Truth be told, the once awe-inspiring Michael Kors (KORS) has fallen from grace over, at least, the past year. As of this writing, KORS stock has shed nearly 44% of its value since the turn of the year.
One of the reasons for this unfavorable trend is the adoption of a discounting strategy by Kors to help clear backlogs – due to changes in consumer spending pattern.
Essentially, consumers now favor smaller and less costly fashion stuff. This has put pressure on earnings which have been declining since the start of the year.
Rundown on KORS Stock Earnings
Michael Kors was able to change the trend, albeit a little bit, in its fiscal 2016 second quarter, with the company reporting earnings of $1.01 a share, a 1% percent increase over the same prior-year quarter. Revenues also increased by 6.9% to $1.13 billion during the quarter.
In reality, though, the growth wasn’t driven by a change in consumer preference, with KORS admitting that the growth was driven by the new stores it opened, while also admitting that same-store sales decreased by 8.5% during the quarter.
So, not much has improved.
However, it must be said that a 44% decline in KORS stock price since the beginning of the year in reaction to a cumulative 61 cent decrease (in two quarters) from Kors’ EPS peak of $1.48 it reported at the end of 2014 is quite too much.
I believe KORS stock performance during its fiscal Q2 reminds us that the company has enough resources to bounce back. Specifically, its ability to grow sales and earnings by expanding its business despite consumer preference not improving shows that the company is in a good position to change its own fortune.
Michael Kors Has a Healthy Cash Position
On the surface, it would seem as if Kors is running out of cash, with cash and cash equivalents in a constant decline since the middle of 2014 (it now stands at $431.5 million).
However, looking down the balance sheets table, you’d notice that Kors still has over $1.6 billion in current assets. (For the record, current assets stands for cash and other assets that the company expects to convert into cash within a year.)
At first, it might not look like a lot of (potential) cash to have, especially when you consider that a competitor like Coach (COH) had over $2.35 billion in current assets at the end of its last quarter. However, with KORS owing no debt and COH stock having a debt-to-equity ratio of 0.36, you’d appreciate that KORS is doing a great job.
Moreover, we have to remember that the company has been aggressively repurchasing shares. It has most certainly tapped its cash position to make those repurchases. This even puts the company in a stronger cash position, as it could offer the stock again at a higher price to raise cash if need be.
What this means is that KORS stock can continue to expand its business — either through acquisitions, entering into new markets or new product offerings — all without worrying about debt. I believe the growth potential Kors has through its cash position hasn’t been factored into its stock price.
Perhaps, this is one of the things that David Einhorn of Greenlight Capital considered when he said KORS stock “has multiple avenues of continued growth, including its international business and footwear.”
In reality, we can only wait to see of the management makes good use of its good cash position. However, with over 44% decline in stock price this year alone, there’s certainly value in KORS stock and it is time for value investors to get into positions in this company.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
