Less than a year ago, it wasn’t clear what kind of future Michael Kors Holdings Ltd (NYSE:KORS) was facing. Caught in the middle of a so-called retail apocalypse with a ripple effect that reached apparel brands as well, in May of last year KORS stock was nursing a 66% pullback from its 2014 high.
What a difference a year makes.
Since May, Michael Kors stock has rallied nearly 100% from that low, with analysts finally starting to warm up to the name… seeing improvement in the foreseeable future compared to a lackluster recent past.
There’s still work to be done, to be sure, and risks linger. There’s a light at the end of the tunnel, however, and it wouldn’t be crazy to view KORS stock as a buy-on-the-dip play in light of what analysts expect in 2018 and beyond.
Retail’s Rising Tide
Don’t misread the message. The snake that bit the likes of Macy’s Inc (NYSE:M) and The Limited didn’t exclude designers like Michael Kors or Ralph Lauren Corp (NYSE:RL) from its wrath. It was the whole premise of higher-end apparel that suffered, as consumers switched their preferences from goods to experiences.
Everything is cyclical though, and while plenty of distractions that keep consumers out of stores are still difficult to look past, those consumers are a fickle bunch. Sooner or later apparel will be a hot button again, and probably sooner than later.
That’s how Goldman Sachs sees things anyway, recently adding a beleaguered Tapestry Inc (NYSE:TPR) and Michael Kors to its conviction buy list for reasons bigger than either outfit. Analyst Lindsay Drucker Mann noted in December:
“After a multi-quarter period of sluggish trends, we see a bottom forming in trends, and expect a mean reversion towards a mid-single digit long-term category run rate. Sequential improvement in handbag sales trends as well as strong momentum at the luxury end of the spectrum leave us especially encouraged.”
And to the extent the cyclical nature of consumerism isn’t helping, circumstances might be. The economy is humming for the first time in a long time, and with President Trump’s tax cuts now in effect, would-be shoppers may be willing to buy an experience and a handbag rather than an experience or a handbag.
There’s also the not-so-small fact that, thanks to the retail apocalypse, Michael Kors is facing less competition than it was just a couple years ago.
Investors would also be wise to bear in mind that once a couple more upgrades fall into place, the rest of the analyst community is apt to follow suit. In fact, they’re already starting to. That brewing wave of new-found optimism can be a bullish catalyst in itself.
Analyst Outlook for KORS Stock
Most of the analyst community has thus far been hesitant to call KORS stock a “Buy.” It’s collectively rated just a little better than a “Hold,” and its average target price of $58.92 is actually less than the stock’s current value.
Click to Enlarge
And yet, these same analysts still collectively see modest revenue and profit growth for Michael Kors in the foreseeable future. Kors sales should be up 2.5% this year, and grow more than 5% next year when per-share profits are expected to start edging a little higher.
Click to Enlarge
As for why analysts are still on the fence about the stock but feel good about the company’s growth, chalk it up to the psychology of professional stock-picking. Most can more or less agree on fiscal results, but few want to be the first to stick their neck out on a stock that may or may not respond as expected/hoped to those results.
Remember, the market’s perception of a company’s prospects is the ultimate driver of a stock’s price, and if investors don’t trust the growth they’re seeing is sustainable, the stock isn’t going to rise.
Goldman Sachs, of course, was willing to take that chance. If nothing else, investors should respect the firm’s confidence in KORS stock, and ask themselves what Goldman sees that few others see right now.
Bottom Line for KORS Stock
Again, it’s not the kind of name grandma would want to blindly buy and hold in her long-term value portfolio; there’s still a lot of uncertainty here, not so much with Michael Kors specifically, but with the broad, higher-end apparel market.
Still, with the economy racing ahead and paychecks improving (not to mention a psychological “reset” now that the impact of Amazon’s full entry into the fashion world has been fully digested) there’s a light at the end of the tunnel. If you have to make a fashion play, Michael Kors stock isn’t a bad way of doing it.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
