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KORS Stock is a Tweener: No Longer a Momentum Stock, But Not Yet a Value Stock

August 05, 2014 | About:

Michael Kors (KORS) just can’t seem to catch a break. Despite crushing fiscal 1st quarter 2015 revenue and earnings estimates on Monday, KORS stock is in freefall, down by about 6% on the day.

KORS reported earnings of $0.91 per share on revenue of $919.2 million, far exceeding analyst consensus expectations of $0.81 and $851.66 million, respectively. Total revenues were up 43.4%, and same store sales jumped by fully 24.2%. Gross margins increased slightly from 62.0% to 62.2%. And KORS continued to poach market share from aspirational rival Coach (COH).

Overseas, the numbers were even better. Per the press release, “In Europe, we were extremely pleased with our revenue growth of 128%, which was driven by a comparable store sales increase of 54.2%, as well as strength in our wholesale business. Lastly, revenue in Japan increased 89%, driven by comparable store sales growth of 48.8%.”

By an objective measure, KORS had a fantastic quarter. So…why the selloff in KORS stock?

Wall Street appears to be worried that KORS has grown too far too fast in North America and that markdowns and margin compression are doing to accelerate as a result.

We saw the same concerns crop up last quarter. Then, as now, KORS soundly beat analyst estimates and still saw its stock price collapse.

Let me give it to you straight: the collapse in KORS stock has nothing to do with operating performance, which is still fantastic, and everything to do with valuation. After the last earnings release I wrote:

“The biggest worry for KORS stock? Valuation. Kors is not cheap by any measure, trading at 33 times trailing earnings, 21 times forward earnings and nearly 7 times sales.”

In the two months that have passed since that article, not much has changed. KORS stock is still very pricey at 5 times sales, and this is after a 12% drop in the stock price since that last article was published.

Michael KORS is a fine company, but KORS stock is case study in what happens when a former momentum darling falls out of fashion. Not even handedly beating earnings estimates is enough once sentiment shifts.

So, where do we go from here?

KORS is in that unfortunate limbo that many high-growth dynamos eventually find themselves in: It’s fallen out of favor as a momentum stock, but it is still too expensive to be a value stock. Given KORS fantastic sales growth rates, KORS stock should trade at a premium to slower-growing rivals such as Coach or LVMH Moet Hennessey Louis Vuitton (LVMUY). At around 3 times sales, I would consider KORS stock an absolute steal.

Even at current levels, I would not be surprised to see a few bargain hunters fishing around. But I wouldn’t advise trying to catch that falling knife just yet. Be patient, and I expect you’ll get a better buying opportunity in the months ahead.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.

Visit Charles Sizemore's Website


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