Michael Kors Holdings (KORS, Financial) is a luxury lifestyle brand company headquartered in London, and in the last year, its stock has been cut in half. The founder, Michael Kors, is best known for his appearances on the television show Project Runway, but he got there by building a fantastic business. It operates a global distribution network of company-operated stores, department stores, specialty stores and licensing partners.
Public financials are not available past 2009, but since that time the company has grown significantly, increasing net margins along the way.
4/3/2010
Total Sales: $483 million
Net Income: $39 million
Capital Ep: $35 million
Book Value: $0.35
Net Margin: 8%
3/28/2015
Total Sales: $4.2 billion
Net Income: $881 million
Capital Ep: $356 million
Book Value: 10.78
Net Margin: 20%
Every dollar KORS spends on CapEx produces over $2.00 in net income, allowing the company grow book value at a very steady pace. And, if you learn anything from Buffett, that’s one of the better ways to judge the value of a business. The current book value is $11.27, growing at about 4.5% a quarter. Given another 12 to 20 quarters, the book value would be above $20 and at 3.5x the stock would be in the mid-70’s.
With that said, the market tends to trade more on earnings (anticipated or realized) than on book value. The company’s stock is trading at 9x earnings, while the S&P sits at 19x and the Consumer Goods sector as a whole trades at 23x. It’s sitting on close to $1 billion in cash and zero debt. If that cash is used wisely in the next few years, KORS net earnings could reach $1.1 to $1.2 billion. With this potential, the multiple would have to expand back toward the industry average for investors to see a double - somewhere around 15x would do it.
The GuruFocus DCF calculator puts KORS at $63. However, I believe the EPS is more likely to be at $5 in the next year or two and the discount rate for their earnings should be closer to 10%, not 12%. This puts the stock at $87.21, a number that is more than achievable given its recent history and continued ability to produce cash. And, despite going public in 2011, the company has been around for more than 30 years, allowing it to create some persona of brand value and business predictability.
While the company has experienced slower comps (6% year over year vs 9% estimated), it’s not unreasonable to believe that KORS will have at least a few more years of higher than industry growth thanks to its expanding global footprint (Europe, Asia, Latin America), where the brand is growing in popularity. By the time 2020 rolls around, the company will likely have 1,000 stores worldwide, a 100% increase over today’s number.
Conservatively, using the current year-over-year comps, that would put the net income around $1.3 billion. It’s a bargain at the current price.
