Michael Kors (KORS) Report

I’ve posted this elsewhere but was wondering if anybody else had additional thoughts. If I recall, there were at least a few of us who posted on KORS early this past summer. Is anybody still invested in it?

Michael Kors Holdings is far, far, far removed from what I would call my wheelhouse. Usually my fashion sense extends little beyond not wanting to drip salsa on my shirt. Reading extensively about fashion lines, runways and handbags while a Miami Heat is on in the background has made me question many things, not the least of which is my sanity. And, yet, here we are.

I stumbled upon KORS because it is one of TMF1000’s “super stocks”. After its huge stock price drop earlier this year, it seemed like a good place to jump in, and I made an initial purchase at about $47. I do believe that at current prices the company represents a great value and will reward patient shareholders.

One more note before we begin: For entirely my purposes to distinguish the two, “Kors” will refer to the fashion designer and founder of the company, “KORS” will refer to the company. Michael Kors could refer to either depending on context, but I have done my best to try to make it clear.

Michael Kors Holdings (KORS)

Twitter Intro

Michael Kors Holdings currently produces a range of products including accessories, footwear, watches, jewelry, men’s and women’s ready-to-wear apparel, eyewear and a full line of fragrance products. The company is often described as a “global luxury lifestyle brand”.

History

At the young age of 22 and just four years after dropping out of the Fashion Institute of Technology in New York City, fashion designer Michael Kors launched the Michael Kors womenswear fashion line at several prominent department stores including Bloomingdale’s, Lord & Taylor, Neiman Marcus, and Saks Fifth Avenue in 1981. After suspending the line in the early 90s due to bankruptcy and financial woes, the line continued in 1997. In 2002, Kors launched a menswear fashion line.

In 2003, Kors left a French fashion house as a designer in order to focus on his own brand. KORS went public in late 2011 propelling Michael Kors to billionaire status. The stock more than tripled until 2014 when it began a long descent down to where it now stands at about half its all-time highs.

Michael Kors, the person, appeared on Project Runway as a judge for the shows’ first ten seasons becoming a pop culture darling and helped KORS reach new business heights.

Business Model

Michael Kors earns money through three different revenue channels: retail, wholesale, and licensing.

1) Retail: In the fiscal year 2015, the retail business segment accounted for 48.8% of the company’s total revenue ($2.135 billion) and 44.3% of income from operations ($557 million).

For this segment’s purposes, KORS sells their products, as well as licensed products bearing their name, directly to the end consumer through our retail stores and concessions primarily in North America, Europe, and Japan. As of this past quarter, KORS operated 377 retail locations in North America, 155 in Europe, and 57 in Japan. They continue to open at an aggressive pace. In their last quarterly report, KORS stated they currently operated 589 retail locations worldwide, up from 473 locations at the same time last year. This month (November 2015), they are due to open a 9,000 sq. ft. flagship store, their largest yet, in Beijing.

There are four retail store formats:

I. Collection Stores – located in high-end and “prestigious” shopping areas

II. Lifestyle Stores – located in well-populated commercial and regionally-leading shopping plazas

III. Outlet Stores – Located in outlet centers, this is the company’s attempt to make some of their luxury items more accessible and to, ahem, “reach additional consumer groups” (that’s a direct quote from their 10K filing).

IV. E-commerce – Last fiscal year, KORS launched a new e-commerce platform in the U.S. and Canada and, since that time, digital sales have exploded in these regions. Digital flagships are expected to come online for European markets in the fall of 2016 followed by Asia thereafter. Currently their e-commerce business carries a lower operating margin than their physical retail locations, but the company expects this to change as the e-commerce platform grows and reaches scale.

In last week’s conference call (2QFY16), CEO John Idol stated:

We are seeing accessories and footwear emerge as dominant e-commerce categories, demonstrating the brand strength of these core luxury product lines. We believe the transition to online and mobile purchasing will continue worldwide, and we are poised to capitalize on this shift with the development of our digital platform to provide a global, multi-language, multi-currency e-commerce experience for our customers. The roll out of our digital flagships across Europe is expected to begin in fall of 2016, followed by Asia thereafter.

2) Wholesale: In the fiscal year 2015, the wholesale business segment accounted for 47.2% of the company’s total revenue ($2.065 billion) and 48.6% of income from operations ($611 million).

KORS’ wholesale segment sells products through major department stores and some specialty stores, primarily in North America and Europe. One thing KORS has been focused on for a while in this segment is to create a shop-in-a-shop experience in these department stores. From their 10K, KORS states they want to continue to “focus our sales efforts and drive sales in existing locations by enhancing presentation, primarily through the creation of more shop-in-shops with our proprietary fixtures that effectively communicate our brand and create a more personalized shopping experience for consumers.”

3) Licensing: In the fiscal year 2015, the licensing business segment accounted for 3.9% of the company’s total revenue ($172 million) and 7.1% of income from operations ($89 million).

KORS’ product licensing agreements allows third party manufacturers of a variety of products, including watches, jewelry, and fragrances, to use the KORS’ brand name and trademarks. KORS emphasizes that they are heavily involved in the design process for all licensed products.

In their last conference call, for their Licensing business segment they were particularly excited about: 1) Their new Gold Fragrance collection featuring scents for women “ranging from feminine and seductive to sparkling and sensuous”; 2) Their new eyewear partnership with Luxottica featuring aviator-style sunglasses; and 3) Their new connected fashion accessories line which will launch in Fall 2016 (I believe this is mostly smartwatches as part of their licensing partnership with Fossil).

Brand Strategy – Two Distinct Fashion Lines

The company offers two primary collections: the Michael Kors luxury collection and the MICHAEL Michael Kors accessible luxury collection. (Yes, the hope is that the clothes are more imaginatively designed than they were named.)

Michael Kors Collection – From the company’s latest 10K report, the Michael Kors collection company’s “establishes the aesthetic authority of our entire brand”. This collection is carried in a number of their retail locations, including all Collection stores, and higher-end wholesale locations including Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus, Holt Renfrew, Harrods, Harvey Nichols and Printemps.

MICHAEL Michael Kors Collection – The buzzwords for this space are “accessible luxury”. In other words, as a middle class American, while I will never be able to afford to buy my wife a $2,000 purse of blouse from the Michael Kors collection, I might be able to buy her a similar purse or blouse for $300-400 from the MICHAEL collection.

While this category offers footwear and apparel products, there is an especially strong focus on accessories here. The MICHAEL collection is carried in all Lifestyle retail locations and wholesale locations in department stores like Bloomingdale’s, Nordstrom, Macy’s, Harrods, Harvey Nichols, Galeries Lafayette, Lotte, Hyundai, Isetan and Lane Crawford.

The idea is that, with the two brands combined, KORS can target a broad customer base while maintaining a “premium luxury image”. Critics say the danger of offering an accessible luxury brand is that it cheapens the entire brand and lose its appeal among higher-end consumers.

For those interested, Michael Kors discusses the purpose and launch of the MICHAEL collection, among many other topics, in this interview from September 2012:

https://www.youtube.com/watch?v=hKkklMJ_4I4

Corporate Culture and Management

On Glassdoor, KORS has 3.4 stars (out of 5), 87% approve of the CEO, and 64% would recommend to a friend.

Michael Kors is currently the Chief Creative Officer and honorary Chairman.

John Idol has been serving as the CEO since 2011 and has been a director with KORS since 2003. Prior to working for KORS, Idol had previous career stops at Ralph Lauren and Kasper ASL. He has been in the fashion industry since 1994.

Joseph Parsons is the CFO and COO. He has worked at KORS since 2004.

Their 10K report states senior management has an average of ten years with the company.

Competition

KORS faces intense competition from a number of competitors in all phases of their business segments. For instance, in the retail and wholesale segments, KORs recognized these other companies by name in their 10K as serious competitors: Coach, Burberry, Ralph Lauren, Hermès, Louis Vuitton, Gucci, Marc Jacobs, Chloé, Tori Burch and Prada. And that doesn’t even take into account other design names like Kate Spade. With these companies, KORS will, according to their 2015 Annual Report, “compete on the basis of style, price, customer service, quality, brand prestige and recognition, among other bases.” I think we all get and understand this. Consumers have only a finite amount of money to spend and can choose to buy only a certain amount of purses.

In Wholesale, they are not only competing for the consumer’s finite purchasing money, but also with other manufacturers’ products for a finite amount of display space.

In Licensing, they reported watch sales were “soft” this past quarter. Hmm, Apple Watch anyone? While they are looking to introduce connected accessory devices next fall, they will have to compete with technology companies, as well as their more traditional competitors, moving forward in this space.

Risks and Concerns

Declining Same Store Comps. We cannot begin discussing concerns with Michael Kors without starting with the falling same store sales and massive slowdown in EPS growth.

Part of KORS stock price contraction has been a completely normal high-growth company evolving into a more mature one. The U.S. market is now fairly well saturated with KORS’ products and retail locations, especially the glamorous areas KORS wants to be associated with, and Michael Kors became a household name and a celebrity during his stint as a fashion judge on Project Runway. The high growth phase of KORS’ life is probably over so it makes sense that it’s P/E and probably its stock price would contract a bit.

Yet it was KORS falling same store sales that sent the stock price into a death spiral earlier this year. So why have same store comps declined? There are many answers:

1) Growth rates had been so high, they were simply unsustainable and made for hard-to-beat comps;

2) Current fashion trends are favoring smaller handbags. As an acute observer of fashion I’ve noticed this trend for a while now. Or I just read it on their last conference call. So while the number of handbags being sold is largely staying constant, the prices for these smaller handbags are decreasing;

3) The strong dollar is affecting margins in merchandise sold overseas and creating less tourist traffic in stores stateside;

4) Many retail stores and wholesale locations are located in malls and malls are currently operating in difficult circumstances and experiencing less foot traffic than in years past;

5) Perhaps, foremost, the aggressive opening of more stores, has led to a cannibalization of same store sales. Yes, that leads one to immediately wonder, “Why not just slow down the aggressive opening of stores then?” Many analysts ask the same question. In the last conference call, CEO Idol responded:

And, again, as we’ve said to you many times, because you’ve all questioned us regularly, I might say, on why do you open more stores.

Well, we’re profitable when we open more stores. And people, while online shopping is absolutely a trend and it’s going to move the needle for the company, people will still go out and shop in a store. That won’t, at least while I’m alive, won’t have evaporated. So we’ll be in the right cities, in the right locations, and feel good about that.

Not sure how I feel about that response. Would welcome any comments or responses.

6) Finally, a robust online presence has led to less store traffic.

So, I would like to delve a little deeper into two of the above concerns.

Sale Cannibalization. First, they obviously recognize the trend towards e-commerce. They have invested heavily into this revenue channel and their North American online sales have taken off since last year. They plan on launching similar online platforms in Europe next year and Asia thereafter.

Yet they continue to aggressively open up new stores too. While this would be fine if same store comps were still growing, they’re not. They have a strong balance sheet with a $431 million in cash and only $7 million in debt. So that’s not the concern. I just wonder if this is the best way forward, opening so many new domestic stores while comps are still falling and while their online business is exploding.

Strong American Dollar. Another area I would like to address is the strong dollar and foreign exchange rates. This is absolutely killing their YOY comps right now. Reporting on its latest quarter, Motley Fool’s Dan Caplinger wrote:

Geographically, Kors continues to see strength in its overseas markets, even though currency impacts reduced their positive effect. In North America, revenue rose 4.5%, but Japanese sales rose 36% even after taking into account nearly 25 percentage points of currency-related downward revisions. European sales grew 21% in constant-currency terms, but that equated to growth of just 2.3% due to the weak euro.

From http://www.fool.com/investing/general/2015/11/04/kors-soars-…

But the strong dollar doesn’t just affect margins on products sold internationally. It also affects the money international tourists spend when visiting the U.S. Many foreign tourists like to buy high end products from the country they’re visiting. In the U.S. KORS has traditionally seen a sizeable amount of traffic and purchases from such tourists, especially in areas like NYC and South Florida. With the stronger dollar, less tourists come to the U.S. and the ones that do have less money to spend. In the last conference call, CEO Idol specifically addressed this concern:

…the moderation from our previous guidance also reflects the continuation of what we think is impacting us is the tourist traffic. Both in the department stores and in the retail channel, we have huge doors, whether it’s in New York, whether it’s in the Southern Florida area, all of us are now being impacted in parts of Texas because of oil prices there, that’s a little bit less tourist, but some of it’s related to the Mexicans shopping cross-border with the peso to the dollar.

Beyond these concerns, investors in any company dependent upon changing fashions will have to be concerned with…

Changing Tastes in Fashions. Beyond the falling same store comps, the one concern investors will always have with fashion is that tastes are fickle and apt to change. Of course, this is true! For instance, in my own life I can often be seen wearing blue jeans and Guy Harvey t-shirts. But fifteen-twenty years ago I would’ve been wearing something like blue jeans and an Aerosmith t-shirt. So big changes in taste, like mine, will always be there.

Oddly, I’m not too concerned with this though. Michael Kors has been designing clothes since his teens. He first introduced a ready-to-wear clothing line when he was in his early 20s in 1981! He has been wildly successful designing and selling clothes ever since. During this time we’ve seen many changes in fashion sense and tastes, but that hasn’t affected his ability to design successful lines of clothes. I do not see why, going forward, this would change. However, if Kors ever left the company, for personal, health or other reasons, I would seriously consider selling or at least lightening my position.

Revenues and Earnings


Revenue (millions)		Q1		Q2		Q3		Q4
2012				243.1		305.5		373.6		379.9
2013				414.8		532.9		636.7		597.1
2014				640.8		740.3		1,012.2		917.4
2015				919.2		1,056.6		1,314		1,081	
2016				985.9		1,130				

Earnings (per share)		Q1		Q2		Q3		Q4
2012				0.13		0.25		0.28		0.22
2013				0.34		0.49		0.64		0.50
2014				0.61		0.71		1.11		0.78
2015				0.91		1.00		1.48		0.90
2016				0.87		1.01		

Current (11/4/15, 2016 Q2 Earnings)

Revenue Growth (millions)
2015 Q2 TTM Revenue = 3,905
2016 Q2 TTM Revenue = 4510.9
Year Over Year Revenue Growth = 15.5%, last quarter 23.6%

Earnings Growth (per share)
2015 Q2 TTM Earnings = 3.80
2016 Q2 TTM Earnings = 4.26
Year Over Year EPS Growth = 12.1%, last quarter 21.08%

P/E = (Check current price) 42.57/4.26 = 10

1YPEG = 10/12.1 = 0.83

Balance Sheet

KORS’ balance sheet is nearly pristine:

Cash/cash equivalents = $431.541 million
Short term debt = $5.416 million
Long term debt = $4.123 million
Total debt = $9.54 million

Cash Flow

This is a little different. I’ve never calculated cash flow for a company before but am trying something new. Please feel free to let me know if you think this is useful in any way.

After guidance from TMF1000, I am equating cash flow with net cash from operations minus capital expenditures. This is how he calculates the measure for his page posts, and for an explanation of why he does it this way you can see this thread (requires Hidden Gems subscription): http://boards.fool.com/1008/kors-page-7-31980119.aspx?sort=w…


Cash flow (millions)		Q1		Q2		Q3		Q4
2013				 41.2		  29.6		103.5		124.1
2014				149.3		 (41.4)		215.0		112.3	
2015				149.2		(107.8)		350.4		501.7
2016				173.7		  25.7

Cash flow growth (millions)
2015 Q2 TTM Cash Flow = $368.7
2016 Q2 TTM Cash Flow = $1,051.5
Year Over Year Cash Flow Growth = 185.2%

Share Repurchases and Dividends

The company does not currently pay a dividend.

This past quarter the Board approved another $500 million in share repurchases. This raises their initial repurchase authorization to $2 billion, of which $758 million is available for future repurchases through March 2018. To date, buybacks have totaled approximately 23.2 million shares and $1.2 billion.

Conclusion – My Bullish Thesis for KORS

As an investment, KORS has several attractive qualities despite its obvious flaws:

Extremely Attractive Valuation. Currently Coach (COH), another struggling and much more mature luxury retailer, sports a P/E of 23.92. Ralph Lauren’s P/E is 21.37. Burberry’s P/E is 18.38. Kate Spade’s P/E is over 30! Now, I’m not saying these P/Es are or are not deserved. I just see no reason why KORS should be trading at half their peers’ valuation. IMHO, while KORS undoubtedly deserved to come off of its highs from a couple of years ago, the market vastly overreacted creating a great buying opportunity for patient investors.

Founder and Creative Director Michael Kors. I believe almost all companies’ histories reveal something important about their business. In this case, I believe it shows Michael Kors’ burning passion in life is fashion or, more specifically, designing clothes. While researching this report, I’ve come across several anecdotes driving this point home. These anecdotes ranged from how Michael helped design his mother’s wedding dress when he was still five to how he designed and sold clothes out of his parents’ basement as a teen. Are these stories true? I couldn’t tell you. What I do know is that everything in his life seems to have revolved around designing his own clothes even at remarkably young ages. Indeed Kors found incredible success doing so while in his early 20s.

This helps me trust that Kors, as the Chief Creative Officer, will not miss out on trends or make clothes that are out of fashion or that won’t appeal to contemporary tastes. He has designed clothes through numerous fashion cycles and has always been successful doing so.

Brand Recognition and Marketing. KORS has nearly become synonymous with high-end fashion, especially in the fashion accessory market. The accessories product category has been the fastest growing product category in the global luxury goods industry and a segment which they have aggressively pursued from the company’s beginning.

For publicity, KORS has managed to find a number of low cost ways to market their brand and products. The company hosts semiannual runway shows to highlight new products. They have had several celebrities sport their clothes on red carpets, including Halle Berry, Angelina Jolie, Blake Lively, Penelope Cruz, Jennifer Lopez, Michelle Obama, Gwyneth Paltrow, the Duchess of Cambridge, and Cate Blanchett. And Michael Kors himself has found ways to remain in the public eye as a fashion icon, like judging ten seasons on the Bravo/Lifetime series Project Runway.

Macro Trend Tailwinds. While they face several shorter-term headwinds (smaller average purse size, foreign currency exchange, etc.) management believes larger macro tailwinds are at the company’s back. These include a growing global accessory market, emerging middle classes in foreign countries, and multi-format retail operations, including a robust online presence and strategically-placed retail locations.

More growth in mature European economies is still possible. There are huge avenues of growth available in China, Japan and the rest of Asia.

Management understands the importance of e-commerce and is currently making the necessary investments to be a leader in that space for years to come.

Conclusion

Despite its low 1YPEG, this is not what one would characteristically call a “Saul” stock. I get that. Though avenues of potential growth clearly exist, it is much more of a value play than a growth story. The basic thesis is that after hitting the ball out of the park for so much of its early public trading history, the company stumbled and Mr. Market vastly overreacted. I would love to hear feedback though on what others think.

  • Matt
42 Likes

Hi Matt, I read your very thoughtful write-up on KORS and my first question is

Why do you think same store sales will stop falling? High fashion is known for exclusivity, and opening more and more stores in every out-of-the-way mall seems a way of degrading your brand, making you quite ordinary… as well as cannibalizing sales as you pointed out. Yet they are determined to keep doing it from what you say. Michael Kors may be a design genius, but not too smart about running his business. He may really send his company into a “death spiral” if he doesn’t reverse course, and even close a quarter of his stores (which he won’t do).

On the other hand, as you say the stock price and PE are quite low, but earnings for the last two quarters combined are $1.88, DOWN from $1.91.

What do you think?

Saul

2 Likes

Hey Saul, thanks so much for the response and for hosting your amazing board. I’ve learned so much from you and the other amazing contributors here, it’s almost hard to put into words how appreciative I am.

So just a few thoughts:

It might (or might not ) be important to understand that Michael Kors doesn’t run the company. As Honorary Chairman and Chief Creative Officer, he designs clothes and serves as a public face for the company, but I’m actually not sure if he ever handled the business side of things. CEO Idol is the Chairman and the business side is handled by real business people. I probably should have clarified that in my original post.

Why do you think same store sales will stop falling?

Well, it’s a good question but, no, I don’t think same store sales will fall forever. My reasoning is …

  1. The trend towards smaller and smaller purses will stop and reverse at some point. These types of things just seem to ebb and flow. And since smartphones are getting larger, I think there is at least a decent possibility that this trend ends sooner rather than later.

  2. The dollar won’t stay this strong forever either, though I readily admit I have no more expertise on this matter than I do high-end fashion! But the strong dollar is a double-whammy for KORS, much more than your typical American conglomerate, as it also hurts tourist traffic and spending in their stateside stores. I live in South Florida, where wealthy foreigners come all too often during the winter months and I can readily attest that the money they spend at higher-end stores can be quite a lot. In their last conference call, KORS CEO Idol stated that there had been much less tourist traffic in domestic stores lately.

I don’t want to just copy and paste or paraphrase it and take credit for myself, but Tom E. talks about the strong dollar’s effect on KORS at length in his Page 7 post on KORS here:

http://discussion.fool.com/1008/kors-page-7-31980119.aspx

When the dollar weakens, not only will earning comps go up, but the money foreign tourists are spending stateside will also increase. This will be a boon for KORs when it eventually does happen.

  1. Finally, they won’t be expanding stateside forever. They say their goal for number of stores is within reach and that they will reach it relatively soon (this is probably another thing I should have clarified in the original post). IMHO, when the building out phase stops, this will ease the pressure on same store sales.

High fashion is known for exclusivity, and opening more and more stores in every out-of-the-way mall seems a way of degrading your brand, making you quite ordinary… as well as cannibalizing sales as you pointed out. Yet they are determined to keep doing it from what you say.

To me, this is the million dollar question, surrounding KORS and I’m glad you highlighted it. Should KORS maintain their exclusive image and forget about the “accessible luxury” market, as many do think, or should they go after a broader range of customers but possibly put their image at risk doing so?

It probably comes as no surprise, but I like the two-pronged strategy of going after the mid-to upper-middle class too as well as the high-end consumers. You will only be able to sell so many $4500 purses and $2600 blouses stateside and/or globally. And while I can’t imagine what the margins are for products like that, the market is finite, no matter how much you penetrate previously untapped markets globally.

For instance, there is no chance in hell I would ever buy my wife a purse that cost thousands of dollars. Or a blouse that cost $2600. But, if my wife really wanted to spring for a $400-500 purse, we could do that.* And there are lots and lots and lots more of households like mine, far more than could ever be a KORs customer than if they didn’t go after this market. In my mind, this thinking works even better on a global scale. Middle classes are growing by leaps and bounds in Asia and South America, leaving KORS’ potential runway quite long (again IMHO). I think it can work.

but earnings for the last two quarters combined are $1.88, DOWN from $1.91.

Yeah, I know, I know. And you’re right. Earnings are basically flat right now, they are not growing, that’s for sure. But cash flow is growing, they have basically no debt to speak of and they’re sitting on a pile of cash, most of which they are allocating towards share buybacks. As long as the stores are profitable, they stay out of debt, and cash flow is increasing, and they stop building all these dang stores soon, I think KORS makes for a good investment at this price.

There is no doubt KORS is a flawed company, but I just don’t see any reason why they should be selling at half the P/E of their just-as-flawed peers.

Anyway, these are just my humble thoughts and reasoning behind this investment. I hope this helps but please, please remember that I’m the guy that just a little over a year ago opened up a brokerage account and put all my deposits toward a basket of 3D printing stocks less than a week after watching a Motley Fool marketing video late one night! But, hey, I didn’t want to miss out on the third industrial revolution! And I thought I was diversified because I had more than one 3D printing company!

Of course, I would welcome any further feedback/questions/thoughts on KORS.

Again, its amazing how much I’ve learned since then and a lot of that is owed to what I’ve picked up on this board. Thanks again Saul for everything.

*I am actually very fortunate and grateful to have a frugal wife who would be horrified at spending that much money for a purse.

  • Matt
12 Likes

Matt, I’m not the only one who liked this post. You won the MF Post of the Day today.

Saul

4 Likes

Very cool!

Matt,

Anyway, these are just my humble thoughts and reasoning behind this investment. I hope this helps but please, please remember that I’m the guy that just a little over a year ago opened up a brokerage account and put all my deposits toward a basket of 3D printing stocks less than a week after watching a Motley Fool marketing video late one night! But, hey, I didn’t want to miss out on the third industrial revolution! And I thought I was diversified because I had more than one 3D printing company!

You have indeed come a long way in a very short amount of time. That was an outstanding post, and showed considerable understanding of the business of KORS. You are maturing into a formidable investor!

Tiptree, Fool One guide

4 Likes

Tiptree and Saul,

Thank you both for the kind words. I am now going to bask in this for a while.

  • Matt

One would believe that the investment bankers would maximize the value of the IPO for the sellers, the angels and the venture capitalists. Despite these best efforts, KORS, the stock, has a CAGR of 87.8% from IPO to bubble top on February 24, 2014. Either the IPO was too low of excessive exuberance overtook investors. My bet is on the latter. Since then KORS, the stock, has come back to earth with a CAGR of 13.7% since IPO.

On the subject of share buybacks, it’s often an illusion. The real story of KORS outstanding shares is this from the various 10-Ks

http://softwaretimes.com/pics/kors-shares.png

Management exercised options like crazy or angels and the venture capitalists dumped shares like crazy to take advantage of the bubble mania. Now they piously buy some back with your money.

Based on information I received recently about another stock I wrote “Good Growth, Bad Growth” to which Murph appended a good link.

http://discussion.fool.com/good-growth-bad-growth-31985869.aspx?..

Denny Schlesinger

2 Likes

of excessive exuberance overtook investors.

should read

or excessive exuberance overtook investors.

Sorry about that!

Denny Schlesinger

"Middle classes are growing by leaps and bounds in Asia and South America, leaving KORS’ potential runway quite long (again IMHO). I think it can work. "

I was surprised to learn that KORS do not have that much business internationally. For example China is consuming luxury products in large amount. A relatively unknown and new luxury brand is of interest since they appear more exclusive. Wouldn’t KORS benefit as they penetrate such markets?

The ‘middle class’ in China is very large, and what we consider the very-rich are also numerous. Those people are very keen on buying these kinds of luxury products.

tj

1 Like

One would believe that the investment bankers would maximize the value of the IPO for the sellers

Hi Denny, that’s not actually how it works. They usually don’t care a hoot about the stockholders of some little company that is IPOing. What they want is to put the price as LOW as they can get away with and convince the sellers to take. The investment banker’s goal is to get a big bounce post-IPO for themselves and for their favorite clients, who got shares in the IPO, and they get that by setting the price low, getting an immediate bounce, and all selling their shares for an immediate profit. That’s just the way it works.

Saul

4 Likes

The ‘middle class’ in China is very large, and what we consider the very-rich are also numerous. Those people are very keen on buying these kinds of luxury products.

Kors has licensed out the China portion of the market to the Ceo, Michael Kors and other shareholders.

http://seekingalpha.com/article/3005696-michael-kors-and-its…

Andy

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Hi Denny, that’s not actually how it works. They usually don’t care a hoot about the stockholders of some little company that is IPOing. What they want is to put the price as LOW as they can get away with and convince the sellers to take. The investment banker’s goal is to get a big bounce post-IPO for themselves and for their favorite clients, who got shares in the IPO, and they get that by setting the price low, getting an immediate bounce, and all selling their shares for an immediate profit. That’s just the way it works

I have to agree. My old neighbor had a good chunk of family money from real estate inheritance and he was a client of Goldman Sachs. He was essentially “forced” into all the IPOs, but the incentive was that GS had a lot of really good IPOs and they priced them low enough to keep their clients happy. The clients got in on some stinkers, but overall made out very well. Takes money to make money. So GS makes a sweet fee off the company they IPO, then their clients sell out at a big profit and pay another fee, or at least 1.5% yearly for management fees. Everyone wins except the suckers who can’t help buying it in the open market first day.

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Saul & PuddinHead, I’ll defer to your superior knowledge about investment bankers but I maintain that the rise of KORS was not sustainable. By the time it doubled it was time to take some off the table. When it doubled again the bubble burst. Four fold in two years is too good to continue.

And the rise in outstanding diluted shares is reported fact.

Denny Schlesinger

I’ll contend that KORS has never been a “luxury” brand. More in that mid tier level where they try to position themselves as “affordable luxury”

Once I started seeing a ton of coworkers shopping for KORS stuff on all of those deal websites it caused me to stay away as an investment. Fairly generic and just like a lot of retail lately, they are falling into the too much stuff trap where people just don’t need more of the same thing every other month

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Saul & PuddinHead, I’ll defer to your superior knowledge about investment bankers but I maintain that the rise of KORS was not sustainable. By the time it doubled it was time to take some off the table. When it doubled again the bubble burst. Four fold in two years is too good to continue.

And the rise in outstanding diluted shares is reported fact.

Certainly, and my conversation was not to contradict your statement. I did own KORS early on its way up. I was quite annoyed when MK sold a VERY large number of his shares early in the game.

In the end fashion is fad and at first people ran from boring old Coach to the new shiny KORS (and Kate Spade). It seems the economy and time have changed that.

The PE is crazy low though. I have not looked at any other numbers to check the value otherwise. Retail is puking at the moment, so there will be better opportunities.

opportunities.http://stockcharts.com/freecharts/candleglance.html?KORS,COH…

http://finviz.com/quote.ashx?t=kors

Retail is puking at the moment, so there will be better opportunities.

Not just retail! I sold my beach condo in July and I’m waiting for the right time to put the money to work. Finding the bottom is no easy task. In retail I’ve given up on “fads” but I’m long on off-price outfits serving the more numerous low income classes (ROST). There are many more poor than rich. Discretionary luxuries are too fickle for my taste, the basics are steadier.

A couple of my junk stocks are bottoming.

Denny Schlesinger