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Michael Kors vs. Fossil: Which Is the Better Post-Earnings Buy?

Both stocks jumped Tuesday after posting impressive growth


While the bulk of retail earnings will come during the next few weeks, two specialty retailers kicked things off a little early today.

Before the bell, Michael Kors (KORS) and Fossil (FOSL) both released numbers for the most recent quarter, and these two were sizzling. In fact, the earnings results were good enough for FOSL and KORS to open up 15% and 4%, respectively.

Now that the cheerleading is out of the way, let’s take a closer look into each company’s report and see whether one of these two hot retail stocks has an investment edge over the other.

Earnings beats from Michael Kors are almost starting to become old hat. The company has topped sales and earnings estimates every quarter since coming public — part of the reason that shares have more than tripled since their late 2011 debut.

The most recent quarter — Kors’ fiscal 2014 Q1 — was no exception. Take a look:

  • KORS handily beat the high bar set by analysts, thanks to eye-popping earnings growth of 82% — good for earnings per share of 61 cents — on a 55% gain in revenue.
  • Same-store sales improved 27% in the quarter and 75 new stores were added — around 17% of its current total.
  • Sales in Europe grew 144% thanks in part to same-store sales growth of 56%.
  • The low end of the company’s full-year earnings range topped analysts’ range by a dime, while the revenue estimate was right on track.

Fossil’s numbers weren’t anything to sneeze at, either. A quick rundown:

  • The company posted a record $706 million in sales — an 11% year-over-year gain and better than the $691 million analysts were expecting. The bulk of the growth came thanks to double-digit improvement in watches.
  • That translated to record earnings too, as the company pocketed $1.15 per share — a 25% increase from last year.
  • Net sales grew in all segments, with Europe’s 15% increase leading the way.
  • Fossil also raised its full-year EPS guidance, expecting $6.15 to $6.35 vs. a previous range of $6 to $6.26.

If you looked at each report in a bubble, it’s clear Kors is posting more impressive growth. But that’s to be expected considering the different stages and brands behind each name.

While both are relatively high-end, Michael Kors is the newer kid on the block, and boasts a more runway feel, on par with Coach (COH) — coming off a not-so-hot report — or Tiffany (TIF). That’s good news right now, as Kors is the name in fashion. But it might not be a good thing down the road, when its hot streak eventually cools off.

Meanwhile, Fossil has been around and popular far longer than Michael Kors. That makes it a promising sign that its brand continues to be desired, and that growth is still strong. But it also means less room to grow.

Just consider the laundry list of growth drivers Investor’s Business Daily mentioned heading into KORS’ report:

“Kors is aggressively expanding its store base and converting wholesale locations into ‘shop-in-shops,’ which results in a big lift in productivity. And it’s seeing continued growth in brand awareness and product category extensions.”

Fossil, on the other hand, posted flat same-store sales, has less room to expand its store base, is already present in a variety of department stores and other retailers — did I mention it sells its product not just in standalone stores, but in retailers ranging from Walmart (WMT) to Nordstrom (JWN)? — and arguably has less upside in terms of brand awareness as a result.

That makes its earnings growth and beat more impressive — as seen by the stock’s double-digit jump vs. KORS’s slighter move higher.

But it also makes the new, steeper FOSL price tag harder to swallow.

At more than $122 per share, Fossil is trading for almost 18 times predicted 2014 earnings, while its five-year annual growth is slated at a mere 14%. Kors’ discrepancy falls in the other direction; sure, it now trades for a frothier 22 times forward earnings, but its slated to improve earnings by 29% per year over the next half-decade.

With that in mind, the nod has to go to Kors. The brand is hot. And while the stock’s subsequent momentum likely won’t last forever, it hasn’t showed any signs of slowing down just yet. Kors is still the name in fashion at the moment, which has sent more and more consumers clamoring after its products, and more and more investors clamoring for its stock.

As Michael Kors continues to expand its store count, grow its same-store sales and improve efficiency — all while the stock makes higher highs and higher lows — there’s plenty of reason to think KORS’ run is far from over.

Meanwhile, if you want to bet on Fossil’s steadier brand and impressive watch portfolio, that’s not a terrible strategy … but now simply isn’t the time to get in.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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