Michael Kors Presentation

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A presentation accompanying an equity research project, researching the financials, valuation, projected statements, and stock recommendation for Michael Kors Holdings Limited.

Text of Michael Kors Presentation

  • MICHAEL KORS Equity RESEARCH Report Presented by: Jeremy Edwards, Skylar Thomas, and James Nguyen

  • Stock Profile

    Headquarters: New York, NY

    We expect for Kors to OUTPERFORM, with a HOLD rating only if the firm does not offer new products, or brand loyalty falters.

    Our price target of $51.50 derives from a price range of $49.92 53.88, which represents 30.48% upside.

    $0.00$10.00$20.00$30.00$40.00$50.00$60.00$70.00$80.00$90.00

    Michael Kors - 1 Year Price Perfomance

    FY12A FY13A FY14A Gross Margin 59.9% 60.9% 60.6% EBIT Margin 28.9% 30.5% 28.8% Net Income Margin 18.2% 20.0% 20.2%

    FY15E FY16E FY17E Gross Margin 58.9% 58.9% 58.9% EBIT Margin 35.0% 34.1% 32.5% Net Income Margin 22.8% 22.9% 22.4%

  • Main Operations

    Michael Kors Holdings Limited is a global accessory, footwear, and apparel company and operates within three distinct segments of the market; retail, wholesale, and licensing.

    Operates in over 100 countries, with North America, Europe, and Japan being the 3 primary markets

    New investments in the European and Japanese markets, which increased revenue in Europe by 42% and 57% in Japan in the last quarter.

  • Financial Results (Q2 2015)

    $71$66 $68

    $70$75 $79

    $83

    -8.0%

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    4.0%

    6.0%

    8.0%

    $0 B

    $10 B

    $20 B

    $30 B

    $40 B

    $50 B

    $60 B

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    $90 B

    FY08A FY09A FY10A FY11A FY12A FY13A FY14A

    Revenue Growth, FY08 - FY14

    Net Sales Revenue growth

    Highlights Revenue: $24.8 billion, up 4.3% from 2Q14 Comps Positive: 4.2% Diluted EPS: $1.73; +13.8% Gross Margin: 33.7% of sales, an increase of 6 basis points from 2Q14 Net Earnings: $2.2 billion, compared to $2.1 billion in 2Q14 Operating Margin: 14.7% Net expenses (pretax): $92 million Gain on sale (pretax): $144 million

  • SWOT Analysis

    Strengths: Unique product line with exclusive designs High quality products allow positive pricing

    power Strong branding allows continued support of

    quality image High customer loyalty from repetitive

    purchases due to high satisfaction

    Weaknesses: Expansion of online sales in US and foreign markets may

    undermine retail sales revenue Lack of market exposure in foreign markets in

    comparison to other competitors Over-saturation of items lower luxury factor

    Opportunities: Emerging international interest in luxury American

    apparel makes foreign markets lucrative Company sector organization allows management to

    Threats: Changes in trends for luxury goods Significant competition among rival brands Shifts in demographics and lifestyle changes

  • Revenue Drivers

    Expanded global footprint of retail outlets (an additional fifteen retail outlets opened worldwide, up from 85 to 100)

    A push to increase the direct-to-user abilities of the online market.

    License revenues also increased due to the related sales of eyewear, footwear, and jewelry.

  • Expense Driver and Gross Margin

    Primary expense driver is expansion in Europe and Japan

    Sales growth has slowed, but SG&A has also decreased

    57.40% Gross Margin, and has been stable around this percentage for the last few years averaging 55.80% for the last five years

  • Industry Overview

    The apparel, accessories and luxury goods industry is highly fragmented with three top players accounting for 74.7% of the markets total revenues. However, customers have already developed their loyalty to specific brands. The competition among top players is intense in terms of pricing and promotional materials. The industry relies both on local spending and international tourism to drive up its sales.

  • Indirect Competitors

    In countries such as China, the market for luxury goods is increasing, yet customers do not have the disposable income to afford these goods, so imitation goods are prevalent.

    Amazon sells directly to the consumer, yet, reduces the revenues generated through selling to consumer within retail outlets

  • Recent Trends

    Primary cause for the recent downturn is lack of recent unique design and the loss of luxury factor by failing to maintain pricing power. Kors strong brand relevance and loyalty among customers suggests this will only be temporary as market adjust to changing design trends

    A correlation of -.71 between accessories and footwear means that Kors able to still maintain steady consumer demand despite fluctuations in market trends

  • Porters Five Forces

    Strong competitive rivalry among competing firms. Many of the firms within the industry have already built brand loyalty

    Buying power of consumers is contingent on the demand, so their threat is moderate

    Buying power for suppliers is low as they often compete for opportunities to supply luxury goods

    The threat of substitutions is weak as it is difficult to substitute luxury goods

    New entry into the market is difficult, but with enough initial capital, is possible, so the threat is moderate

  • Valuation Overview

    Discounted Cash Flow Analysis Terminal FCF Growth Rate of 2% WACC of 10.21% Mid-year Convention Multiple Method Terminal EV/EBITDA of 4.5x Comparable Companies Multiples

  • Comparable Companies - Apparel, Accessories and Luxury Goods Companies, with Revenue More than $200M($ in Millions Except Per Share and Per Unit Data)

    Operating Statistics Capitalization Projected ProjectedShare Equity Enterprise Revenue EBITDA Reported Net Income Revenue EBITDA EBITDA Margin

    Company Name Ticker Price Value Value LTM 2015E 2016E LTM 2015E 2016E 2014A 2015E 2016E Growth Growth LTM 2015E 2016ECoach, Inc. COH 32.28$ 8,958$ 8,572$ 4,183$ 4,469$ 4,656$ 921$ 957$ 1,063$ 404$ 510$ 597$ 4.2% 11.1% 22.0% 21.4% 22.8%Prada S.p.A 1913 4.04 10,334 10,638 3,938 3,750 3,891 965 932 988 471 421 456 3.8% 6.0% 24.5% 24.9% 25.4%Under Armour, Inc. UA 95.30 20,553 21,298 3,688 3,924 4,922 469 515 650 208 232 301 25.4% 26.2% 12.7% 13.1% 13.2%Fossil Group, Inc. FOSL 53.88 2,594 3,053 3,424 3,281 3,361 628 465 484 377 250 239 2.4% 4.1% 18.3% 14.2% 14.4%Hanesbrands Inc. HBI 32.72 12,820 15,315 5,845 5,853 6,042 960 998 1,064 405 599 724 3.2% 6.7% 16.4% 17.0% 17.6%Burberry Group plc BRBY 21.15 9,324 8,552 3,881 2,565 2,731 862 566 600 366 321 343 6.5% 5.9% 22.2% 22.1% 22.0%Herms International Socit RMS 381.57 39,833 38,836 4,900 4,873 5,312 1,748 1,692 1,912 859 1,013 1,144 9.0% 13.0% 35.7% 34.7% 36.0%Hugo Boss AG BOSS 100.90 6,964 7,164 2,979 2,789 2,957 623 610 652 333 339 384 6.0% 6.9% 20.9% 21.9% 22.0%Ralph Lauren Corporation RL 113.57 9,727 9,269 7,506 7,612 7,934 1,221 1,176 1,271 702 587 657 4.2% 8.1% 16.3% 15.4% 16.0%PVH Corp. PVH 92.08 7,601 10,516 8,045 8,025 8,357 953 1,101 1,152 439 577 625 4.1% 4.6% 11.8% 13.7% 13.8%

    Maximum 381.57$ 39,833$ 38,836$ 8,045$ 8,025$ 8,357$ 1,748$ 1,692$ 1,912$ 859$ 1,013$ 1,144$ 25.4% 26.2% 35.7% 34.7% 36.0%75th Percentile 99.50 12,199 14,146 5,609 5,608 5,860 964 1,075 1,130 463 584 649 6.4% 10.4% 22.2% 22.0% 22.6%Median 72.98$ 9,525$ 9,892$ 4,060$ 4,197$ 4,789$ 937$ 944$ 1,025$ 404$ 465$ 526$ 4.2% 6.8% 19.6% 19.2% 19.8%25th Percentile 32.39 7,940 8,557 3,736 3,399 3,493 687 577 650 369 326 353 3.8% 5.9% 16.3% 14.5% 14.8%Minimum 4.04 2,594 3,053 2,979 2,565 2,731 469 465 484 208 232 239 2.4% 4.1% 11.8% 13.1% 13.2%

    Michael Kors KORS 39.46$ 8,123$ 7,111$ 4,512$ 7,278$ 9,323$ 1,356$ 2,179$ 2,791$ 881$ 1,334$ 1,731$ 28.1% 28.1% 30.0% 29.9% 29.9%

    Valuation Statistics Capitalization Enterprise Value / Enterprise Value / Share Equity Enterprise Revenue EBITDA P / E Multiple

    Company Name Price Value Value LTM 2015E 2016E LTM 2015E 2016E 2014A 2015E 2016ECoach, Inc. COH 32.28$ 8,958$ 8,572$ 2.0 x 1.9 x 1.8 x 9.3 x 9.