Michael Kors Future Earnings Growth

KORS will address competitive challenges with intelligent initiatives in rapidly growing categories.

The Luxonomist. 23/04/2015
Michael Kors 4
«A Day At The Races» by Michael Kors. Click to buy

Michael Kors Holdings (NYSE:KORS) efforts to strengthen its performance by making aggressive growth investments have been helping its market share expand. However, the margins are being pressurized due to growth investments and due to increased promotional activity.

Moving ahead, KORS’ growth investments, targeted at store expansion, increasing product assortment and growing online sales channel, will portend well for its top and bottom-line numbers. In addition, KORS’ active share repurchase plan will also continue to improve the stock’s attractiveness for shareholders.

KORS’ strong strategic growth initiatives, directed at expanding its brand reach worldwide, are helping the company’s market share grow at a decent pace. KORS recently opened its world’s largest flagship store in New York. With the store, the company has launched its first ever ready-to-wear men’s wear and men’s footwear outlets.

Michael Kors Bags. Click to buy

The company is expected to benefit from men’s wear market growth; according to analysts, men’s wear will contribute approximately $40 billion by 2019 in the global apparel market. I believe that adding a men’s wear store outlet to its retail business will better KORS’ future growth potentials.

In addition to store expansion, the company is working to extend the product range of its well-known business segments like handbags and watches. Owing to KORS’ attractive handbag range, being offered at reasonable prices, upper income U.S. teens prefer them over its peers. By the end of fall 2014, KORS held the highest share in the handbag category.

An increase in promotional spending by peers like Coach (NYSE:COH) has pressurized KORS’ handbag sales. For the first quarter of calendar year 2015, KORS’ hand bag sales decreased by 23%. Owing to this slowdown in sales, the company accelerated its handbag category launches under the lead of Michael and his design team. KORS is trying to strengthen its position in the category by launching small-or-medium-sized handbags, which are sold at relatively lower prices than large bags.

Michael Kors S/S 2015. Haz clic para comprar
Michael Kors S/S 2015. Click to buy

Analysts are expecting that U.S. handbag market sales will reach $9 billion in 2015. I believe the company’s strong position in the handbag category, supplemented by its increased focus on the much demanded small-to-medium sized bag range, will help it cater to the growth potentials of the strong U.S. handbag market, which will mean more upside for its future sales base.

Furthermore, KORS has a dominant position in the watches category due to its well-established brand name. KORS plans on opening almost 500 new watches and jewelry shop-in-shops over the long term. The company’s watch category sales will grow at a better pace in the years ahead.

Moreover, the company is taking its world-class assortments to global customers with the aggressive rollout of its e-commerce sales channel. In this regard, its website is doing pretty well thus far; for 3QFY15, KORS’ website generated 73% more sales than the previously outsourced site.

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«Style Confidential» by Michael Kors. Click to buy

The company sees a lot of growth potential in the rapidly growing online sales channel. In efforts to cater to the growth potentials of online sales, KORS will take its e-commerce business to Canada over the next few months, followed by Europe and Japan in Calendar Year 2016. I believe the growing e-commerce sales channel will not only expand the company’s global market share, but will also better its long-term growth potentials.

KORS has been keen on making healthy cash returns to its shareholders. Moreover, the company’s share repurchase plan has been positively affecting its EPS and ROE. For the recently ended 3QFY15, KORS repurchased almost 5.1 million shares for $399.9 million.

Owing to the strong potentials of the company’s aggressive growth investments, KORS’ management’s guidance seems conservative to me. Although the guidance has been uplifted in February 2015, the company has strong growth potentials to remain at the high-ends of this updated guidance range. As per the updated guidance, comparable store sales growth will be in low-double digits for full fiscal year 2015, which will result in total revenues of $4.42 billion, as compared to the previous guidance of $4.3 to $4.4 billion. Moreover, the management expects KORS’ 2015 EPS to remain in a range of $4.27 to $4.30 versus the previous guidance of $4.13 to $4.18.

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«The Gingham Girl» by Michael Kors. Click to buy

The company will continue to face strict competitive headwinds due to aggressive discount offers and innovative product launches by its peers. And since KORS is aggressively extending its presence in international markets, a stronger dollar will remain a threat to its future top and bottom-line growths.

In addition, changing consumer preferences and unforeseen economic changes are key risks hovering over the stock’s future performance. Furthermore, any laxness during the execution of its planned strategic growth initiatives might undermine the company’s future growth potentials.

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