Michael Kors (KORS) just can’t seem to catch a break. Despite crushing fiscal first-quarter 2015 revenue and earnings estimates this morning, KORS stock is in freefall, down by about 7% at midday.
- KORS earnings 91 cents per share on revenue of $919.2 million, far exceeding analyst consensus expectations of 81 cents per share and $851.66 million, respectively.
- Total revenues were up 43.4%, and same-store sales jumped by fully 24.2%.
- Gross margins increased slightly from 62% to 62.2%.
- KORS continued to poach market share from aspirational rival Coach (COH).
Overseas, the numbers were even better. Per the press release:
“In Europe, we were extremely pleased with our revenue growth of 128%, which was driven by a comparable store sales increase of 54.2%, as well as strength in our wholesale business. Lastly, revenue in Japan increased 89%, driven by comparable store sales growth of 48.8%.”
By an objective measure, KORS had a fantastic quarter. So … why the selloff in KORS stock?
Wall Street appears to be worried that KORS has grown too far too fast in North America, and that markdowns and margin compression are going to accelerate as a result.
We saw the same concerns crop up last quarter. Then, as now, KORS soundly beat analyst estimates and still saw its stock price collapse.
What’s Wrong With KORS Stock?
Let me give it to you straight: The collapse in KORS stock has nothing to do with operating performance, which is still fantastic, and everything to do with valuation. After the last earnings release, I wrote:
“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.”
In the two months that have passed since that article, not much has changed. KORS stock still is very pricey at five times sales, and this is after a 12% drop in price since that last article was published.
Michael Kors is a fine company, but KORS stock is case study in what happens when a former momentum darling falls out of fashion. Not even handily beating earnings estimates is enough once sentiment shifts.
So, where do we go from here?
KORS is in that unfortunate limbo that many high-growth dynamos eventually find themselves in: It has fallen out of favor as a momentum stock, but it is still too expensive to be a value stock.
Given Michael Kors’ fantastic sales growth rates, KORS stock should trade at a premium to slower-growing rivals such as Coach or LVMH (LVMUY). At around 3 times sales, I would consider KORS stock an absolute steal.
Even at current levels, I would not be surprised to see a few bargain hunters fishing around.
But I wouldn’t advise trying to catch that falling knife just yet. Be patient, and I expect you’ll get a better buying opportunity in the months ahead.
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.