Winners and Losers From This Fashion Boom
Michael Kors is firing on all cylinders, and the company looks remarkably well positioned for growth over the coming quarters. At the same time, booming demand for Kors products is generating a serious problem for Coach and big opportunities for Fossil .
is one of the most successful growth stories in high-end fashion over the past few years. The company sells handbags, shoes, watches, jewelry, and other accessories through three different channels: retail stores, wholesale, and licensing agreements.
Kors is an aspirational brand, and all kinds of celebrities have been portrayed in the media wearing the company's products. Higher prices generate profitability levels that are remarkably high in comparison to industry averages; Michael Kors has a gross margin above 60% and an operating margin in the area of 30% of revenue.
Sales have exploded at a growth rate of 47.5% annually over the last five years, and earnings per share have grown at an even faster 51.1% per year over that period. Earnings have been consistently strong in recent quarters, too, and the stock has risen by more than 60% in 2013.
There is no slowdown in sight: The company delivered a blowout earnings report for the third quarter of the year with revenues growing by 38.9% and earnings per share increasing by 44.9% to $0.71 per share.
Performance was strong across the board: Retail sales jumped 46.8%, driven by a 22.9% increase in comparable-store sales and 83 net new store openings in the quarter. Wholesale revenues increased 29.9% to $351.9 million and licensing sales grew by a whopping 65.4% to $32.9 million.
Management also raised guidance for the rest of the year due to strong demand and abundant growth opportunities. The company plans to open approximately 100 retail locations in fiscal 2014, including 54 in North America, 40 in Europe, and six in Japan.
The company is barely testing the waters in emerging markets, and initial response by customers has been quite promising. The way things are going, Kors has plenty of room for expansion, both in the U.S. and on a global basis.
The stock is not cheap at all, however; Kors trades at a P/E ratio of 36.5. But the best growth opportunities in the market are rarely available for cheap prices.
Coach is probably one of the biggest losers form the tremendous success of Michael Kors. The maker of high-end handbags, shoes, and accessories is clearly feeling the competitive pressure and has reported weak sales in North America over recent quarters.
Coach has over expanded and diluted its brand identity over the last few years, and competition from Kors is undeniably a reason for concern for investors in the company.
Sales in North America decreased by 1% during the last quarter, and comparable-store sales fell by 6.8% during the period. The company is doing better on the international front, though: On a constant-currency basis, international sales increased by 9% and China delivered a big increase of 35% in total sales.
Not everything is bad news for Coach, and the stock is quite cheap, trading at a P/E ratio below 15. Coach is offering plenty of upside potential if the company manages to reignite sales growth in the key North America region.
In the meantime, however, the competitive threat from Michael Kors will likely remain a considerable burden for investors in Coach.
On the other hand, Fossil is well positioned to benefit from booming demand for Michael Kors products. The company designs, manufactures, and sells watches, accessories and jewelry for different brands, and Kors is one of them.
Management is quite optimistic about the opportunities that Michael Kors means for the company. According to CEO Kosta N. Kartsotis during the latest earnings conference call:
The Kors jewelry business continues to be strong. Especially in Europe, it's showing very strong sell-throughs. And as we continue to build watch and jewelry shops with Kors around the world, I think that's going to be a big opportunity for us.
The company doesn't provide specific financial data for its different brands, but Fossil reported a big increase of 18% in sales and a jump of 25% in earnings per share during the last quarter, so the company is clearly performing strongly lately.
The stock is trading at a P/E ratio around 21; this doesn't look prohibitively expensive considering the company's financial performance and future growth opportunities as Fossil continues benefiting from its partnership with Michael Kors over the coming years.
Michael Kors is booming, and there is no slowdown in sight for this high-end fashion company. As long as the trend continues, this means good news for investors in Fossil and a considerable risk for shareholders in Coach.
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The article Winners and Losers From This Fashion Boom originally appeared on Fool.com.Fool contributor Andrés Cardenal owns shares of Michael Kors and Coach. The Motley Fool recommends Coach and Fossil. 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.