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Michael Kors Holdings Ltd: An Exponential Growth Story On Anvil

 February 20, 2013 02:55 PM

(By Mani) Michael Kors Holdings Ltd (NYSE: KORS) remains on track for continued superior growth as it rolls out new stores, increases its international presence, and grows wholesale distribution through more shops in the U.S.

Founded in 1981, Michael Kors is a luxury lifestyle brand designer and retailer of accessories and apparel. Kors' products are sold through company-operated retail stores and department stores primarily in North America but also through a growing number of international locations.

Michael Kors is set to post strong revenue and earnings growth in the next two years. For the March quarter, the company's earnings are estimated to climb 72 percent to 38 cents a share, with June quarter earnings seen rising 41 percent to 48 cents a share. Revenues are projected to climb 42 percent and 36 percent, respectively, for the two periods.

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For the fourth quarter of fiscal 2013, the company expects total revenue to be in the range of $515 million to $525 million. This assumes a low to mid-twenty percent comparable store sales increase. Diluted earnings per share are expected to be in the range of 32 to 34 cents for the fourth quarter of fiscal 2013.

For 2013, profit is expected to surge 137 percent to $1.85 a share while revenue is estimated at $2.12 billion, an increase of 63 percent from last year. In 2014, the company is set to record 30 percent growth in profit on 33 percent rise in revenue.

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For fiscal 2013, the company sees revenue of approximately $2.1 billion, assuming a mid-thirty percent comparable store sales increase. Diluted earnings per share are expected to be in the range of $1.80 to $1.82 for fiscal 2013.

The company would benefit from the favorable trends in the global luxury goods industry, which is expected to grow at a 6 percent CAGR from 2011 to 2014 to reach sales of between $307.8 billion and $314.4 billion, according to the Altagamma Studies. The growth will be driven by an improving global economy, favorable demographics and increased demand for luxury goods, especially in emerging markets due to higher per capita income levels.

Meanwhile, Michael Kors' U.S. business has strong momentum and holds the number 2 market share in handbags after Coach, Inc. (NYSE:COH).

In addition, international growth potential is a very attractive part of this story. Europe is just reaching profitability with Japan the next major focus. For the year ended March 31, 2012, Europe generated sales of $108.8 million, up from $38.5 million a year-ago, and retail sales from Japan increased to $10.2 million from $1 million last year.

For the third quarter, it earned $130.0 million, or 64 cents a share, compared to $32.00 million or 20 cents per share in the year ago quarter. In the past four quarters, the company's earnings have topped Street view by a wide margin ranging between 22.5 percent and 70 percent. In the last 30 days, 12 analysts have increased their earnings estimate for 2013.

Michael Kors boasts one of the best comparable store sales in the industry and have consistently outperformed expectations due to continued traffic and gains in average selling prices. Moreover, new store rollout is even faster than expected with new store metrics exceeding expectations. This is phenomenal considering the weak economic environment, it is operating.

Total revenue increased 70.4 percent to $636.8 million for the third quarter. Retail net sales increased 66.8 percent, driven by a 41.4 percent increase in comparable store sales. Wholesale net sales increased 77.4 percent to $274.3 million, and licensing revenue increased 52.1 percent to $29.8 million.

The company opened 14 new retail stores in the region during the period. In Europe, comps rose 58 percent, and it were up 11 percent in Japan. Revenue edged up 67 percent, 112 percent and 103 percent in North America, Europe and Japan, respectively.

The Hong Kong-based company has cash and cash equivalents of $405.6 million and no debt.

Since launching his namesake brand 31 years ago, founder Michael Kors has featured distinctive designs, materials and craftsmanship with a jet-set aesthetic that combines stylish elegance and a sporty attitude. Kors' vision has taken the company from its beginnings as an American luxury sportswear house to global accessories, footwear and apparel company with a presence in 85 countries.

Over the years, the company has successfully expanded beyond apparel into accessories including handbags, small leather goods, eye wear, jewelry and watches and footwear, which together now account for the majority of our wholesale and retail sales. It generates about 60 percent of sales from the high-growth accessories category.

At Dec. 29, 2012, the company operated 297 retail stores, including concessions, compared to 231 retail stores, including concessions, at the end of the same prior-year period. Including licensed locations, there were 388 Michael Kors stores worldwide at the end of the third quarter of fiscal 2013. There is room to double the store base to 600 in the long-term.

On the valuation side, shares are not cheap as it trades 34 times its 2013 consensus earnings estimate and 20 times its EV/EBITDA. They have surged 171 percent since it began trading in December 2011 at $24 levels. But, such a premium is warranted given the company's high growth prospects, iconic brand, and solid fundamentals.

Currently, shares dropped 3 percent after founder Michael Kors said he planned to sell 3 million shares in the company as part of a secondary offering of 25 million shares. Kors' ownership in the company will fall to about 4.8 million shares, or 2.4 percent down from 3.9 percent after the sale.

However, the recent stake sale doesn't impact the company's growth potential, thereby creating a buying opportunity.



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