Viking Global Bets On Apparel: Ralph Lauren Corp (RL), Coach, Inc. (COH), Express, Inc. (EXPR)

Guess? is still a turnaround story and has seen some of the most pressure, with revenue declines in each of the last three quarters as store traffic continues to slow in North America. The stock is down 20% over the last twelve months, but does pay a 2.8% dividend yield and a payout ratio of only 35%. Express‘last quarter earnings come in somewhat weak, with EPS down 45% for the quarter on a year-over-year basis. However, increased guidance has pushed the stock up almost 20% year to date. After the increased guidance, TheStreet moved the stock from a sell to a hold based in part on increasing profit margins. Billionaire Ken Griffin made a big bet on Express earlier this year, upping his stake by 2.4 times what he owned at the end of the third quarter (read more about Griffin’s big bet on Express).

Kors still appears to be in rapid growth mode, snapping up market share in North America where same store sale growth is expected to jump 20% this year. Kors still has a lot of room for expansion, with the Asian market being wide open, which is one of the fastest growing luxury markets, and Japan, which the company believes could eventually be a top market. At the end of last quarter, the company had 65 stores in the Far East, including five new stores opened in Japan during the quarter. The company believes that in the long term it can reach 150 stores in Japan.

From a valuation perspective, Kors is one of the most expensive stocks in the industry on both a P/E and P/S basis…

• Michael Kors 27x
• Ralph Lauren 19x
• Express 11x
• Coach 12x
• Guess? 12x

• Michael Kors 6x
• Ralph Lauren 2.3x
• Express 0.8x
• Coach 2.7x
• Guess? 1x

Although Kors does appear expensive, its robust growth warrants the large multiples…

• Michael Kors 33%
• Ralph Lauren 13%
• Express 19%
• Coach 13.5%
• Guess? 10%

Don’t be fooled

Over the last three months, Kors’ earnings estimates for fiscal year 2013 (ending March) have been lifted 20%, and are expected to come in at $1.85 per share – which would be an increase of 137% from 2012 EPS. The high estimate for Kors’ 2014 EPS is around $2.75, which puts the stock’s forward P/E at only 21.5x. This 21.5x P/E is still above other major peers, but I am less concerned given Kors’ robust growth prospects and opportunities. A 30x (Kors’ current P/E) multiple on that 2014 high-end EPS of $2.75 suggests 37.5% upside from current levels. Michael Kors is also one of the top ten consumer goods stocks loved by hedge funds during the fourth quarter (see all 10 here).

The article Viking Global Bets On Apparel originally appeared on Fool.com and is written by Marshall Hargrave.

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