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Here’s Why You Should Pay Attention To Michael Kors Stock Now

KORS stock - Here’s Why You Should Pay Attention To Michael Kors Stock Now

Source: Mike Mozart via Flickr (Modified)

Say goodbye to Michael Kors (NYSE:KORS), the iconic fashion brand that has cycled in and out of popularity over the past several years. And say hello to Capri Holdings (NYSE:CPRI), the global high-end fashion conglomerate that will soon include Michael Kors, Versace, and Jimmy Choo.

Michael Kors recently announced a deal to acquire Italian luxury fashion house Gianni Versace for $2 billion in a combination of cash and stock. Upon closing of the acquisition, Michael Kors, which bought luxury shoe brand Jimmy Choo last year for $1.2 billion, will change its name to Capri Holdings, a fitting way to cap off a two-year buying spree that has transformed Michael Kors from cyclical, one-dimensional fashion brand to stable, multi-name fashion conglomerate.

This is a favorable transition for KORS stock. The company is going from cyclical to much more stable. Stability will be rewarded with a higher multiple for KORS stock. The company is also growing its revenue and earnings base substantially through an expanded global presence. Higher profit growth will be reflected in KORS share price.

Thus, the transition from Michael Kors to Capri will inevitably provide a double tailwind for KORS stock through multiple expansion and super-charged profit growth. Does this double tailwind make KORS stock a buy here and now?

I think so. At the very least, investors should be paying attention. Michael Kors is doing unprecedented things in the fashion industry, and the implications could be huge.

The Michael Kors Transformation Is In Full Swing

In its life as a public company, Michael Kors stock has been highly cyclical.

KORS stock burst onto Wall Street with a bang in 2011. The stock went public at $20 per share. A little more than two years later, in early 2014, KORS was a $100 stock as the company was firing on all cylinders and brand popularity was at an all-time high.

But, as CNBC points out, Michael Kors expanded too quickly. Part of the allure of luxury brands is that they are luxury, and luxury is a byproduct of scarcity. When a luxury brand becomes too affordable and too available, it loses its appeal. That’s what happened to Michael Kors in 2014. By mid-2017, KORS stock price had collapsed to $30.

KORS stock bounced back late last year, as Michael Kors brand popularity started to rebound. But, more importantly, the company also shifted its global growth strategy from building out the eponymous Michael Kors brand to creating a portfolio of luxury fashion brands. That is why the company acquired Jimmy Choo last year, is acquiring Versace, and is changing its name to Capri.

This is a favorable transition for the company.

Affordable luxury brands in the fashion world are subject to wild swings in popularity because they lack enduring appeal that comes with true luxury brands, but are also prone to big upswings in popularity due to their relatively low price-points. As such, when the trend is your friend, sales and profits explode higher. But, when the trend ain’t your friend, sales and profits fall off a cliff.

This dynamic has made Michael Kors a tough stock to own. You don’t really know with any certainty where the fashion trend is going, and as such, you really don’t know where sales or profits are going.

That isn’t true for Capri. This new name is one-part affordable luxury brand (Michael Kors), and two parts enduring luxury brands (Jimmy Choo and Versace). As such, when the trend is your friend, Capri wins big because of resurgent Michael Kors popularity. But, when the trend isn’t your friend, Capri doesn’t fall off a cliff because Kors weakness is offset by enduring popularity of Jimmy Choo and Versace.

It’s a win-win scenario that should ultimately benefit KORS stock owners.

Michael Kors Stock Has Upside From Here

I doubt the Michael Kors shopping excursion is over. Before all is said and done, I fully expect this company to pull the trigger on a few more luxury brand acquisitions to build out an even more robust luxury fashion portfolio.

Nonetheless, with three brands in the KORS wheelhouse, management believes they can grow sales to $8 billion globally. Conservatively assuming 20% operating margins, you are talking about a long-term operating profit goal of $1.6 billion. Taking out 20% for taxes, that equates to $1.3 billion in net profits.

KORS stock usually trades at 16X forward earnings. Although I think the stock will get a higher multiple down-the-road due to greater predictability, a conservative 16X multiple on $1.3 billion implies a potential long-term target market cap of over $20 billion.

That’s twice the market cap of Michael Kors today.

Thus, if this company’s transition from niche affordable luxury brand to global luxury fashion conglomerate plays out as planned, KORS stock could double in the long run.

Bottom Line on KORS Stock

Following the Versace acquisition, I’m bullish on the Michael Kors transition, and believe that KORS stock has doubling potential over the next several years. Investors may want to wait for more proof that this transition is working before pulling the trigger. But, at the very least, investors should be paying attention to KORS stock at this point in time.

As of this writing, Luke Lango was long KORS. 

Article printed from InvestorPlace Media,

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