Why Michael Kors Refuses to Be Stopped

Why Michael Kors Refuses to Be Stopped

Even a slow summer for retail sales couldn't stop Michael Kors from forging ahead, growing sales and income at a market-beating rate. The company announced second-quarter earnings this morning, beating Wall Street's expectations and pushing shares up 5% in early trading. The result was a strong showing for a brand that has been riding high all year, and Kors once again managed to succeed in the two areas that it needed to.

Michael Kors wins with strong sales
The basis for Kors' jump is its continued comparable-sales growth. The business is trouncing its competitors, and this quarter it put up a 22.9% increase. The company had forecast a 15% to 20% increase in comparable sales, but historically it's a conservative estimator. While the increase is the smallest quarterly gain that the business has put up, it's still incredibly strong. For a reference point, rival Coach's North American comparable sales -- the only geography the company offered detail on -- dropped by 6.8% last quarter.

Michael Kors was able to keep sales up even as it pushed its margins higher. Gross margin increased to 60.8%, a 1.5-percentage-point increase from 2012. That's an indicator of Kors' brand strength, and shows that the business didn't have to resort to discounting to get traffic through the door.

The success of excess
Even with lackluster sales, Coach has managed to avoid falling into the pricing trap that many retailers find themselves in. Gross margin has been strong through this year, pointing to the pockets of strength that luxury retailers have had. Analysts have cited an increase in the overall wealth of the richest Americans as the fuel driving the growth in luxury.

According to a Pew Research Center study released earlier this year, the richest Americans had an average increase in their net worth over the last few years, while the middle class experienced a decline. That jump in income has given the upper crust more to splash out on goodies like handbags and jewelry.

Although it's done so at a slower pace, Tiffany has also experienced growth this year. The jeweler had comparable sales and gross margin growth in its last quarter, as it continued to revamp its image. The distinction between the success at Kors and Tiffany and the shortfall at Coach shows just how important brand image is to luxury goods.

Michael Kors continues to grow
Kors has taken market share from Coach by being the new hot thing, and that hasn't shown any real sign of letting up. While comparable sales may be growing at an all-time low pace, they're still beating the pants off almost everyone else. The company is planning for more geographic growth this year, and the brand's continued expansion should lead to a strong increase in sales.

I've been loath to wholeheartedly recommend Kors for a while now. The combination of high-flying shares, high valuation, and a seeming lack of commitment from Michael Kors the man -- he's been hemorrhaging shares -- makes it hard. I still think there's a lot at risk here, especially if comparable sales growth continues to slide, but I can't say that this is a bad company or a bad stock.

Kors has shown strong planning and execution, and even if Mr. Kors isn't interested in being a massive shareholder, he's certainly given the company a face and an attitude that consumers seem to love. Even if the broader market continues to struggle, Kors looks like it's going to keep running.

Investing in the long run
Even when it's riding at its highest, Kors will still be subject to the whims of fashion. If that sounds like too much risk for you, then you might be a long-term investor. That's a good thing to be, and the Motley Fool has a special report on three businesses that we think every buy-and-hold portfolio could benefit from. Check out the Fool's free report "
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The article Why Michael Kors Refuses to Be Stopped originally appeared on Fool.com.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published