Watch the video below for more on how losing a major shareholder is affecting Michael Kors:
Michael Kors shares were down 4.2% to $76.63 on Friday afternoon, a level not seen since February, according to Yahoo! Finance. The stock's trading volume was more than triple its three-month average daily trading volume of 3.5 million shares.
The handbag and accessories retailer announced after the markets closed on Thursday that Sportswear Holdings, one of its founding shareholders, would be selling 11.6 million shares, representing about 6% of the company's outstanding shares, according to an analyst, for $890 million. Michael Kors will not receive any proceeds from the sale, expected to close on Sept. 10. The shares were priced on Friday at $76.75 a share -- a 4% discount to the stock's closing price on Thursday.
Lawrence Stroll and Silas Chou of Sportswear Holdings will also be resigning from the retailer's board.
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Here's what analysts were saying on Friday.
Paul Lejuez, Wells Fargo Securities (Market Weight; $82-$84 Valuation Range)
KORS announced that majority shareholder Sportswear Holdings Ltd (SHL) will be selling their remaining 11.7MM shares or 6% stake in the company. SHL owners Silas Chou and Lawrence Stroll will be retiring from the board. SHL was a founder of KORS and also sold about 20% of their stake in the IPO and another roughly 25% prior to the most recent announcement, so this is not entirely unexpected. While typically viewed as a negative when insiders sell their entire stake, it may also help the company gain more independence on its board (and may avoid conflicts of interest if/when the company repurchases its China business).
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Joan Payson, Barclays (Underweight; $74 PT)
Sportswear Holdings was a founding shareholder that originally purchased the brand in 2003 and took the company public in Dec 2011. Since the IPO (FY12), cumulative growth included 119% in revenue vs. 50% plan and 192% in EPS vs. a 60% plan. Following the IPO, Sportswear still owned 35.5% of shares, and proceeded to sell down to a 5.7% stake by June 2013.
We view this final exit as supportive of our thesis that the business is approaching a near-term slowdown, on both the top and bottom line, and potentially indicative that there could be risk to earnings going forward: If we use the last public brand owned and developed by Sportswear as a case study ([PVH's PVH] Tommy Hilfiger), the group's most significant stock sales occurred from Feb - Aug 01, and were followed by revenue and EPS deterioration (-1% and -11% in FY01-05 vs. +43% and +27% in FY97-00). We estimate KORS will soon see deceleration in revenue (15-20% in FY16+) and EPS (15% in FY16+), still solid by industry standards but a wide shortfall from the 87% and 145% CAGRs, respectively, from FY10-14. However, we see incremental risks in the form of 1) a widespread domestic wholesale network of 2,500 full price doors (vs. <1,200 for peers); 2) the possibility that North America and Europe could decelerate nearly simultaneously given they have equal 4-year comp stacks-we also note Google Trends U.S. has now seen 13 weeks of decline; 3) downside risks to margin target of 28-29%.
TheStreet Ratings team rates MICHAEL KORS HOLDINGS LTD as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate MICHAEL KORS HOLDINGS LTD (KORS) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, impressive record of earnings per share growth, compelling growth in net income and expanding profit margins. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth greatly exceeded the industry average of 10.9%. Since the same quarter one year prior, revenues rose by 43.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- KORS has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 4.20, which clearly demonstrates the ability to cover short-term cash needs.
- MICHAEL KORS HOLDINGS LTD has improved earnings per share by 49.2% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, MICHAEL KORS HOLDINGS LTD increased its bottom line by earning $3.21 versus $1.97 in the prior year. This year, the market expects an improvement in earnings ($4.05 versus $3.21).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Textiles, Apparel & Luxury Goods industry. The net income increased by 50.2% when compared to the same quarter one year prior, rising from $125.00 million to $187.72 million.
- The gross profit margin for MICHAEL KORS HOLDINGS LTD is rather high; currently it is at 62.19%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 20.42% significantly outperformed against the industry average.
- You can view the full analysis from the report here: KORS Ratings Report
--Written by Laurie Kulikowski in New York.