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Michael Kors: A Fashion Retailer That Is Making Smart Moves

September 19, 2014 | About:

Michael Kors (NYSE:KORS), a leading specialty retailer in global luxury market, has been doing well ever since its IPO. Let’s look at the growth drivers that could possibly be fueling its revenue and margins going forward and allowing it to sustain its rapid growth.

Michael Kors is heavily banking on its strategically diversified and captivating product portfolio to drive its margins this calendar year. The specialty store retailer for men’s and women’s apparel and accessories has a wide range of offerings of handbags, jewelry, small leather goods, footwear, eyewear, fragrance, watches and ready-to-wear products. The company is seeing tremendous growth opportunities for each of these product categories across the globe in retail, wholesale as well as in licensing segments as it is involved in various strategic footsteps such as new store openings and expansions, shop-in-shop conversion and expansion, the transition to its e-commerce business in house that are driving growth for its comparable store sales.

Potential regions to complement growth for its luxury products

Michael Kors has transformed approximately 108 department store doors in the branded shop-in-shop in the global market. This calendar year it remains on track to convert an additional 750 department stores in shop-in-shop in most of its categories worldwide. The company is seeing remarkable growth prospects in North America, Europe and emerging markets in Asia Pacific.

North America remains a potential market for the specialty giant as it expects this market to support more than 400 stores in the region in the long run excluding its men’s locations. The specialty retailer remains focused to inaugurate an additional 45 retail stores in North America this financial year. The company had opened 13 new retail stores in the first quarter taking its retail store count to 301 in the region. It is additionally planning to build an e-commerce site in house in the region this fall, which will certainly add value to its products and brands and drive growth for the company as this site will offer an influential marketing tool permitting the company to track the customer movements, while they purchase its luxury products. Moreover, the company is also engaged in renovating its department store doors to the shop-in-shops that will further assist Michael Kors to better market its brands within the department stores.

Europe is another probable market that looks strong to complement its growth in the future. Michael Kors sees $1.5 billion market opportunity in the region and remains committed to enlarge its store base to nearly 200 new locations in the region. It also remains on the track to open about 55 new retail stores in the region this fiscal year. It has opened 21 new stores in the last quarter, with a total of 101 retail stores at present in the region. The company expects its new stores, expansion of selected retail stores and accelerated penetration of its wholesale business to drive growth in the region. Furthermore, the company is experiencing good momentum in its various categories such as accessories, footwear, ready-to-wear as well as jewelry and watches in the region that will definitely drive its margins this quarter.

In addition, the specialty retail giant is strategically accelerating its presence in the Asia-Pacific region. It has opened about 112 Michael Kors stores in China, southeast Asia and Australia. Also, it expects relatively a greater growth opportunity in these markets that will drive growth for its luxury products. Besides, the company is extremely pleased with its performance in Japan, where its revenue surged 89% to $15 million in the last quarter. Though the company is in the early stages of its business in Japan, it has developed a strategic framework that will certainly support its long-term growth in the region. The company has 41 retail locations in the country, and it sees remarkable growth for new retail locations with its licensed partners.

The company is also targeting the best known airports and travel destinations to further increase its retail store locations. It has close to 66 locations at present worldwide and remains on track to eventually open 100 travel retail shops across the world.

Strategic investments to drive its growth

Michael Kors is executing various initiatives such as structuring the store base, growing or shuffling the selected stores and constructing shop-in-shop conversions that will positively contribute in a definite manner to its growing business and increase its market penetration across the world. The company is also investing heavily in its marketing, distribution center and technology to create strong foundation for its growing brands and products that complement its global growth. Also the company is making continuous efforts to bring luxury product assortments with world class quality standard that will drive its customer demands for its products going forward.

Meanwhile the company is planning to quickly open SoHo flagship store with specific concentration to its men’s apparel that will occupy an entire floor as the company remains focused to open about 500 men stores globally in the long-run. Moreover, the store expansion plan also remains on the cards as it plans to enlarge six of its best locations worldwide and doubling the average size of these selected stores to nearly 5000 square feet. This expanded store should help the company to effectively place its products such as footwear, ready to wear category, watches and jewelry and drive more footfalls that could possibly result in greater purchases.

Apart from this, the company plans to open close to 750 shop-in-shops during this calendar year for its appealing footwear’s and ready to wear accessories that will certainly increase its performance in the wholesale segment. Besides, the company is seeing positive traction in watches and jewelry offerings in both the retail stores and wholesale partners. The company has launched approximately 30 additional watches and jewelry shop-in-shops during the first quarter in most of its department stores that will also drive growth for the company going forward. Further the company sees opportunity for about 500 shop-in-shops conversions that will lead to greater penetration for its offerings.

Conclusion

The company looks quite strong to achieve its forecasted revenue growth of 30% and projected earnings growth of approximately 26% this fiscal year. Michael Kors is currently trading at the trailing P/E of 24.84 and forward P/E of 16.70 that reflects reasonable growth prospects for the stock. Besides, the company remains solid on the performance ground as it delivers profit and operating profit yield of 20.18% and 30.33% respectively. Another striking fundamental is that its ROE looks pretty attractive with the yield of 44.84% for trailing twelve months and it has no debt outstanding, while its operating cash flow stands at 670.83 million with leveraged free cash flow of 362.12 million. Also the analysts have estimated CAGR of 23.36% which is greater than that of industry average CAGR of 13.08% for the next five years signifies tremendous growth for the stock in coming years.


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