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Buckingham Lowers Michael Kors Price Target To $47, Sees 13% Upside

Buckingham Lowers Michael Kors Price Target To $47, Sees 13% Upside
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Buckingham has cut the price target of Michael Kors Holdings Ltd (NYSE: KORS) by $7 to $47, implying a 13 percent upside. The brokerage also cut its EPS estimate to reflect more conservative sales assumptions as retailers reduce their exposure to the Michael Kors brand due to over distribution.

Estimates And Expectations

Analyst Scott Krasik cut the 2016 EPS view to $4.39 from $4.43 and 2017 profit estimate to $4.31 from $4.57. The Street's consensus estimate calls for EPS of $4.42 FOR 2016 and $4.53 for 2017.

Krasik, who reiterated his Neutral rating on the stock, said the recent 21 percent fall in stock price largely prices in potential weak fourth quarter results and below consensus FY17 guidance when it reports on June 1.

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The Street expects fourth-quarter EPS of $0.97 on revenue of $1.15 billion, while Krasik slashed his earnings and sales forecast to $0.92 and $1.16 billion from $0.96 and $1.177 billion, respectively.

At current valuation levels (P/E 9.5x, EV/EBITDA 5.5x), Michael Kors trades at a discount to every other global branded company; the analyst noted that the company's valuation "has reached a level typically accorded to brands/retailers whose existences are in doubt."

That said, Krasik believes the margin drop "associated with a sales pullback will be better than feared and worst case EPS scenarios are not likely in play."

'Benefit Of The Doubt'

"While we are forecasting an 80 bps decrease in GM in FY17, we expect GM to inflect positively in 4Q when it laps the wholesale reset, inventory corrections and reduced licensing revenue. Going forward, a smaller refocused wholesale business will be positive for GM," the analyst said.

In North America, the analyst projects a negative comp and a larger decline in wholesale sales. Meanwhile, Krasik says negative comments from Macy's, Inc. (NYSE: M) and Nordstrom, Inc. (NYSE: JWN) are expected to impact wholesale growth in FY17.

However, the analyst continues to project growth in Europe (+8 percent) and Asia (+17 percent), although at a slower pace.

"While we do not see KORS getting 'the benefit of the doubt' in the current retail environment to support meaningful multiple expansion and justify a BUY rating at this time, at current levels, we view the risk/reward as slightly favorable (15 percent downside/20 percent upside)," Krasik highlighted.

At the time of writing, shares of Michael Kors were up 2.52 percent at $42.85.

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