michael kors presentation
DESCRIPTION
A presentation accompanying an equity research project, researching the financials, valuation, projected statements, and stock recommendation for Michael Kors Holdings Limited.TRANSCRIPT
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
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$0 B
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$30 B
$40 B
$50 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 market’s 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
Porter’s 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%Hermès International Société 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 9.0 x 8.1 x 22.2 x 17.6 x 15.0 xPrada S.p.A 1913 4.04 10,334 10,638 2.7 x 2.8 x 2.7 x 11.0 x 11.4 x 10.8 x 22.0 x 24.5 x 22.7 xUnder Armour, Inc. UA 95.30 20,553 21,298 5.8 x 5.4 x 4.3 x 45.4 x 41.4 x 32.8 x 98.8 x 88.7 x 68.3 xFossil Group, Inc. FOSL 53.88 2,594 3,053 0.9 x 0.9 x 0.9 x 4.9 x 6.6 x 6.3 x 6.9 x 10.4 x 10.9 xHanesbrands Inc. HBI 32.72 12,820 15,315 2.6 x 2.6 x 2.5 x 16.0 x 15.4 x 14.4 x 31.7 x 21.4 x 17.7 xBurberry Group plc BRBY 21.15 9,324 8,552 2.2 x 3.3 x 3.1 x 9.9 x 15.1 x 14.3 x 25.5 x 29.0 x 27.2 xHermès International Société RMS 381.57 39,833 38,836 1.7 x 1.8 x 1.6 x 4.9 x 5.1 x 4.5 x 10.9 x 9.2 x 8.1 xHugo Boss AG BOSS 100.90 6,964 7,164 2.9 x 3.1 x 2.9 x 13.7 x 14.0 x 13.1 x 28.0 x 27.5 x 24.3 xRalph Lauren Corporation RL 113.57 9,727 9,269 1.1 x 1.1 x 1.1 x 7.0 x 7.3 x 6.7 x 13.3 x 15.9 x 14.2 xPVH Corp. PVH 92.08 7,601 10,516 1.1 x 1.1 x 1.0 x 9.0 x 7.8 x 7.4 x 21.2 x 16.2 x 14.9 x
Maximum 381.57$ 39,833$ 38,836$ 5.8 x 5.4 x 4.3 x 45.4 x 41.4 x 32.8 x 98.8 x 88.7 x 68.3 x75th Percentile 99.50 12,199 14,146 2.7 x 3.0 x 2.9 x 13.1 x 14.8 x 14.0 x 27.3 x 26.8 x 23.9 xMedian 72.98$ 9,525$ 9,892$ 2.1 x 2.3 x 2.2 x 9.6 x 10.2 x 9.4 x 22.1 x 19.5 x 16.4 x25th Percentile 32.39 7,940 8,557 1.3 x 1.3 x 1.2 x 7.5 x 7.4 x 6.9 x 15.3 x 16.0 x 14.4 xMinimum 4.04 2,594 3,053 0.9 x 0.9 x 0.9 x 4.9 x 5.1 x 4.5 x 6.9 x 9.2 x 8.1 x
Michael Kors KORS 39.46$ 8,123$ 7,111$ 1.6 x 1.0 x 0.8 x 5.2 x 3.3 x 2.5 x 9.2 x 6.1 x 4.7 x
DCF Calculation DCF Calculation:($ in Millions Except Per Share and Per Unit Data)
ProjectedAnnual Unlevered FCF Projection FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22ERevenue: 4,371$ 7,278$ 9,323$ 11,466$ 13,730$ 15,752$ 17,172$ 18,556$ 19,650$ EBIT: 1,258 2,034 2,639 3,273 3,946 4,704 5,138 5,561 5,894 EBIT(1-‐t): 825 1,334 1,731 2,147 2,588 3,086 3,370 3,648 3,867 Non-‐cash Adjustments: 161 220 249 278 307 332 352 372 388 Changes in NOWC: (184) (205) (230) (241) (255) (248) (162) (158) (124) CapEx: (356) (534) (801) (1,202) (1,803) (2,164) (2,597) (3,116) (3,428) FCFF: 446 815 948 982 836 1,006 964 746 703 FCFF, remaining periods: 360 948 982 836 1,006 964 746 703 Present Value of FCFF: 353 865 813 628 686 596 419 358 Sum of PV of FCFF: 4,717
Normal Discount Period: 0.44 1.44 2.44 3.44 4.44 5.44 6.44 7.44 Mid-‐year Discount Period: 0.22 0.94 1.94 2.94 3.94 4.94 5.94 6.94
Annual FCFF Growth: 83.0% 16.3% 3.6% -‐14.8% 20.3% -‐4.1% -‐22.6% -‐5.8%
ProjectedAnnual Unlevered FCF Projection FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22EFCFE: 815 948 982 836 1,006 964 746 703 FCFE, remaining periods: 360 948 982 836 1,006 964 746 703 Present Value of FCFE: 353 865 813 628 686 596 419 358 Sum of PV of FCFE: 4,717
WACC Analysis Cost of Capital Risk-‐free Rate: 2.94%Market Risk Premium: 6.42%Beta: 1.25Cost of Equity: 10.97%Default Spread: 0.40%Pre-‐tax Cost of Debt: 3.34%Cost of Preferred Stock: 0.00%
Industry -‐ Unlevered BetaLevered Unlevered Beta % Debt % Equity Tax Rate Beta
Apparel, Accessories and Luxury Goods 0.97 17.2% 82.8% 35.0% 1.10
Michael Kors -‐ Levered Beta and WACC CalculationUnlevered Levered
Beta Debt % Debt Equity % Equity Tax Rate BetaOptimal Capital Structure: 1.10 1,395 17.2% 6,729 82.8% 34.4% 1.25Current Capital Structure: 1.10 -‐ 0.0% 8,123 100.0% 34.4% 1.10
WACC, Optimal Capital Structure: 9.46%WACC, Current Capital Structure: 10.97%Average WACC: 10.21%
Valuation Summary
We considered two scenarios: ▪ Base Case: Abnormal growth disappears in FY22. CapEx grows aggressively to be in-line with the guidance of 400 new stores to be opened. SG&A slightly decreases to 28% in 7 years. ▪ Bear Case: Revenue tumbles to $18.5 B in FY22 due to brand saturation. Michael Kors appears to be undervalued in the Base Case. Even in the more pessimistic scenario, the implied share price is close to its current value.
Valuation Summary – Base Case
$0.00 $50.00 $100.00 $150.00 $200.00 $250.00
9.7% -‐ 10.7% Discount Rate, 1% -‐ 2% Terminal FCF Growth Rate:
Terminal EBITDA of 3.0 -‐ 5.0 x:
12/31/2016E Reported P / E:
12/31/2015E Reported P / E:
LTM Reported P / E:
12/31/2016E EV / EBITDA:
12/31/2015E EV / EBITDA:
LTM EV / EBITDA:
12/31/2016E EV / Revenue:
12/31/2015E EV / Revenue:
LTM EV / Revenue:
Michael Kors -‐ Range of Implied Values Per Share
25th to Mean
Mean to 75th
Valuation Summary – Bear Case
$0.00 $50.00 $100.00 $150.00 $200.00 $250.00
9.7% -‐ 10.7% Discount Rate, 1% -‐ 2% Terminal FCF Growth Rate:
Terminal EBITDA of 2.0 -‐ 4.0 x:
12/31/2016E Reported P / E:
12/31/2015E Reported P / E:
LTM Reported P / E:
12/31/2016E EV / EBITDA:
12/31/2015E EV / EBITDA:
LTM EV / EBITDA:
12/31/2016E EV / Revenue:
12/31/2015E EV / Revenue:
LTM EV / Revenue:
Michael Kors -‐ Range of Implied Values Per Share
Min to 25th
25th to Mean
Conclusion
We think Michael Kors’s stock price will appreciate in the next 12-18 months for the following reasons: ▪ Strong brand relevance & customer loyalty ▪ Highly possible price increase for accessories & the launch of new handbag groups ▪ Overseas expansion
Q & A
Financial Ratios FY10A FY11A FY12A FY13A FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22EProfitability Ratios Return on Assets 25.8% 29.2% 40.1% 36.0% 32.0% 38.0% 32.6% 28.6% 25.6% 23.3% 20.2% 17.9% 15.9% Return on Capital 39.9% 43.7% 51.7% 44.2% 38.8% 45.6% 38.6% 33.2% 29.1% 26.2% 22.3% 19.5% 17.2% Return on Equity 83.2% 50.7% 52.9% 46.4% 43.5% 45.6% 38.6% 33.2% 29.1% 26.2% 22.3% 19.5% 17.2%
Efficiency Ratios Total Asset Turnover 2.4 x 2.4 x 2.2 x 1.9 x 1.8 x 1.7 x 1.5 x 1.3 x 1.2 x 1.1 x 0.9 x 0.8 x 0.7 x Fixed Asset Turnover 7.9 x 9.0 x 10.6 x 11.2 x 9.6 x 7.6 x 5.8 x 4.3 x 3.2 x 2.5 x 2.0 x 1.6 x 1.3 x Accounts Receivable Turnover 11.1 x 12.6 x 13.1 x 13.1 x 13.2 x 15.8 x 14.6 x 14.3 x 14.2 x 13.9 x 13.6 x 13.5 x 13.4 x DSO 33.0 29.1 27.9 27.8 27.6 23.2 25.0 25.5 25.8 26.3 26.9 27.0 27.3 Inventory Turnover 3.9 x 3.6 x 3.9 x 3.7 x 3.6 x 4.5 x 4.2 x 4.1 x 4.0 x 4.0 x 3.9 x 3.8 x 3.8 x DIO 93.0 101.2 94.7 97.8 100.2 81.0 87.7 89.3 90.4 92.2 94.4 94.8 95.8 Accounts Payable Turnover N/A 9.1 x 11.6 x 11.4 x 12.0 x 14.4 x 12.3 x 12.1 x 11.9 x 11.7 x 11.4 x 11.4 x 11.2 x DPO N/A 39.9 31.3 31.9 30.3 25.4 29.7 30.3 30.6 31.2 32.0 32.1 32.5 CCC N/A 90.3 91.3 93.7 97.5 78.7 83.0 84.5 85.5 87.2 89.4 89.7 90.6
Margin Analysis Gross Margin 55.5% 57.8% 59.9% 60.9% 60.6% 58.9% 58.9% 58.9% 58.9% 58.9% 58.9% 58.9% 58.9% SG&A Margin 34.8% 35.7% 28.5% 28.0% 28.6% 29.0% 29.0% 29.0% 29.0% 28.0% 28.0% 28.0% 28.0% EBITDA Margin 20.7% 22.2% 31.4% 32.9% 31.9% 29.9% 29.9% 29.9% 29.9% 30.9% 30.9% 30.9% 30.9% EBIT Margin 17.5% 19.3% 28.9% 30.5% 28.8% 27.9% 28.3% 28.5% 28.7% 29.9% 29.9% 30.0% 30.0% Net Income Margin 9.0% 11.3% 18.2% 20.0% 20.2% 18.3% 18.6% 18.7% 18.9% 19.6% 19.6% 19.7% 19.7%
Short Term Liquidity Current Ratio 1.9 x 2.8 x 6.0 x 5.8 x 6.1 x 6.1 x 6.7 x 7.1 x 7.1 x 7.5 x 7.8 x 7.9 x 8.0 x Quick Ratio 0.8 x 1.4 x 4.1 x 4.1 x 4.1 x 4.6 x 5.2 x 5.5 x 5.6 x 5.9 x 6.2 x 6.3 x 6.5 x
Long Term Solvency Total Debt/Capital 47.7% 4.7% NM NM NM NM NM NM NM NM NM NM NM Total Liabilities/Total Assets 68.6% 32.4% 18.8% 18.5% 16.8% 16.8% 14.7% 13.0% 11.6% 10.2% 8.9% 8.0% 7.1% EBIT/Interest Expense 75.6 x 167.9 x NM NM NM NM NM NM NM NM NM NM NM Total Debt/EBITDA 0.7 x 0.1 x NM NM NM NM NM NM NM NM NM NM NM
DuPont Analysis Net Income Margin 9.0% 11.3% 18.2% 20.0% 20.2% 18.3% 18.6% 18.7% 18.9% 19.6% 19.6% 19.7% 19.7% Total Asset Turnover 2.4 x 2.4 x 2.2 x 1.9 x 1.8 x 1.7 x 1.5 x 1.3 x 1.2 x 1.1 x 0.9 x 0.8 x 0.7 x Equity Multiplier 3.9 x 1.8 x 1.3 x 1.2 x 1.2 x 1.5 x 1.4 x 1.3 x 1.3 x 1.3 x 1.2 x 1.2 x 1.2 x ROE 83.2% 50.7% 52.9% 46.4% 43.5% 45.6% 38.6% 33.2% 29.1% 26.2% 22.3% 19.5% 17.2%