One positive symptom of a strong consumer economy—which we should have, given the nature of the labor market and recent tax cuts—is growing interest in luxury brands, and when investors can spot such a trend, opportunity becomes evident. I believe that is exactly what we have right now with
Michael Kors Holdings KORS.
Michael Kors is a global accessories, footwear, and apparel company. It offers two primary collections: the Michael Kors luxury collection and the MICHAEL by Michael Kors line, an affordably luxury brand. Michael Kors also acquired Jimmy Choo, a luxury shoes and handbags maker, last year.
The company operates through its retail, wholesale, and licensing segments, meaning that its products are available in its own retail outlets, within leading department stores, and at select licensing partners.
After a strong quarter saw Michael Kors surpass estimates on the top and bottom line, this Zacks Rank #1 (Strong Buy) stock is generating remarkable earnings estimate revision and share price momentum, while its valuation remains at an attractive level.
Latest Earnings and Outlook
Last week, Michael Kors reported its 13
th consecutive earnings beat, notching quarterly profits of $1.32 per share which crushed the Zacks Consensus Estimate of 94 cents and improved 65% from the prior-year period. Meanwhile, the luxury brand reported revenue of $1.20 billion, beating our consensus estimate of $1.14 billion and surging more than 26% year over year.
The company cited robust performance in its Michael Kors and Jimmy Choo brands as key catalysts for its great quarter. Adjusted gross margin expanded 230 basis points due to higher MK Wholesale gross margins, while Jimmy Choo contributed 40 basis points to overall gross margin.
These strong results led Michael Kors to raise its earnings and revenue guidance for the remainder of its fiscal 2019, although management predicted some headwinds for the current quarter. Here’s a look at recent earnings estimate revision activity, which shows analyst reaction to the report and guidance:
Earnings estimate revisions are the crux of the Zacks Rank, so Michael Kors’ positive trends in this department explain its #1 (Strong Buy) designation. Strong earnings trends also tend to lead to share price momentum, which explains why the stock is up about 9% since reporting.
Despite its recent surge higher, KORS is still trading at an attractive valuation. In fact, its earnings outlook has improved so greatly that shares are still trading near their “cheapest” levels in months:
Perhaps more important than the fact that Michael Kors is trading within its own valuation range is that it offers a steep discount compared to the Textile-Apparel industry average. Contributing even more evidence to the value case for KORS is its PEG of 2.1 and P/S of 2.2. Both of these ratios are slight premiums to their respective industry averages but still well within reasonable ranges.
Other Reasons to Buy
As mentioned before, the Jimmy Choo acquisition is already starting to pay off for Michael Kors, and it likely still offers plenty of international expansion opportunity, as the brand has a strong retail presence in not only the Americas, but also Europe, Asia, and the Middle East.
Meanwhile, the company continues to see opportunities in e-commerce, which drove comparable sales by 250 basis points in the most recent quarter. This will be part of Michael Kors’ Runway 2020 plan, which focuses on product innovation, brand engagement, fleet modernization, digital innovation, and customer experience.
Also as a part of this plan, Michael Kors will invest in the opening of 60 Michael Kors outlets and 30 Jimmy Choo stores, with focus on Asia, in 2019.
Michael Kors is a unique combination of many things that should attract investors right now. First, it is a play on the strength of the global consumer economy, and it presents exposure to a portfolio of growing brands with a focused management team.
On top of these general concepts, Michael Kors has also been able to deliver strong actual results recently, and that has led to an improving earnings outlook for the company. Plus, the stock’s valuation is attractive and should leave shares plenty of room to run higher.
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