Michael Kors (KORS) likes to refer to itself as the luxury brand for the jet set. But lately, the company has been mostly doing a nose dive. Consider that KORS stock is off an ugly 32% in just the past three months.
The company’s fiscal fourth-quarter results were mostly to blame for the drop. Sure, things looked fairly good on the surface as revenues increased by 17.8% to $1.1 billion and earnings grew by 15.4% to $183 million. However, serious problems were lurking underneath those results.
KORS saw a drop in comparable-store sales of 5.8% for the quarter, and the company’s guidance was weak. For Q1, the company is now forecasting revenues of $930 million to $950 million, below the Street estimate of $1.1 billion.
On a full-year basis, the outlook from KORS was still pretty dour. The company believes that its sales will be within the range of $4.7 billion to $4.8 billion, which is below the analysts’ consensus of $5.05 billion. KORS is also guiding for flat comparable-store sales.
Is the recent performance a sign that the company has lost its Midas touch? Or perhaps KORS stock could be a nice bargain right now?
The Good and Bad News for KORS Stock
As should be no surprise, KORS has been feeling the adverse impact of the currency fluctuations. Keep in mind that these effects have resulted in a less travel to the U.S. and yes, muted traffic for the company’s stores. There was also a disruption with supplies because of the delays of the strike at the West Coast ports.
Ultimately, Michael Kors has just had a really tough time keeping up the torrid growth. Remember, during the fiscal Q4 in 2014, comparable-store sales hit a heady 26.2%.
No doubt, many of these factors may end up being temporary. But of course, some investors on Wall Street think that there is something fundamentally wrong with KORS stock — that the brand may be getting overexposed. Let’s face it, the company has been aggressively expanding its store base, licensing activities and distribution deals. KORS has also been around since the early 1980s — there’s nothing particularly new about its brand.
Despite all this, it still looks like the worries are overblown. According to the Q4 earnings call, Michael Kors’ CEO noted continued strong growth with social media. For example, on a year-over-year basis, the number of followers increased by 22% for Facebook (FB), 46% for Twitter (TWTR) and 99% for Instagram.
Analysts are also recognizing the company’s potential. Bernstein Research analyst Anne-Charlotte Windal recently published a survey that indicated that Michael Kors scored the highest with purchase intent for handbags – along with Coach (COH). She also reiterated her “outperform” rating and a $66 price target on KORS stock.
So all in all, the growth opportunities still look promising, especially with international markets like Asia. Already KORS is making lots of headway in Japan, with Q4 revenues up 43% and same-store sales growth of 12%.
At the same time, KORS is in the early stages of its digital commerce efforts. Part of those efforts include online sales as well as in-store technologies, such as tablets.
Finally, the valuation of KORS stock is certainly attractive. After all, the forward price-to-earnings ratio is only 9! If anything, this is the kind of multiple you would see for a lumbering, mature company with little pricing power and market opportunities. But KORS continues to have a premium brand.
There are various catalysts that can get things back into gear, such as the digital strategy and moves into foreign markets. In other words, there’s a good chance that KORS stock can become fashionable again with investors.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
