Michael Kors Is a Good Pick in a Growth Portfolio

Michael Kors Is a Good Pick in a Growth Portfolio

Michael Kors has grown quite fast, both in terms of fundamental business performance and stock price. Its share price has soared from $26 per share at the beginning of 2012 to $79.40 per share at the time of writing. Optimistic market momentum was driven by strong earnings results in its fiscal second quarter of 2014. Does Michael Kors' performance justify a current forward earnings valuation of 23? Let's find out.

High growth potential
In the second quarter, Michael Kors experienced 39% revenue growth to $740 million, while its operating income enjoyed a 40% rise to $221 million, and it had an operating margin of 30%. Currently, Michael Kors has 477 retail stores, 352 of which are company-owned. The company has delivered significant comparable sales growth in many important geographic areas; 21% in North America, 45% in Europe, and 15% in Japan. It said that it would continue to expand its retail business in other areas of the Far East via regional licenses, including 10 new locations opened in the recent quarter. Michael Kors expects to have as many as 200 retail locations in this region in the long run.

The company sees tremendous growth opportunity in its licensing business. In the second quarter, its licensing segment's revenue rose by 65%, driven by the strong growth of its luxury watch and jewelry business. Michael Kors will maintain this growth momentum by expanding the offering in its retail stores and rolling out additional shops that sell both jewelry and watches in its wholesale channel. Indeed, Michael Kors has been strengthening its position in the global luxury market, so it has great long-term growth potential going forward.

Coach will grow its Chinese and European business
In contrast, its direct competitor Coach had a much weaker performance with zero earnings growth. In the first quarter of 2014, Coach's revenue dropped by 1% to $1.15 billion, while its earnings per share stayed flat at $0.77. The company has been beaten in the North American market, with a 6.8% decline in comparable-store sales.

However, its Asian and European operations' top lines experienced good growth, especially China. In the full year of 2014, Coach expects to increase its square footage by around 25% by opening 30 new stores. It estimates total China sales of around $530 million, supported by double-digit comparable-store sales growth and strong distribution. The company also intends to expand its business in Europe by opening 70 wholesale and 10 retail stores across the region in the current fiscal year.

Vera Bradley might deliver good returns with its new CEO
Vera Bradley , the functional accessories retailer for women, reported that its comparable store sales declined by 3.7% in the second quarter of fiscal 2014. This was mainly due to the sluggish performance of its product offerings and reduced traffic. For the full year of 2014, comparable-store sales are expected to drop in the mid-to-high single digits, more than Vera Bradley originally estimated.

Recently, the company announced that it had a new President & CEO, Robert Wallstrom, the ex-president of the OFF Fifth Division of Saks Fifth Avenue. Under his leadership, the OFF Fifth Division increased its sales by 50% and achieved 100% growth in profit, driven partly by improvement in merchandise assortment and increasing brand awareness. With the new CEO and his extensive 30-year retail experience, Vera Bradley could potentially increase its comparable-store sales, open more stores, and boost its overall profitability and cash flow.

My Foolish take
Michael Kors deserves the highest forward earnings multiple because of its impressive operating performance and high growth potential. When growth is incorporated into the valuation, Michael Kors is the cheapest stock with a PEG ratio of only 1.12, while the PEG ratios of both Vera Bradley and Coach are higher at 1.55 and 1.52, respectively. Thus, Michael Kors could be a good stock in investors' growth portfolios.

Like Michael Kors, these stocks could also be in your growth portfolio.
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The article Michael Kors Is a Good Pick in a Growth Portfolio originally appeared on Fool.com.

Anh HOANG 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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