Michael Kors Holdings Ltd (KORS), Coach, Inc. (COH), Ralph Lauren Corp (RL): Big Growth Potential Ahead for This Fashion Company

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Fashion is a volatile and dynamic business, but at the same time it can be enormously profitable when it comes to well run companies positioned on the right side of the trend. Michael Kors Holdings Ltd (NYSE:KORS) is in fashion right now, and the company is well positioned to continue growing for years to come.

A quality company

Michael Kors Holdings Ltd (NYSE:KORS) is a high-end fashion company selling handbags, shoes, watches, jewelry and accessories through three different channels: retail stores, wholesale and licensing agreements.

Michael Kors Holdings Ltd (NYSE:KORS)

Kors is an aspirational brand:famous movie stars walking the red carpet or the first lady herself in the White House have been seen in the media wearing the products. This is probably the best kind of free advertising the company can hope for, but Michael Kors Holdings Ltd (NYSE:KORS) also offers flexibility and a wide variety of price ranges in order to cater to different kinds of clients.

The company is firing on all cylinders with sales increasing 67.4% annually in the last three years and earnings per share rising by more than 107.5% per year over the same period. Profitability is remarkably high compared to industry averages; Michael Kors Holdings Ltd (NYSE:KORS) has a gross margin above 60% and an operating margin in the area of 30% of revenue.

Strong performance in a tough environment

Kors delivered outstanding financial results in the last quarter. Total revenue increased 54.5% to $640.9 million and performance was strong across the different segments. Retail sales increased 51.5% to $325.7 million driven by a 27.3% increase in comparable-store sales and 75 net new store openings. Wholesale net sales increased by 59.3% to $290.6 million and licensing revenue grew 40.7% to $24.6 million for the quarter.

Competitors have not been doing so well over the last quarters, and this makes the company’s results even more impressive. Notably Coach, Inc. (NYSE:COH), one of its closest competitors, is having trouble when it comes to sustaining the growth rates it has delivered in previous years.

Coach, Inc. (NYSE:COH) reported a decline of 1.7% in comparable store sales in North America for the last quarter. Disappointing North American sales have been a recurrent problem for Coach for some time now, as the company is clearly feeling pressure and losing market share to Michael Kors Holdings Ltd (NYSE:KORS).

Another high-end fashion company disappointing investors during the last quarter was Ralph Lauren Corp (NYSE:RL), which reported a decline of 1% in consolidated comparable store sales for the quarter.  The company reaffirmed its guidance for the rest of fiscal 2014 with an expected increase of between 4% and 7% in consolidated net revenue, but management characterized the current global environment as “uneven.”

Vera Bradley, Inc. (NASDAQ:VRA), which sells more affordable handbags and accessories is trading near its lows for the year as the company reported disappointing results on Monday: Total sales were up by 1.9% in the last quarter, but same-store revenue fell 3.7%. Management attributed the weakness to a soft consumer environment, and forward-looking guidance was also below analysts’ expectations.

The current environment has been quite challenging for fashion retailers, but Michael Kors seems to be the exception to the rule, and this makes the company´s financial performance particularly remarkable.

Opportunities and risks

Kors has plenty of room for expansion, both in the U.S. and abroad. The company opened 75 net new stores in the last year, 24 of which were opened during the last quarter. The company ended the quarter with 328 company-owned global retail stores and 442 stores including licensed locations.

Management is planning to open 50 new stores during this year in North America, and believes there is potential for 400 locations in the region. When it comes to international markets, the opportunity is still practically untapped; Kors opened its first stores in Brazil and in India during the last quarter.

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