It has been reported by ShopperTrak that retail traffic to U.S. stores has declined in 8 out of the last 10 weeks, and a heat wave in the Midwest has also had an effect, making the overall trend for the back-to-school season and holiday season looks weak.
However, there are a few on-trend firms bucking this decline, such as Michael Kors Holdings Ltd (KORS), who is still firing on all cylinders. Whilst many other retailers are missing their comparable same-store sales, lowering guidance, and generally blaming the weather for poor sales and profit, this global brand, KORS, is certainly hitting its growth stride, which leads to the action required to apply an options call to benefit from this situation.
KORS is gaining a great deal of attention after another stellar earnings report this month. In fact, since March of 2012, after the company’s first quarterly report following their IPO in December 2011, KORS has consistently been an analyst favorite, and is now being targeted by institutional investors. KORS definitely deserves this recognition after rising from the mid-$40’s to $70.
KORS momentum can be attributed to several factors:-
- It is built on high double-digit sales growth, global expansion in branded outlets and top high-end retailers, and a wide diversity of apparel and accessories for men and women that command must-have fashion sense.
- Many of KORS products are at more affordable price points, what the company calls “accessible luxury.”
- Over the last three earnings reports, the company has posted a positive revenue surprise in each, and these big gains.
- KORS has generated more than 15% quarterly EPS growth. This shows that the business is growing organically and the company’s products generate solid demand.
- The average annual sales growth rate generated over a 3 year period was 63%.
- Revenue was up over 50% in its fiscal Q1 (which ended in June) versus a year earlier, with net income rising over 80%. Markets have already priced in high growth, with a trailing P/E of 33, but forecasts from Wall Street analysts place the five-year PEG ratio right about at 1.
- Institutional investors are keen on KORS — Steve Mandel of Lone Pine Capital announced in an SEC filing that his fund has acquired a 5.2% position of over 10 million shares; this is up from about 8.1 million shares as of the beginning of April.
- There has been a rapid rise in analyst earnings estimates. Most analysts believe that this brand, and management’s multi-channel strategy and superior execution, are winners — recently analysts at Barclays Capital, Wedbush and Sterne Agee raised their price target on shares of KORS.
Besides the points listed above, an opportunity has presented itself in the guise of war-mongering, causing KORS to pull-back (see chart above) and allows for a much better entry point for the recommended options trade.
Therefore, based on the facts above the following options trade is recommended.
OPTIONS TRADE: Buy the KORS Jan 2014 85.000 call (KORS140118C00085000) at or under $1.70, good for the day. Place a protective stop limit at $0.70 and a pre-determined sell at $2.60.
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