It is the right time to add Michael Kors Holdings Limited (KORS) to your portfolio, if you haven’t yet, as the stock is looking much promising now and the underlying factors are capable of carrying the momentum further. The stock holds a Zacks Rank #1 (Strong Buy) and has surged roughly 20% year-to-date demonstrating its inherent strength and long-term earnings growth projection of 25.4%. We believe the stock could prove to be a solid bet for investors.
Michael Kors’ primary strength is its earnings surprise history. The company had outperformed the Zacks Consensus Estimates in the past 9 quarters. Looking at its earnings surprise history of the last four quarters, this global luxury lifestyle brand has topped the Estimate by an average of 23.3%, including a whooping earnings surprise of 29.1% in third-quarter fiscal 2014.
Shares of Michael Kors crafted a new 52-week high of $99.74 on Feb 18, and have shot up approximately 29%, since posting solid third-quarter results. The quarterly earnings came in at $1.11 per share, cruising ahead of the Zacks Consensus Estimate of 86 cents and surging 73.4% year over year. Revenue for the first time surpassed the $1 billion mark at $1.01 billion, handily beating the Zacks Consensus Estimate of $860 million and escalating nearly 59% year over year.
A splendid performance prompted management to provide an upbeat guidance. Management expects fourth-quarter revenue to be $790 million to $800 million and earnings between 63 cents and 65 cents a share. For the full year, revenue is likely to be in the range of $3.18 billion to $3.19 billion and earnings are forecasted in the band of $3.07 to $3.09 per share.
Ever since Michael Kors posted better-than-expected results and provided a solid guidance, the Zacks Consensus Estimate has been trending upwards. The Zacks Consensus Estimates for fiscal 2014 and 2015 increased 10.2% and 9.8% to $3.12 and $3.82, respectively, in the last 30 days.
Michael Kors is seeking to carve a niche in the high-end retail sector by broadening its footprint in strategic markets and offering merchandise that caters to the elite. In addition to its watch and handbag collection, Michael Kors is now focusing on enhancing apparel, footwear and other miscellaneous categories to compete better with peers like Coach Inc. (COH), Hanesbrands Inc. (HBI) and Ralph Lauren Corporation (RL).
Moreover, the company plans to invest additional capital in its fourth quarter, which is expected to be diverted towards the opening of 9 new retail stores as well as its ongoing shop-in-shop conversions and investments to develop infrastructure and systems.
Michael Kors currently trades at a forward P/E of 31.70x, reflecting a substantial premium to the peer group average of 15.44x. Its price-to-book ratio of 12.41x is also significantly higher than the peer group average of 4.56x. Given the company’s compelling fundamentals, the premium valuation is justified.
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