For those who read Investor’s Business Daily and follow their top 50 picks, you may know that Michael Kors Holdings Ltd (NYSE:KORS) is a top ten pick for the publication. This is one of my favorite stocks, and it’s no mystery why IBD loves this stock as well. Kors’s share price skyrocketed by nearly 85% in 2012, and is already up about 9% this year. Let’s take a look at some reasons why this stock could come close to doubling again this year and possibly crack through the $100 mark.
Have you never heard of Michael Kors? Like me, then, you probably don’t spend $145 for a pair of jeans. Michael Kors is a Hong Kong-based designer of women’s apparel and accessories, and it also designs men’s apparel. Kors makes a variety of clothing in addition to handbags, wallets, and small leather goods.
I like these types of businesses because the product isn’t overly complicated. For Kors, the hard part is maintaining brand image to keep customers purchasing luxury items at higher prices. Altagamma Studies show that global demand for luxury goods is expected to grow to around $310 billion in 2014 (from $230 billion in 2010), so this is a good business to be in right now. Kors’s gross profit percent was a whopping 52.5% two years ago, and increased to 57.8% in 2012. This increased efficiency is mindboggling when considering the fact that the average apparel store has a profit margin of around 5.1%.
Revenue has grown at an increasing rate over the past three fiscal years with an average growth of 48.4% per year. FY2012 revenue grew almost 85% year-over-year. At the same time, net income has grown at a rate of nearly 125% per year, and if that’s not enough, EBITDA has grown by more than 90% annually during this same period. While Kors has grown revenue from wholesale operations and licensing, retail sales have shown the highest rate of growth and now make up a greater portion of revenue than all other areas. Analysts think this stock can grow revenue from $1.3 billion in 2012 to over $2 billion in 2013, and I’m excited to see if Kors can meet or beat this challenge.
In the hedge fund space, Michael Kors saw a massive increase in aggregate fund activity in the third quarter of 2012—the last complete filing period from the SEC. It’s obviously important to follow the smart money (see why here), and of the 400-plus hedgies we track, the number of funds invested in the stock increased by 43% quarter-over-quarter. With this boost, Kors is now held by about 11% of the funds we track, most notably Steven Cohen of SAC Capital.
Now, Kors faces clear competition from Coach, Inc. (NYSE:COH) and Ralph Lauren Corp (NYSE:RL). Coach’s stock price fell around 10% in 2012 while Ralph Lauren shareholders saw a 6% gain. Coach has grown revenue at a rate of 9.4% per year the past three years, while net income grew 4% annually over this time. Ralph Lauren has grown annual revenue by 5%, and net income has grown at a rate of 10.5% over this same time period.
Why the lackluster performance compared to Michael Kors?
The answer is surprisingly simple: Wall Street is obsessed with revenue growth and earnings.
These are the first two areas I look for trends when I’m assessing a stock because I know how obsessed the Street is with these numbers. If you’re a long-term investor and have a lot of faith that a company’s management isn’t going to let the business slump, then don’t be concerned about occasional quarterly disappointments in these figures. Your attention will best be focused on annual figures.
Ralph Lauren and Coach both had dips in quarterly revenue and net income in 2012, while Michael Kors continued to grow both their top and bottom lines at impressive rates. As a result, Kors’s shareholders were rewarded. I still think Coach and Ralph Lauren can be good buying opportunities, though, so don’t write them off just for missing a few earnings or revenue estimates. Michael Kors will likely meet the same challenge someday itself.
If you want to buy a retail stock instead of getting into individual apparel designers I would recommend reading a recent article I wrote: Retail Stocks: The Bad, The Ugly, and the Worst. Both Macy’s, Inc. (NYSE:M) and Kohl’s Corporation (NYSE:KSS) are noted as stocks that have outperformed their peers in recent years, with Macy’s being the best performer, up 60% in the last half-decade.
Both retailers sport low P/E ratios of 12.4 and 10.5, respectively, and carry less volatility than the overall market. Macy’s is my favorite retail performer, as revenue, income and EBITDA have all been growing the past two years, and the company’s appreciation has been very impressive. With a 2% dividend yield to top it off, it might not be a bad idea to pair this stock with an apparel player like Michael Kors.
Disclosure: I have no positions in any of the stocks mentioned above
