After a terrible 2015, the market thinks high-end retailer Michael Kors Holdings Ltd (KORS) has its mojo back, sending KORS stock up 26% so far this year.
That’s a remarkable performance for any name in a year when the broader market has lost nearly 10% for the year-to-date. It’s even more impressive considering how beaten down Michael Kors was last year — and how gloomy its prospects looked.
The growth of the retailer’s business was something to behold after it went public about four years ago, but it rapidly became a victim of its own success. It saturated the market with luxury handbags that were available seemingly everywhere.
Pretty soon the brand lost its special cache. Same-store sales went into a steep and prolonged funk and KORS was forced to crush its margins with discounts to purge inventory.
Indeed, business was so bad it dragged other retailers down too, with the most notable victim being Macy’s (M).
When a luxury brand loses its cool factor, it can be almost impossible to regain. Just ask Coach (COH), which went through the exact same thing a decade ago, when it over-expanded and — gasp! — even opened margin-killing outlet locations.
But back to KORS. The stock hit an all-time high almost exactly two years ago and was a grinding disaster until a month ago when it at long last bottomed out. From the record high to the recent record low, shares lost more than 60% of its value to lag. That lagged the S&P 500 by more than 60 percentage points.
And then, in 2016, the narrative changed with holiday period results. The retailer exceed Wall Street’s profit estimates by a wide margin for the third quarter in a row and issued upbeat guidance.
Michael Kors Stock as a Rebound Play
Analysts quickly changed their opinions on shares, but it’s important to remember that a good holiday season doesn’t mean the company has fixed all its problems. Citigroup analysts say Michael Kors is pursuing a high-risk, high-reward strategy. Here’s what they said in a recent note to clients, via Barrons:
“On one hand, in a consumer environment where newness drives sales, KORS is positioning themselves to win. On the other hand these actions, if not successful could result in more markdowns ([gross margin] pressure).
Mgmt believes they got a bit too stale for a while and hinted that they don’t want to rely on core product for too long. [CEO John] Idol joked that he was ‘banning data’ because it was backward looking, implying that they aren’t going to rely on what was working but rather look to innovate and produce that next great item.”
A more daring Michael Kors could help restore its positioning as an upscale brand, so it’s a reasonable strategy to pursue. Whether it makes KORS stock a buy at this point is harder to say.
No, this stock doesn’t look particularly pricey, but that’s because it has such muted growth projections. It’s just not all that compelling as a longer-term holding.
That said, it’s very hard to find stocks with any kind of upside momentum in this crummy market. That should boost Michael Kors on performance chasing alone.
As long as the company doesn’t stumble on earnings, KORS stock remains a credible rebound play in 2016.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
