KORS: Freight Train Keeps Rolling

Takeaway: Growth like this is tough to find in retail. KORS may look expensive, but we would argue that 25x next year’s earnings is cheap.

Growth like this is tough to find in retail. 2Q results were solid across every line of the P&L again this quarter. Most notably, underlying 2yr sales growth accelerated both in retail comps (+45%) and at wholesale (+75%) with Europe (+97%) a source of strength (yes, not a typo) outpacing domestic growth (+45). 3Q guidance had some concerned pre-market, but the company has established a track record since the IPO of setting a reasonable bar, issuing a positive preannouncement intra-quarter, and then topping higher expectations. We think KORS’ 2H outlook suggests much of the same and expect this one to keep working higher into year-end.


The longer-term growth story predicated on store growth, wholesale conversions, handbag and accessories mix shift, and e-commerce and international penetration is still very much intact. Store rollouts and wholesale conversions continue to track ahead of plan and are likely to drive continued outperformance over the near-term. We still don’t love the inventory levels (+90%), but the sales/inventory spread improved sequentially by +16pts to -15% in the quarter – notable and favorable for gross margins. With the sales/inventory spread negative for the third consecutive quarter now, we think it reflects KORS' aggressive store rollout, but is a risk worth noting as we head into holiday shopping season. With gross margins coming in well ahead of expectations, improved inventory levels, mix, and decision not to engage in competitor promotions, we think outlook for a contraction in 2H gross margins will prove conservative.

 

All in, we’re shaking out 10% above the high-end of initial Q3 and FY EPS guidance at $0.44 and $1.65 respectively and $2.15 for FY14. That’s over 100% EPS growth this year and +28% growth next year. KORS may appear expensive, but for a high end brand with this kind of share gain and growth trajectory, we would argue that 25x next year’s earnings is cheap.


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

 

KORS: Freight Train Keeps Rolling - KORS OUtlook table