In its relatively short life in the financial markets, Michael Kors Holdings Ltd. (KORS) has become one of the most enigmatic names on Wall Street.
For the first half of its existence as a publicly traded asset, KORS stock was the toast of the town thanks to its explosive sales growth. In just a year after its initial public offering on Dec. 15, 2011, KORS stock more than doubled in value, prompting generous praise by leading investment analysts for company founder and fashion icon Michael Kors.
If only the second half of the act was just as buoyant!
After reaching an all-time closing high of $99.84 on Feb. 25, 2014, KORS stock has since lost more than 61% of its valuation, with most of the bearishness culminating only recently.
Year-to-date, Michael Kors shares have shed 49% in the markets as a chronically strong dollar and global economic weakness contributed to a deceleration in revenue growth, particularly for the fourth quarter of fiscal year 2015 when the retailer was forced to cut next year’s guidance. Following the announcement, KORS stock was veritably crushed, closing down 24%.
Has KORS Stock Become a Bargain?
Understandably, some risk-tolerant traders have been eyeballing the freefall in KORS for quite some time, but contrarians beware — Michael Kors is a bargain only on paper. Any notion that currently depressed share prices reflect a hidden, undervalued opportunity evaporate quickly under fundamental analysis.
The most obvious indicator is KORS’ annual revenue trends. Between fiscal year 2011 and FY2014, sales growth averaged a whopping 60%! However, between FY2014 and FY2015, that velocity was nearly halved at 32%.
Additionally, both cost of goods and operating expenses outpaced revenue in the same time frame, averaging 34%.
Still, contrarians may argue that net income results are overwhelmingly positive and earnings performances outside of the fourth-quarter FY2015 blip are consistently robust.
While this is undoubtedly true, KORS stock is losing support in the markets based on some of the finer details.
The number of days inventory was held at Michael Kors store locations have been significantly rising on a year-over-year basis since Q1 FY2015, averaging an 8% increase.
Further pressuring matters is that the inventory turnover ratio has declined by a similar magnitude, down an average of 7%. The bearish implications behind these numbers perfectly align with KORS management’s bemoaning of reduced traffic and oversaturation of its brand name.
Sadly, there doesn’t seem to be much indication that the aforementioned statistics will get better any time soon.
Wall Street already has dim expectations for KORS stock’s upcoming Q2 FY2016 earnings report, scheduled for release on Wednesday. Consensus estimate for Michael Kors earnings per share is 89 cents — the same EPS target from a year ago. Given recent sales trends, Q2 revenue could come in around $1.14 billion, or a 15% year-over-year improvement.
While this may sound like a large bump-up, KORS is on pace to hit just under $4.9 billion in revenue for FY2016 — a comparatively small 12% increase over the prior year.
In fact, total sales would have to be close to $6 billion for the growth rate to impress KORS stock’s early bird investors. Thus, market professionals are abandoning Michael Kors not on the basis of its fundamentals — which is solid, especially in its strength of balance sheet — but on the fact that it can no longer provide the crazy returns it once did.
Bottom Line
Technically, KORS stock finds itself stranded in the markets.
After severely gapping down following the Q4 FY2015 disaster, KORS has been trading in a fairly narrow consolidation range between $45 at the high and $38 at the low. There’s not much support at these levels and a particularly poor earnings report could send investors scrambling again for the exits.
Either way, the demonstrated volatility in recent sessions is liable to give most investors’ seasickness.
It’s a shame that an otherwise stable and debt-free company like Michael Kors has to endure such deep-seated troubles.
However, there’s little point in arguing with the markets — the downside risk for KORS stock is too great to be ignored.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
