Michael Kors: Growth Is Dying, But KORS Stock Is Building a Value Case

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Michael Kors Holdings Ltd (NYSE:KORS) isn’t exactly the belle of the luxury ball right now.

korsKORS recently was hit by a Sterne Agee analyst downgrade, prompted by a double whammy of weakening mall traffic and building issues at a distribution center.

The result has been a 4% loss in KORS stock over the past few days, continuing a yearlong decline for the once-beloved retailer.

Pile that on top of an already clearly declining sales trend, and … well, you can safely end the momentum chapter in the Michael Kors story.

But maybe it’s time to write a new chapter: Michael Kors, Value Play.

Recent Ugliness Just Adds to Kors’ Problems

The aforementioned weakness in February just adds to Michael Kors’ sales woes — namely, that the company is projected to hit its fourth consecutive year of slowing sales growth in 2016. Investors Business Daily provides the skinny here:

“The once-hot fashion house’s January sales seemed solid, according to Sterne Agee, but ‘our store checks in February have unsurprisingly come in soft as weak mall traffic and unfavorable weather appear to have further slowed U.S. comp growth.’ Promotions were heavier, with more 50%+ markdowns present.”

Meanwhile, a warehouse that fulfills Michael Kors’ online orders was the victim of a roof collapse, which Sterne said could cause a “lengthy disruption to the nascent e-commerce operation.” Not exactly what you want to see at the same time you’re experiencing foot-traffic issues, and it’s certainly enough to blunt some more positive aspects of its e-commerce side. Namely, KORS brought e-commerce in-house in 2014,  resulted in a 73% boost to the company’s North American online sales.

The result? Sterne cut its earnings targets for Q4, all of fiscal 2015 and even fiscal 2016 … though the numbers weren’t too ugly. Q4 expectations went from 91 cents to 89 cents, fiscal 2015 estimates went from $4.30 to $4.27, and fiscal 2016 was downgraded from $4.75 to $4.62.

Still, it adds more downward pressure on a company that’s already staring at some troubling forecasts.

KORS grew revenues 67% in fiscal 2013 and 52% last year. It’s expected to turn out still-brisk 32% sales growth this year, but then that will decline even further, to just 17% next year, if the analysts are right.

In a bubble, things look pretty bad for Michael Kors.

The Best of a Bad Bunch?

The 35% decline in KORS stock off its 2014 peak is certainly justified, given that the go-go sales ramp has long ago waved bye-bye.

But if you look at Michael Kors’ rivals, you’ll see a couple things:

  • Kors is hardly the only luxury retailer struggling with growth right now.
  • While Kors’ growth story might be dying, a value story might be emerging.

Yes, KORS is only expecting 17% sales growth next year, but that starts to look awfully good when you consider Coach Inc (NYSE:COH) is expected to see just 2% growth, and Ralph Lauren Corp (NYSE:RL) is projecting just a 1% uptick in sales. Even looking a little outside KORS’ realm, Tiffany & Co. (NYSE:TIF) is estimated to grow earnings 4%.

Earnings are a similar picture. Analysts see KORS boosting earnings by 11%, vs. 6% growth for Coach and 7% for Tiffany & Co. Ralph Lauren? A 7% decline.

And in such a slow-growth environment for these luxury names, at least KORS stock is a relative bargain. Michael Kors shares are trading at just 13 times next year’s earnings vs. forward P/Es of 18, 19 and 20 for RL, TIF and COH, respectively. The price/earnings-to-growth ratios tell the same story. KORS trades at a PEG of 0.8, where 1 is considered to be fairly valued. TIF’s the cheapest of the bunch at 1.7, RL has a PEG of 2.4 and COH’s is a whopping 5.4.

And all of this isn’t to say that Kors is attractive simply because it’s cheap.

For instance, while problems with its Ohio warehouse will certainly cramp its online sales, e-commerce isn’t exactly dead. This year, KORS will launch a new e-commerce site in Canada. Next year, Europe and Japan are on the slate.

Also, there’s the issue of size. On one hand, KORS is expecting to grow its footprint from just more than 500 currently to 700 eventually. Store expansion typically is one of the easiest paths to growth — theoretically, if more people have access to your goods, your sales will improve.

The flip side? Brand tarnish. In the case of luxury, CTV News’ Angela Mulholland talked to a University of British Columbia luxury brand researcher, Annamma Joy, who found that, “For too many fashion lovers, Michael Kors’ bags have become annoyingly ubiquitous. And when a luxury item is everywhere, it begins to feel ordinary, Joy says.”

That’s not theory. Brand dilution woes are apparent — just look at KORS’ need to slash prices. But the company is plenty aware of its situation, planning to expand further into footwear and jewelry.

Bottom Line

Michael Kors is far from a clear-cut winner right now. It has numerous near-term problems that will take time to resolve, and the prolonged halt in momentum has shaken a lot of KORS stock holders off the tree.

But a value proposition is already becoming clear in Kors. And should the company be able to find a second wind by revitalizing its brand through merchandise outside of the handbag world, that’s a recipe for a potent resurgence.

Should you buy KORS stock this second? Probably not. Instead, wait until the recovery timeline for the Ohio warehouse becomes clearer, as well as any signs in earnings that Kors’ other offerings start to take hold. Any M&A in jewelry or footwear companies would be a promising signal, too.

Kyle Woodley is the Managing Editor of InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @KyleWoodley.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/michael-kors-holdings-ltd-kors-stock-value/.

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