Morgan Stanley On Michael Kors Holdings Ltd: Fundamentals Intact, Compelling Valuation
"Within the past week KORS dropped five percent on fears of heightened inventory and incremental promotions pressuring gross margin," Greenberger wrote Wednesday in a note to clients. "While our store checks found approximately 15 percent more of the store on discount at Retail (primarily camouflage collection), we have observed similar differentials on prior occasions without damage to gross margin."
Greenberger noted that previous store checks conducted in January and June both found 15 percent or more differential and in both quarters the company was able to deliver gross margin increase of 20 basis points.
The analyst added that the company's current gross margin guidance of -50 basis points “appears more than sufficient” to absorb a temporary promotional bump.
Greenberger believes that Michael Kors' North American market remains in a mature phase and not an over-saturated phase. To further this hypothesis, the analyst utilized Michael Kors' eComm “Locate in store” feature to scan inventory availability across 16 key handbags in six major markets. The conclusion was that 13 out of 16 handbags had at least three or more cities with 50 percent or more stores showing limited availability or out of stock.
Bottom line, the analyst believes that current share prices implies “essentially no future long-term growth.” The analyst has a different view and believes that the company could grow its earnings per share at a 19 percent plus three-year compounded annual growth rate. After three years, the analyst expects the company to grow its earnings per share at an 11 percent compounded annual growth rate.
“The stock is undervalued at the current price,” Greenberger wrote. “We see a clear path to KORS' $7 billion plus revenue and $6.00 plus earnings power by calendar year 2017.”
Latest Ratings for KORS
|Feb 2017||Evercore ISI Group||Downgrades||Buy||Hold|
|Nov 2016||Morgan Stanley||Downgrades||Overweight||Equal-Weight|
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