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Michael Kors Holdings Ltd (KORS): The Best Growth Story in Retail

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Michael Kors Holdings Ltd (NYSE:KORS) has again delivered robust earnings and revenue growth that outpaced analyst expectations and the company’s own guidance. It does not come as a surprise, since the company has been very conservative in providing guidance, and on the other hand, very good at delivering above both its own expectations and analyst estimates. The growth is on track to continue in the future, with very high same store sales growth and further expansion in North America, Europe and Asia.

Michael Kors Holdings Ltd (NYSE:KORS)

Earnings highlights

Michael Kors Holdings Ltd (NYSE:KORS) reported fourth quarter earnings of $0.50, far above analyst estimates of $0.39, and 127% higher than year ago. Revenue grew 57% to $597 million, ahead of estimates for $546 million. Margins continued to expand. The company’s gross profit margin increased to 59.7% from 57.7% in the same period last year, and its operating margin rose to 26% from 20.2% in the fourth quarter of fiscal 2012.  In fiscal year 2013, earnings grew 129% to $1.97, while revenue increased 69% to $2.2 billion.

The company’s management gave uninspiring guidance, as was the case in previous earnings announcements. For fiscal year 2014, the company expects revenue in $2.65 billion to $2.75 billion range, a 22.7% increase over 2013 at mid-point of guidance. Earnings are expected in $0.46 to $0.48 range, a 24.3% increase over 2013. Analysts have caught the company’s conservative trends, and are projecting a 30% increase in earnings and a 29% rise in revenue. I find both estimates highly conservative, given the company’s prior history of underpromising and overdelivering. As an example, in the fourth quarter of fiscal year 2012, management’s guidance was for a 26.7% increase in earnings on a 34.6% rise in revenue, but in fiscal year 2013, the company delivered triple-digit earnings growth and double the expected revenue growth. Of course, the guidance kept increasing throughout the year, and the company kept delivering above expectations.

Michael Kors Holdings Ltd (NYSE:KORS) has strong momentum across all channels, and very high same store sales growth. North American same store sales increased 35% in the fourth quarter, as a result of increasing demand for its luxury brand, and the exceptional jet-set in-store experience. Europe saw an exceptional 63% growth in comparable store sales. The management believes that the company is ideally positioned within the global luxury lifestyle market, and expects further robust growth and continued advances in its long-term objectives.

Peer comparison

Kors trades at a premium compared to its peers, but the premium seems low when you compare its PEG ratio and expected growth rate to theirs. While Kors has grown earnings in triple digits and they are expected to grow 30% this year, Ralph Lauren Corp (NYSE:RL) and Coach, Inc. (NYSE:COH) are growing their earnings in the low single digits and in the mid-teens at best, and Kors has the lowest PEG ratio.

Coach, Inc. (NYSE:COH) is Kors’ closest competitor, but it has not managed to come close to Kors as far as growth is concerned. Therefore, Coach’s share price has suffered and is still far from early 2012 levels. Ralph Lauren Corp (NYSE:RL) also has a lower P/E ratio, but its growth levels are quite lower. Nonetheless, its share price is near 52-week highs, and in much better shape than Coach. Kors is very well-positioned to continue to deliver growth that will be much higher than that of its competitors, and the P/E premium is more than justified. Given the very conservative company guidance, the growth will probably exceed expectations in a major way.

Company Trailing P/E Forward P/E PEG EPS growth 2013 EPS growth 2014
KORS 36.82 19.69 0.85 129.00% 30.00%
COH 15.75 14.11 1.32 5.70% 10.70%
RL 21.89 17.47 1.80 8.70% 13.30%

Source for data: Yahoo! Finance as of May 31

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