4 Reasons Why Beaten-Down Michael Kors Is Poised for Revival

This troubled brand-name provider of designer wear is emerging from the doldrums in much stronger shape. The holiday shopping season will only accelerate this remarkable turnaround story.
By Chiradeep BasuMallick ,

Popular sportswear and designer brand company Michael Kors Holdings (KORS) launched its IPO with a euphoric flourish in 2011, rising 21% on its debut on the New York Stock Exchange.

Since then, the company has seen its share of twists and turns, leading to a gradual letdown for investors with a series of tepid earnings reports. But the company's second-quarter performance suggests a recovery is right around the corner.

So what's the best way forward with Michael Kors? Should you trust the resurgence and bank on Kors once again? Or would it be prudent to hold off just a while longer?

KORS

data by

YCharts

Here are four reasons why a turnaround is around the corner: 

1. What the figures foretell

Michael Kors Holdings reported robust sales and profits results for its second quarter. Earnings-per-share rose to $1.01 from $1.00 (an improvement from the predicted 89 cents). Its quarterly revenues reflected a healthy rise, up $1.13 billion as against the $1.06 billion from a year ago period.

The turnaround was powered by a clutch of new offerings engineered to revitalize the company's sagging fortunes. In addition, a series of store openings pushed Kors ahead, helping sales grow by 7% in the three months ended September 26.

To be sure, this performance isn't anywhere near the original 30% growth curve that was once the company's calling card. Nonetheless, the numbers are indicative of a revival in the making.

2. Strategies, challenges and the changing landscape

While same-store sales dropped to a pace that was lower than expected, the company's been striving to architect a set of measures that address the slump at the earliest.

The company's attempt to reposition itself as an affordable luxury brand (offering a plethora of discounts and deals) and the quest for effective diversification (extending the customer base from women to younger consumers who prefer shopping online) is a work in progress.

Further, a rising interest in small handbags, the successful Chinese business extension and a strong e-commerce showing boosted the company's position, helping it cement a platform of stability this quarter. These initiatives are expected to drive growth going forward.

3. How the quarter was won

North American digital sales for the second quarter more than doubled in comparison to last year, as consumers continued to express a preference for online and mobile channels.

The second quarter also saw an increase in revenues across Michael Kors' licensing business segments including fragrance, jewelry and eyewear. Watches, however, continued to disappoint. Accessories and footwear emerged as major game-changers for the company.

What's more, once the company jumpstarts its digital flagship across Europe (fall of 2016), followed by another wave over Asia, the recovery process will have finally found its feet.

The holiday season (that's just around the corner) is a crucial phase for Kors -- design, sales and marketing teams must work in close co-operation to create a range of fashion products that embody the brand's core values while ensuring an understanding of contemporary sensibilities.

4. Investor guidance, valuation and the final verdict

Michael Kors' success story across Europe is a clear statement of reassurance. The company can now boast of over $1 billion in business on the continent, reached within a mere six of years of operations.

The stock has lost nearly half its value this year. So, at less than 10 times forward earnings, it's now a high value stock, compared to close rivals Coach Inc. (15 times) and Kate Spade & Co. (26 times).

The stock boasts superb 25% operating margins -- higher than the 10%-to-17% for its peers -- but keep in mind, margins alone can't drive earnings. And therein lies even better news: earnings-per-share growth this year is pegged at 100% and is predicted to be a solid 68% for 2016, as per consensus expectations.

And let's look at the five-year expected price-to-earnings growth ratio. Michael Kors is at over 3 times, Coach Inc. at 2.5 times and Kate Space & Co at 0.99 times.

The final analysis: Michael Kors is definitely moving out of the shadows, a resurgence that will only accelerate during the holiday shopping season.

Michael Kors is gaining strength, but here's a list of 29 doomed stocks that will soon collapse.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Loading ...