Michael Kors brown thomas

September 22, 2017

I previously wrote about Michael Kors (NYSE:KORS) in this article, where I laid out a bullish investing thesis on the company for 2015 and beyond. Today, KORS reported its Q3FY15 earnings, showing strong top and bottom line growth. Despite the growth, the market remains uncertain about the company. A lowering in next quarter’s guidance, coupled with single-digit comp growth, pushed the stock down as much as 8% pre market. As I write this, the stock has gained some ground and is now only down about 1%. The earnings report, and especially the market reaction, has reinforced my belief that KORS is undervalued, and I believe that investors can capitalize on the market’s uncertainty about the company buying up shares now. All information in this update is taken from the earnings press release and the conference call transcript.

Top and bottom line growth continued to impress me. Total revenue was up 29.9% and earnings per share increased about 30% year over year from $1.11 to $1.48. Both of these numbers beat estimates, and continues the management’s pattern of under-promising and over-delivering. On the conference call, management mentioned that it was its 35th consecutive quarter of comparable store sales growth, along with 13 straight quarters of revenue and earnings growth. These numbers show that management is consistently executing on its plan and should give investors faith in continued growth. It should be noted that this increase in earnings gives the company a trailing P/E around 16.6 at the time I write this article. This trailing P/E represents a significant discount to KORS’s current growth rate, and implies that the market does not expect the company to maintain that growth in the future. Personally, given management’s track record of under-promising and over-delivering, I believe that KORS will maintain its current growth rate.

Michael Kors Holdings Ltd (NYSE:KORS) has increased 10% in value over the past five trading days due to posting better-than-expected quarterly results and providing a strong guidance. The results came in line with our expectations, easing out the investors’ concerns related to weakness in handbag retail and improving the company’s valuation. Based on the recent trends, we initiate the coverage of Michael Kors with a Buy rating and target price of $51 per share, suggesting an upside potential of 19.2%.The key assumptions underlying our target price for Michael Kors include a forward price-to-earnings (P/E) multiple of 10.6x; improvement in comparable store sales (comps) of retail business; reduction in foreign exchange rate pressures on wholesale business; slowdown in the contraction of gross margins; movement of net margins towards stabilization; and continuing share repurchases. These key assumptions along with their rationale are discussed in detail below.

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