It’s been a great month for Michael Kors Holdings Ltd (KORS) announcing surprisingly strong earnings Feb. 2, following it up with a 35% bump in KORS stock through Feb. 23.
Investors once again are flocking to the high-end retailer. The million-dollar question is whether that’s going to last.
One need only look to its online business for the answer. Omnichannel might be an overused industry buzzword but that doesn’t make it any less important to the future success of brick-and-mortar retailers across the country.
Michael Kors Stock: The Last Frontier
Macy’s (M), criticized by Jeff Macke in a recent iBankCoin blog for not spending enough to keep its stores looking pretty, has spent a small ransom building its e-commerce business; now it’s reaping the rewards of investing in the online side of its business.
Michael Kors certainly has Macy’s to aspire to. EMarketer puts Macy’s fourth amongst U.S. retailers in terms of digital sales, with $4.7 billion, or 17% of its overall revenue generated in the most recent 12-month period where data is available. Only Nordstrom (JWN) does better amongst its department store peers.
It’s important to remember that the company only took over its e-commerce business in 2014. Before that, it was operated by Neiman Marcus. You have to walk before you can run.
North American customers have become very adept at shopping online and that has meant its digital business is going great, generating double-digit growth in the latest quarter year-over-year.
In its Q3 2016 conference call, CFO Joseph Parsons indicated that U.S. digital flagship sales accounted for 360 basis points of the company’s overall comps on a constant currency basis. With retail comps up 2% on a constant currency basis for the quarter, it’s easy to see why an omnichannel strategy makes sense for KORS and every other retailer with significant brick-and-mortar footprints.
How big a contribution can e-commerce be to the top- and bottom-lines? Huge, but that doesn’t mean it’s going to forget about its retail stores anytime soon. As Michael Kors CEO John Idol said during the Q3 conference call:
“We also believe that while e-commerce one day will end up being 20% or 30% of our business, it’s not going to be 100% … e-commerce generates a lower operating profit for us than four-wall brick-and-mortar. We think over time, that will reverse itself… we’re about halfway through our investment to have our entire network built out in terms of global e-commerce.”
Add to this the fact it hasn’t made a dent outside North America when it comes to e-commerce and you’re talking about significant upside for Michael Kors stock.
“We are on track to launch in six European countries this fall and an additional 16 countries in Europe thereafter,” Idol said. “Our digital flagship strategy is enabling us to engage consumers with our luxury lifestyle brand and provide a best-in-class shopping experience.”
Bottom Line on KORS Stock
InvestorPlace contributor James Brumley discussed the KORS turnaround earlier, suggesting that it had found the right formula for the consumer’s current spending habits, something that’s not easy to do. While not sold on Michael Kors stock he was willing to concede that it at least deserves to be on investors’ radar.
For me it’s all about the additional profits to flow from a business that recognizes the importance of an omnichannel retail strategy: Think Williams-Sonoma (WSM), which has generated enormous profits over the years leaning on its e-commerce business.
Its current valuation does not, in my opinion, reflect a future income statement blessed with higher operating margins — margins that are already pretty darn good.
KORS stock is currently sitting on a three-year total annualized loss of 2.5% through Feb. 23, 13 percentage points worse than the S&P 500. Not only that, but it’s 45% off its five-year high of $101.04.
Will it get to $100 in the next 12 to 24 months? I don’t know. What I do know is that its online business is not going to be the reason why it doesn’t.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
