value and opportunity

In this post I identified Michael Kors as a “Tier 2” luxury stock with a really high valuation which might be an interesting stock to short based on my underlying thesis.

So justa few days later, Michael Kors reported a blow out performance, among oters:

Sales including licensing revenue rose 71 percent to $414.9 million in the first quarter ended June 30, driven by comparable-store sales and shops within department stores, the company said.

Retail net sales rose 76 percent to $215 million in the quarter, driven by a 37 percent increase in sales at stores open for at least a year, or comparable-store sales. The company opened 76 stores from the same period last year and operated 253 retail stores as of June 30.
First-quarter net income more than doubled to $68.6 million, or 34 cents a share, from $24.1 million, or 13 cents a year earlier.

First-quarter net income more than doubled to $68.6 million, or 34 cents a share, from $24.1 million, or 13 cents a year earlier.

So a doubling net income, 76% sales growth and a 37% yoy same store sales growth is really amazing if we look at how other upscale retailers do.

Interestingly enough, Michael Kors is not yet present in Asia, despite having the shares listed in Hongkong.

So the question is clear: Why is Michael Kors so successful (at the moment) ?

I guess one of the reasons is hs involvement in the US “Project Runway” designer casting show as a judge. However, the 10th series seems not to be too successful right now with viewers down 25%.

Kors’ Fashion is often described as the “Jet Set style”, whatever that means. His bio is not without bumps, for instance he went bankrupt in 1993 according to this article.

Michael Kor watches and jewelry are actually made by Fossil, which seems to have its own problems.

But still, why are they so successful ? I browsed around a little bit and among others I found statements

here:

What is the deal with the Michael Kors watch phenomenon? Everywhere I look there’s another small wrist encircled by an oversized gold Kors disc. Beauty PRs and fashion assistants absolutely love them, as do twenty-something city girls. “Girls that work in the city who want a Rolex. They might not know who Michael Kors is but they know they like shiny things,” tweeted @WhistlesPR in reply to my ‘who’s buying all the Kors watches’ tweet. “It’s chunky and looks expensive but it’s waaay cheaper than my dream Rolex! It has that magpie effect on everyone who clocks it,” confirmed @saraheangus.

With prices for Kors watches hovering around the £250 mark, they’re an easy entry-level accessory to buy into if you’re not in a position to spend £600+ on the bag or shoes. Clearly, plenty of people aren’t; according to the New York Times, sales of Kors watches went up 142% in the first quarter of this year. And good news for Mr Kors, his customers don’t just settle for one.

If one googles around, it seem to be really the relatively cheap watches which are extremely popular at the moment.

Balance sheet

Looking in the 2011/2012 annual report one can see that comparable sales growth per store have been 39% last year and even 48% the year before.

A quick check of the annual report showed nothing unusual in the accounts. Free cashflow generated is positive but relatively low due to large investments and the high growth rate. That’s normal. Also, goodwill is low and almost no financial debt.

Operating lease liabilities are around~ 560 mn and increasing due to the new stores.

Summary:

I am not sure why Michael Kors is so successful at the moment. This might be just a consumer fad which according to Jim Chanos might be a good short opportunity. On the other hand, the accounts look OK and currently in a “new normal” world, people pay up for growth.

So for the time being I will sit on the sideline and watch.