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Michael Kors: Cheap, But Limited Upside

  • KORS recently announced a blowout quarter.
  • Global unit expansion can drive sales, but the waning popularity of the KORS brand serves as a ceiling to potential upside.
  • We believe the stock has some runway for growth here, but believe it is close to fair value at $44.

Luxury product giant Michael Kors (NYSE:KORS) recently announced blowout Q1 Fy16 results versus estimates. We were surprised by the numbers, so we decided to reevaluate the stock price based off of a more bullish sentiment reflected in the results.

Q1 Fy16 revenues came in at $986 million, up 7.3% YoY. This was driven by the opening of 107 new retail stores since Q1 Fy15. The company experienced better-than-expected top- and bottom-line growth across the North American, European, and Asian regions, but this growth is driven by unit growth and not comps growth. KORS opened 53 North American stores in the trailing twelve-month period, which equated to roughly 2% constant-currency revenue growth. In other words, 17% unit growth translated to 2% revenue growth in constant currency. We are strongly deterred by this statistic.

Moreover, KORS increased its European store count by 42% YoY, which translated to constant-currency sales growth of 42%. In Europe, we see that comps appeared to be flat, which is a bearish indicator for a company that is still strongly expanding in this market and relying on strong same-store growth.

In Japan, 30% YoY store count growth translated to 57% sales growth. These are the types of numbers we would like to see in Europe. Japan currently only accounts for 4% of total sales, so we believe the Japan tailwinds do not offset intrinsic European and North American headwinds.

Accessories and footwear segments performed very well in retail and wholesale. Looking forward, CEO John Idol stated that the company "will continue to execute on our multiple growth initiatives including global expansion of our digital flagships, growing our international presence and building upon our core categories as well as further developing our men's, women's and footwear businesses."