The Story Behind the Amazing Run-Up in Michael Kors Shares
Sometimes a stock just seems to be in vogue with investors. Seldom has that been more true – or more apropos – than in the case of Michael Kors Holdings (KORS). As seen in a stock chart, Kors is currently being rewarded by the market for its prowess in developing “fashion forward” handbags, clothing, shoes and other accessories that it sells both in its growing number of company boutiques as well as department stores like Macy’s (M).
Kors’s third-quarter results served as a reminder of why the company’s stock has become as fashionable to own as the designer’s handbags. Its profits soared from $39 million to $130 million, dwarfing the company’s own earlier earnings forecasts; gross margin hit 60.2%, while same-store sales exploded 41% during the quarter. The question now is whether the stock (see its stock chart) has already priced in all of that gain – and whether the company will hang on to its status as the darling of the notoriously fickle world of fashion.
In its favor is the fact that Michael Kors is positioning its brand as something slightly more than some of its peers, like Coach (COH), to which it is frequently compared. Coach sells handbags and wallets; Michael Kors is trying to present itself to the market as a lifestyle brand – a fashion industry Apple (AAPL) of sorts.
The dramatic jump in earnings means that Michael Kors is no longer trading at the extreme multiples that it commanded immediately after its IPO. But it is worth noting that company insiders have been extremely active sellers as the stock price has risen, with the company’s founder, honorary chairman and chief creative officer, Michael Kors, slashing his own stake in the company to only 2.4% from nearly 12% before the IPO.
Kors himself hasn’t commented publicly on the reason behind these sales, and it is both logical and prudent that he would seek to diversify his wealth. But the magnitude of those sales may – and in this case, probably should – raise questions that the company needs to address. To take a position in the company at its current prices and PE ratio, investors will want to be convinced that Kors himself – as chief creative officer, overseeing new products and design, upon whom the company’s ability to keep its fashion-conscious customers happy hinges – isn’t seeing his own level of engagement with the company diminish along with his ownership position. Alternatively, they will want more visibility into the design talent bench behind Mr. Kors at the firm that bears his name.
Fashion brands survive their creators – look at Chanel, Yves Saint Laurent and others. But those venerable labels are long-established companies, and most now reside within one of a handful of stables of luxury brands, like LVMH, not as stand-alone, publicly-traded companies. So investors attracted to the company by its rapid expansion and the surge in profit margin may want to bear this rather more intangible risk in mind when pondering at what price and valuation they want to buy and/or continue to own the stock.
Clearly, the company is on track to deliver more impressive growth, and analysts are hailing its apparent inability to put a foot wrong. But the higher expectations climb, the harder will be the fall in the wake of a disappointment, and the smaller such a disappointment will need to be for the stock to take a beating. There are no clouds on the Kors horizon at present, but that fact alone may mean the time is coming when it will be a smart idea to take some profits off the table.
Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at firstname.lastname@example.org.
Filed under: Company Analysis