Tory Burch Stake Sale Suggests Michael Kors (KORS) is Overvalued

January 3, 2013 5:56 PM EST
Is Michael Kors Holdings (NYSE: KORS) overvalued? That's the chatter being discussed on trading desk today after a value of $3.25 billion was slapped on direct-competitor Tory Burch LLC by the way of a 25% stake sale by Burch's ex-husband J. Christopher Burch to General Atlantic and BDT Capital Partners.

While privately-held Tory Burch LLC is being valued at $3.25 billion, publicly-traded Michael Kors is valued at $10.35 billion. Is there a disconnect?

Let's look at the numbers...

In 2012, Tory Burch is said to have posted sales of $760 million, representing 1 year growth of 55.1%. If Tory Burch keeps up its 3-year revenue CAGR of 50%, the company can be expected to post revenues of $1.14 billion in 2013.

Meanwhile, Michael Kors posted revenues of $1.3 billion for the fiscal year ended March 31, 2012, representing growth of 62% from fiscal year 2011. For fiscal 2013 - which ends March 31,2012 - Michael Kors is expected to post revenues of $2 billion, representing growth of 54%. And for fiscal 2014, Michael Kors is expected to post revenues of $2.63 billion, representing growth of 32%.

Because of its funky March year end, Michael Kors' $2.63 billion sales figure in FY14 may be the best comparison to Tory Burch's 2013 sales.

Given that both have similar revenue growth rates, it might be appropriate to look at a multiple based on revenues. Based on the recent stake sale, Tory Burch is being valued at less than 3x forward sales. Meanwhile, Michael Kors is trading at a multiple of 4x forward sales.

Given that public companies should be valued more than private companies due to the liquidity-premium it can be argued that the valuation of Michael Kors is justified. However, it will certainly be part of the conversation going forward on Kors and could keep a lid on upside.

Tory Burch, for its part, may be contemplating the discount it is being given versus Michael Kors. It should be a given that an IPO is part of the conversation at the company.

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