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KORS: The Story Has Fundamentally Changed

Takeaway: We’ve been KORS agnostic. But today we don’t think we can call KORS expensive – even after the pop - for now this name is unshortable.

 

Conclusion: We’ve been KORS agnostic since we issued our Black Book on March 12th. But today we don’t think we can call KORS expensive – even after the pop.  Every line of the P&L is on fire, and share gain from COH is unmistakable. We don’t love the inventories, and think that people will need to appropriately model occupancy for when comps slow, but for now it does not matter.  This name is unshortable at this price.

 

 

Straight 'A's for KORS this quarter. Every line of the P&L flies in the face of every global macro headwind the rest of the world is seeing. We don’t love the inventories, and think that people will need to appropriately model occupancy for when comps slow, but for now it does not matter. The only super bearish factor relates to COH, not KORS. The share shift is unmistakable.


Check out the math:

 

KORS: The Story Has Fundamentally Changed - KORS Share Chart

 

The clear takeaway from KOR’s Q1 results is simply the share it’s taking from COH. The contrast between the KORS results and what we saw out of COH is startling. Given the magnitude of the beat, margin trajectory, and more constructive outlook for F13, the intermediate-term tailwind behind this story remains firmly intact. As such, this story will remain expensive as great brands with robust earnings momentum and conservative expectations often do. We’d still rather buy FNP than KORS.


What We Liked:

  • Every line on the P&L came in better than expected with the top-line accelerating on both a 1 and 2-year basis by over 1000bps (to 71% yy). KORS levered that to +149% EBIT and +156% EPS growth.
  • Growth was driven by solid performance across all channels driven by Retail with +31pts from comp stores and +7pts from new stores along with Wholesale contributing +30pts and another +3pts from Licensing. With 23 stores opened in the quarter, KORS is tracking ahead of its plan for ~70 stores in F13. In fact, management suggested that it could be tracking closer to 75 stores for the year. In addition, store productivity continues to improve and is now approaching a run-rate of $1,600/sq. ft. With the retail channel accounting for nearly 2/3 of F13 growth in our model the incremental rate of door growth and productivity continues to be positive.
  • Unlike its major competitor, KORS is experiencing solid growth at wholesale with comps up double-digits driven by category expansion (small leather goods, footwear, etc.) in addition to shop-in-shop conversions, which are running ahead of plan and the company’s target of 100 for the year. At this rate we think they are likely running ahead of our expectation of 150 conversions, which would account for at least 5pts of total revenue growth in F13 alone.     
  • Gross margins: While the mix shift towards retail remains a key gross margin driver over a multiyear period, less discounting/markdown activity also contributed to the +415bps increase. This is in stark contrast to COH which was impacted by an increasingly promotional environment and re-instated couponing just a quarter after eliminating the practice.
  • European strength: It's been a while since we've heard a U.S. company note that its European business is ahead of expectations. Well, that’s exactly what KORS did. Yes, Europe still accounts for just under 10% of business so the bar is low, but KORS stores are comping up +23%. We don’t care how small of a footprint they have, demand is there for more – which is exactly what they got.

What We Didn’t Like:

  • Inventory growth was the biggest item we flagged last quarter and that continues to be the case. The  sales/inventory spread eroded 30pts to -31% with inventories up +102% outpacing sales growth of +71%. Given the rate of store growth, we’re willing to give the company a pass to a point, but it will be important to see this spread shift direction over the next quarter or two.
  • For those of you who are modeling out beyond a couple of quarters, keep in mind KORS’ occupancy costs. We think that the comp needed to leverage occupancy is 2x that of other high-end retailers. In other words, KORS could print an 8% comp and still barely leverage occupancy. This is often the case with retailers that are in a hyper-comp stage, as this is partly because of a mix shift towards very expensive real estate, which carries much higher sales per square foot. With comps up so strong, an increase in the hurdle rate of a few points is un-noticeable. But if and when comps revert back to something below 10%, remember that leverage works both ways.


All in, the intermediate-term tailwind behind KORS remainsfirmly intact. We’re shaking out at $1.50 and $1.95 in FY13 and FY14, respectively. That’s about 96% EPS growth this year, and 31% next year. We can complain til we’re blue in the face that KORS is too expensive, but for a high end brand with this kind of share gain and growth trajectory, we could argue that 25x next year’s earnings are cheap. We wouldn’t buy it here on the pop, but we think that it is absolutely unshortable right now.

 

 

Share Shift - Youtube:

 

(KORS Q1cc) “Retail segment, we have experienced strong double-digit comp increases and we believe that we can
continue at double-digit sales pace in our North American Wholesale channel


(COH Q4cc) “Sales were driven by international wholesale shipments, while shipments into U.S. department stores declined…While in U.S. department stores, sales decreased moderately on a y-over-y basis in the quarter”

 

Casey Flavin

Director

 

KORS: The Story Has Fundamentally Changed - KORS Margins

 

Accountability and Outlook: Here’s a look at KORS’s variance between guidance and actual, as well as outlook
for F13 vs expectations:

 

KORS: The Story Has Fundamentally Changed - KORS GTable

 

 

 

 


CHART DU JOUR: PRICELINE AND LV

Takeaway: MGM and PCLN commentary not matching up despite historical correlation

Priceline bookings closely correlate to Strip room rates 

 

 

  • Correlation between YoY change in Priceline's booked ADR and Strip ADR was 88% over the past 2 1/2 years
  • Despite Priceline's warning about Q3 bookings and ADR, MGM management cited a recent improvement in consumer trends
  • We remain skeptical of a Las Vegas Strip comeback this year and the long-term demographic picture may impede a return to peak metrics

 

CHART DU JOUR: PRICELINE AND LV - PCLN


Is The Manheim Index Signaling A Market Crash?

Takeaway: If correlations serve us correctly, we're due for a big drop in the S&P 500 rather soon.

The Manheim Index is a used car index that essentially values what used cars are worth. The company is the largest buyer of used cars in America, which it then auctions off. An index reading of 100 corresponds to January 1995.

 

If you look at the chart we’ve posted below, there appears to be a correlation with the S&P 500 vs the Manheim Index. In periods when the index went negative in terms of year-over-year growth (the black dips), the S&P 500 dropped hard and fast. This occurred back in 2001-2002 (dotcom bubble), 2007-2008 (credit crisis) and if we look at the chart now, it appears the S&P 500 is about to turn along with the index. This could be a sign that we’ve peaked at the 1400 S&P 500 level.

 

Correlations are just that, but we think this one has legs. It’s rarely discussed in the media and we think that it’s only a matter of time before stocks drop.

 

 

Is The Manheim Index Signaling A Market Crash?  - manheim SP500

 

 

Is The Manheim Index Signaling A Market Crash?  - manheim spx


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Abysmal Volumes

Takeaway: It's tough being a broker. NYSE volumes have fallen off a cliff since July and continue to trend lower.

These days, a rally doesn't take much. Pump the bid a few times and you'll get whatever price you want. It's not secret that volume in the stock market has been awful, but just how awful is the question? The answer will blow your mind.

 

We continue to see massive drops in NYSE volume day after day and this chart clearly illustrates just how bad the situation has become. Since the end of July, volumes have fallen off a cliff. For the broker-dealers out there trying to make a buck of equities - it just isn't happening. And if the trend is any indication of what's to come, volumes are going to get even worse by year's end.

 

 

Abysmal Volumes - NYSE Volume


UA: Going For Growth

Takeaway: UA international growth has slowed. The company needs to work extra hard to grow on a global scale.

Under Armour (UA) is a company that has enjoyed domestic growth over the last decade. The company hasn’t made inroads or attempted to penetrate international markets. International sales account for a low percentage of overall sales. Getting UA into the UK could prove even harder on news that Dick’s Sporting Goods (DKS) won’t be making a grand entrance into the UK via JJB Sports.  

 

UA will ultimately make it into the UK and will grow its business there but it will be costly and will take more time with Dick’s out of the picture. As you can see from the chart, growth has slowed year-over-year between 2010 and 2011. That trend could continue into 2012 without an international push from UA.

 

 

UA: Going For Growth - UA intl


Did We Mention Growth Is Slowing?

DID WE MENTION GROWTH IS SLOWING?

 

 

CLIENT TALKING POINTS

 

SLIGHT WORK, THE RIGHT WORK

Old Wall loves to spend its time forecasting earnings and pounding its chest about how great its calls are. That is, until they’re wrong. Then they get quiet or say something like “oh, but revenue doesn’t manner – only EPS does.”  That’s not a risk management process. In fact, that’s what  got us in trouble back in 2007. Value at Risk models and all that poppycock went out the door and the game was up. If you’re comfortable with a sellside report, you’ve got a tough stomach.

 

 

BACK TO THE VIX

We’re really biting our lip here with the VIX dropping below 14. Did you know the VIX hasn’t dropped below 14 since 2007? That’s scary. Every single asset manager is running around chasing beta and reallocating assets in an attempt to make some kind of return on their capital. We’re clearly overdue for a big drop in the market and with the VIX this low, it can’t be far off. NYSE volume continues to be abysmally low, but no matter. As long as the brokers have order flow coming their way, all is right in the world.

 

 

DID WE MENTION GROWTH IS SLOWING?

Hey, it may sound like a broken record at this point, but that IS the point. Growth is slowing and you’re stuck with it. Keynesian economics has worked real well for us thus far, hasn’t it? All this bailing out and printing of money and you’ve got a 1400 S&P 500. Buying anything here with the SPX this high and the VIX at 14 is maniacal. What do you think is going to happen? Are you that confident that we can pull off 1500 by year’s end? That’s wishful thinking for sure.

 

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ASSET ALLOCATION

 

Cash:                  UP

 

U.S. Equities:   Flat

 

Int'l Equities:   Flat   

 

Commodities: Flat

 

Fixed Income:  DOWN

 

Int'l Currencies: Flat   

 

 

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TOP LONG IDEAS

 

JACK IN THE BOX (JACK)

This company is transitioning from cash burn to $75mm annual free cash flow generation thanks to completion of a reimaging program and refranchising of JIB units. Qdoba is the leverage; a maturing and growing store base will bring higher margins. We see 8.5% upside over the next 6-9 months.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG            

 

FIFTH & PACIFIC COMPANIES (FNP)

The former Liz Claiborne (LIZ) is on the path to prosperity. There’s a fantastic growth story with FNP. The Kate Spade brand is growing at an almost unprecedented clip. Save for Juicy Couture, the company has brands performing strongly throughout its entire portfolio. We’re bullish on FNP for all three durations: TRADE, TREND and TAIL.

  • TRADE:  LONG
  • TREND:  LONG
  • TAIL:      LONG

 

LAS VEGAS SANDS (LVS)

LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TRADE:  LONG
  • TREND:  NEUTRAL
  • TAIL:      NEUTRAL

  

_______________________________________________________

 

THREE FOR THE ROAD

 

TWEET OF THE DAY

“Everytime I meet somebody who laughs at my trading methods or my rules, I sleep easy.” -@persist2end

 

 

QUOTE OF THE DAY

“The only function of economic forecasting is to make astrology look respectable.” – John Kenneth Galbraith

 

 

STAT OF THE DAY

NYSE volume was only down -42% versus our intermediate-term TREND duration average yesterday.

 

 


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