Michael Kors (KORS) knocked the ball out of the park again this quarter. Revenues were up 53.6% over the previous year and same-store sales increased by 26.2%. Earnings per share were up by a whopping 56%. For Kors’ fiscal year 2014 — which ended March 29 — earnings per share were up by an even more impressive 63.5%.
Michael Kors is first and foremost an American brand — more than 80% of its revenues are from North America — but sales are growing at an absolutely blistering pace in Europe. European revenue grew 125% in the fourth quarter, and same-store sales were up by 62.7%.
All of these results beat expectations … and yet Kors stock was actually down in early trading, yesterday. And it’s sinking again, today.
What gives? What’s not to like here?
To start, rapid growth creates certain problems that make investors wary. They are high-quality problems, mind you … but problems nonetheless.
Gross margins fell ever so slightly from the previous year (59.9% vs. 60.1%). Kors’ retail operating margins fell 6.7% due to paying higher rent costs for stores that aren’t open yet or that have only been open for a short time. Add to this an uptick in inventories, and you had a recipe for investor skepticism. Flat-lining margins and an inventory build are a recipe for deep discounting.
But the biggest worry for KORS stock? Valuation. Kors is not cheap by any measure, trading at 33 times trailing earnings, 21 times forward earnings and nearly 7 times sales. As a point of comparison, rival Coach (COH) trades for 12 times trailing earnings, 14 times forward earnings and just 2 times sales.
I know, I know. Coach is struggling and losing market share at the moment. I get that. But what about LVMH Moet Hennessy Louis Vuitton SA (LVMUY), the premier global luxury conglomerate? It trades for 21 times trailing earnings, 18 times forward earnings, and a very Coach-like 2 times sales.
Of course, a high valuation is completely reasonable for a high growth company, and let’s not forget that Michael Kors is more than doubling its annual revenues every two years. Fashion is fickle — just ask Coach about that — but the Kors brand still appears to be gaining momentum.
What’s the story here? First, Michael Kors is in the right market at the right time. The U.S. economy is further along the road to recovery than Europe and most emerging markets. High concentration in the North American market — and distinctly low concentration in Asia and emerging markets — would normally be something I would consider a negative. But for Kors, it has been a case of being at the right place at the right time.
Cost is also a factor. Michael Kors is an aspirational brand that most middle class women can afford to buy, at least in moderation. Its lower price point also makes it attainable for Millennial women starting their careers. And because Kors is still a relatively new brand, the market hasn’t been flooded with fakes … not yet, anyway.
Will Kors’ day in the sun last forever? No, of course not. And 50% annual revenue growth is certainly not sustainable over the long haul. But right now, the Michael Kors brand has momentum, and I expect it to last for at least another couple years. I’d recommend buying KORS stock on any dips.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.