Michael Kors on Track to Threaten Coach, Inc.
While other rival brands like Kate Spade and Tory Burch are also growing quickly, Michael Kors appears to be the most serious potential threat to Coach's market share.
Michael Kors’ astounding growth over the past few years poses a potential threat to the market share of Coach Inc. (NYSE:COH), the current dominant player in the US with 28% of the US handbag market. While KORS holds only a third of Coach’s market share, KORS has cornered a lucrative position by providing more fashionable product offerings at similar price points. While other rival brands like Kate Spade and Tory Burch are also growing quickly, Michael Kors appears to be the most serious challenger to Coach’s reign.
KORS has also taken a page out of the playbook of iconic luxury brands like Hermès (EPA:RMS) and Chanel by anchoring its product line with specific handbag and accessory pieces – Hermès has the Birkin, KORS has the Hamilton bag and its line of chronograph watches. This has helped to further the perceived prestige of Michael Kors products by preserving brand loyalty and strengthening brand recognition.
Recently, the high-end retailer reported sturdy fiscal Q4 2013 earnings that blew past expectations as sales of handbags and flashy watches surged. Key highlights from the earnings report are as follows:
- Q4 EPS of $0.50 surpassed analyst estimates by $0.11.
- Q4 revenue grew a staggering 57.1% to $597.2 million, beating estimates by $51.1 million.
- Since Q4 2012, retail sales increased by 59%, driven by a 37% increase in total same-store sales and new store openings.
- Gross profits grew 2% as a percentage of revenue, reflecting stringent control of product margins.
Much of the company’s growth can be attributed to expanding market penetration both domestically and abroad, a well-diversified and appealing product line, and mounting brand recognition worldwide. Favorable economic conditions will further amplify KORS’s trend of stunning earnings growth in the upcoming quarters. With US consumer confidence recently hitting six-year highs, consumers are loosening their purse strings and are likely to indulge in accessible luxuries from retailers like Michael Kors. Positive employment data is another bullish sign for the consumer retail market that bodes well for the company.
Market IQ pro metrics give KORS a neutral rating. Market IQ characterizes KORS as high quality but low value stock (see below).
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The above Quality – Value chart consists of the following comparable companies: Michael Kors, Fifth and Pacific Companies, Inc. (NYSE:FNP), Coach, V.F. Corporation (NYSE:VFC), and Ralph Lauren Corporation (NYSE:RL).
The company’s qualitative strengths can be seen in multiple areas such as EPS growth, Return on Equity (ROE), and financial strength.
- Strong sales in conjunction with improving margins have translated into an annual EPS growth rate of 26.1%, which greatly surpasses the peer average growth rate of 15.7%.
- ROE increased to 32.1% in fiscal Q4 2013 vs. in fiscal Q4 2012. Additionally, KORS offers a higher ROE relative to the peer average of 12%.
- KORS maintains an adequate Interest coverage ratio of 22, which demonstrates the firm’s ability to maintain its short-term obligations.
Despite the high valuation, KORS's impressive trend of growth and its valuable brand equity serve to justify the premium investors are placing on the stock. With stellar growth prospects and sound financials, the vast majority of analysts have been very bullish on KORS – EPS estimates for fiscal 2014 have increased from $2.34 per share 90 days ago to a current estimate of $2.57 per share.
For the upcoming fiscal year, KORS has set revenue projections of $2.65 billion, with EPS estimates between $2.43 to $2.47. The expectations on Wall Street are slightly rosier, however, with estimates of $2.82 billion and EPS of $2.45. It should be noted that despite giving modest projections, KORS has consistently surpassed analysts’ EPS by an average of 44% for the past four quarters. Based on this trend, it may be reasonable to expect further upwards revision in revenue and EPS in the near future.
Going forward, management foresees opportunities for expansion within domestic and international markets.
Within the domestic market, the company is planning on expanding its retail store count from 231 locations to 50 new stores by end of 2013. Additionally, KORS is focused on driving incremental revenue from wholesale segment by converting department store doors to shop-in-shops. An in-store conversion produces three times the sales volume of an unconverted door. The company sees an opportunity to operate through shop-in-shops within 1000 doors domestically, with plans to convert over 100 per year.
On the international front, opening 40 new boutiques in Europe and approximately 200 stores in the Far East focus the firm on exploring avenues of growth within the European market and the Far East.
Management is confident in its ability to continue attracting consumers with its chic assortment of products and a differentiated positioning within the luxury retail market. With aggressive domestic and international expansion plans, management's optimism is another symbol heralding a bright future ahead of KORS.
This article was written by Erika Chau and Adil Yousuf and originally appeared on Market IQ
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