Wall Street can be pretty stingy when growth stocks slow down. The market has been turning its back on Michael Kors (KORS) lately, even though the premium handbag maker is still coming through with big gains on both ends of the income statement.
Kors posted strong financial results last week. Revenue rose 30 percent to $1.3 billion during the holiday quarter relative to the prior year’s seasonally potent period. Retail net sales climbed 37 percent, fueled by the opening of 114 net new stores, a healthy 8.6 percent spike in comparable-store sales, and a boost from its recently launched e-commerce site.
That’s encouraging on all fronts. The big move up in comps proves that shoppers are continuing to gravitate to Kors as an upscale brand. Brisk expansion finds landlords just as hungry to get Kors to open up in their malls. Earnings are clocking in at record levels, but things aren’t exactly right. The high-end handbag market is getting competitive, and Kors isn’t entirely immune from the market’s cutthroat ways.
It’s in the Bag
These are challenging times for the industry. Former market darling Coach (COH) has been posting shrinking year-over-year sales for five consecutive quarters. Kors overtook Coach in terms of total revenue two quarters ago. They were passing ships.
However, things aren’t exactly rosy at Kors. Operating profit margins have contracted in back-to-back quarters, and the outlook that it provided for the current quarter suggests that the streak of declining margins will stretch to three periods.
Kors went public in late 2011. It was an immediate hit. The stock soared 87 percent in 2012, following that up with a 59 percent surge in 2013. Things turned last year, with the shares moving 8 percent lower. The stock is trading slightly lower so far in 2015. The carnage is pretty grim if we tinker with the starting line: Shares of Kors have plummeted 29 percent since peaking 12 months ago.
Kors may seem cheap by historical standards. It is fetching 17 times earnings, based on analyst projections for this fiscal year ending next month. That’s not too shabby for a stock expected to grow sales and earnings by 32 percent and 33 percent, respectively.
Wall Street sees growth continuing to decelerate in the new fiscal year that kicks off in April, but the profit multiple for fiscal 2016 drops to just 15. That’s not too bad for a company growing in the double digits, even if we’re talking about sales and earnings climbing just 18 percent and 12 percent, respectively. Sales growing faster than earnings points to continuing margin compression, but that’s not necessarily a permanent state.
The fear with Kors is that it will become the next Coach. A couple of years ago, growth rates began to slow at Coach, and then in late 2013 those rates turned negative. We’re not there yet with Kors, but just the fickle nature of fashion — even when it’s something as simple as an MK logo on an upscale purse — has been enough to scare away investors. If this is a fluke and Kors finds a way to accelerate its growth or reverse its diminishing margins, the stock will roar back. If that isn’t the case, the stock will continue to languish, and even a stock as seemingly cheap as this one relative to its historical growth rates will seem expensive in retrospect.
[source : dailyfinance.com]