106% Run-Up in Michael Kors, Post-IPO, and Sales Growth Continues

The IPO market in 2012 may go down in history as the year in which Facebook (FB) face-planted, but that high profile debacle overlooked the extent to which many newly-public companies – even those outside the technology arena – have posted healthy returns for their investors.

Michael Kors (KORS) is a case in point. While other high-end designers and retailers -- think Coach Inc. (COH) -- stumbled during 2012, Michael Kors, which celebrates its first anniversary as a public company this month, has seen an awe-inspiring run in it share price in that brief period, as seen in a stock chart.

KORS Chart

KORS data by YCharts

Fans include Stephen Mandel’s Lone Pine Capital; even as the stock’s price has more than doubled, he and others have hung on as earnings growth has been even more rapid, even if the rate isn’t as jaw-dropping as it was in the company’s first quarters as a public company.

KORS Net Income Annual YoY Growth Chart

KORS Net Income Annual YoY Growth data by YCharts

The question now for investors is whether Kors can continue that kind of growth in both stock price and earnings, justifying its PE ratio for the trailing 12 months, which currently stands at nearly 40. One reason for confidence is that the company currently generates about 88% of its revenues from North America. That is good news on two fronts: firstly, to the extent that it would be exposed to problems that some other luxury retailers have begun to witness in Europe and Asia, as even high-end shoppers aren’t increasing their spending as rapidly as they once did, Kors won’t feel the same pinch. Secondly, it also means opportunity for the retailer. While the brand may be increasingly familiar to U.S. shoppers (thanks in part to the participation of Kors himself on the television show Project Runway in recent years), there is plenty of room for the company to capture more market share overseas, as economies there recover.

Indeed, in the fiscal second quarter, Kors reported a 97% gain in European revenues in spite of the region’s ongoing fiscal crisis that has driven some parts of the continent back into zero growth and even back into recession.

KORS Shares Outstanding Chart

KORS Shares Outstanding data by YCharts

The company has responded to the market’s enthusiasm for its stock by providing them with more of it. While this year many companies have seen their share prices remain volatile out of fear that the expiry of post-IPO lockups of insiders will lead to a rush of selling, Kors was actually able to break its lockup, selling 25 million more shares into the market before that expired due to the surge in the stock price. Indeed, the company in September completed the second of two separate follow-on offerings – each done at a higher price than the issue before – with sales being sold at $53 a share.

It all hinges on whether Kors can continue to pull off the kind of growth in earnings that it has been able to deliver to investors during the course of its first year as a public company. While the company continues to win the support of analysts (Goldman Sachs (GS) earlier this week rated the stock a “conviction buy”) and has managed to more than deliver on expectations, there is room for it to stumble in 2013. To the extent that the negotiations aimed at resolving the ‘fiscal cliff’ impasse produce higher tax rates for consumers, there may well follow some cutbacks in consumer spending. One of Kors’s strengths is that the company’s accessories, and especially its handbags, while technically upscale luxury items, remain affordable to a wider array of shoppers than those offered by Prada or Louis Vuitton, for instance, enabling the designer to reach a wider demographic than, say, Coach. But those shoppers may also be among the first to trim their spending in anticipation of a higher tax bill, and designer accessories may be among the victims.

KORS Gross Profit Margin Quarterly Chart

KORS Gross Profit Margin Quarterly data by YCharts

That said, there is no evidence of that scenario taking shape in the company’s fiscal second-quarter earnings or same-store sales growth. While Kors had warned that the results of the current third quarter may fall short of previous expectations, that now appears to be priced into the stock, and the company boosted its full-year earnings forecast to between $1.48 and $1.50 a share. The only reason to be wary of this IPO outperformer is the valuation and the magnitude of its recent gains, which may give you an argument in favor of waiting to buy and not trying to chase any rallies, but not in favor of selling. When it comes down to the bottom line, how many other places in the market can you find a company still posting such healthy growth – even in European markets?

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 editor@ycharts.com.



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