The Michael Kors Phenomenon

Despite record earnings, Michael Kors stock falls. Analysts question long-term strategy

NEW YORK–When everything is said and done, one thing will stand as a historic fact: Michael Kors ruled the streets of New York with his handbags for a few years in the early teens of the 21st century—and was a darling of Wall Street.

On Monday, the company smashed earnings (up 49.2 percent versus a year ago) and sales (up 43.4 percent) for the first quarter of its 2014 fiscal year. It also beat earnings expectations of 81 cents per share and delivered 91 cents.

“Our success in establishing Michael Kors as a global luxury lifestyle brand is grounded in Michael’s vision for design and the aspirational jet-set luxury experience we offer our customers,” the company’s CEO John Idol stated.

However, the stock sold off hard (-6.5 percent to $76.50) as the company moved toward slowing growth in the second quarter of 2014. At this potential tipping point, the Epoch Times is taking a look back to see what made Kors so successful and what lies ahead.

Success

Most fashionistas say Kors had the perfect strategy for a sluggish economy and a snobbish clientele—and the perfect product.

“They have no size, no age. You could feel you are having a fat day, and you can still wear accessories,” Kors told Bloomberg in an interview. So handbags are the all-weather product, always in demand. They make up 70 percent of Michael Kors’s sales.

However, there is quite some competition when it comes to designer handbags and most women dream of owning a piece of Gucci, Prada, or Louis Vuitton.

Here is where the second pillar of MK’s success comes in. “Michael Kors typically takes the design, shape and styles of bags from more expensive designers like Louis Vuitton and make it their own,” writes princesssss<3 in a Yahoo forum.

On top, he sells it for a quarter of the price, retailing at $300–$400 instead of the $2,000 you’d have to pay for the top brass.

In terms of publicity, it probably didn’t hurt that Kors was a judge on reality TV fashion program “Project Runway.” And despite the relative cheapness, celebrities from Heidi Klum and Zoe Saldana also sport the bags and many rappers use his name in their lyrics.

Whatever the factors, since going public in 2011, the stock only knew one way—up! It almost quadrupled from its IPO price of $25 to top out at $98 at the beginning of this year. Annual revenues increased 312 percent since 2011, net income by 818 percent.

What’s Ahead

The question is: Will this growth continue and even if it does, will the stock continue to rise?

“We think we’re positioned to continue our growth and have the right strategy to do that,” Idol said on a conference call Monday. The company wants to have 400 stores in Europe, 100 in Japan, and 200 in the rest of Asia in the medium term. So far, it has 228 stores in North American and 117 in Europe and Japan combined. Idol also wants to push other accessories such as boots, watches, and men’s wear.

So the potential is there, but some fashion addicts think the brand is becoming too mainstream and is losing exclusivity. “I think he going bankrupt, I’m starting to see way more of his stuff in basic stores …” writes Divakim89 on lipstickalley.com.

Surely, with sales and margins like these, the company is not going bankrupt. However Citigroup analysts think investors will adhere to the old adage of buy the rumor, sell the fact: “Guidance is solid [but] substantial stock upside could be challenging as investors likely focus on sustainability of growth and potentially sell into the strength,” according to a Citi report.

Investors and analysts are also worried about lower profit margins, but Idol thinks they will merely contract to normal levels. “We believe that there’s just some more normalized selling rates. … Those were unsustainable margins. We told everyone that,” he said on the conference call.

The Citi analysts still value the shares at $98, but the stock is anything but cheap at 23x fiscal 2014 earnings. Also EPS growth needs to continue in the range of 20–25 percent for some time.

With expectations that high, chances are even a jet-set company like Michael Kors will run out of fuel.

Additional reporting by Amelia Pang

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