This Retail Stock Will Make Over Your Portfolio

As it goes in the fashion industry, one day you're in and the next you're out. Now may not seem like the best time to be all-in on the luxury retail business. The economy's head is barely above water. Even iconic jeweler Tiffany (NYS: TIF) lost favor recently, signaling weakened demand for designer goods and exposure to Europe and other weak international markets. However, I'm not sure that's the case with newly public retail stock Michael Kors (NYS: KORS) .

Balancing act
For a company that started as a luxury sportswear product, Michael Kors has truly transformed its brand to meet the changing needs of its customers. Even as a high-end fashion business, Kors sells to the full scope of prices and customers. In addition to the many boutique stores the company currently operates in the U.S., Kors merchandise is also sold in hundreds of department stores including rivals Macy's and Nordstrom.

Michael Kors designs are flying off the shelves. From affordable accessories like gold-plated chronograph watches to popular handbags, the brand teeters between mass-market and high-end -- a balancing act that's working well for competitor Coach (NYS: COH) . Though the company's stock tumbled after reporting disappointing holiday sales on Jan. 10, it has realized strong growth in the past as an aspirational brand, one that floats just between the high- and middle-class offerings.

Creating demand
Consumers want affordable luxury. Tiffany rarely discounts its goods, and as a result, sales continue to slide. Coach and Kors get it. The launch of MICHAEL, a Kors collection of lower-priced apparel, has been a huge success for the brand. The company is looking to operate upward of 400 stores in the U.S. by the end of fiscal 2012. That's tremendous growth that I think the Kors brand can support.

On a forward price-to-earnings basis, the stock trades at a premium to its peers, including Ralph Lauren (NYS: RL) and Liz Claiborne (NYS: LIZ) .


Forward P/E

Michael Kors


Ralph Lauren


Liz Claiborne



While the stock looks pricey compared to that of industry rivals, Kors is growing its sales about 25% a year. That compares nicely to its retail rivals, especially considering the company's same-store sales were almost 40% in the last six quarters. Competitor Coach shows a 9% comp, which is hardly notable next to Michael Kors' expected comp of around 30%. Liz Claiborne has retracted at about 37% each year for the last five years, and is only expected to grow at 10.5% going forward. Meanwhile, Ralph Lauren, despite better growth, is still getting left in Kors' wake with expected growth of only 14% per year going forward. Because investors are evaluating Kors for the first time as a publicly traded company, it's easy to dismiss the stock's success as a passing trend. But I wouldn't be too quick to count out Kors.

Great brand momentum
If Coach's positive sales in emerging markets are any indication, Michael Kors' global expansion looks like a positive growth strategy. In February, the retailer plans to open a 7,000-square-foot store in Paris, which is in addition to recently launched or expanded boutiques in London, Milan, Munich, Seoul, and Tokyo. From where I'm sitting, the designer has a winning retail formula. For that reason I'm giving the stock an outperform rating on CAPS.

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