While ready-to-wear is a surprise growth point for the company, it’s also focusing on European expansion. The company has had a good response in Europe among vacationers from all over the world, and the locals seem interested, too. European stores managed a 58% comparable-sales increase last quarter, and between retail and wholesale, European revenue increased 112%. That market is going to continue to be a hot one for Kors, and the vacationer traffic should provide the company with an inroad to some of those markets that it doesn’t have stores in yet. Watch for that comp rate to increase over this year.
This past year European revenue accounted for 9% of total revenue, which is a 2-percentage-point increase from the same quarter last year. While the company doesn’t have a public target, I’d be surprised if Europe didn’t account for close to 15% of total revenue by this time next year. It’s the company’s fastest-growing region.
If it can manage to pull in additional traffic from ready-to-wear and the new stores, then it should have no problem beating its internal comp sales target again. For the second quarter in a row, management predicted mid-20% comp sales growth in the coming quarter. While that would still be leagues ahead of Coach and Tiffany — which were flat and down slightly, respectively, in the U.S. last quarter — it would be a dramatic drop from 40% growth. Right now one of my biggest fears is that management’s estimates are so pessimistic that they’re becoming meaningless. At some point this year I’d like to see them be in the right ballpark for estimated growth.
Finally, look for Kors to start pushing on its celebrity status to gain customers from Coach and other handbag makers. In Wednesday’s New York Fashion Week presentation, Kors presented to a star-studded crowd. As those celebrities start to pick up more and more Kors pieces — Michelle Obama wore Kors to the inauguration this year — it’s only going to increase its status as an aspirational brand.
The bottom line
Kors continues to be a difficult stock to read, as evidenced by its recent surprise. In part, it’s flying higher than anyone expected and in part it’s having a hard time making internal predictions work. That means that forecasting success is getting more difficult. I like what the company is doing with its branding and I like the rapid expansion it’s undertaking while the brand is hot. Having said that, a P/E of 36 is well above the retail average and companies like Coach can be had for less than 15 right now. It’s difficult to bite the bullet and just buy. I’ll certainly keep watching, though. This is a fun company if nothing else.
The article Urgent: Michael Kors Earnings Update and What to Watch originally appeared on Fool.com and is written by Andrew Marder.
Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach.
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