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CLSA Rates Michael Kors Holdings as a ‘Sell’

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Price movement

Michael Kors Holdings (KORS) has a market cap of $7.9 billion. It fell 2.8% to close at $46.87 per share on September 29, 2016. The stock’s weekly, monthly, and year-to-date (or YTD) price movements were -6.5%, -4.8%, and 17.0%, respectively, on the same day. KORS is trading 3.9% below its 20-day moving average, 5.8% below its 50-day moving average, and 4.1% below its 200-day moving average.

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Related ETFs and peers

The Vanguard Mid-Cap Growth ETF (VOT) invests 0.58% of its holdings in Michael Kors. The ETF tracks a market-cap-weighted index of mid-cap growth companies selected by the CRSP (Center for Research in Security Prices). The YTD price movement of VOT was 6.5% on September 29.

The iShares MSCI USA Quality Factor ETF (QUAL) invests 0.18% of its holdings in Michael Kors. The ETF tracks an index of US large and mid-cap stocks, selected and weighted for having a high ROE (return on equity), stable earnings growth, and a low debt-to-equity ratio compared with peers in each sector.

The market caps of Michael Kors’ competitors are as follows:

  • Ralph Lauren (RL) — $8.2 billion
  • Coach (COH) — $10.1 billion

Michael Kors’s rating

CLSA has initiated the coverage of Michael Kors Holdings with a “sell” rating and set the stock’s price target at $45 per share.

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Performance of Michael Kors in fiscal 1Q17

Michael Kors reported fiscal 1Q17 total revenue of $987.9 million, a rise of 0.19% over the total revenue of $986.0 million in fiscal 1Q16. Revenue from the retail segment rose 7.6%, and revenue from the wholesale and licensing segments fell 7.0% and 20.9%, respectively, between fiscal 1Q16 and fiscal 1Q17. The company’s gross profit margin and income from operations fell 2.2% and 24.8%, respectively.

Its net income and EPS (earnings per share) fell to $147.1 million and $0.83, respectively, in fiscal 1Q17, compared with $174.4 million and $0.87, respectively, in fiscal 1Q16.

Michael Kors’s cash and cash equivalents fell 52.0% and its inventories rose 11.0% between fiscal 4Q16 and fiscal 1Q17. Its current ratio fell to 1.8x and its debt-to-equity ratio rose to 0.53x in fiscal 1Q17, compared with 3.8x and 0.28x, respectively, in fiscal 4Q16. During fiscal 1Q17, it repurchased 8.0 million of its common shares, amounting to ~$400.0 million in open market transactions.

Projections

Michael Kors has made the following projections for fiscal 2Q17:

  • total revenue in the range of $1.07 billion to $1.09 billion, which includes a reduction in wholesale shipments and comparable sales
  • operating expense as a percentage of total revenue to rise in the range of 7.9% to 8.2%
  • EPS in the range of $0.84 to $0.88
  • tax rate of ~21%

The company has made the following projections for fiscal 2017:

  • total revenue to be flat and comparable sales to fall in the mid-single digit range
  • non-GAAP (generally accepted accounting principles) operating margin of ~21.5%, which excludes one-time acquisition-related costs
  • non-GAAP EPS in the range of $4.56 to $4.64
  • GAAP EPS in the range of $4.51 to $4.59
  • tax rate of ~21%

Next, we’ll look at Mohawk Industries (MHK).

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