Michael Kors (KORS): Don't Fall for the Seemingly Low Valuation - Cannacord Genuity
Cannacord Genuity analyst, Camilo Lyon, isn't dissuaded from the Hold rating and $45 PT despite Michael Kors (NYSE: KORS) posting decent Q4 results. EPS of 98c topped the 95c estimate on slightly stronger retail comps (+0.3% vs. our -2.4%) and curiously strong w/s sales (+3.5% vs. the -7% est.). Gross margin of 58.2% was in line with estimates while SG&A dollar growth of 20.9% far outpaced our 11% est.
That all said, we remain concerned that the underlying trends at KORS are deteriorating. First, NA wholesale is under pressure due to excessive promotions, weak traffic trends, and general structural issues resulting in expected declines in the high teens (~$300M in 2017 ex-China shift). This sales contraction is probably concentrated to one retailer. In response, KORS is planning to reduce its promotional stance at department stores to improve the perception of the brand; however, the analyst expects demand will fall precipitously as the consumer has come to expect KORS on sale.
Also, the analyst questions how KORS will fair if the competition does not pull back on promotions. Recall, through discussions with our industry contacts, the analyst believes Tory Burch is entering the mid-tier price point ($200-$400) thus increasing the competitive threats in the industry.
KORS needs to rationalize far more NA distribution to achieve the desired results of greater full price selling and expect 2017 to be the beginning of an extended destocking trend for the brand.
Second, KORS's move to acquire its China license, which is nicely accretive to sales and gross margin, is having the affect of increasing retail sales by $200M, despite global retail comps that are expected to decline LSD. China is effectively adding 800bps to 2017 retail sales growth. This comes at a time when Q1 comp guidance of -MSD clearly points to further weakness in its business.
Last, while EBIT margins are expected to decline ~350bps we note that a 700bp reduction in the tax rate will boost EPS by ~40c. That coupled with China and a planned 17M sharecount reduction are the key (and sole) drivers behind 3% EPS growth. In sum, the analyst remains concerned that the core fundamentals of the business are deteriorating, and remains on the sidelines as the risk/reward does not look favorable, even with a seemingly attractive valuation.
For an analyst ratings summary and ratings history on Michael Kors click here. For more ratings news on Michael Kors click here.
Shares of Michael Kors closed at $45.55 yesterday.