compound annual growth rate of 4.80% during the same period.
Kors’ price to earnings ratio is over 70, compared to around 25 for Ralph Lauren (RL). A higher price to earnings ratio for Kors implies the market is willing to pay a higher premium to own the stock because they expect higher growth than its competitor, Ralph Lauren. A higher PEG ratio for Michael Kors helps understand that the market is in fact expecting a higher growth rate from this stock. In general, a stock that is accurately priced will have a PEG of one. Anything below means that stock is undervalued while a PEG higher than one indicates a stock is overvalued or the market expects a higher growth rate.
|MICHAEL KORS||RALPH LAUREN||INDUSTRY|
|Gross Margin (ttm):||57.48%||58.26%||43.76%|
|Operating Margin (ttm):||18.52%||15.43%||7.06%|
|Net Income (ttm):||96.15M||659.80M||N/A|
|PEG (5 yr expected):||2.13||1.65||1.25|
Looking at the data in the table above, Michael Kors earned revenue of $393,887 per employee while Ralph Lauren earned $277,500.
Michael Kors has $21.07 million in cash and equivalents while current liabilities and long term debt stand at $127.72 million and $101.65 million, respectively. The company does not have enough cash to meet its short term liabilities, or its long term debt.
The company’s working capital is $117.68 million, giving it a working capital per share of $0.62. According to Kors’ income statement, total revenue came to $757.80 million last year. This means Kors has less working capital than its sales last year; the working capital per dollar of sales is 15.53%. Ralph Lauren’s working capital per dollar of sales is 29.08%. The most recent data states that the average working capital per dollar of sales for the apparel sector is 27.41%.
Furthermore, Kors has a quick ratio of 0.79, meanings it has $0.79 in current (quick) assets for every $1 it has in current liabilities. Ralph Lauren has a quick ratio of 1.86, or $1.89 in current (quick) assets for every $1 it has in current liabilities. The company’s debt to equity ratio is 4.14 compared to 7.53 for Ralph Lauren. Cash flow has been increasing at a CAGR of over 94% during the last three years.
I think the strong bullish momentum for this newly publicly traded company will continue, which will reflect in an appreciation of value in the stock. I also think the stock will appreciate in value because revenue will continue to increase as management continues to tap into new markets in Europe and Asia. I recently spend almost two years in Europe and I can confirm that consumers are becoming more aware of the Michael Kors brand, thus I’m certain their marketing campaigns throughout Europe will help them acquire new customers.
Although Michael Kors’ financial position is not the best, maybe because management is more concerned on expansion, the company's future looks very bright as revenue will continue to rise due to expansion into new markets and acquisition of new loyal customers. The stock has appreciated over 118% since its IPO in December 2011. I recommend buying this stock now.
About the author:
At Investment Underground, our editors are disciplined, independent thinkers who will inform you when to buy undervalued investments, recognize catalysts, and sell when full value is realized. We provide timely, detailed analysis of our value investing strategies and help you achieve your goals of a reduced-risk trading environment.
If you are fed up with volatile markets and manipulation that put your financial well-being in jeopardy, join us to achieve those gains you deserve without the headache.