Morgan Stanley On Michael Kors: Reaction Overdone, Buy The Pullback

Michael Kors Holdings Ltd KORS earned $0.11 per share on revenue of $1.06 billion in its second quarter, both topping analyst expectations. However, shares were punished on Tuesday after the company reported North American comps slowed to a low double-digit growth rate.

Kimberly Greenberger of Morgan Stanley is advising clients to buy shares following a near 8 percent decline on Tuesday.

"While the pace of slowing in North America is faster than expected, we think Kors comp delivers the best in Retail," Greenberger wrote in a note to clients on Wednesday.

The analyst adds that Kors continues to top earnings and revenue consensus estimates. In addition, the company's inventory spread narrowed 1,113 basis points sequentially to 1,049 basis points (+53.2 percent inventory – 42.7 percent sales growth), which should help reduce concerns of an inventory build.

Greenberger does admit that North American comp growth of 10.8 percent fell short of the 16.6 percent she expected. However, a trend of higher European penetration helped narrow the total company comp differential as European comps grew 41.1 percent.

Greenberger noted that Michael Kors updated full-year gross margin guidance of 61 percent (an improvement of 10 basis points year over year), along with a 29 percent operating margin guidance, should warrant shares trading at a premium to its peers.

Shares of Michael Kors were trading at $72.20, approximately 15 times cons CY15 $4.67 EPSe, which is below Coach Inc's multiple and the Specialty Retail sector average.

Shares are Overweight rated with a $105 price target.