Months before Facebook (NASDAQ:FB) practically ran the IPO market dry, Michael Kors (NYSE:KORS) made a big splash. And as Facebook continues to get worse and worse, Kors — which had gained 15% Tuesday after sewing up another fantastic quarterly report — only seems to be getting better.
A quick recap: Q1 earnings tripled to $68.6 million, or 34 cents per share, beating analyst estimates of 20 cents per share. Revenue grew more than 70%, also blowing away estimates. Same-store sales increased 38%, and the company boosted its earnings forecast.
Whew! After results like these, or last quarter’s report, is it any wonder the company has now more than doubled its IPO price of $20?
Of course, success is a double-edged sword: Now KORS has to keep it up.
Consider the case of Lululemon (NASDAQ:LULU) — a fellow luxury retailer, although one with a very different product line — a few months back.
LULU, a fast-growth company best known for its yoga pants and athletic wear, posted mammoth numbers in early June. Earnings jumped 40%, revenue jumped 56% and same-store sales jumped 25%. The stock moved about the same amount as KORS on the news — but in the opposite direction.
Why? Investors saw growth, but not fast-enough growth to warrant its hefty 50 price-to-earnings ratio. Worse yet — the company reported that same-store sales growth was expected to slow to low double digits, and LULU’s full-year profit outlook was 3 cents lower than the analyst forecast. Investors quickly bailed.
That brings us back to Michael Kors and its own onerous valuation.
A trailing P/E around 70, as well as a more “modest” forward valuation in the mid-30s, dwarf just about everyone else in the high-end retail game, and obviously hinge on the hope that KORS can keep up the growth.
The 30-year-old company that has been public for less than a year is attempting to pull off a “brandsformation,” as analyst Omar Saad told Bloomberg. The plan is to create must-have apparel and transform Kors into an authentic luxury lifestyle brand with a global reach — a very ambitious goal.
The company has indeed been off to a good start. In the last quarter, it greatly expanded its distribution with additions like in-store shops, company-owned retail locations and licensing deals. It already has stores in Europe and the U.S. — where it saw 24% and 38% same-store growth respectively — and also launched stores in Japan over the last year.
And thinks look good down the road. KORS raised full-year earnings guidance (which in itself is more than most can say) from $1.08-$1.12 per share to $1.32-$1.34 per share, and boosted revenue forecasts from an originally expected $1.7 billion-$1.8 billion to $1.8 billion-$1.9 billion. So there’s little reason to think that Michael Kors can’t keep achieving breakneck growth.
But that lofty premium means KORS has to keep achieving breakneck growth — better-than-average growth just won’t cut it.
Something else to keep in mind about today’s run: Michael Kors might have gotten an additional boost from reporting earnings the same day it was learned retail sales increased for the first time in four months. LULU didn’t have that luxury — a great amount of market uncertainty and fear of a downturn loomed over its report.
None of that’s to say that KORS is dead in the water. It should grow, and its stock should appreciate more down the road. But in the short-term, KORS might have gotten ahead of itself, and future earnings reports will be meticulously scanned for perfection. The slightest hint of anything else could lead to the same kind of selloff that Lululemon saw a few months back.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.