Wedbush and Piper Jaffray are going back and forth, each with different opinions on Michael Kors Holding Ltd (KORS) just 24 hours before KORS stock reports earnings.
It’s an odd move for research firms, to make bull and bear calls so close to the report of a largely volatile stock like KORS. However, the reasoning for such confidence of behalf of both firms is well warranted, and ironically, both firms are probably right.
Jaffray’s call is very simple: Expectations for Michael Kors’s earnings have been reduced; KORS stock has fallen unjustly in response to sector-wide weakness; and the stock is very cheap at just 9x forward EPS. For these reasons, Jaffray is reiterating its “overweight” rating and a $67 price target, upside of about 60%.
Meanwhile, Wedbush is looking more to in-house research and channel checks to drive its price target cut from $52 to now $43. Notably, Wedbush’s price target is still slightly higher than where KORS stock is trading at right now.
Wedbush takes notice that luxury retailer Nordstrom, Inc. (JWN) is pulling Michael Kors handbags from the shelf due to weak demand, and that retailers who are keeping Michael Kors in store are having to discount products upwards of 40%.
Why Both May Be Right About KORS Stock
With that said, I would not be shocked if Wedbush’s surprising revelation about Michael Kors is right. Fact is that both Macy’s, Inc. (M) and Nordstrom have suffered over the last year with stock losses of about 50%, and are likely spinning to find some solution to drive consumers back into their stores.
Given that the KORS brand stole significant shelf space from the likes of Coach Inc (COH) over the last several years, investors should not be surprised if the struggling retailers who stock Michael Kors products are trying to rebalance. After all, everyone knows that the days of double-digit same-store sales growth in the U.S. are long gone for Michael Kors.
Yet, the big question investors must ask is whether this potential reality and action on behalf of two key retailers makes KORS stock a bad investment.
I don’t think so.
If we look back to Michael Kors’s last quarter, where it beat expectations and KORS stock surged double digits behind a 6.3% increase in total revenue to $1.4 billion, the company never mentioned North American brick-and-mortar as an area of strength. In fact, KORS specifically noted that e-commerce sales was the primary driver of retail net sales that increased 11.1% to $766.2 million.
Furthermore, even with strong e-commerce sales, total revenue in the Americas only increased 0.4% to $1.06 billion. It was European revenue growth of 14.3% and Japanese revenue growth of 59.1% that drove growth for Michael Kors.
Therefore, one could conclude that brick-and-mortar retailers like Macy’s and Nordstrom are becoming less and less important to Michael Kors, and that KORS stock is more connected to e-commerce and emerging markets.
Wedbush Is Probably Right, But I Doubt It Matters
The reasons can be found in what Piper Jaffray said, noting that KORS stock is cheap and has mostly fallen victim to the performance of its retail sector as a cause for its 27% stock loss during the last three months.
While it is impossible to know how KORS stock will respond when the company reports earnings tomorrow, I think we can all agree that e-commerce, Europe and Japan will be most important short-term for Michael Kors, and that KORS stock is cheap at 9x forward earnings. Therefore, KORS stock should outperform long-term.
As of this writing, Brian Nichols does not own any of the aforementioned securities, but may initiate a long position in KORS stock in the next 72 hours.
