KORS - Michael Kors Holdings Ltd

[DavidVY]

KORS

 

-Trading at 15 P/E.

-12.8B market cap with 1B in cash.

- Zero Debt

- 52 week low

- 40% yoy revenue growth

- 30% yoy income growth

- Gross margin of 60%. Net margin  20%

- Expanding worldwide

 

Fashion companies are a curious breed of companies. Ususally prices at insane multiplies because the profit margins are insanely high, and they flip and drop rapidly as soon as brand value (exclusivitiy) diminishes. In many cases, previous sales and results delude rear-looking "value investors".

 

Fashion is easy come easy go. The biggest value trap in fashion is Coach. And everybody is getting it wrong. Their brand value is basically zero because its for Moms and Asian tourists. The next step is Marshalls and TJ-Max (hyperbole, but you get my drift).

 

Thats being said KORS is a different demographic. People haven't really understood this concept. Its a "mass luxury" brand which appeals to everybody from teenagers to professionals (16-45). Dilution of brand hasn't happened because it was "mass luxury" to begin with.

 

Revenue and Earnings are increasing, albeit at a slower rate. Slight slowing in % growth lead to questions about KORS brand value. I believe its a temporary misunderstanding and that within the next year or two, these questions should be answered and everybody will hop unto the bandwagon.

 

Based on today's EPS of 4.12 I estimate a fair value today of around $100 ($63.50 today) and $150-200 within the next two years (depending on how much growth is. I estimate 15-25%- most of which will come from overseas)

 

 

[CorpRaider]

I'm watching it to potentially diversify a little from Coach, once all the analysts hate it, just like Coach and just like LULU.  Kors is actually already readily found in TJX, Costco, etc...Coach is not.  Timely Coach reference, as COH just caught an upgrade from Barclays today with an upped price target from 30s to $50 based on early turnaround indicia/store trends.  Second analyst to get with the program after Topeka Capital broke the seal a few months back.  I am not currently feeling trapped.  Up ~15% YTD plus fat dividends.  I am feeling the power of the confirmation bias flowing through me...;D

[DavidVY]

@Corp Raider- I didn't know they sold Kors @ those locations, but what I do know is I see few people who are aged 20-30 w/Coach bags and I see tons with Kors.

 

The white Kors watch is a Chanel knock-off (white porcelain that everybody loves). Take a look at how many people wear it. You'll be shocked.

[ItsAValueTrap]

Kors is actually already readily found in TJX, Costco, etc...Coach is not. 

 

Yeah all of Kors' and Coach's peers at their price point engage in made for outlet / made for factory nonsense.  They make lower-quality knockoffs of their own product specifically for outlet stores.  Coach may be diluting their brand less by selling their MFO product at their own branded outlet stores rather than TJ Maxx, etc.

 

Looking at google trends and both company's financials, the Coach brand is declining relative to the Kors brand.  Kors is slowing down in the United States.

 

*I am long KORS (calls) and short COH (puts).

[CorpRaider]

Yeah, I think they should return to using the outlet channel, at least primarily, to liquidate full priced inventory.  Coach just up and destroyed a material amount of inventory last year to clean out the channel.  COH still has a larger share of the handbag market than KORS and the price points are higher and moving up.  COH is also not in department stores like Kors.  Anyhow, both will probably work well at the right price and with the right cost base for the size of the businesses in various markets...margins and ROIC can/should be FAT.  Below is a WSJ piece on Kors bear case.  Didn't know market cap was greater than RL and TIF.  KATE and Tory Burch are going to be the next most popular girls at the ball and will likely take some of Kors shine, if I had to guess.

 

http://www.wsj.com/articles/popular-or-overexposed-michael-kors-walks-thin-line-1406911371

[ItsAValueTrap]

Even J Crew (apparel) can be found at TJ Maxx.

 

Apparently this stupid made-for-outlet thing works???

[ritrading]

KORS just showed up on my radar after today's drop. The residual income model that I use previously valued it at ~60, so it was fairly valued at best until now. After today's 10K release, my model is showing around ~65, so the 46 price is looking attractive.

 

I'd like to get in a position very soon, and I'm looking for other things wrong with KORS. Here are the negatives so far, perhaps others can add more.

-Anti takeover provisions, shareholder unfriendly

-Made its largest repurchases in 2014, which was the peak of its stock price as well as its most overvalued history (according to the difference between market price and intrinsic value in my model)

-the drop in comparable store sales of 6-7%

-aggressive expansion of ~25% new store locations in 2014

-gross profit and gross income margins down a bit

 

Nevertheless, revenue, net income, free cash flow, and book value have all increased as shown in the earnings release. I'm 99% sure the company is worth equal or more today than it was yesterday. Anyone else care to chime in?

[Cardboard]

I would be careful with this one. This reminds me of Coach which was all the rage until it wasn't.

[hardcorevalue]

I agree with Cardboard, it's so hard to get comfortable with the brand. Very few fashion companies stay in favour long term. (Although there are exceptions obviously)

[Guest 50centdollars]

Kors popularity is dying down. It's too common amongst women now, which means its brand value goes down. They should raise the prices of their products.

[Ross812]

I looked into Coach a year ago and concluded understanding women's fashion trends was beyond my circle of competence. I don't understand what makes a good purse and these companies don't even behave cyclically. More of a boom then bust. Once the company losses mind share they are done. Akin to selling blackberries to highschool kids...

[DavidVY]

- US demographic is pretty much in slow growth mode. I think they will quash any new store development in the US area. Comp store sales was down 6% but revenue for US was still up double digits. Store growth was about 30% so you do the math... E-commerce is booming though so if you add that back in its roughly a 0% same store growth.

 

- Europe, China and Japan #s look pretty good.

 

- Forex pressures is more of a concern. Druckenmiller believes that the euro will stabilize around 80c on the dollar. If so thats a serious headwind.

 

- Still growing revenue yoy and qoq. 

 

- Balance sheet is pristine. Zero debt. ~1B in cash.

 

I think EPS growth will be in the 15-25% range for the next 2-3 years.

 

What troubles me is the 1c miss. It seems like management pulled out all the stops to get as close to analyst estimates as possible and still missed. Thats a red flag, as any CFO has tons of tricks in his bag to add or subtract 10c from earnings. OR the company made a decision to miss on purpose and then deliver strong performances in future quarters. Its difficult to say what goes on behind the curtain. Is it a cockroach motel or a big-bath accounting?

 

There was crazy volume today in the stock. Be interesting to see how the stock changes hands over the next week or two. Some portfolio manager or hedge fund definitely got demoted or fired after this fiasco.

 

I am waiting for another week and going to ponder all the Qs.

 

I would say I am inclined to buy more, but maybe thats my ego bias setting in. I am going to sleep on it for the next week.

[kab60]

KORS just showed up on my radar after today's drop. The residual income model that I use previously valued it at ~60, so it was fairly valued at best until now. After today's 10K release, my model is showing around ~65, so the 46 price is looking attractive.

 

I'd like to get in a position very soon, and I'm looking for other things wrong with KORS. Here are the negatives so far, perhaps others can add more.

-Anti takeover provisions, shareholder unfriendly

-Made its largest repurchases in 2014, which was the peak of its stock price as well as its most overvalued history (according to the difference between market price and intrinsic value in my model)

-the drop in comparable store sales of 6-7%

-aggressive expansion of ~25% new store locations in 2014

-gross profit and gross income margins down a bit

 

Nevertheless, revenue, net income, free cash flow, and book value have all increased as shown in the earnings release. I'm 99% sure the company is worth equal or more today than it was yesterday. Anyone else care to chime in?

I'd suggest taking a look at Fossil Group instead. They produce watches for Kors and a broad range of brands and have some inhouse labels as well (Danish Skagen which I think is somewhat of timeless design unlike the rest). They also have a CEO who owns 10 percent of the stock and takes no compensation and Vulcan Value own 10 percent of the shares as well.

[jawn619]

I think the cycle of fashion goes like this. Women's fashion is just more sped up. From what I've seen happen to VRA, KORS, COH, ANF, ARO, RL, AEO, ANN 

 

phase 1. Hot betches "HBs" and celebrities start wearing things that no one is wearing. Often overpriced and exclusive (Canada goose, Luis Vuitton)

phase 2. Mainstream popularity - Popular among high school, college students, and young adults (Burberry, Chanel, Gucci, North Face, Timberland)

phase 3. Fading popularity but popular among middle school and older people (VRA, ANF, AEO, KORS )

phase 4. Decline and death (ARO)

 

Note: Chinese popularity usually comes in at the end of phase 2 and phase 3

Once a brands starts entering phase 4, I've never seen it bounce back.

 

A lot of investors start looking and entering these around phase 3 hoping earnings will "normalize" when the stock is cheap on a lot of metrics. Almost always it is a brand in decline and its really hard to pick out the brands that have staying power because there's actually huge "capex" needed to stay current. Sometimes there is some short term money to be made if you buy at a low enough multiple and bet on multiple expansion but the tide is against you.

 

The only brands I've seen that seem to be immune to this cycle is TIF and Limited brands (Victoria's secret)

[yitech]

I think the cycle of fashion goes like this. Women's fashion is just more sped up. From what I've seen happen to VRA, KORS, COH, ANF, ARO, RL, AEO, ANN 

 

phase 1. Hot betches "HBs" and celebrities start wearing things that no one is wearing. Often overpriced and exclusive (Canada goose, Luis Vuitton)

phase 2. Mainstream popularity - Popular among high school, college students, and young adults (Burberry, Chanel, Gucci, North Face, Timberland)

phase 3. Fading popularity but popular among middle school and older people (VRA, ANF, AEO, KORS )

phase 4. Decline and death (ARO)

 

Note: Chinese popularity usually comes in at the end of phase 2 and phase 3

Once a brands starts entering phase 4, I've never seen it bounce back.

 

A lot of investors start looking and entering these around phase 3 hoping earnings will "normalize" when the stock is cheap on a lot of metrics. Almost always it is a brand in decline and its really hard to pick out the brands that have staying power because there's actually huge "capex" needed to stay current. Sometimes there is some short term money to be made if you buy at a low enough multiple and bet on multiple expansion but the tide is against you.

 

The only brands I've seen that seem to be immune to this cycle is TIF and Limited brands (Victoria's secret)

 

+1

 

I was guilty in investing in ARO following Kerrisdale Capital's pitch probably during the transition between phase 3 and 4. But it's mostly my own fault for not understanding industry dynamics. I did make some money in COH after '09, but it's just luck as almost everything else bounced back as well.

[kab60]

I think the cycle of fashion goes like this. Women's fashion is just more sped up. From what I've seen happen to VRA, KORS, COH, ANF, ARO, RL, AEO, ANN 

 

phase 1. Hot betches "HBs" and celebrities start wearing things that no one is wearing. Often overpriced and exclusive (Canada goose, Luis Vuitton)

phase 2. Mainstream popularity - Popular among high school, college students, and young adults (Burberry, Chanel, Gucci, North Face, Timberland)

phase 3. Fading popularity but popular among middle school and older people (VRA, ANF, AEO, KORS )

phase 4. Decline and death (ARO)

 

Note: Chinese popularity usually comes in at the end of phase 2 and phase 3

Once a brands starts entering phase 4, I've never seen it bounce back.

 

A lot of investors start looking and entering these around phase 3 hoping earnings will "normalize" when the stock is cheap on a lot of metrics. Almost always it is a brand in decline and its really hard to pick out the brands that have staying power because there's actually huge "capex" needed to stay current. Sometimes there is some short term money to be made if you buy at a low enough multiple and bet on multiple expansion but the tide is against you.

 

The only brands I've seen that seem to be immune to this cycle is TIF and Limited brands (Victoria's secret)

Good points but I think you underestimate the staying power of a brand like Louis Vitton. Which today is just one part of Moet Hennessy Louis Vitton (LVMH) and thus you have some brand diversification so hopefully you have some brands in phase 1 and some in phase 4. And doesn't some companies move back in phases as well?

[Borgesian]

I think the cycle of fashion goes like this. Women's fashion is just more sped up. From what I've seen happen to VRA, KORS, COH, ANF, ARO, RL, AEO, ANN 

 

phase 1. Hot betches "HBs" and celebrities start wearing things that no one is wearing. Often overpriced and exclusive (Canada goose, Luis Vuitton)

phase 2. Mainstream popularity - Popular among high school, college students, and young adults (Burberry, Chanel, Gucci, North Face, Timberland)

phase 3. Fading popularity but popular among middle school and older people (VRA, ANF, AEO, KORS )

phase 4. Decline and death (ARO)

 

Note: Chinese popularity usually comes in at the end of phase 2 and phase 3

Once a brands starts entering phase 4, I've never seen it bounce back.

 

A lot of investors start looking and entering these around phase 3 hoping earnings will "normalize" when the stock is cheap on a lot of metrics. Almost always it is a brand in decline and its really hard to pick out the brands that have staying power because there's actually huge "capex" needed to stay current. Sometimes there is some short term money to be made if you buy at a low enough multiple and bet on multiple expansion but the tide is against you.

 

The only brands I've seen that seem to be immune to this cycle is TIF and Limited brands (Victoria's secret)

 

Pretty accurate, though I disagree about Burberry. High school and college kids aren't buying Burberry coats and bags and as a brand it's a lot stronger and will have much more staying power than the other's you've grouped it with.

[Guest 50centdollars]

 

 

Pretty accurate, though I disagree about Burberry. High school and college kids aren't buying Burberry coats and bags and as a brand it's a lot stronger and will have much more staying power than the other's you've grouped it with.

 

agreed. Prada, burberry have staying power. The average women can't afford it. If you look at michael Kors, the average women is buying it, which means that it will become uncool like Coach did.

[Ross812]

The problem increasing revenue leads to the brands failure. This NPR podcast from Planet Money discusses the problem well and demonstrates what a brand needs to do to stay relevant.

 

http://www.npr.org/sections/money/2015/03/11/392381112/episode-609-the-curse-of-the-black-lotus

[benhacker]

Only on a wonky value investing blog populated heavily by engineers would a discussion of high end women's fashion lead to an NPR podcast talking about Magic The Gathering --- as a solution to the management problems of running a women's fashion company. :)

 

And I'm not criticizing Ross (I liked that episode by the way)... I just find the discussion (very common on investment boards) of the high end fashion companies (selling 90% to women) by 99% male boards... pretty hilarious.

[Ross812]

Only on a wonky value investing blog populated heavily by engineers would a discussion of high end women's fashion lead to an NPR podcast talking about Magic The Gathering --- as a solution to the management problems of running a women's fashion company. :)

 

And I'm not criticizing Ross (I liked that episode by the way)... I just find the discussion (very common on investment boards) of the high end fashion companies (selling 90% to women) by 99% male boards... pretty hilarious.

 

I listened to the episode recently on the air plane. I thought it gave a fun take on how bubbles form and steps that good companies can take to maintain their brand's value. I think the economics behind these fashion brands are terrible because to maintain popularity they must maintain price and thus scarcity. To please investors, the companies have to increase sales which reduces scarcity. The brands further dilute themselves by discounting to increase sales further. It is a negative feedback loop. All these investments are essentially turn around type investments. You are betting the company can step back one of Jawn's phases which is nearly impossible to do.

 

The paradox of how a fad plays out parallels what the Co that owns the Magic game figured out early on. They can make a ton of money in the short term by feeding their customers what they want as fast as they can produce their product, but this creates a bubble and kills the fad in the end. Any sustainable company that sells a fad type product has to have a mechanism to maintain scarcity and exclusivity. Show me what fosl, kors, or coh does to sustain their fad and I would entertain an investment.

 

So far it seems like the companies mentioned address falling sales by making their stores nicer and flooding them with new products. This does nothing to address that middle school students have these "luxury" products.

 

 

[Jurgis]

Only on a wonky value investing blog populated heavily by engineers would a discussion of high end women's fashion lead to an NPR podcast talking about Magic The Gathering --- as a solution to the management problems of running a women's fashion company. :)

 

And I'm not criticizing Ross (I liked that episode by the way)... I just find the discussion (very common on investment boards) of the high end fashion companies (selling 90% to women) by 99% male boards... pretty hilarious.

 

Yeah, you know, if only Michael Kors started selling bling collectible packs bags with rares in them... it would be HUGE!

 

;D 8)

[orthopa]

KORS caught my eye too. Based purely on value its very attractive, but only if the growth continues at a reasonable pace.  I have a little FOSL which in regards to value/product is essentially in the same boat. I feel like FOSL is a little different in that strangely enough it is not desirable enough/trendy that, that people would shun it because its not exclusive anymore.

 

When you buy a big flashy hand bag with a big gold MK hanging off your definitely trying to make a statement. I don't think you are so much when buying at watch in the price range FOSL sells. I believe that person is looking for a watch that wont break in 2 months and a brand that offers a wide selection. I doubt any great number of people that buy watches that FOSL produces under another brand even knows its a FOSL watch.

 

That being said fashion is very hard to judge as people who buy these goods have only a transient need for the product while it helps their image. Hard to invest on the urge to be popular as mentioned already.

 

Much easier to invest in things people need/require if it wasn't obvious already.

[constructive]

I think the cycle of fashion goes like this. Women's fashion is just more sped up. From what I've seen happen to VRA, KORS, COH, ANF, ARO, RL, AEO, ANN 

 

phase 1. Hot betches "HBs" and celebrities start wearing things that no one is wearing. Often overpriced and exclusive (Canada goose, Luis Vuitton)

phase 2. Mainstream popularity - Popular among high school, college students, and young adults (Burberry, Chanel, Gucci, North Face, Timberland)

phase 3. Fading popularity but popular among middle school and older people (VRA, ANF, AEO, KORS )

phase 4. Decline and death (ARO)

 

Note: Chinese popularity usually comes in at the end of phase 2 and phase 3

Once a brands starts entering phase 4, I've never seen it bounce back.

 

A lot of investors start looking and entering these around phase 3 hoping earnings will "normalize" when the stock is cheap on a lot of metrics. Almost always it is a brand in decline and its really hard to pick out the brands that have staying power because there's actually huge "capex" needed to stay current. Sometimes there is some short term money to be made if you buy at a low enough multiple and bet on multiple expansion but the tide is against you.

 

The only brands I've seen that seem to be immune to this cycle is TIF and Limited brands (Victoria's secret)

 

This is not a very accurate picture of fashion because you are mixing up different price points. ARO, AEO and ANF never depended on the perception of scarcity. If anything, low end teen brands are the opposite - they depend on fitting in with people who are wearing similar clothes.

 

VRA, KORS and COH are all mid market so both forces (exclusivity and fitting in) are competing. Enforcing exclusivity is the primary problem only in luxury brands.

 

I find it puzzling that so many people think fashion is a bad business. Most of these companies we're talking about grew from $0 to $billions in a short period of time. KORS value creation has been staggering (of course, that was before they went public).

[Jurgis]

I find it puzzling that so many people think fashion is a bad business. Most of these companies we're talking about grew from $0 to $billions in a short period of time. KORS value creation has been staggering (of course, that was before they went public).

 

I don't think anyone is saying that fashion is a bad business for fashion owners or early-stage-growth-investors. I.e. if you get in at early stage, you can make multimillions as you suggest.

 

It's the value investing in fashion business that is difficult, because usually you can only buy them at value prices if they stumble. And when they stumble their business is far from good. It becomes turnaround investing and turnarounds are tough to call. ;)