I've started buying KORS

Investment Analysis Clubs Saul’s Investing Discussions
1

I’ve recently started a position in Michael Kors (KORS), which ironically was recently sold from the Rule Breakers service based on a member vote. But here are the numbers I get for historical TTM EPS and TTM Revenue. Note that KORS only reports GAAP numbers, so these are all GAAP except the most recent quarter’s EPS where they explicitly called out a $0.06 hit from FX, so I added that back:

                                       KORS
           Price: $42.11          1YPEG: 0.27          Adjusted P/E: 10          

                        Adjusted Earnings - Historical Stats
+---------------------------------------------------------------------------------+
| Fiscal Q.     Adj. EPS     TTM EPS      YoY TTM Growth      Growth Acceleration |
+---------------------------------------------------------------------------------+
| Q4 2015          $0.96       $4.35               35.5%                   -16.1% |
| Q3 2015          $1.48       $4.17               42.3%                   -22.4% |
| Q2 2015          $1.00       $3.80               54.5%                    -3.9% |
| Q1 2015          $0.91       $3.51               56.7%                          |
| Q4 2014          $0.78       $3.21                                              |
| Q3 2014          $1.11       $2.93                                              |
| Q2 2014          $0.71       $2.46                                              |
| Q1 2014          $0.61       $2.24                                              |
| Q4 2013          $0.50                                                          |
| Q3 2013          $0.64                                                          |
| Q2 2013          $0.49                                                          |
+---------------------------------------------------------------------------------+

                             Revenue - Historical Stats
+---------------------------------------------------------------------------------+
| Fiscal Q.      Revenue    TTM Revenue     YoY TTM Growth    Growth Acceleration |
+---------------------------------------------------------------------------------+
| Q4 2015          $1.1B          $4.4B              34.0%                 -19.4% |
| Q3 2015          $1.3B          $4.2B              42.2%                 -16.4% |
| Q2 2015          $1.1B          $3.9B              50.5%                   3.9% |
| Q1 2015        $919.2M          $3.6B              48.6%                        |
| Q4 2014        $917.5M          $3.3B                                           |
| Q3 2014          $1.0B          $3.0B                                           |
| Q2 2014        $740.3M          $2.6B                                           |
| Q1 2014        $640.9M          $2.4B                                           |
| Q4 2013        $597.2M                                                          |
| Q3 2013        $636.8M                                                          |
| Q2 2013        $532.9M                                                          |
+---------------------------------------------------------------------------------+

So a 1YPEG of only 0.27 with a TTM P/E of 10, while earnings and revenue are still growing rapidly (though decelerating as the law of large numbers kicks in).

The stock price has declined from a peak of around $98 in Feb, 2014 to around $42 today. This seems to largely be a reaction to slowing growth, and then the stock plummeted when KORS announced negative same store sales in the most recent quarter. I think people are looking at the recent decline of Coach and are throwing KORS into the same bucket and over-reacting.

For anyone who has access to Supernova, this is a wonderful and in-depth recent discussion of KORS (pros and cons) that evaluates the current situation far better than I can:
http://newsletters.fool.com/1502/coverage/2015/06/22/team-in…

Has anyone else here looked at KORS? I’m curious what others think. I personally put very little stock in the at-large RB membership that voted the company out of the service. I basically feel that even if the business has very mediocre performance from here, the stock is still too cheap.

Neil
Long KORS

12 Likes
2

Neil,

I went through a similar round of thinking a few weeks ago, and like yourself, I decided KORS was significantly undervalued. I owned a small KORS position once before and sold it when it last took a dive. But at these levels the stock looks very compelling and I started a synthetic LEAP position a few weeks ago and will wait on earnings to confirm whether or not all is as bad as it seems.

Best of luck,
–Kevin

3 Likes
3

I think it looks cheap also Neil but I have been buying it on the way down. I thought it was overdone while the company produces 35% revenue growth. Although the one thing that is worrisome is that growth is coming down. But as you point out at a P/E of 10 I can’t see this going much further down. I have 7% of my portfolio in Kors now.

Andy
Long Kors

1 Like
4

Hey Andy, with a 7% position you must have some conviction :slight_smile: What are your thoughts on the business?

Neil

5

Brave people like you can make serious money by knowing the company in question well but I have always tried to avoid potential value traps signalled by the absence of RS etc. I like my companies to be currently successful! I admit that is expensive. Good luck to you.

PS I do note the fall in China recently.

2 Likes
6

I like my companies to be currently successful!

I agree strelna, and that’s a lesson I’ve learned the hard way. But my thinking is that KORS is currently successful: 35% YoY TTM EPS growth with 34% YoY TTM revenue growth: those are great numbers. Growth has been slowing down from the hyper levels the company had been experiencing previously, but that’s to be expected as the company gets larger.

Now at first blush there is a red flag with the negative same-store-sales reported last quarter. But after reading a lot about it, I don’t think it’s as indicative as it might look at first: that quarter included the west-coast port closure, and that hurt KORS. And despite the negative SSS, both earnings and revenue still grew over 23% YoY in that quarter on a constant-currency basis. So while existing stores stumbled, growth in new stores (and online – up 63%) still drove results.

So there is certainly some concern, and some things that need to be carefully watched. But the stock is so cheap that I think these concerns (and a lot more besides) have largely been priced in: earnings and revenue growth could be cut in half and the stock would still be cheap on 1YPEG basis at today’s prices.

That’s how I’m looking at it anyway :wink: But I’d love to see some discussion! I’m new to this company.

Neil

10 Likes
7

So a 1YPEG of only 0.27 with a TTM P/E of 10, while earnings and revenue are still growing rapidly (though decelerating as the law of large numbers kicks in).

The stock price has declined from a peak of around $98 in Feb, 2014 to around $42 today. This seems to largely be a reaction to slowing growth, and then the stock plummeted when KORS announced negative same store sales in the most recent quarter. I think people are looking at the recent decline of Coach and are throwing KORS into the same bucket and over-reacting.

I do have a position in KORS (down heftily) and did recently add to it based on the argument posed above and similar ones “pounded on the table” by Tom E. For me, this is an experiment in the rallying ability of the above argument as these days, it is not my policy to add to stocks that are underwater. So experimenting, in this case (with a position still small overall even with the recent addition).

However, in spite of the strong argument for an undervalued stock that is being punished on several counts which if looked into more deeply could easily be the result not of poor performance (though poor performance stock price wise) but instead a result of such quick success of a recent IPO that company is plowing money back in to build on that early success so KORS can REALLY take off. Tom E. proposes once website is up and running and store expansion slows a little, cash flow will exceed 1 billion.

We’ll see. My biggest niggling doubt in spite of excellent arguments is I don’t find the fashion that compelling, especially at high end prices. Walked by a recent 50% off table at Bloomingdales of KORS purses. Not the super high end couple thousand dollar ones, but the ones that retail for only $350 or so (still above my handbag budget). But even at $175, I couldn’t find one that I might love to carry. Even if they were dropped down to $50, I couldn’t see anything that I felt was unique or delicious that would draw me even pretend to want one.

This does concern me.

okapimoon

14 Likes
8

Neil and all,

I like KORS at this price. I have admittedly poor taste in fashion and style and buy much of my wardrobe from Costco so the fact that the fashion doesn’t appeal to me doesn’t mean much. I have never met Okapimoon but love her name and her posts. Perhaps she is a fashionista and that should be taken into account.

The fact that Tom E likes this stock does give me some added confidence. I’m hesitant to copy much from one of his recent posts but here is one snippet:

If the stats below was anything but a retail store: Would you sell?

1. $1 billion in cash and zero debt
2. Revenue growing 17.8%, while net income grew 15.4, with a PE ratio of only 11
3. Cash flow generation of $500 million a year or $2.47 per share or for a cash flow yield of 5.4%
4. Beating their domestic peers and crushing some of them badly. I couldn’t identify one peer doing better than them
5. A company that could easily raise cash flow, by slowing their store expansion.
6. Comps that were down, due to many logical reasons

Or would you buy?

Here’s a link for those with RB access to his most recent KORS page post:

http://discussion.fool.com/1069/kors-page-8-31769450.aspx

Also TMFRP writes financial data point posts on stocks of interest. As part of that he calculates valuation scenarios based on current growth rates, 80% of current rates and for 120% of current rates. All those scenarios for KORS, including the “worst case” show substantial potential increase in share price. In the past when RP’s data has shown that finding for other stocks, the company has substantially outperformed. For those with SA access here is his post:

http://discussion.fool.com/1081/kors-financial-data-value-points…

Having watched COH tank recently I am cautious but KORS is putting up numbers that are hard to ignore.

David

9 Likes
9

Neil,

I’ve been thinking about KORS for a while and have not made a decision whether this is a contrarian opportunity or Buffett’s ‘buying fair company at a wonderful price.’

My sense is that decline in SSS is already priced-in, (perhaps oversold) but we need to really understand this sector for future projection.

KORS operates in an industry where things change very quickly. Fads come and go, and that’s how I see it. To confirm my understanding, I’ve been asking around group of lady friends who are very knowledgeable and sensitive in fashion changes. They agree that KORS is ‘kind of yesterday’ and hot new designer bags are out there taking some of KORS market. (i.e. Tory Burch) However, I think it’s too early to say KORS is following Coach. KORS may come back to become the hot trend once again, but it’s though to do so in its business environment.

I really like what numbers are telling me, but not what my ‘experts’ told me about KORS. I’m probably biased because of what they said but I think it adds color to KORS future growth and is a good starting point to continue my KORS homework.

Hex

8 Likes
10

Hey Neil,

Thanks for starting this thread. I considered opening up a position in KORS after reading Tom E.'s write-up on the company a few weeks back. After working out its 1YPEG calculations and looking over some other data, I took the plunge. To be honest, it’s encouraging for me to know that not only Tom E. likes it but that you and others on this board like it too.

From what little I know, the numbers look great. Like David, I would encourage everyone to check TMFRP’s table on it as well.

I have to agree with Okapimoon though, not impressed with its merchandise. About a week ago, my wife were out and decided to poke our heads into one of their nearby stores. This was about a week after I opened my position and I was curious what their stores were like.

Not impressed. The store was sparse, with limited selections and lots of empty space. It just didn’t seem like the company was making anywhere near efficient use of its available square footage. But I guess this is what’s considered cool and hip now?

My wife did like a lot of what was on sale but didn’t love any of it. And she would never purchase it for the amount displayed on the price tag.

Of course, neither my wife nor I are KORS targeted audience. My wife has simple tastes and likes to hunt down bargains at TJ Maxx and Kohl’s. My taste in fashion rarely takes me beyond a Guy Harvey shirt and khaki shorts.

Anyway, just my thoughts. Would love to hear what Andy and others have to say as well.

  • Matt
2 Likes
11

Of course, neither my wife nor I are KORS targeted audience. My wife has simple tastes and likes to hunt down bargains at TJ Maxx and Kohl’s.

Nor am I the targeting audience. I don’t buy high fashion, or high-priced fashion at all for that matter. I do however love design, unique artistry and flair and beauty in my fashion (just love hunting it out, use my own artistry to create something unique, and do so at a price that allows me to save money and add that savings to my investments!). I believe none of those are qualities (design, artistry, uniqueness, flair, unusual beauty) should be lacking in high-end products. Rather, in my mind they should be more on display. But I find none of them in what I’ve seen in KORS products I’ve recently come across.

okapimoon

7 Likes
12

Opened a small position about 2 weeks ago. I will be watching this one.

Wayne

1 Like
13

nothing to do with KORS but that
" at a P/E of 10 I can’t see this going much further down"
has often proved damaging to my wallet in the past. Because some of them kept going down.

14 Likes
14

T J Max and Costco are upscale for me, I seldom get much above Wal- Mart.

Which is why I have never bought clothing retailers stocks. I did make an exception with SKX. So thanks to this board, and all the posters on it. Because to me the only criteria for a shoe us how it treats my feet.

I once knew a guy who specialized in picking out store locations He used all the usual data but also shared with me two other things

  1. the shoes people wore. Shoes like tires are not a good place to pinch pennies, well off people will buy good shoes even if they wear $20 Wrangler jeans. 2) oil stains on parking spots for cars leaking oil.
3 Likes
15

Now at first blush there is a red flag with the negative same-store-sales reported last quarter. But after reading a lot about it, I don’t think it’s as indicative as it might look at first: that quarter included the west-coast port closure, and that hurt KORS. And despite the negative SSS, both earnings and revenue still grew over 23% YoY in that quarter on a constant-currency basis. So while existing stores stumbled, growth in new stores (and online – up 63%) still drove results.

So there is certainly some concern, and some things that need to be carefully watched. But the stock is so cheap that I think these concerns (and a lot more besides) have largely been priced in: earnings and revenue growth could be cut in half and the stock would still be cheap on 1YPEG basis at today’s prices.

Sorry I didn’t get back to you sooner Neil, I am on vacation and have to do relaxing things instead of looking at my stocks. :slight_smile:

I agree with what you said but I do not like all of the excuses they are handing out. Problems with the ports, strong dollar, and let’s throw in weather problems with one of their warehouses. I have to think that is a record amount of problems for one quarter. :slight_smile:

But like you said the stock is so cheap. In fact I do not think it has ever been this cheap. A few points that I would like to make is that the company has a share buyback program of 1.5 billion dollars that will run until May 2017. I hope they are buying some back right now at these prices.

Also they are guiding for Revenue of 930 million to 950 million next quarter, Which will only be an increase of 6%, they are also calling for EPS of $.76 at the mid point which will be a decrease of 16.5%. They are calling this year a year of infrastructure improvement. They expect the second half Revenue to accelerate.

So Neil this business looks like over all it is decelerating. But I am betting that this is just a temporary thing and that it will pick up and start growing again. They have some catalyst’s for this, Europe is improving, Japan is a bright spot, Their licensing segment is growing also. Finally they will have a full year of operating the Digital Flagship in the U.S. and hopefully with no disruption to the warehouse.
They also have the Canadian Digital Flagship store, which they will have opened for almost a year.

I am willing to give them this year and then re-evaluate them. After all they are really cheap. Somebody on the RB boards said that a company that is growing Earnings can not be a value trap. Well a company can grow earnings and have that growth coming down until they no longer are growing earnings. That is what I am keeping an eye on.

Andy

12 Likes
16

I am not a fashion buyer or a fashion investor. Neil, you are so good at analyzing companies and I hope this works out for you!

IMO the Kors brand peaked when Michael Kors was continually on Project Runway (his judge spot is now covered by Zac Posen). I don’t know what most women want or carry.

The Skechers (SKX) is interesting because they are shoes – and everyone needs shoes and they have good mid-price range, they are not top of the market. I like the mass appeal.

Luxury is fickle. If anything, I want to un-fickle my portfolio. But you may have a winner! Are you looking at this one as a shorer-term trade or as a long term investment??

Karen

no position in Kors, long SKX, I like SBUX for affordable luxury!

6 Likes
17

Hi Karen, great thoughts, though I think you give me far too much credit on the analysis front!

I don’t have a specific timeline for the investment: I’ll hold for as long as I think my thesis is playing out and the stock doesn’t seem priced unreasonably high relative to ongoing performance; and if I decide I’m wrong, I’ll sell and reallocate that capital to something else. It’s 3% of my portfolio.

I think all of the concerns people have mentioned are quite legitimate, and clearly the market shares many of them. I think the market is also very concerned about the Euro, as the KORS growth story is really about Europe and Asia (minus China): North America is already mature in most categories (like hand bags), though some newer categories are still experiencing rapid growth (like shoes).

But unless KORS is going out of business, I think the stock is too cheap. I could be wrong, of course! As I said, it’s 3% of my portfolio, so I’m managing that risk through allocation.

Neil

1 Like
18

Neil,
Thanks for starting this.
I don’t understand fashion and so I cannot understand why people pay so much for something like a handbag.
I bought Coach despite this when ti was recommended way back in 2012 and am still waiting. At that Kors was the favorite. Coach was still making money and had lots of free cash; it was old company; yet still has not come back despite bringing in a designer.

I think Saul said somewhere that don’t invest on hope. after considering and really felt convinced by TE arguments, i decided to stay away because, I felt I am hoping they will come back.
Thanks again.
can you explain your thesis?
usha

2 Likes
19

I had a look at KORS yesterday. I updates the revenue numbers as Neil’s had them rounded to the nearest $100M (when over $1). For anyone who is interested in more precise numbers, they are here:


	Revenue in $M				
	Q1	Q2	Q3	Q4	Total
2013	414.9	532.9	636.8	597.2	2181.8
2014	640.9	740.3	1012.2	917.5	3310.9
2015	919.2	1056.6	1314.7	1081	4371.5
2016	940(E)

I can’t argue that stock is not cheap, that it is currently a money making machine, or that Tom E makes some great arguments. My decision to not buy came down the the following reasons:

  1. I currently have 14 stocks including one retail stock (SKX). I am optimistic about SKX, its valuation, and its future growth for the foreseeable future. I think the growth is going to continue for at least another 2 years. My reasons for holding are basically unchanged from what I wrote in this post: http://discussion.fool.com/swks-skx-crto-which-one-is-really-the…
    I pay attention to my industry sector allocation and I ask myself would I sell some SKX to buy KORS. My answer is currently no.

  2. I don’t like that KORS has declining earnings, at least if you go by their EPS guidance of $0.76 for the quarter ended 6/30/2015. While the P/E is very low, I’d like to have visibility that the growth will resume. Maybe that will happen in the 9/30/15 quarter or the 12/31/15 quarter. I can wait until SKX and KORS have reported the last quarter and then reassess. I’d also like to see how the stocks respond to the earnings reports.

  3. I’d like to see the stock price bottom out. That hasn’t happened yet so I think it’s ok to wait until it starts to climb again.

Just my opinion.

Chris

13 Likes
20

KORS is a fashion company. A while back TMFAgewone made this comment:

Fashion is the place capital goes to die.

That won’t always be true, but I have trod lightly ever since.

Jeb
No position in KORS
You can see all my holdings here: http://my.fool.com/profile/TMFJebbo/info.aspx

9 Likes