Michael Kors Holdings Ltd in 2015: Can High-Growth Luxury Bounce Back?

By Markets Fool.com


Source: Michael Kors.

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Luxury retailer Michael Kors Holdings has been a good example of how great companies can run into problems with their share prices. The company has done well at maintaining impressive growth in sales and earnings, dispelling challenges from weaker rivals in the luxury retail area. Yet as the company prepares to report its fiscal third-quarter results on Thursday, shareholders have to wonder whether the stock will finally bounce back from its poor 2014 performance.

Kors put in a subpar performance in 2014, with its stock falling almost 8% even in an upward-moving stock market. Most of the retailer's problem arose in the second half of the year, as investors became troubled with what they saw as a disturbing trend toward slower growth rates. The big question Kors has to answer is how fast its growth will decelerate and whether it can at least temporarily reverse adverse trends to produce a positive surprise for those following the stock. Let's take an early look at what's been happening with Kors over the past quarter and what we're likely to see in its report.

Stats on Michael Kors Holdings

Analyst EPS Estimate

$1.33

Change From Year-Ago EPS

19.8%

Revenue Estimate

$1.30 billion

Change From Year-Ago Revenue

28%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

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Will Kors blow out earnings expectations again?
In recent months, investors have gotten more optimistic about their long-term views on Kors earnings, even though they've ramped back their near-term expectations. Projections for full-year fiscal 2015 and 2016 earnings have risen by 3% and 1% respectively, but the stock has fallen further, with a drop of 9% since late October.


Source: Michael Kors.

Just about all of Kors' losses came after the company reported its fiscal second-quarter results in November. Overall sales growth of 43% was impressive and led to earnings that far exceeded what investors had expected to see. But shareholders appeared more worried about the extent of Kors' slowdown in same-store sales growth, with comps rising just 16.4%. Even worse, Kors projected that its fiscal third-quarter growth would come in even slower than investors had feared, with the retailer expecting mid-teens comps once again.

Michael Kors now seems to have two vastly different markets, only one of which has huge growth potential. In North America, comparable-store sales rose less than 11%, and although store expansion bolstered its overall revenue growth to 30%, Kors' home region is growing more mature and has less potential for high-paced gains in sales. By contrast, comps in Europe and Japan soared 41% and 53% in the most recent quarter, which is even more impressive when you consider how much pressure both of those economies are under right now.

Source: Michael Kors.

Some of those who follow the stock have started giving up on Michael Kors as ever returning to its highest-growth history. In early January, analysts at Credit Suisse downgraded Kors, slashing their price target by more than 20% as they pointed to higher inventory levels and reduced customer traffic. Of greatest concern is a big jump in the amount of promotional activity, which is something that Kors has largely avoided even as Coach and other luxury retailers had resorted to discounting in the past.

What's clear, though, is that Kors now looks a lot more like a stock bargain than it has in a long time. With shares fetching less than 20 times trailing earnings, shareholders seem to have written off Kors prematurely and are assuming much slower growth than the company itself expects.

In the Kors earnings report, look at the international numbers to make sure that the retailer is still outperforming outside its North American market. With expectations so low, anything short of a disastrous quarter could lead to a nice share-price rebound for Kors -- and perhaps set the stage for a much more favorable 2015 for long-term investors.

The article Michael Kors Holdings Ltd in 2015: Can High-Growth Luxury Bounce Back? originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.