Company Overview
Michael Kors Holdings Limited (KORS) is a specialty retailer engaged in the design and retailing of Michael Kors branded apparel, accessories, and fragrances for both men and women. The company's inventory include women's and men's casual apparel, watches, handbags, fragrances, eye-wear, leathered goods, footwear, cosmetics, miscellaneous jewelry, coats, men's and women's formal apparel, swimwear, furs, and ties.
Qualitative Upside
Michael Kors is best known and most popular for their watches and handbags, which are both high quality and in high demand amongst teens.
Just peruse this slideshow, which details 3 of Michael Kors' watches in the top 10 of the trendiest watches in 2014, including a Michael Kors' watch holding the top spot. This website shows that Michael Kors' watches are very highly rated and of superior quality than its peers. The company has already seen leaps in revenue due to its growing watch popularity. Just view this website to see that they are in pretty high demand across all aspects of apparel, ranking second in Best Tuxedo Brands, third in Best Slipper Brands, ninth in Top Handbag Designers, fifth in Best Underwear, and seventh in Best Watch Brands for Men.
Qualitatively, we see immense upside in Michael Kors' branded products, especially their watches and handbags.
Financial Model
Our financial model makes the following assumptions for the next six quarters into the end of FY 16:
- Topline growth will slow down at a rate equal to one-half the average of the growth rate in the past two/three fiscal years. For example, Q2 FY 15 Revenue Growth = 0.5 * [(Q2 FY 13 Revenue Growth + Q2 FY 14 Revenue Growth) / 2], and Q1 FY 16 Revenue Growth = 0.5 * [(Q1 FY 13 Revenue Growth + Q1 FY 14 Revenue Growth + Q1 FY 15 Revenue Growth) / 3].
- SG&A and COGS will maintain quarterly rates (percent of topline) equal to the average of previous quarterly rates.
- Shares outstanding will follow a semi-sporadic pattern fluctuating between 207 and 211 million.
| FORECASTED INCOME STATEMENT | Actual | Actual | Actual | Actual | Actual | Actual | Actual | Actual | Actual | Actual | Actual | L&F Forecast | L&F Forecast | L&F Forecast | L&F Forecast | L&F Forecast | L&F Forecast | L&F Forecast | L&F Forecast | L&F Forecast |
| Q1 | Q2 | Q3 | Q4 | 2013 | Q1 | Q2 | Q3 | Q4 | 2014 | Q1 | Q2 | Q3 | Q4 | 2015 | Q1 | Q2 | Q3 | Q4 | 2016 | |
| Net Revenue | $414.90 | $532.90 | $636.80 | $597.20 | $2,181.70 | $640.90 | $740.30 | $1,012.20 | $917.50 | $3,310.80 | $919.20 | $950.03 | $1,339.65 | $1,171.46 | $4,380.34 | $1,177.31 | $1,174.23 | $1,700.82 | $1,441.60 | $5,493.96 |
| % Change | 70.60% | 74.40% | 70.40% | 57.10% | 67.50% | 54.50% | 38.90% | 59.00% | 53.60% | 51.80% | 43.40% | 28.33% | 32.35% | 27.68% | 32.30% | 28.08% | 23.60% | 26.96% | 23.06% | 25.42% |
| COGS | $163.90 | $217.00 | $253.30 | $240.90 | $875.20 | $243.60 | $290.40 | $392.70 | $368.00 | $1,294.80 | $347.50 | $379.54 | $526.48 | $470.93 | $1,724.45 | $452.44 | $469.11 | $668.42 | $579.52 | $2,169.49 |
| % of Revenue | 39.50% | 40.70% | 39.80% | 40.30% | 40.10% | 38.00% | 39.20% | 38.80% | 40.10% | 39.10% | 37.80% | 39.95% | 39.30% | 40.20% | 39.37% | 38.43% | 39.95% | 39.30% | 40.20% | 39.49% |
| Gross Profit | $251.00 | $315.90 | $383.50 | $356.20 | $1,306.60 | $397.30 | $449.90 | $619.50 | $549.40 | $2,016.10 | $571.60 | $570.49 | $813.17 | $700.54 | $2,655.89 | $724.87 | $705.13 | $1,032.39 | $862.08 | $3,324.47 |
| % of Revenue | 60.50% | 59.30% | 60.20% | 59.70% | 59.90% | 62.00% | 60.80% | 61.20% | 59.90% | 60.90% | 62.20% | 60.05% | 60.70% | 59.80% | 60.63% | 61.57% | 60.05% | 60.70% | 59.80% | 60.51% |
| SG&A | $139.10 | $158.00 | $178.60 | $200.90 | $676.60 | $199.70 | $228.40 | $276.30 | $303.50 | $1,007.90 | $294.90 | $287.38 | $370.41 | $390.68 | $1,343.38 | $379.92 | $355.21 | $470.28 | $480.77 | $1,686.17 |
| % of Revenue | 33.50% | 29.60% | 28.00% | 33.60% | 31.00% | 31.20% | 30.90% | 27.30% | 33.10% | 30.40% | 32.10% | 30.25% | 27.65% | 33.35% | 30.67% | 32.27% | 30.25% | 27.65% | 33.35% | 30.69% |
| EBIT | $111.90 | $157.90 | $204.80 | $155.30 | $630.00 | $197.60 | $221.50 | $343.20 | $245.90 | $1,008.20 | $276.80 | $283.11 | $442.75 | $309.85 | $1,312.51 | $344.95 | $349.92 | $562.12 | $381.30 | $1,638.30 |
| % of Revenue | 27.00% | 29.60% | 32.20% | 26.00% | 28.90% | 30.80% | 29.90% | 33.90% | 26.80% | 30.50% | 30.10% | 29.80% | 33.05% | 26.45% | 29.96% | 29.30% | 29.80% | 33.05% | 26.45% | 29.82% |
| Other Expenses (Interest and Forex Rates) | 0 | 0.3 | 1.8 | 0.7 | 2.9 | 0.5 | 0.1 | 0.1 | -0.1 | 0.5 | 0.8 | 0.8 | 0.7 | 0.6 | 0.7 | 0.7 | 0.8 | 0.7 | 0.7 | 0.5 |
| Pre-Tax Income | $111.90 | $157.60 | $203.00 | $154.60 | $627.10 | $197.10 | $221.30 | $343.10 | $246.10 | $1,007.60 | $276.00 | $282.31 | $442.05 | $309.25 | $1,311.81 | $344.25 | $349.12 | $561.42 | $380.60 | $1,637.80 |
| Income Taxes | $43.20 | $59.80 | $73.00 | $53.50 | 229.5 | $72.10 | $75.50 | $113.50 | $85.00 | 346.2 | $88.30 | $90.34 | $141.46 | $98.96 | $419.06 | $110.16 | $111.72 | $179.65 | $121.79 | $523.33 |
| % Tax Rate | 38.60% | 37.90% | 36.00% | 34.60% | 36.60% | 36.60% | 34.10% | 33.10% | 34.60% | 34.40% | 32.00% | 32.00% | 32.00% | 32.00% | 32.00% | 32.00% | 32.00% | 32.00% | 32.00% | 32.00% |
| Net Income | $68.60 | $97.80 | $130.00 | $101.10 | $397.60 | $125.00 | $145.80 | $229.60 | $161.00 | $661.50 | $187.70 | $191.97 | $300.60 | $210.29 | $892.76 | $234.09 | $237.40 | $381.77 | $258.81 | $1,114.47 |
| % of Revenue | 16.50% | 18.40% | 20.40% | 16.90% | 18.20% | 19.50% | 19.70% | 22.70% | 17.60% | 20.00% | 20.40% | 20.21% | 22.44% | 17.95% | 20.38% | 19.88% | 20.22% | 22.45% | 17.95% | 20.29% |
| EPS | $0.34 | $0.49 | $0.64 | $0.50 | $1.97 | $0.61 | $0.71 | $1.11 | $0.78 | $3.22 | $0.91 | $0.92 | $1.44 | $1.00 | $4.27 | $1.13 | $1.14 | $1.82 | $1.23 | $5.31 |
| Shares Outstanding | 199.4 | 200.2 | 202.8 | 203.8 | 201.5 | 204.3 | 205.2 | 206.1 | 207 | 205.6 | 207.2 | 208 | 209 | 210 | 210 | 208 | 209 | 210 | 211 | 211 |
| Revenue / Share | $2.08 | $2.66 | $3.14 | $2.93 | $10.83 | $3.14 | $3.61 | $4.91 | $4.43 | $16.10 | $4.44 | $4.57 | $6.41 | $5.58 | $20.86 | $5.66 | $5.62 | $8.10 | $6.83 | $26.04 |
By this model, we project KORS to post a $5.31 EPS in FY 16, compared to Yahoo! Analysts' projection of a $4.78 EPS. Further, we see revenue per share increasing to approximately $26 per share by the end of FY 16.
Valuation
We have two methods of approaching this valuation:
1) Current Revenue Multiple * Forecasted FY 16 Revenue / Share
2) Graham Formula derived forward P/E * Forecasted FY 16 EPS
The first method achieves a valuation of approximately $110 per share. Forecasted FY 16 Revenue / Share is $26.04, and the stock is currently trading at 4.31x revenue multiple. As qualitatively explained above, we do not expect growth expectations for this company to slow down from a market perspective, and thus we feel a 4.31x revenue multiple is appropriate for FY 16. Multiplying 4.31 by 26.04 and we achieve a valuation of approximately $110 per share.
The second method achieves a valuation of approximately $130 per share. As outlined in the model above, we expect earnings to grow 35% from FY 14 to FY 15 and 25% from FY 15 to FY 16, thus averaging to a 30% annualized earnings growth rate between now and the end of FY 16. Using this earnings growth in a conservative Graham Formula (P/E = 9 + 0.5 * Earnings Growth), we achieve a forward P/E of 24. Multiplying this forward P/E by our projected FY 16 EPS of 5.31, and we see a valuation for KORS of approximately $130 per share.
Recognizing both methods as appropriate routes to valuing the upside of KORS, we average the two valuation to achieve a L&F price target of approximately $120 per share.
Conclusion
We believe the three assumptions that define our financial model are very conservative considering the growth machine that KORS has been in recent years. As such, we believe our price target of $120 to be very appropriate. This gives investors a potential for 60% return. Seeing as the stock is nearly 25% off its 52-week-high, we view this as a fantastic entry point for investors who believe in the Michael Kors product to continue solid revenue growth (keep in mind our model essentially halves the growth rate and still values the stock in a range of $110-130 per share).
