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Value Hedge Fund Betting on Apparel: Michael Kors (KORS)

March 01, 2013 | About:

Viking Global, with $22.5 billion of assets under management, now owns over 10.6 million shares of Michael Kors (KORS), or 5.3% of the apparel and accessory company’s outstanding shares. This is a jump of over 4.5 times the 2.27 million shares Viking owned at the end of the fourth quarter. Despite the stock being up 140% since its late-2011 IPO, I agree with Viking: There might still be room for this high-growth stock to go higher.

So why listen to Viking Global?

Viking Global, managed by Andreas Halvorsen, was one of the top 20, $1 billion or more, hedge funds of the first 10 months of 2012, ranking 17th and having returned 19.4%. Halvorsen also one of Julian Robertson's Tiger Cubs and was a senior managing director at Tiger Management before starting the Viking Global hedge fund in 1999. From June 2005 to March 2010, Viking returned some 119% compared to the 11% for the MSCI World Index.

So why Kors?

Kors' fourth quarter EPS came in at $0.64 per share, topping analysts' estimates of $0.41, and same-store sales growth was robust across the board: 40% in North America and almost 60% in Europe. Margins were also on the rise, with the gross margin rising 80 basis points to over 60%, which only helps boost Kors' impressive operating margin.

Operating Margin (TTM)

  • Michael Kors 28%
  • Ralph Lauren 16%
  • Express 12%
  • Coach 32%
  • Guess? 7%
So how are other retailers faring?

Some of the other major retailers include Ralph Lauren (RL), Coach (COH),Guess? (GES) and Express (EXPR). Ralph Lauren has seen pressures due to the weakness in Europe, where over 35% of revenues are derived from international markets. As far as recent performance, Ralph Lauren posted EPS of $2.31, beating estimates of $2.18 on 2% higher same store sales and 4% higher total sales from the same quarter last year. The uptick in performance was mainly due to improvements in its U.S. markets.

Coach saw its total (addressable) women’s market in North America grow by 10% during December, but the company posted EPS that fell short of estimates, posting $1.23 compared to consensus of $1.28. This was driven by the $1.5 billion in revenue the company posted, versus $1.6 billion estimates. Part of Coach’s pressures involves its ties to the discretionary spending market, and as a result to consumers' disposable income.

Guess? is still a turnaround story and has seen some of the most pressure, with revenue declines in each of the last three quarters as store traffic continues to slow in North America. The stock is down 20% over the last twelve months, but does pay a 2.8% dividend yield and a payout ratio of only 35%. Express' last quarter earnings come in somewhat weak, with EPS down 45% for the quarter on a year-over-year basis. However, increased guidance has pushed the stock up almost 20% year to date. After the increased guidance, TheStreet moved the stock from a sell to a hold based in part on increasing profit margins. Billionaire Ken Griffin made a big bet on Express earlier this year, upping his stake by 2.4 times what he owned at the end of the third quarter.

Kors still appears to be in rapid growth mode, snapping up market share in North America where same store sale growth is expected to jump 20% this year. Kors still has a lot of room for expansion, with the Asian market being wide open, which is one of the fastest growing luxury markets, and Japan, which the company believes could eventually be a top market. At the end of last quarter, the company had 65 stores in the Far East, including five new stores opened in Japan during the quarter. The company believes that in the long term it can reach 150 stores in Japan.

From a valuation perspective, Kors is one of the most expensive stocks in the industry on both a P/E and P/S basis:

Price to Earnings

  • Michael Kors 27x
  • Ralph Lauren 19x
  • Express 11x
  • Coach 12x
  • Guess? 12x
Price to Sales

  • Michael Kors 6x
  • Ralph Lauren 2.3x
  • Express 0.8x
  • Coach 2.7x
  • Guess? 1x
Although Kors does appear expensive, its robust growth warrants the large multiples:

5-Year Projected Earnings Growth

  • Michael Kors 33%
  • Ralph Lauren 13%
  • Express 19%
  • Coach 13.5%
  • Guess? 10%
What's an investor to do?

Over the last three months, Kors' earnings estimates for fiscal year 2013 (ending March) have been lifted 20%, and are expected to come in at $1.85 per share, which would be an increase of 137% from 2012 EPS. The high estimate for Kors' 2014 EPS is around $2.75, which puts the stock's forward P/E at only 21.5x. This 21.5x P/E is still above other major peers, but I am less concerned given Kors' robust growth prospects and opportunities. A 30x (Kors' current P/E) multiple on that 2014 high-end EPS of $2.75 suggests 37.5% upside from current levels. Michael Kors is also one of the top 10 consumer goods stocks loved by hedge funds during the fourth quarter.


Rating: 3.1/5 (8 votes)

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