Michael Kors Holdings Limited

KORS : NYSE : US$77.01
BUY 
Target: US$123.00

Consumer & Retail — Footwear and Apparel
SOLID Q1; BIG PICTURE GROWTH INTACT: REITERATE BUY, $123 PT
Investment recommendation
KORS reported solid Q1 EPS results of 91c vs. our 82c estimate. Stronger
comps (+24.2% vs. our 20% est.) and gross margin expansion (+20bps
vs. our -20bps est.) drove the beat. Broad based growth across
geographies and categories continues to be robust as evidenced by NA
comps of 18.7%, European comps of 54.2%, and Japan comps of 48.8%.
Not only does KORS continue to take share domestically, but it is also
taking share from luxury brands across Europe.

With respect to gross margins, wholesale margin expansion of 62 bps more than offset
incremental markdowns at retail (-48bps) that were driven by a higher
sell thru mix of markdown product despite the same SKU count and rate
of markdowns y/y. That said, margin guidance for Q2 and the year is
-50bps from down slightly previously as the much anticipated and very
natural evolution of margin normalization has begun. We therefore
expect to see modest margin contraction in both retail and wholesale in
the near term, until retail mix helps margins mix higher.

Overall, F2015 guidance was raised by a few pennies in excess of the beat. We believe
the stock’s reaction (-6%) is unwarranted given the momentum the
brand has across its business. Moreover, the current valuation (18x
forward EPS) puts KORS at a 30% discount to its growth rate. With still
vast market share growth opportunities in Europe and Asia, which
combined represented just ~16% of total sales last year, we would use
this weakness as a buying opportunity. We reiterate our BUY.
Investment highlights
Europe continues to experience dramatic growth (+128% in Q1).
With greater confidence in its brand positioning, KORS increased its
long term market opportunity to $1.5B in sales from $1B

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