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Michael Kors Initiated At Sell By CLSA, Sees Lack Of Major Drivers

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CLSA initiated coverage of Michael Kors Holdings Ltd (NYSE: KORS) with a Sell rating and price target of $45 as it sees lack of major drivers to boost sales given its biggest markets near maturity.

"Estimates and guidance for FY17 (current year) appear achievable, but we think the Street is too bullish on FY18. In the Americas and Europe, store expansion will stop after this year and growth will depend more on comps, which are declining," analyst Rick Patel wrote in a note.

Despite below-historical valuation, Street estimates for FY18 are $0.25 (5 percent) above CLSA view and Patel sees risk for downward revisions.

North America and Europe (90 percent of sales) near maturity while comps are under pressure In the Americas (about 70 percent of sales). Patel noted that the picture in Europe (about 20 percent of sales) is similar to the Americas as its footprint will saturate in FY17, while comps are falling on weak tourism/traffic and an increase in promotions.

Meanwhile, Kors is expected to benefit from one last year of retail growth in FY17 before its footprint saturates. As such, beginning FY18, growth will depend more on comps, which are declining on multiple headwinds.

The analyst sees FY18 North America wholesale to be down an estimated 9 percent as Kors excludes itself from promotions starting this February.

"Europe wholesale has also decelerated over the last few quarters and cannot be a dependable growth driver. We see a lack of high-conviction drivers that can turn these trends around in the near term," Patel highlighted.

Further, Patel expects EPS growth to primarily come from buybacks as more investments would increase expenses in FY17 and likely FY18, driving margins lower.

"On the bright side, we are bullish on Asia but at ev100/0 of sales, it's not big enough to offset softness elsewhere. Men's and the Access watch could be huge, but both are unproven," Patel continued.

At the time of writing, shares of Michael Kors fell 2 percent to $47.27.

Latest Ratings for KORS

DateFirmActionFromTo
Jan 2019Wells FargoMaintainsMarket PerformMarket Perform
Nov 2018OppenheimerDowngradesOutperformPerform
Nov 2018MacquarieInitiates Coverage OnOutperform

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