Michael Kors Rebounds after Downgrade: What Wall Street’s SayingBy twocents@thestreet (Laurie Kulikowski) NEW YORK (TheStreet) - Investors bought shares of Michael Kors on Wednesday, a day after Credit Suisse downgraded the handbag and accessories retailers stock from the equivalent of a buy rating to neutral. Shares were rising 3.1% to $68.98 atBy twocents@thestreet (Laurie Kulikowski) NEW YORK (TheStreet) - Investors bought shares of Michael Kors on Wednesday, a day after Credit Suisse downgraded the handbag and accessories retailers stock from the equivalent of a buy rating to neutral. Shares were rising 3.1% to $68.98 at last check, with about 7.1 million shares changing hands -- above the three-month daily average of 3.7 million shares. The stock plunged more than 8% on Tuesday following Credit Suisses downgrade. Analyst Christian Buss once again renewed concerns over the companys margins given its dramatic step up in promotional activity during the holiday season. Buss wrote that Kors 15% or more earnings growth trend is now likely unsustainable. The issue is not a new one. Wall Street scrutinized Michael Kors during the back half of 2014 over how its merchandise markdowns -- something that the growth company did not have to do in its early stages -- would affect its margins and ultimately its earnings growth. In a year in which the S&P 500 rose 12%, Michael Kors shares fell 7.5% last year. Must Read: 10 Stocks Every Millennial Should Add to Their Portfolio Right Now Other analysts had varying opinions about Michael Kors markdown activity during the holiday season. Heres what Credit Suisses Buss and others had to say. Christian Buss, Credit Suisse (Neutral from Outperform; $79 from $103 PT) We are downgrading shares of Michael Kors Holdings to Neutral from Outperform in light of a dramatic ramp in promotional activity seen across the U.S. retail landscape for Michael Kors handbags (80% of sales). Our Outperform thesis has been predicated on the view that the company has maintained appropriate control of distribution which will limit margin compression as the brand matures. As a result, our view has been that even with U.S. comps slowing to the high-single digit level, 15%-plus earnings growth could be sustained. This no longer appears to be the case, as a combination of rising inventories and softening traffic has led to a dramatic step up in promotional activity across Michael Kors stores, eCommerce sites, and premium wholesale distribution partners. We lower comp and margin estimates accordingly. We lower our target price to $79 from $103 and downgrade shares from Outperform to Neutral. We are increasingly concerned about the level of promotions in the premium department store channel. The percent of SKUs on sale in premium department stores spiked from 5% in October to 31% in December. We found Michael Kors handbags to have the highest average percentage of SKUs on sale (18%) compared to the other top brands in the space (group average of 12%) for the 3 month holiday period. We were also concerned to find that 65% of handbags on the company owned website were discounted in December, making it the most promotional company eCommerce site out of the 6 brands we studied. Must Read: Cramers Outlook for the Dow 30: 10 Stocks That Were Top Performers Adrienne Yih-Tennant, Janney Capital Markets (Neutral) We expect Dec to be roughly in line with BOM expectations. Many retailers already gave guidance for a highly promotional holiday season. Promotions during the month began early and were deep throughout the season. The post-Christmas week has become increasingly important as a driver of sales (but not necessarily margin). Based on our checks, positive traffic & conversion, driven by flat-to-better/less deep promotional cadence, included AEO, BEBE, Old Navy, PSUN, and ZUMZ, while KORS was notably strong in conversion on deeper yoy promotions, which is likely to pressure merchandise margins. Kimberly Greenberger, Morgan Stanley (Overweight) Despite 40-50% off original prices, COHs semi-annual sale does not appear to be driving traffic or clearing inventory. KORS markdown activity has returned roughly in-line with last year after being elevated for most of December. We observed strong traffic throughout the month and believe conversion remains one of Retails best. Must Read: 11 Worst-Rated Stocks in the Dow Jones Industrial Average TheStreet Ratings team rates MICHAEL KORS HOLDINGS LTD as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation: We rate MICHAEL KORS HOLDINGS LTD (KORS) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The companys strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, impressive record of earnings per share growth, compelling growth in net income and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow. Highlights from the analysis by TheStreet Ratings Team goes as follows: The revenue growth came in higher than the industry average of 17.1%. Since the same quarter one year prior, revenues rose by 42.7%. Growth in the companys revenue appears to have helped boost the earnings per share. KORS has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with this, the company maintains a quick ratio of 4.17, which clearly demonstrates the ability to cover short-term cash needs. MICHAEL KORS HOLDINGS LTD has improved earnings per share by 40.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, MICHAEL KORS HOLDINGS LTD increased its bottom line by earning $3.21 versus $1.97 in the prior year. This year, the market expects an improvement in earnings ($4.18 versus $3.21). The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Textiles, Apparel & Luxury Goods industry. The net income increased by 42.0% when compared to the same quarter one year prior, rising from $145.81 million to $206.99 million. The gross profit margin for MICHAEL KORS HOLDINGS LTD is rather high; currently it is at 61.05%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 19.59% is above that of the industry average. You can view the full analysis from the report here: KORS Ratings Report Must Read: Byron Wiens 10 Surprises for 2015 and 4 Bonus Predictions Click to view a price quote on KORS. Click to research the Specialty Retail industry. ift.tt/1gB4pon
Posted on: Wed, 07 Jan 2015 21:19:09 +0000
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