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Luxury Update: Morgan Stanley Still Loves Michael Kors Despite 50% Year-To-Date Decline

November 16, 2015 8:37 am
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  • Shares of Michael Kors Holdings Ltd (NYSE: KORS) have lost nearly 50 percent year-to-date.
  • A team of Morgan Stanley analysts maintained an Overweight rating and $63 price target on shares of Michael Kors.
  • The analysts noted that Michael Kors' approximate $300 average selling price for its handbags offers a level of a protection versus the higher-priced European names.

A team of European, Asian and U.S.-based luxury goods analysts offered a global outlook on the sector. The analysts noted that while there is no "recessionary" scenario, sales of global luxury goods are expected to rise approximately 5 percent through 2019 while luxury makers should see an average 8 percent growth in their earnings per share.

Global luxury makers have seen their sales grow on average by 10 percent over the past year and benefited from an average 16 percent growth in their earnings per share.

The analysts said there will be a "wider divergence" in performance across peers with 2016 earnings per share growth estimates for luxury makers ranging from -6 percent to +15 percent. As such, "there should be winners" and "risks are greatest for brands not embracing change fast enough."

Michael Kors Remains One Of Only Two Overweight Rated Names

Morgan Stanley analysts maintained an Overweight rating and $63 price target on shares of Michael Kors. Shares opened 2015 trading around $75 a share.

The analysts pointed out that Michael Kors' does not operate an international e-commerce website, nor does it ship internationally, thereby limiting price transparency. As such, Michael Kors' regional prices are "relatively similar." In addition, Japan accounts for approximately only 2 percent of sales so if the company were to undertake any price adjustments, it will be immaterial to the P&L line.

Related Link: Michael Kors Tourism Traffic Down Significantly, New Channel Checks Show

The analysts also noted that the "pricing architecture" among the European luxury brands remains "the most vulnerable." However, the analysts stated that U.S. names, particularly Michael Kors, are "less impacted" given the lower average selling prices ($300 average handbag price) versus the more expensive European luxury names.

Note: Shares of European-listed Richemont (owner of Baume et Mercier, Cartier, IWC, among others) were upgraded to Overweight from Equal-weight, making it the only other Overweight name within Morgan Stanley's coverage.

Coach Most At Risk

According to the analysts, Coach Inc (NYSE: COH) faces risk given its "greater" international pricing discrepancies. In fact, prices are approximately 50 percent higher in Japan (12 percent of sales), and 70 percent higher in Hong Kong and Mainland China (14 percent of sales). As such, further pricing pressure for Coach could accelerate in 2016 and 2017 and the brand runs the risk that it may appear to be "overcharging" in certain regions.

Shares of Coach were maintained with an Equal-weight rating and unchanged $27 price target.

Tiffany: One Of The ‘More Protected' Luxury Brands

The analysts stated that Tiffany & Co. (NYSE: TIF) is "one of the more protected" luxury brands given its sustainable pricing strategy. The company has a strategy of pricing its products at only a five to 10 percent premium in Europe (12 percent of sales), 10-15 percent in Asia (24 percent of sales) and 20-35 percent in Japan (13 percent of sales) to largely cover its higher cost of international operations.

The analysts added Tiffany's "minimal" premiums in its international markets offer the company "greater flexibility" to increase its pricing due to unfavorable foreign exchange shifts.

Image source: Nic Taylor of Flickr

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