Kors 3Q Lawsuit No Kors For Concern
February 11, 2017
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got off to a seemingly inauspicious get-go yesteryear posting a long thesis on KORS a solar daytime earlier the company’s 3Q outcome came inwards curt expectations, sending the stock downwards equally much equally 15% intra-day (10% yesteryear the close). I increased my position yesteryear 50% at about the daily lows of $35, reducing my average inwards to US$39, together with increasing the position size to 25bp of the fund. The stock is trading upwardly today early on inwards the session at US$38, against a weak broader market, together with therefore my position is exclusively marginally underwater at present.
The 3Q outcome itself was genuinely broadly inwards occupation alongside expectations. While headline sales together with operating margins were downwards YoY, this was already baked into guidance/estimates. Comp sales declined slightly faster than expected (6-7%, vs. 5-6% expectations), but quarterly earnings genuinely compaction street estimates yesteryear a penny. The existent number was weaker 4Q outlook commentary, where the fellowship guided for an accelerated low-teen spend upwardly inwards comp sales inwards 4Q, together with reduced its 2017 financial EPS guidance from almost US$4.40 to almost US$4.20.
I couldn’t tending less. The outcome does non modify my long thesis inwards the slightest, because it is non based on an extrapolation of curt term earnings trends or whatever prediction almost whether together with when earnings turn. It’s based on the fact that the stock is cheap. Stocks are seldom inexpensive when the outlook is good. Stocks ever bottom when the outlook is miserable together with uncertain. Most investors are non willing to purchase stocks inwards the human face upwardly of considerable uncertainty. I am - peculiarly inwards my basketed value strategies, where results are non subject on whatever ane private stock, exclusively statistical averages.
I learnt a long fourth dimension agone that inwards social club to lose a lot of coin on a highly-rated stock, the fellowship demand exclusively accept ane bad year, whereas to construct a lot of coin inwards a lowly-rated company, they demand exclusively accept ane expert year. My sense is that expectations for KORS are similar a shot together with therefore depression that but ane or 2 quarters of marginally positive comp sales volition live on plenty to transportation the stock upwardly 30-50%. I similar those odds. At present, it feels obvious sales volition buy the farm on comping downwards for an extended flow - fifty-fifty to me - but the time to come has a habit of surprising us.
Important is the fact at that topographic point is comparatively piddling prove that KORS’s sales together with earnings pressure level are primarily due to fellowship specific problems. The entire luxury sector is going through tough times. Indeed, according to Morgan Stanley, KORS internet promoter score remains the highest inwards its construct peer group, together with KORS’s financial 2017 revenue guidance is likewise inside a whisker of all fourth dimension highs, despite headwinds from a potent USD. Maybe the fairer sexual activity volition produce upwardly one's heed they don’t desire to ain stylish handbags inwards time to come years, but I seriously doubtfulness it. If KORS were suffering sales declines land its peers were performing strongly, that would live on a much greater crusade for concern. There is a potent illustration to live on made that KORS' problems are primarily cyclical, non structural, together with nevertheless the stock is beingness priced equally if the issues are definitely structural.
Also beingness ignored is the company’s continuing potent FCF generation. By 3Q17’s end, KORS has moved into US$150m internet cash position, despite having spent almost US$1bn on stock buybacks inwards the yesteryear 12 months (1/6th of KORS’s electrical flow marketplace cap). With an EV of US$5.8bn, the stock is currently trading at 6.3x 2017 guided EBIT. That is cheap, fifty-fifty if earnings autumn some other 20% together with never recover.
Happy to remain long at these levels & to accept had the chance to add together to a greater extent than at $35.
LT3000