Morgan Stanley: Michael Kors A 'Best Idea' Investment

Shares of Michael Kors KORS traded lower by more than five percent on Monday following the company's first quarter results. While investors may have been spooked by Michael Kors' tightening margins guidance as the company continues to invest in more European stores, some analysts aren't sharing similar sentiments. In a note to clients on Tuesday, Kimberly Greenberger of Morgan Stanley defended Michael Kors' first quarter results which were “stellar” and that the stock pullback seen on Monday as a buying opportunity. Greenberger notes that Michael Kors has beat the consensus estimate every quarter since its IPO in December 2011. Not only did the trend continue on Monday but Michael Kors raised its fiscal 2015 earnings per share guidance to a range of $4.00 to $4.05 from a previous range of $3.85 to $3.91. The raised guidance, according to the analyst, is still conservative with opportunity for upside. In terms of guidance, Michael Kors also expects a high-teens comp which suggests an ongoing sales strength, however Greenberger notes that the company's 200 basis points EBIT margin decline guidance “spooked the market.” Greenberger added, “Interstingly, Michael Kors' first quarter guidance (sales $850 million and $0.80 at the highe end) implied 150 basis points of EBIT margin erosion, but because management did not quanity it, the market brushed it off.” As such, Greenberger finds Monday's sell-off in shares as being “puzzling the market would put so much stock in guidance.” European long-term outlook Greenberger describes Michael Kors long-term outlook as “robust” given the potential of the European market to grow to over $2.5 billion. “The European business is showing the same encouraging signs as Michael Kors North America did before it inflected higher,” Greenberger wrote. “Interestingly, Europe's fiscal 2014 $478 million revenue base was also nearly identical to Michael Kors' fiscal 2010 North American sales of $473 million.” The encouraging signs the analyst sees includes escalating brand recognition, broadening wholesale distribution, expansion in existing doors and 40 percent plus comp increases. New store openings and expansion early read During the first quarter, Michael Kors expanded and relocated six stores, approximately doubling the floor space to five thousand square feet to showcase footwear, apparel, watches and jewelry. By doing so, Michael Kors stores should see greater visit frequency and incremental purchases, according to Greenberger. The analyst is forecasting sales per square feet grows by five percent to $2,050 plus in fiscal 2014. In addition to relocating six stores, Michael Kors opened 13 net new stores with an average square footage of four thousand versus an approximate 2,500 square foot fleet average. According to the analyst, this suggests that even shopper appetite “remains strong across categories.” Inventory temporary inflated Michael Kors plans to open 42 stores from the first quarter throughout the third quarter while continuing a transition its e-commerce to an in-house operation from a third party wholesaler. Greenberger notes that both of these drove first quarter inventory to grow faster than sales. “We expect second quarter inventory growth continues to outpace sales but to a lesser degree than the first quarter's 21.6 percent spread (65 percent inventory growth less 43.5 percent sales growth),” the analyst projects before adding “we would expect inventory growth more closely resembles sales growth by December 2014 once e-commerce is up and running and the bulk of stores are open.” Shares are Overweight and “Best Idea” rated with a $105 price target.