It's High Time to Buy Michael Kors

Michael Kors Holdings  has emerged as a formidable player in the fashion industry that is gradually stealing customers away from its competitors. In what seems like no time at all, the company has secured a strong foothold in the fast-growing US luxury-goods sector.

Let's examine the company and see whether or not major players like Coach  and Ralph Lauren  can fend off strong competition from this fashion king.

Third-quarter earnings
Michael Kors posted astounding earnings growth of 77% in its latest quarter, while earnings per share came in at $1.11, which was significantly above analysts' estimates of $0.86 a share. Revenue stood at $1.01 billion, a staggering 53% increase over the same quarter last year.

Despite weak global economic conditions, same-store sales witnessed tremendous growth of 27.8%. The gross margin improved by 100 basis points to 61.2%. Selling, general, and administrative expenses climbed about 55% to $254.6 million partly because of increased marketing expenses and new store openings.

What is Michael Kors up to?
During the quarter, Michael Kors opened 43 retails stores, including 20 in North America, 19 in Europe, and four in Japan. In addition, more than 76 department stores were converted into branded shops-in-shops. The company has a further plan to open 57 stores in North America during this fiscal year, which is in-line with its long-term goal of operating around 400 stores.

Michael Kors has plans to grow its men's segment as well; at the moment, men's clothing and accessories sales contribute just 5% toward total revenue. The company recently said that it will expand its men's segment into a billion-dollar business. As part of this plan, the company will launch a new range of men's fragrances in the fall followed by aggressive promotional activities.

Many analysts believe that the company's focus on the men's segment could be a threat to Coach. Paul Lejuez, an analyst at Wells Fargo, said, "To the extent Kors pays more attention to men's, it would probably be a negative for Coach."

Michael Kors has signed a new agreement with Luxottica, the global leader in sports eyewear. The partnership means that Luxottica will produce eyewear for Micheal Kors Collection and MICHAEL Michael Kors lines for 10 years. The two luxury eyewear collections will be available at Michael Kors stores, select travel retail stores, independent optical stores, department stores, and Luxottica's retail outlets.

In an effort to increase its sales, the company is investing heavily in e-commerce. During the next quarter, Michael Kors will launch a new e-commerce site for North America. The site is expected to appeal to customers who prefer to shop from home rather than going to the physical stores; it will also act as a promotional tool for the company's latest products and deals.

Thanks to a robust performance during the third quarter, Michael Kors once again raised its earnings guidance for the year. Now the company expects per-share earnings of between $3.07 and $3.09, while sales are expected in the range of $3.18 billion to $3.19 billion. The previous EPS guidance was $2.77 to $2.81 on sales of $2.9 billion to $3 billion.

Industry peers
Coach recently released disappointing quarterly results due to declining sales in North America. The company earned $1.06 per share compared to $1.23 a share in the year-ago period. Similarly, revenue decreased by 6% to $1.4 billion. Coach's poor performance in North America was mainly attributable to weaker demand, higher competition, and lower traffic for its women's bags and accessories segment.

Although the company managed to deliver better results in the Asian and European markets, performance was partially offset by lackluster results in the North American region. In China, Coach saw robust sales growth of 25%, reflecting its strong foothold in a high-potential market for luxury accessories.

During the latest quarter, Ralph Lauren's EPS came in at $2.57, ahead of analysts' estimates of $2.51. Revenue grew 9% year over year to $2.02 billion. The company attributed strong revenue growth to marked improvements in its wholesale and retail sales. Retail sales rose 6%, driven by newly transitioned operations in Australia and New Zealand; wholesale sales grew 15% on the back of North American merchandise and improving business conditions in Europe. The company is optimistic about its future growth prospects and expects sales to grow by 7% this year.

Final thoughts
Michael Kors once again posted an admirable quarter, as earnings along with comps grew at a tremendous pace. While the company is performing well, it's also expanding, which shows that management is confident about its future growth prospects.

The company's investment in the men's segment and e-commerce will further boost earnings in the coming quarters. The recent agreement with Luxottica will give its eyewear more brand recognition among customers, which will eventually create more sales. The company has also raised its earnings outlook for the third time during this fiscal year, which is a great sign for investors.

Considering all of this, I believe Michael Kors presents a great investment opportunity at this point in time.

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Zahid Waheed 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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