Fossil Inc (FOSL), Ralph Lauren Corp (RL), Michael Kors Holdings Ltd (KORS): Massive Growth Is Always in Fashion

To say that Michael Kors Holdings Ltd (NYSE:KORS) has been an impressive growth story is an understatement. The company’s growth has been nothing short of meteoric. In the current quarter, the company proved doubters wrong again reporting huge growth across the board. To me the only question left is, how long can this continue?

Michael Kors Holdings Ltd (KORS)All Retailers Are Not Created Equal
I’ve read many articles that put Michael Kors and other high-end retailers in the same category as companies like The Gap, Kohl’s, and other well established companies. The usual assumption is, Michael Kors can’t keep growing at this pace, and when the slowdown comes, investors will rue the day they bought the stock.

There are two huge problems with this theory. First, Michael Kors Holdings Ltd (NYSE:KORS) can keep growing, as the vast majority of their sales are in North America. Second, this company isn’t trying to win the same customers as The Gap or Sears.

Let’s face it, if a customer spends $250 or more on a wristwatch, they aren’t worried about watching (pardon the pun) their pennies. Higher-end retailers seek a more affluent customer that isn’t as affected by the economy. Michael Kors customers aren’t coming to the company to buy one watch as a special item. Instead they are looking at multiple watches, a handbag, clothes, and other items. Paying $95 for a pair of shorts, or $145 for a shirt, is considered a normal expense and not outrageous.

Growth Like I’ve Never Seen
To suggest that Michael Kors Holdings Ltd (NYSE:KORS) can’t keep growing just doesn’t make sense. The company’s North American division makes up 90% of revenue, and sales were up 75%. In the Europe division, sales were up 112%, and this only represented 9% of revenues. The entire rest of the world, represented just 1% of revenue. With just 10% of sales internationally, any talk about slowing growth is very premature.

When you consider that same-store sales in North America were up an astounding 41%, and European same-store sales jumped 58%, clearly the company has its finger on the pulse of high-end fashion. In addition, Michael Kors is forecasting a jump to over $2 billion in sales for 2013, on the back of at least 20% same-store sales growth.

No One Can Beat Them, Is A Merger Possible?
When a company is growing this fast, I can’t help but wonder if another company might try to buy them out to benefit from their future growth? There are several companies that Michael Kors either competes with, or licenses their items to.

There is actually the potential for Michael Kors Holdings Ltd (NYSE:KORS) to be the acquirer. The company’s over $11 billion market cap could allow them to acquire watch manufacturer Fossil Inc (NASDAQ:FOSL) to vertically integrate their business. Fossil Inc (NASDAQ:FOSL)licenses the Michael Kors watch line, and has a $6.23 billion market cap, so a stock for stock deal would be possible.

The challenge of course is, Fossil Inc (NASDAQ:FOSL) is expected to grow earnings by a relatively pedestrian 16.6%. Compared to Michael Kors Holdings Ltd (NYSE:KORS) expected EPS growth rate of over 32%, the combined company would have to realize significant cost synergies. Without merger savings, Fossil Inc (NASDAQ:FOSL)’s 21.61% operating margin would bring down Michael Kors’ operating margin of 32.2%.

On the flip side, companies like Ralph Lauren Corp (NYSE:RL) or PVH Corp (NYSE:PVH) could see Michael Kors as an attractive way to significantly increase their growth rates.

PVH already licenses other Michael Kors Holdings Ltd (NYSE:KORS) lines. However, the company is sitting on $1.37 billion in net debt, so a debt financed deal would only add another challenge. PVH’s market cap of $8.33 billion would make a stock for stock merger problematic. However, it’s hard to ignore that the Michael Kors’ brand would go fairly well with the company’s existing Calvin Klein and Tommy Hilfiger brands. If PVH management decided this was the right move, I’m sure the company would be willing to take on more debt financing to acquire this fast growing, high margin brand.

Of Michael Kors’ competitors, Ralph Lauren Corp (NYSE:RL) seems like the most natural fit. The company’s market cap of $15.54 billion means they are large enough to do a stock for stock deal. If the company didn’t want to do all stock, their $1.3 billion in net cash would certainly help. Ralph Lauren Corp (NYSE:RL) already has a watch and accessories line of its own, and pulling Michael Kors Holdings Ltd (NYSE:KORS) into the fold would only broaden the company’s appeal. With analysts calling for 13.67% EPS growth from Ralph Lauren Corp (NYSE:RL), Michael Kors’ 32% EPS growth would certainly increase this number.

If an acquisition occurs, Michael Kors Holdings Ltd (NYSE:KORS)’s stock would likely jump on the news, and investors would be excited. However, with huge growth and huge margins, maybe investors should hope that no other company comes poking around. With the stock trading for about 31 times 2013 projections, it doesn’t seem that expensive considering the company’s growth rate. If you look at analysts’ projections for 2014, the P/E drops even further to about 23.

For a company growing this fast, paying 30 times this year’s earnings or 23 times next year’s earnings, sounds like a very good deal. Consider adding KORS to your personalized Watchlist to keep up with this dynamic company.

The article Massive Growth Is Always in Fashion originally appeared on and is written by Chad Henage.

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