Ride on Michael Kors' Trendy Coattails

 | Oct 04, 2012 | 9:30 AM EDT
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One of the best-performing stocks year-to-date is fashion house Michael Kors (KORS), which has risen 95%. The stock has been powered by exceptionally strong sales momentum. But, with some of its peers reporting lackluster sales, will Michael Kors stay in fashion?

Michael Kors went public late last year, and the stock has been a one-way ticket to the moon. Rescued from bankruptcy by fashion bigwigs Silas Chou and Lawrence Stroll, Michael Kors has gone from lowly men's shirt wear designer to a global brand available in 74 countries. Chou, the Hong Kong fashion billionaire (whose money comes from his father), and former Ralph Lauren (RL) executive Lawrence Stroll, have an enviable track record. The pair helped build Tommy Hilfiger into a global sensation in the 1990s.

Michael Kors' stock price has been pushed higher by very strong revenue growth. In fiscal 2011, the company reported revenue of $803 million, a 58% increase over fiscal 2010. Fiscal 2012 saw revenue of $1.3 billion, and the Street consensus for 2013 is $1.95 billion.

Last month the company announced plans to issue an additional 20 million shares at $53 apiece. Both Stoll and Chou recently celebrated their success by buying a pair of $50 million apartments in New York City's tallest residential building. (Now you know where the money from the secondary offering is going!) The pair controls more than 80% of Michael Kors through their Hong Kong holding company Sportswear Holdings. Michael Kors the man -- the company's namesake -- owns just 8% of the company. Today, the outfit sports market capitalization in excess of $10 billion.

With the kind of revenue growth Michael Kors is putting up, earnings-per-share estimates of $1.42 for fiscal 2013 are an afterthought. Investors are clearly buying the stock on revenue momentum.  But, in my opinion, it's not entirely unreasonable to slap a 40x to 45x multiple on the stock, and that would get you somewhere in the $56 to $64 range.

While others in the luxury space are reporting weak sales, Michael Kors is showing no signs of a slowdown. We've seen this before with fashion. When these companies are on trend, they are next to impossible to stop. Going into the holidays, Michael Kors will probably be "the" fashion brand to own. Barring some unforeseen economic disaster, I think investors can ride the momentum into the low $60s. One day this name will be out of fashion, but right now it is in. You can leave the runway.



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