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Date:

22 Oct 2015

Michael Kors (KORS)


Rating:
Current Price:
Target Price:
52-Week Range:
Market Cap:
Enterprise Value:
*(for 12-18 months)

Investment Summary

OUTPERFORM*
39.46
51.50
38.06 - 78.59
8,234.0 M
7,816.7 M

We initiate our report with an OUTPERFORM rating for Michael Kors.


We think the company is underpriced due to investors overreaction to
last Q4s negative Same-store Sales. However, Michael Korss solid
fundamentals, such as brand relevance and strong balance sheet, might
trigger the stock to increase in value. The return of the handbag trend
and the release of watches new styles could be important factors
propelling the stock price. The rosier picture of the economy also bodes
well for the firm, given that consumers have more disposable income to
spend. Considering all of these elements, we rate Michael Kors as
OUTPERFORM. However, provided that Michael Kors fails to bring
newness to its brand, or customers lose their loyalty to the brand,
Michael Kors will deserve a HOLD.

Michael Kors - 1 Year Price Perfomance


$90.00

$80.00
$70.00
$60.00
$50.00
$40.00

$30.00
$20.00
$10.00
$0.00


Gross Margin
EBIT Margin
Net Income Margin

FY12A
59.9%
28.9%
18.2%

FY13A
60.9%
30.5%
20.0%

FY14A
60.6%
28.8%
20.2%

Gross Margin
EBIT Margin
Net Income Margin

FY15E
58.9%
35.0%
22.8%

FY16E
58.9%
34.1%
22.9%

FY17E
58.9%
32.5%
22.4%

Catalysts: 1) The return of the handbag trend Due to heavy traffic


to the firms website, and 68% of customers surveyed indicated the
intention to purchased Michael Kors handbag in the next 12 months,
we expect handbag trend to pick up. 2) The launch of new products.
For spring 2016, Kors introduces new innovative products offerings
including new handbag groups and watch styles. The trendy innovation
in terms of style and materials could win back customers support
Our price target of $51.50 derives from a price range of $49.92 53.88,
which represents 30.48% upside. We based our price calculation on the
discounted Terminal EV/EBITDA Multiple of 1.5x versus the median
peer EV/EBITDA Multiple of 7.0x. The selection of these multiples might
be conservative, given the firms brand dilution over time. In the DCF
Analysis, Terminal FCF Growth Rate and Cost of Capital are 1% and
10.21%, respectively. These assumptions produces an implied stock
price range of $50.68 - $52.36.

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods

Main Operations

Michael Kors Holdings Limited is a global accessory, footwear, and apparel company based in New York
City. The company incorporated in 2002 and has since continued to have an important share of their
market. Kors Holdings operates within three distinct segments of the market; retail, wholesale, and
licensing.
Within the product line itself; the largest
contingent driving revenues is retail outlets,
followed very closely behind the wholesale
market. For the totality of generated revenues,
the retail market consisted of 48.83%, wholesale
accounted for 47.24%, and licensing 3.93%.

The firm operates currently in around 100


countries and operates in company-operated
retail stores, leading department stores,
specialty stores and select licensing partners.
The primary market is North America, however
given the recent investments in Europe and
Japan, an increasing emphasis has been placed
on growing market share in these areas. For
instance, in the last quarter, revenue increased
in Europe by 42% and 57% in Japan.


The firm operates currently in around 100 countries and operates in company-operated retail stores,
leading department stores, specialty stores and select licensing partners. The primary market is North
America, however given the recent investments in Europe and Japan, an increasing emphasis has been
placed on growing market share in these areas. For instance, in the last quarter, revenue increased in
Europe by 42% and 57% in Japan.
The breadth of products produced is extensive, but as is
expected for the particular market in which this firm
operates. The firms product line includes both men and
womens wear, and produces products such as eyewear,
footwear, handbags, fragrances, watches, and apparel,
among others. The two primary collections are the Michael
Kors luxury collection, and the MICHAEL Michael Kors
accessible luxury collection. The accessible collection focuses
primarily on accessories, but both collections are available
through most retail outlets. The largest and most renowned
retail outlets in which Kors sells its goods are Saks Fifth
Avenue, Nordstrom, Bloomingdales, Macys, among others.



Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods


Business Risks
There is no current litigation again the firm, however, it did just settle a class-action lawsuit for $4.8
million dollars. The litigation brought against the firm claimed that the price tags used for the
merchandise in retail outlets were deceptive to the consumers. The firm wished to settle rather than
continue with litigation, furthering the costs effected by this case. The $4.8 million dollars, however, is
not a significant amount of funds comparatively to their overall operations (LaFreniere, 2015). The
biggest risk to the firm is the fluctuation of currency, given the relative size of the North American
market. When the U.S. market has a particularly strong correlation to that of the Euro or Yen, then
tourists visiting will be more reluctant to purchase. The effect showed greatest in the first quarter of
2015, when the firm posted its first sales loss in the companys history. With the announcement of the
loss, shares fell 24% to $45.93 (Kapner, 2015). Because of the overall effect the exchange rates had, this
could be seen as the largest risk facing the company.
Another risk facing the firm is the rate at which expansion occurred. The company is relatively new to
operating at such as size in so many retailers that it may be difficult to maintain its brand image and
financial performance. As long as improvements to the Management Information Systems, logistics,
product development, and distribution increases accordingly, then current financial projections should
remain intact.
Revenue Drivers
The largest revenue drivers from both the SWOT analysis and from recent financial earnings indicate, is
the expanded footprint of retail outlets globally, as well as a push to increase the direct-to-user abilities
of the online market. An additional fifteen retail outlets opened worldwide, up from 85 to 100. License
revenues also increased due to the related sales of eyewear, footwear, and jewelry.
Expense Drivers and Gross Margin
The largest expense driver is the expansion of operations in both Europe and Japan. This has maintained
a sales growth throughout the previous five years. While the sales growth has slowed, so too has the
selling, general, and administration costs. These costs are typically one of the largest costs associated
with net income, so having the ability to decrease those expenses while overall sales has slowed is key
to maintaining retained earnings.
The latest gross margin calculated showed a 57.40% margin, and has been stable around this percentage
for the last few years averaging 55.80% for the last five years. Both gross margin percentages are higher
than the industry average, which shows that the firm has been able to keep costs down despite the
recent expansions in Europe and Japan. The gross margin is also in line with the other performance
standards exhibited by the firm, in that their margin is higher than most competitors, or the highest in
the industry.






Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods

SWOT Analysis
Strengths:
Weaknesses:
Unique product line with exclusive designs
Expansion of online sales in US and foreign
markets may undermine retail sales
High quality products allow positive pricing
revenue
power
Lack of market exposure in foreign
Strong branding allows continued support
markets in comparison to other
of quality image
competitors
High customer loyalty from repetitive
Over-saturation of items lower luxury
purchases due to high satisfaction
factor
Opportunities:
Threats:
Emerging international interest in luxury
Changes in trends for luxury goods
American apparel makes foreign markets
Significant competition among rival brands
lucrative
Shifts in demographics and lifestyle
Company sector organization allows
changes
management to















Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods


Recent Financial Performance:
Units
$ Millions
%

Historical
FY10A
FY11A
FY12A
FY13A
FY14A
$ 803 $ 1,302 $ 2,182 $ 3,311 $ 4,371
58.1%
62.1%
67.5%
51.8%
32.0%

Cost of Sales:
Gross Profit:
Gross margin:

$ Millions
$ Millions
%

357 549 875 1,295 1,724


446 753 1,307 2,016 2,648
55.5%
57.8%
59.9%
60.9%
60.6%

Operating Expenses:
Selling, General and Administrative:
Depreciation and Amortization:
Total Operating Expenses:

$ Millions
$ Millions
$ Millions

280 465 622 927 1,251


26 38 54 80 138
305 502 676 1,007 1,390

Operating Income (EBIT):


Operating (EBIT) Margin:

$ Millions
%

141 251 631 1,010 1,258


17.5%
19.3%
28.9%
30.5%
28.8%

Other Income/Expense:
Interest and Investment Income:
Interest Expense:
Total Other Income/Expense:

$ Millions
$ Millions
$ Millions

- - - - -
(2) (2) (2) (0) (0)
(2) (2) (2) (0) (0)

Income/(Loss) from Affiliates:


Currency Exchange Gain/(Loss):
Other Income:
EBT Excluding Unusual Items:
Impairment of Goodwill:
Asset Writedown:

$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions

-
(2)
-
137
-
(4)

Earnings Before Provision For Income Taxes:


Provision for Income Taxes:
Net Income:
Effective Tax Rate:

$ Millions
$ Millions
$ Millions
%

133 249 627 1,008 1,256


61 101 230 346 375
72 147 398 662 881
45.6%
40.8%
36.6%
34.4%
29.8%

Preferred Divididends/Other Adjustments:


Net Income to Common:

$ Millions
$ Millions

16 21 - - -
57 126 398 662 881

Weighted Average Common Shares:


Basic Earnings Per Share:
Diluted Weighted Average Common Shares:
Diluted Earning Per Share (EPS):

$ Millions
$ as Stated
$ Millions
$ as Stated

141
$ 0.40
179
$ 0.40

EBITDA:
EBITDA Margin:

$ Millions
%

166 289 685 1,089 1,396


20.7%
22.2%
31.4%
32.9%
31.9%

Income Statement
Net Sales:
Revenue growth:

-
3
-
252
-
(3)

158
$ 0.80
189
$ 0.78

-
(1)
-
628
-
(1)

197
$ 2.02
202
$ 1.97

-
(0)
-
1,009
-
(1)

203
$ 3.27
206
$ 3.22

-
(3)
2
1,257
-
(1)

203
$ 4.35
206
$ 4.28

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods


FY10A

FY11A

FY12A

Historical
FY13A

FY14A

$ Millions
$ Millions
$ Millions
$ Millions
$ Millions

21
80
117
20
238

$ 106
127
187
32
453

$ 473
206
267
35
981

$ 971
298
427
50
1,747

$ 979
363
520
127
1,990

Non-Current Assets:
Net Property and Equipment:
Other Intangibles & Goodwill:
Deferred Tax Assets:
Other Non-Current Assets:
Total Non-Current Assets:

$ Millions
$ Millions
$ Millions
$ Millions
$ Millions

119
30
9
3
161

171
28
15
8
222

242
35
13
19
309

351
62
34
23
470

563
76
30
33
702

Total Assets:

$ Millions

399

674

1,290

2,217

2,692

LIABILITIES AND STOCKHOLDERS' EQUITY


Current Liabilities:
Short-Term Debt:
Accounts Payable:
Accrued Expenses, Unearned Revenue & Others:
Accrued Income Taxes:
Total Current Liabilities:

$ Millions
$ Millions
$ Millions
$ Millions
$ Millions

13
53
43
19
128

23
67
67
8
165

-
83
72
9
164

-
144
117
47
308

-
143
158
26
326

Non-Current Liabilities:
Long-Term Debts:
Other Long-Term Liabilities:
Deferred Taxes Liabilities:
Total Non-Current Liabilities:

$ Millions
$ Millions
$ Millions
$ Millions

102
39
5
146

-
47
6
53

-
65
13
78

-
97
6
102

-
110
14
125

Total Liabilities:

$ Millions

274

218

242

411

451

STOCKHOLDERS' EQUITY
Common Stock & APIC:
Retained Earnings:
Accumulated Other Comprehensive (Loss) Income:
Treasury Stock:

$ Millions
$ Millions
$ Millions
$ Millions

40 228 424
81 229 626
4 (1) (4)
-
-
-

527
1,288
(6)
(2)

637
2,169
(67)
(498)

Total Stockholders' Equity:

$ Millions

125

456

1,047

1,806

2,241

Total Liabilities and Stockholders' Equity:

$ Millions

399

674

1,290

2,217

2,692

Balance Sheet
ASSETS
Current Assets:
Cash and Cash Equivalents:
Accounts Receivable:
Inventories:
Prepaid Expenses & Other Current Assets:
Total Current Assets:

Units

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods


FY10A

FY11A

FY12A

Historical
FY13A

FY14A

$ Millions

73

147

398

661

881

$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions

26
0
-
4
-
-
-
17

38
0
-
3
28
(32)
-
(6)

54
1
0
1
21
(145)
-
8

80
1
4
1
29
(55)
(0)
(21)

138
1
2
1
49
(45)
(0)
15

$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions

(14)
(51)
(9)
18
37
10
(1)
110

(48)
(71)
(13)
15
46
10
(2)
115

(73)
(81)
(4)
18
151
15
0
364

(104)
(158)
(5)
56
124
25
(4)
633

(83)
(112)
(20)
6
22
10
(6)
858

CASH FLOWS FROM INVESTING ACTIVITIES


Capital Expenditure:
Sale (Purchase) of Intangible assets:
Invest. in Marketable & Equity Securtities:
Other Investing Activities:
Net Cash Used in Investing Activities

$ Millions
$ Millions
$ Millions
$ Millions
$ Millions

(57) (88)
(1)
-
-
-
-
-
(58) (88)

(121)
(9)
(3)
(6)
(139)

(185)
(29)
(2)
-
(216)

(356)
(29)
(3)
-
(388)

CASH FLOWS FROM FINANCING ACTIVITIES


Short Term Debt Issued:
Long-Term Debt Issued:
Short Term Debt Repaid:
Long-Term Debt Repaid:
Issuance of Common Stock:
Repurchase of Common Stock:
Issuance of Preferred Stock:
Dividends Paid:
Tax Benefits on Share Options:
Net Cash Used in Financing Activities:

$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions

195
-
(230)
(2)
-
-
-
-
(0)
(38)

111
-
(101)
-
10
-
10
-
30
59

16
-
(39)
-
30
-
-
-
143
151

21
-
(21)
-
19
(2)
-
-
55
71

-
-
-
-
15
(495)
-
-
45
(435)

Effect of FX Changes on Cash:

$ Millions

(1) (2) (5) (27)

Change in Cash and Cash Equivalents:


Beginning Cash:
Ending Cash:

$ Millions
$ Millions
$ Millions

15 85 374 484 8
21 106 473 971
106 480 956 979

Cash Flow Statement


CASH FLOWS FROM OPERATING ACTIVITIES
Net Income:
Adjustments for Non-Cash Charges:
Depreciation and Amortization:
Other Amotization:
(Gain) Loss From Sale Of Assets
PP&E Write-off:
Stock-Based Compensation Expense:
Tax Benefits from Stock Options:
(Income) Loss on Join Venture:
Other:
Changes in Operating Assets and Liabilities:
Accounts Receivable:
Inventories:
Prepaid Expenses & Other Current Assets:
Accounts Payable:
Accrued Expenses & Other Current Liabilities:
Other Non-Current Liabilities:
Other Non-Current Assets:
Net Cash Provided by Operating Activities

Units

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods

Industry Overview
Overview & direct/indirect competitors & market shares

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.



In contrast, indirect competitors of Michael Kors would include such businesses such as Amazon, as
Amazon sells directly to the consumer, yet, reduces the revenues generated through selling to consumer
within retail outlets. Another indirect competitor would be the market for imitation Michael Kors
products. Particularly in countries such as China, the demand for luxury goods is prevalent, however,
many consumers are not willing to pay the luxury prices for the merchandise. Instead, certain
consumers will instead purchase imitation goods that resemble the actual product, thus decreasing
overall sales.


Recent Trends & Explanations

The current downturn in accessory sales exhibited by Michael Kors can be attributed to a number of
causes, primarily the lack of recent unique design and the loss of luxury factor by failing to maintain
pricing power. Despite this downturn, Kors strong brand relevance and clear loyalty among customers
suggests that the dip will only be temporary as market adjust to changing design trends.
During this downturn in accessory sales, one might assume that demand for Michael Kors product line
has diminished. This turns out to be false after examining the correlation found between luxury
accessories and luxury footwear. During the recent decline which we claim to be caused by over-
saturation of the market, we can assume that disposable income for most individuals in the luxury goods
market had no decreased.

Due to brand equity and a loyal consumer base,
demand for the Michael Kors product line had not
diminished it has simply shifted towards its
footwear. This makes sense due to the correlation
of -0.71 between decreases in accessories and
increases in footwear. This is advantageous for
Kors due to their ability to still maintain steady
consumer demand despite fluctuations in market
trends. Although the drop in accessories sales is
slightly offset by the negative correlation with
footwear, due to distribution in sales for Michael
Kors the increase in footwear merely served to

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Equity Research
Apparel, Accessories and Luxury Goods


offset the loss.

Porters Five Forces


Competitive Rivalry (Strong)

Michael Kors competes against other luxury firms, such as Coach. Large luxury retailers often overprice
their goods in order to avoid oversaturation of their brand amongst the industry. This typically leads an
inverse effect that increases demand. Lowering prices below competition under normal conditions
allows shifts in sales to increase in the short run, but negative effects of brand oversaturation pose
larger threats to future revenues. Surprisingly, most other online and small retailers fail to have a
substantial effect on Michael Kors due to its already established and respected brand name. Michael
Kors has made their luxury products more convenient to their customers by expanding their online
presence on domestic and international levels. Despite additional advertisement campaigns to increase
consumer loyalty, faulty design or shifts in trends could equate to large migrations to more fashionable
brands. Possible sales promotions that lower purchase price could also give advantages, as long as the
promotions do not diminish the value of their brand. Ultimately, Michael Kors must continually innovate
to ensure its competitive advantages in the luxury market if it wishes to stay a strong competitor.

Bargaining Power of Buyers (Moderate)

When demand for luxury products increases, bargaining power for buyers will decrease. Although
recent sales decline in accessories for Michael Kors has indicated lower demand, this can be explained in
Kors introduction to lower priced items leading to lower brand equity. This can easily be corrected with
changes to price or development of a new product line, increasing demand once more. Since Michael
Kors expansion into global and online markets has increased availability to regions otherwise unable to
purchase luxury goods, there has been significant increases in demand due to low market saturation and
its high brand equity. Thus, there would be a moderate increase in buying power of consumers in the
United States until changes are made to improve demand.

Bargaining Power of Suppliers (Weak)

Given the size and market share of Michael Kors, suppliers are inclined to bid for exclusive deals. This is
very advantageous for Michael Kors as they can accept bids which ultimately leads to lower production
costs and higher profits. Due to the well managed and structured logistic aspect in Kors wholesale sector,
distribution of products has always been able to keep up with demand. This gives Michael Kors a great
position with the bargaining power of suppliers.

Threat of Substitutes (Weak)

Michael Kors remains one of the top 3 leading manufacturers of luxury goods due to its brand equity
and consumer loyalty. Substitutes that provide cheaper alternatives and similar style to popular luxury
items typically lack in quality. Effects from this shifting consumer base would result in somewhat
lowered sales, but would not be hindered long term due to the lesser asset lifetime and the need for a
more durable and luxurious product. Michael Kors has already established high quality production
facilities which would be difficult to imitate by other substitutes due to significant initial capital
requirements. This in addition to the appeal of the Michael Kors branded design make threats of
substitution minimal.

10

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods



Threat of New Entrants (Moderate)

As with the threat of substitutes above, we observe a similar barrier in capital requirements. New
entrants into the luxury goods market would almost exclusively be limited to only companies that had
significant funding in addition to a desirable design scheme. Such companies might manifest and
become successful at low market exposure, but would never be able to compete with the already
established brand equity of Michael Kors at significant market share. Although Michael Kors is currently
expanding into more foreign markets aided by significant advertisement, possible cultural preferences
of the area might discourage consumer loyalty and allow for native designers to trump Kors. The
chances of this happening dont seem likely with increased sales in most foreign markets for the most
recent year, which makes threats of new entrants unlikely.

11

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Equity Research
Apparel, Accessories and Luxury Goods

Valuation & Future Performance


Summary
The following assumptions are used to evaluate share price:
Discounted Cash Flow Analysis: We assumed the Terminal FCF Growth Rate of 2.0% and the WACC of
10.21%. The Cost of Capitals calculation is based the firms debt rating and the optimal structure of the
industry. Discounted Cash Flow Analysis produces a share price of $50.49.
Multiples: Conservative Terminal EV/EBITDA Multiple of 4.5x accounts for our assumption about brand
dilution in the future.
Weight: We lay more emphasis on FCF Growth Rate and Terminal EV/EBITDA among our valuation
methods. EV/Revenue and P/E Multiple Methods are less meaningful and are for reference.
Current Share Price: At $39.46, we think Michael Kors is underpriced. Based on our DCF and Terminal
Multiple methods, we think the price range should be of $50.00 - $60.00. A share price in between that
range will better present the intrinsic value of the firm and be more in-line with the implied share prices
from the DCF Analysis and Multiple Method.

Michael Kors - Range of Implied Values Per Share


Comparable Company Analysis:
LTM EV / Revenue:

12/31/2015E EV / Revenue:
12/31/2016E EV / Revenue:
LTM EV / EBITDA:

12/31/2015E EV / EBITDA:
12/31/2016E EV / EBITDA:

25th to Mean

LTM Reported P / E:

Mean to 75th

12/31/2015E Reported P / E:
12/31/2016E Reported P / E:

Multiple Method:
Terminal EBITDA of 3.0 - 5.0 x:

Discounted Cash Flow Analysis:


9.7% - 10.7% Discount Rate, 1% - 2% Terminal FCF Growth Rate:
$0.00

$50.00

$100.00

$150.00

Discounted Cash Flow Analysis


Base case assumptions:
WACC of 10.21%, calculated using industrys capital structure.
Terminal EBITDA Multiple of 4.5 x and Terminal FCF Growth Rate of 2.0%.
Mid-Year Convention method is utilized.

$200.00

$250.00

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Equity Research
Apparel, Accessories and Luxury Goods


Financial Projections:
Income Statement
Net Sales:
Revenue growth:

Projected
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
$ 7,278 $ 9,323 $ 11,466 $ 13,730 $ 15,752 $ 17,172 $ 18,556 $ 19,650
66.5%
28.1%
23.0%
19.7%
14.7%
9.0%
8.1%
5.9%

Cost of Sales:
Gross Profit:
Gross margin:

2,988 3,828 4,708 5,637 6,467 7,051 7,619 8,068


4,290 5,495 6,758 8,093 9,284 10,121 10,937 11,582
58.9%
58.9%
58.9%
58.9%
58.9%
58.9%
58.9%
58.9%

Operating Expenses:
Selling, General and Administrative:
Depreciation and Amortization:
Total Operating Expenses:

2,111 2,704 3,325 3,982 4,410 4,808 5,196 5,502


145 153 160 165 170 175 180 186
2,256 2,856 3,485 4,147 4,580 4,983 5,376 5,688

Operating Income (EBIT):


Operating (EBIT) Margin:

2,034 2,639 3,273 3,946 4,704 5,138 5,561 5,894


27.9%
28.3%
28.5%
28.7%
29.9%
29.9%
30.0%
30.0%

Other Income/Expense:
Interest and Investment Income:
Interest Expense:
Total Other Income/Expense:

- - - - - - - -
- - - - - - - -
- - - - - - - -

Income/(Loss) from Affiliates:


Currency Exchange Gain/(Loss):
Other Income:
EBT Excluding Unusual Items:
Impairment of Goodwill:
Asset Writedown:

-
-
-
2,034
-
-

Earnings Before Provision For Income Taxes:


Provision for Income Taxes:
Net Income:
Effective Tax Rate:

2,034 2,639 3,273 3,946 4,704 5,138 5,561 5,894


700 908 1,126 1,357 1,618 1,767 1,913 2,028
1,334 1,731 2,147 2,588 3,086 3,370 3,648 3,867
34.4%
34.4%
34.4%
34.4%
34.4%
34.4%
34.4%
34.4%

Preferred Divididends/Other Adjustments:


Net Income to Common:

- - - - - - - -
1,334 1,731 2,147 2,588 3,086 3,370 3,648 3,867

Weighted Average Common Shares:


Basic Earnings Per Share:
Diluted Weighted Average Common Shares:
Diluted Earning Per Share (EPS):

206 206 206 206 206 206 206 206


$ 6.48 $ 8.41 $ 10.43 $ 12.57 $ 14.99 $ 16.37 $ 17.72 $ 18.78

EBITDA:
EBITDA Margin:

2,179 2,791 3,433 4,111 4,874 5,313 5,741 6,080


29.9%
29.9%
29.9%
29.9%
30.9%
30.9%
30.9%
30.9%

-
-
-
2,639
-
-

-
-
-
3,273
-
-

-
-
-
3,946
-
-

-
-
-
4,704
-
-

-
-
-
5,138
-
-

-
-
-
5,561
-
-

-
-
-
5,894
-
-


Revenue is divided by segments and projected based on Numbers of Stores and Average Sales per
Stores. Stores can be further divided into Retail and Outlet stores.
We assume the number of new Retail stores open for the next 4 year is 400, and then decreases as new
stores will no longer be more profitable or cannibalize other stores. New Outlet stores grow moderately.
In the Base Case, we assume the abnormal growth disappear around year 7 due to brand saturation.
CapEx grows aggressively for the next 4 years due to more open stores and then decreases.
SG&A as % of Revenue stay flat/slightly decreases.


13

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods


Balance Sheet
ASSETS
Current Assets:
Cash and Cash Equivalents:
Accounts Receivable:
Inventories:
Prepaid Expenses & Other Current Assets:
Total Current Assets:

Projected
FY18E
FY19E

FY15E

FY16E

FY17E

FY20E

FY21E

FY22E

$ 1,749
560
806
117
3,233

$ 2,639
718
1,033
148
4,538

$ 3,550
883
1,270
181
5,884

$ 4,301
1,057
1,521
215
7,094

$ 5,209
1,212
1,745
237
8,405

$ 6,067
1,322
1,903
258
9,550

$ 6,698
1,428
2,056
279
10,461

$ 7,279
1,513
2,177
295
11,264

Non-Current Assets:
Net Property and Equipment:
Other Intangibles & Goodwill:
Deferred Tax Assets:
Other Non-Current Assets:
Total Non-Current Assets:

952
76
30
43
1,101

1,601
76
30
53
1,760

2,643
76
30
64
2,813

4,281
76
30
76
4,463

6,275
76
30
89
6,469

8,696
76
30
96
8,899

11,632
76
30
104
11,841

14,874
76
30
109
15,089

Total Assets:

4,333

6,298

8,696

11,557

14,874

18,448

22,303

26,353

LIABILITIES AND STOCKHOLDERS' EQUITY


Current Liabilities:
Short-Term Debt:
Accounts Payable:
Accrued Expenses, Unearned Revenue & Others:
Accrued Income Taxes:
Total Current Liabilities:

-
273
224
35
532

-
350
283
45
679

-
431
345
56
832

-
516
411
68
994

-
592
454
81
1,126

-
645
494
88
1,227

-
697
533
96
1,325

-
738
564
101
1,403

Non-Current Liabilities:
Long-Term Debts:
Other Long-Term Liabilities:
Deferred Taxes Liabilities:
Total Non-Current Liabilities:

-
182
14
197

-
231
14
245

-
282
14
296

-
335
14
349

-
370
14
384

-
403
14
417

-
434
14
449

-
460
14
474

Total Liabilities:

728

924

1,128

1,344

1,511

1,644

1,774

1,877

STOCKHOLDERS' EQUITY
Common Stock & APIC:
Retained Earnings:
Accumulated Other Comprehensive (Loss) Income:
Treasury Stock:

712
3,503
(112)
(498)

808
5,234
(170)
(498)

926
7,381
(241)
(498)

1,068
9,969
(326)
(498)

1,230
13,055
(424)
(498)

1,407
16,425
(530)
(498)

1,598
20,073
(645)
(498)

1,801
23,940
(767)
(498)

Total Stockholders' Equity:

3,605

5,374

7,568

10,213

13,363

16,804

20,529

24,476

Total Liabilities and Stockholders' Equity:

4,333

6,298

8,696

11,557

14,874

18,448

22,303

26,353

14

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods


Cash Flow Statement
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income:
Adjustments for Non-Cash Charges:
Depreciation and Amortization:
Other Amotization:
(Gain) Loss From Sale Of Assets
PP&E Write-off:
Stock-Based Compensation Expense:
Tax Benefits from Stock Options:
(Income) Loss on Join Venture:
Other:
Changes in Operating Assets and Liabilities:
Accounts Receivable:
Inventories:
Prepaid Expenses & Other Current Assets:
Accounts Payable:
Accrued Expenses & Other Current Liabilities:
Other Non-Current Liabilities:
Other Non-Current Assets:
Net Cash Provided by Operating Activities

Projected
FY18E
FY19E

FY15E

FY16E

FY17E

1,334

1,731

2,147

2,588

145
-
-
-
75
-
-
-

153
-
-
-
96
-
-
-

160
-
-
-
118
-
-
-

(197)
(286)
11
130
66
72
-
1,350

(157)
(227)
(31)
77
59
49
-
1,749

CASH FLOWS FROM INVESTING ACTIVITIES


Capital Expenditure:
Sale (Purchase) of Intangible assets:
Invest. in Marketable & Equity Securtities:
Other Investing Activities:
Net Cash Used in Investing Activities

(534)
-
-
-
(534)

CASH FLOWS FROM FINANCING ACTIVITIES


Short Term Debt Issued:
Long-Term Debt Issued:
Short Term Debt Repaid:
Long-Term Debt Repaid:
Issuance of Common Stock:
Repurchase of Common Stock:
Issuance of Preferred Stock:
Dividends Paid:
Tax Benefits on Share Options:
Net Cash Used in Financing Activities:

-
-
-
-
-
-
-
-
-
-

Effect of FX Changes on Cash:

(45) (58) (71) (85) (98) (106) (115) (122)

Change in Cash and Cash Equivalents:


Beginning Cash:
Ending Cash:

770 890 911 751 908 858 631 581


979 1,749 2,639 3,550 4,301 5,209 6,067 6,698
1,749 2,639 3,550 4,301 5,209 6,067 6,698 7,279

FY20E

FY21E

FY22E

3,086

3,370

3,648

3,867

165
-
-
-
142
-
-
-

170
-
-
-
162
-
-
-

175
-
-
-
177
-
-
-

180
-
-
-
191
-
-
-

186
-
-
-
203
-
-
-

(165)
(237)
(33)
80
62
51
-
2,184

(174)
(251)
(34)
85
66
53
-
2,640

(156)
(224)
(22)
76
43
35
-
3,170

(109)
(157)
(21)
53
40
33
-
3,561

(107)
(153)
(20)
52
39
32
-
3,862

(84)
(121)
(16)
41
31
25
-
4,130

(801)
-
-
-
(801)

(1,202)
-
-
-
(1,202)

(1,803)
-
-
-
(1,803)

(2,164)
-
-
-
(2,164)

(2,597)
-
-
-
(2,597)

(3,116)
-
-
-
(3,116)

(3,428)
-
-
-
(3,428)

-
-
-
-
-
-
-
-
-
-

-
-
-
-
-
-
-
-
-
-

-
-
-
-
-
-
-
-
-
-

-
-
-
-
-
-
-
-
-
-

-
-
-
-
-
-
-
-
-
-

-
-
-
-
-
-
-
-
-
-

-
-
-
-
-
-
-
-
-
-

15

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods


WACC Analysis
Cost of Capital
Risk-free Rate:
Market Risk Premium:
Beta:
Cost of Equity:
Default Spread:
Pre-tax Cost of Debt:
Cost of Preferred Stock:

2.94%
6.42%
1.25
10.97%
0.40%
3.34%
0.00%

Industry - Unlevered Beta

Apparel, Accessories and Luxury Goods

Levered
Beta
0.97

Unlevered
% Debt
% Equity Tax Rate
Beta
17.2%
82.8%
35.0% 1.10

Michael Kors - Levered Beta and WACC Calculation


Unlevered
Beta
Debt
Optimal Capital Structure:
1.10 1,395
Current Capital Structure:
1.10 -

% Debt
Equity
17.2% 6,729
0.0% 8,123

% Equity Tax Rate


82.8%
34.4%
100.0%
34.4%

WACC, Optimal Capital Structure:


WACC, Current Capital Structure:
Average WACC:

Levered
Beta
1.25
1.10
9.46%
10.97%
10.21%

Cost of
Capital

0.109675
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%

10.0%
10.1%
9.0%
7.9%
6.8%
5.7%
4.6%
3.5%
2.4%
1.3%

20.0%
10.3%
9.2%
8.1%
7.0%
5.9%
4.8%
3.7%
2.6%
1.5%

30.0%
10.5%
9.4%
8.3%
7.2%
6.1%
5.0%
3.9%
2.9%
1.8%

40.0%
10.7%
9.7%
8.6%
7.5%
6.4%
5.3%
4.2%
3.1%
2.0%

Debt
50.0%
11.0%
9.9%
8.8%
7.7%
6.6%
5.5%
4.4%
3.3%
2.2%

60.0%
11.2%
10.1%
9.0%
7.9%
6.8%
5.7%
4.6%
3.5%
2.4%

70.0%
11.4%
10.3%
9.2%
8.1%
7.0%
5.9%
4.8%
3.7%
2.6%

80.0%
11.6%
10.5%
9.4%
8.3%
7.2%
6.1%
5.0%
3.9%
2.8%

90.0%
11.8%
10.7%
9.6%
8.6%
7.5%
6.4%
5.3%
4.2%
3.1%

Michael Kors is behind the industry in terms of capital structure.


Without any debt, the Cost of Capital for Michael Kors is high, 10.97%. The firm has the capacity to use
financial leverage to reduce its Cost of Capital. Using leverage to a certain degree will drive up the
Enterprise Value and propel stock price to higher level. Taking only industry-average Debt/Capital of
17.2% does make a difference of $4 in stock price.





16

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods


Unlevered FCF Projection:
Annual Unlevered FCF Projection
Revenue:
EBIT:
EBIT(1-t):
Non-cash Adjustments:
Changes in NOWC:
CapEx:
FCFF:
FCFF, remaining periods:
Present Value of FCFF:
Sum of PV of FCFF:

FY14A
$ 4,371
1,258
825
161
(184)
(356)
446

FY15E
$ 7,278
2,034
1,334
220
(205)
(534)
815
360
353
4,717

Normal Discount Period:


Mid-year Discount Period:

FY16E
$ 9,323
2,639
1,731
249
(230)
(801)
948
948
865

FY17E
$ 11,466
3,273
2,147
278
(241)
(1,202)
982
982
813

Projected
FY18E
FY19E
$ 13,730 $ 15,752
3,946 4,704
2,588 3,086
307 332
(255) (248)
(1,803) (2,164)
836 1,006
836 1,006
628 686

FY20E
$ 17,172
5,138
3,370
352
(162)
(2,597)
964
964
596

FY21E
$ 18,556
5,561
3,648
372
(158)
(3,116)
746
746
419

FY22E
$ 19,650
5,894
3,867
388
(124)
(3,428)
703
703
358

0.44 1.44 2.44 3.44 4.44 5.44 6.44 7.44


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%

Implied Share Price Calculation:


Terminal Value - Multiple Method
Terminal EBITDA Multiple:
Terminal Value:
Implied Terminal FCF Growth Rate:

4.50 x
9,805
2.50%

Terminal Value - Perpetuity Growth Method


Implied Terminal EBITDA Multiple:
4.20 x
Terminal Value:
9,162
Terminal FCF Growth Rate:
2.00%

PV of Terminal Value:
Present Value of FCFF:
Implied Enterprise Value:

4,755
4,717
9,472

PV of Terminal Value:
Present Value of FCFF:
Implied Enterprise Value:

4,664
4,717
9,381

Plus: Cash & Cash-Equivalents:


Less: Total Debt:
Implied Equity Value:

1,012
-
10,484

Plus: Cash & Cash-Equivalents:


Less: Total Debt:
Implied Equity Value:

1,012
-
10,394

Diluted Shares Outstanding:

205.87

Diluted Shares Outstanding:

205.87

Implied Share Price from DCF:


Premium / (Discount) to Current:
Annual Unlevered FCF Projection
FCFE:
FCFE, remaining periods:
Present Value of FCFE:
Sum of PV of FCFE:

$50.93
29.06%
FY14A

Implied Share Price from DCF:


Premium / (Discount) to Current:

$50.49
27.95%

Projected
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
815 948 982 836 1,006 964 746 703
360 948 982 836 1,006 964 746 703
353 865 813 628 686 596 419 358
4,717


Terminal Value - Perpetuity Growth Method
Terminal Value:
8,393
Terminal FCF Growth Rate:
2.00%
PV of Terminal Value:
Present Value of FCFE:
Implied Equity Value:

4,075
4,717
8,792

Diluted Shares Outstanding:

205.87

Implied Share Price from DCF:


Premium / (Discount) to Current:

$42.71
8.23%

Michael Kors does not have debts and have intention to


issue debt or dividend at the time of valuation. As a result,
FCFE projection is similar to that of FCFF. Implied share price
from DCF will be lowered as we use Cost of Equity of 10.9%
instead of Cost of Capital.

17

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods


Base Case Sensitivity Analysis:

Sensitivity Table: Discount Rate vs Terminal FCF Growth Rate and Implied Share Price

Discount Rate
(WACC)

50.48805
9.20%
9.45%
9.70%
9.95%
10.20%
10.45%
10.70%
10.95%
11.20%

1.00%
52.37
51.15
50.00
48.92
47.89
46.91
45.98
45.10
44.26

1.25%
53.18
51.91
50.70
49.57
48.50
47.48
46.52
45.60
44.73

1.50%
54.04
52.71
51.45
50.26
49.14
48.09
47.08
46.13
45.22

Terminal FCF Growth Rate


1.75%
2.00%
2.25%
54.96 55.95 57.01
53.56 54.47 55.44
52.24 53.08 53.98
51.00 51.78 52.61
49.83 50.55 51.33
48.72 49.40 50.12
47.68 48.31 48.98
46.69 47.28 47.90
45.75 46.30 46.88

2.50%
58.14
56.49
54.94
53.50
52.15
50.88
49.68
48.56
47.49

2.75%
59.36
57.61
55.97
54.45
53.03
51.69
50.44
49.26
48.15

3.00%
60.69
58.82
57.08
55.47
53.96
52.56
51.24
50.00
48.84

5.50 x
58.75
58.07
57.40
56.74
56.10
55.46
54.83
54.22
53.62

6.00 x
61.50
60.78
60.06
59.36
58.66
57.99
57.32
56.66
56.02

6.50 x
64.25
63.48
62.72
61.97
61.23
60.51
59.80
59.10
58.42

Sensitivity Table: Discount Rate vs Terminal EBITDA Multiple and Implied Share Price

50.927165
9.20%
9.45%
9.70%
Discount Rate
9.95%
(WACC)
10.20%
10.45%
10.70%
10.95%
11.20%

2.50 x
42.26
41.86
41.46
41.07
40.68
40.30
39.93
39.57
39.21

3.00 x
45.01
44.56
44.12
43.68
43.25
42.83
42.42
42.01
41.61

3.50 x
47.76
47.26
46.77
46.29
45.82
45.36
44.90
44.45
44.01

Terminal EBITDA Multiple


4.00 x
4.50 x
5.00 x
50.51 53.26 56.01
49.96 52.67 55.37
49.43 52.09 54.74
48.91 51.52 54.13
48.39 50.96 53.53
47.88 50.41 52.93
47.38 49.87 52.35
46.89 49.34 51.78
46.41 48.81 51.21

Sensitivity Table: Average Sales per Retail Store vs New Retail Store and Implied Share Price

50.48805

New Retail
Store Growth
Rate

-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%

50.48805
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%

4.00%
-2.00%
38.48
39.53
40.63
41.75
42.80
43.84
45.02
46.07
47.53

4.50%
-1.50%
40.81
41.90
43.04
44.20
45.29
46.37
47.59
48.67
50.19

5.00%
-1.00%
43.22
44.34
45.52
46.73
47.85
48.97
50.24
51.36
52.92

Average Sales per Retail Store


5.50%
6.00%
6.50%
-0.50%
0.00%
0.50%
45.69 48.24 50.86
46.85 49.44 52.11
48.08 50.71 53.42
49.33 52.00 54.76
50.49 53.21 56.01
51.65 54.41 57.25
52.96 55.77 58.66
54.12 56.97 59.91
55.75 58.65 61.65

7.00%
1.00%
53.56
54.85
56.21
57.60
58.89
60.18
61.64
62.93
64.73

7.50%
1.50%
56.34
57.68
59.09
60.52
61.86
63.19
64.70
66.04
67.90

8.00%
2.00%
59.21
60.59
62.05
63.53
64.91
66.29
67.86
69.24
71.17

10.00%
1.00%
42.36
44.84
48.55
49.37
57.37
63.35
68.83
69.65
73.42

10.50%
1.50%
45.45
48.01
51.84
52.69
60.96
67.14
72.81
73.66
77.56

11.00%
2.00%
48.62
51.27
55.22
56.10
64.65
71.04
76.90
77.78
81.82

Sensitivity Table: Average Sales per Outlet Store vs New Outlet Store and Implied Share Price

50.48805

New Outlet
Store Growth
Rate

-6.00%
-3.00%
0.00%
3.00%
6.00%
9.00%
12.00%
15.00%
18.00%

50.48805
50.48805
-6.00%
-5.00%
-4.00%
-3.00%
0.00%
3.00%
4.00%
5.00%
6.00%

7.00%
-2.00%
25.60
27.62
30.67
31.33
37.86
42.73
47.21
47.87
50.94

7.50%
-1.50%
28.20
30.29
33.44
34.13
40.88
45.92
50.55
51.24
54.42

Average Sales per Outlet Store


8.00%
8.50%
9.00%
9.50%
-1.00%
-0.50%
0.00%
0.50%
30.87 33.62 36.45 39.37
33.04 35.86 38.77 41.76
36.29 39.23 42.25 45.35
37.00 39.97 43.01 46.15
43.99 47.19 50.49 53.88
49.21 52.59 56.07 59.66
54.00 57.55 61.20 64.96
54.71 58.29 61.96 65.75
58.01 61.69 65.49 69.40

18

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods


Sensitivity Table: Licensing Segment Growth vs SG&A as % Sales and Implied Share Price

50.48805

SG&A Growth
Rate

25.00%
26.00%
27.00%
28.00%
29.00%
30.00%
31.00%
32.00%
33.00%

50.48805
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%

22.00%
-8.00%
73.54
67.24
60.94
54.65
48.35
42.05
35.75
29.45
23.15

24.00%
-6.00%
74.05
67.74
61.43
55.11
48.80
42.49
36.17
29.86
23.55

26.00%
-4.00%
74.62
68.29
61.96
55.63
49.31
42.98
36.65
30.32
23.99

Licensing Segment Growth


28.00%
30.00%
-2.00%
0.00%
75.26 75.96
68.91 69.59
62.56 63.23
56.21 56.86
49.87 50.49
43.52 44.12
37.17 37.75
30.82 31.38
24.47 25.01

30.00%
2.00%
76.75
70.35
63.96
57.57
51.18
44.79
38.39
32.00
25.61

30.00%
4.00%
77.61
71.19
64.78
58.36
51.94
45.52
39.11
32.69
26.27

30.00%
6.00%
78.57
72.12
65.68
59.23
52.79
46.34
39.89
33.45
27.00

30.00%
8.00%
79.63
73.15
66.67
60.19
53.72
47.24
40.76
34.29
27.81

Comparable Public Companies


Comparable Companies - Apparel, Accessories and Luxury Goods Companies, with Revenue More than $200M
($ in Millions Except Per Share and Per Unit Data)
Operating Statistics
Company Name
Coach, Inc.
Prada S.p.A
Under Armour, Inc.
Fossil Group, Inc.
Hanesbrands Inc.
Burberry Group plc
Herms International Socit
Hugo Boss AG
Ralph Lauren Corporation
PVH Corp.

Ticker
COH
1913
UA
FOSL
HBI
BRBY
RMS
BOSS
RL
PVH

Maximum
75th Percentile
Median
25th Percentile
Minimum
Michael Kors

KORS

Share
Price
$ 32.28
4.04
95.30
53.88
32.72
21.15
381.57
100.90
113.57
92.08

Capitalization
Equity
Enterprise
Value
Value
$ 8,958 $ 8,572
10,334 10,638
20,553 21,298
2,594 3,053
12,820 15,315
9,324 8,552
39,833 38,836
6,964 7,164
9,727 9,269
7,601 10,516

$ 381.57
99.50
$ 72.98
32.39
4.04

$ 39,833
12,199
$ 9,525
7,940
2,594

$ 39.46

$ 8,123

Share
Price
$ 32.28
4.04
95.30
53.88
32.72
21.15
381.57
100.90
113.57
92.08

Capitalization
Equity
Enterprise
Value
Value
$ 8,958 $ 8,572
10,334 10,638
20,553 21,298
2,594 3,053
12,820 15,315
9,324 8,552
39,833 38,836
6,964 7,164
9,727 9,269
7,601 10,516

$ 381.57
99.50
$ 72.98
32.39
4.04

$ 39,833
12,199
$ 9,525
7,940
2,594

$ 38,836
14,146
$ 9,892
8,557
3,053

5.8 x
2.7 x
2.1 x
1.3 x
0.9 x

5.4 x
3.0 x
2.3 x
1.3 x
0.9 x

4.3 x
2.9 x
2.2 x
1.2 x
0.9 x

45.4 x
13.1 x
9.6 x
7.5 x
4.9 x

41.4 x
14.8 x
10.2 x
7.4 x
5.1 x

32.8 x
14.0 x
9.4 x
6.9 x
4.5 x

98.8 x
27.3 x
22.1 x
15.3 x
6.9 x

88.7 x
26.8 x
19.5 x
16.0 x
9.2 x

68.3 x
23.9 x
16.4 x
14.4 x
8.1 x

$ 39.46

$ 8,123

$ 7,111

1.6 x

1.0 x

0.8 x

5.2 x

2.7 x

2.1 x

9.2 x

4.9 x

3.8 x

Valuation Statistics
Company Name
Coach, Inc.
Prada S.p.A
Under Armour, Inc.
Fossil Group, Inc.
Hanesbrands Inc.
Burberry Group plc
Herms International Socit
Hugo Boss AG
Ralph Lauren Corporation
PVH Corp.

COH
1913
UA
FOSL
HBI
BRBY
RMS
BOSS
RL
PVH

Maximum
75th Percentile
Median
25th Percentile
Minimum
Michael Kors

KORS

LTM
$ 4,183
3,938
3,688
3,424
5,845
3,881
4,900
2,979
7,506
8,045

Revenue
2015E
$ 4,469
3,750
3,924
3,281
5,853
2,565
4,873
2,789
7,612
8,025

2016E
$ 4,656
3,891
4,922
3,361
6,042
2,731
5,312
2,957
7,934
8,357

$ 38,836
14,146
$ 9,892
8,557
3,053

$ 8,045
5,609
$ 4,060
3,736
2,979

$ 8,025
5,608
$ 4,197
3,399
2,565

$ 7,111

$ 4,512

$ 7,278

Projected Projected
Revenue EBITDA
Growth
Growth
4.2%
11.1%
3.8%
6.0%
25.4%
26.2%
2.4%
4.1%
3.2%
6.7%
6.5%
5.9%
9.0%
13.0%
6.0%
6.9%
4.2%
8.1%
4.1%
4.6%

LTM
$ 921
965
469
628
960
862
1,748
623
1,221
953

EBITDA
2015E
$ 957
932
515
465
998
566
1,692
610
1,176
1,101

2016E
$ 1,063
988
650
484
1,064
600
1,912
652
1,271
1,152

Reported Net Income


2014A
2015E
2016E
$ 404 $ 510 $ 597
471 421 456
208 232 301
377 250 239
405 599 724
366 321 343
859 1,013 1,144
333 339 384
702 587 657
439 577 625

$ 8,357
5,860
$ 4,789
3,493
2,731

$ 1,748
964
$ 937
687
469

$ 1,692
1,075
$ 944
577
465

$ 1,912
1,130
$ 1,025
650
484

$ 859
463
$ 404
369
208

$ 1,013
584
$ 465
326
232

$ 1,144
649
$ 526
353
239

25.4%
6.4%
4.2%
3.8%
2.4%

26.2%
10.4%
6.8%
5.9%
4.1%

35.7%
22.2%
19.6%
16.3%
11.8%

34.7%
22.0%
19.2%
14.5%
13.1%

36.0%
22.6%
19.8%
14.8%
13.2%

$ 9,323

$ 1,356

$ 2,675

$ 3,412

$ 881

$ 1,660

$ 2,138

28.1%

27.6%

30.0%

36.8%

36.6%

Enterprise Value /
Revenue
LTM
2015E
2016E
2.0 x
1.9 x
1.8 x
2.7 x
2.8 x
2.7 x
5.8 x
5.4 x
4.3 x
0.9 x
0.9 x
0.9 x
2.6 x
2.6 x
2.5 x
2.2 x
3.3 x
3.1 x
1.7 x
1.8 x
1.6 x
2.9 x
3.1 x
2.9 x
1.1 x
1.1 x
1.1 x
1.1 x
1.1 x
1.0 x

Enterprise Value /
EBITDA
LTM
2015E
2016E
9.3 x
9.0 x
8.1 x
11.0 x
11.4 x
10.8 x
45.4 x
41.4 x
32.8 x
4.9 x
6.6 x
6.3 x
16.0 x
15.4 x
14.4 x
9.9 x
15.1 x
14.3 x
4.9 x
5.1 x
4.5 x
13.7 x
14.0 x
13.1 x
7.0 x
7.3 x
6.7 x
9.0 x
7.8 x
7.4 x

2014A
22.2 x
22.0 x
98.8 x
6.9 x
31.7 x
25.5 x
10.9 x
28.0 x
13.3 x
21.2 x

P / E Multiple
2015E
17.6 x
24.5 x
88.7 x
10.4 x
21.4 x
29.0 x
9.2 x
27.5 x
15.9 x
16.2 x

LTM
22.0%
24.5%
12.7%
18.3%
16.4%
22.2%
35.7%
20.9%
16.3%
11.8%

EBITDA Margin
2015E
2016E
21.4%
22.8%
24.9%
25.4%
13.1%
13.2%
14.2%
14.4%
17.0%
17.6%
22.1%
22.0%
34.7%
36.0%
21.9%
22.0%
15.4%
16.0%
13.7%
13.8%

2016E
15.0 x
22.7 x
68.3 x
10.9 x
17.7 x
27.2 x
8.1 x
24.3 x
14.2 x
14.9 x

Revenue & EV/EBITDA Multiples: Michael Kors has been well performing in terms of Revenue Growth
and EBITDA Margin, so we think it deserves EBITDA Multiple in the Mean 75th range. Given the growth
is currently abnormal and unstable in the long-term, we chose EBITDA Multiple of 9.6x in-line with the
Mean.
P/E & PEG: We put less or little weight on P/E. The reason for that is because Earnings is misleading
given the impacts of non-cash items. However, taking a further step to integrate growth into P/E
multiples, we find current stock price is cheap given that the PEG ratios for FY14A and FY15E are 0.29
and 0.09.
Result: In the Base Case, we use EV/EBITDA of 9.6x, which produces the result of $70.03.

19

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods

Investment Thesis and Risks


We think the share price may reach higher levels within the next 12 - 18 months for the following
reasons:
Michael Korss brand relevance and customer loyalty are still generating sales for the firm. The
Jefferies Report shows at the time of valuation, customers still have strong awareness and preference
for Kors. In term of handbag, Michael Kors is ranked 2nd for favorite brand. 68% of the customers
surveyed indicated a likelihood of purchasing Michael Kors in the next 12 months. We think that the
launch of new products, with higher pricing and different styles, will help the firm win back its customers
and gain market share in the American market.
Handbag category, a major product significantly contributing to Revenue, is in its downturn and is
expected to re-accelerate as newer styles gain customers attention. With the strong correlation of -0.71
between handbag and footwear, the latter does act as a safety cushion to mitigate losses from handbag
decrease in sales. We expect to see higher revenue in the handbag category as Michael Kors launch the
largest amount of new handbag groups for spring 2016.
The overall luxury market exceeded 850B in 2014, which showed a healthy growth of 7%, it is
expected to perform better this year as consumers have more disposable income and confidence.
America and Japan were the engines behind that growth, with 6% and 10% at constant exchange rates,
respectively. As Michael Kors plans to expand its operations overseas, we think that the firm will be able
to capitalize the growing emerging market potential.

Investment Risks
The following represent greatest risks to our investment thesis:
Brand Management: Customers taste does change. While Michael Kors has been succeeding in
turning out exquisite luxury goods, brand saturation could significantly damage the firms customer base
and put a downward spiral on sales. Failure to release newer-style products with higher prices,
customers will move towards products that are more luxurious and expensive. The lack of brand
devotion could prove to be fatal to the firms success.
Too-Central Leadership: While Michael Kors is the main designer behind the firms success and most
important decision, his leadership has a possibility of leading the firm towards failure. It is possible that
investors sole focus on the chief designer would negatively affects the share price.
The luxury market fails to pick up: Economic challenges and socio-political tensions in Eastern Europe
could hinder tourism and growth in the luxury good market. As local spending is experiencing slow
growth, a less dynamic tourism is a drag to the industry growth.
Other market-specific and corporate-specific risks include: (1) Weather-related Issues can deter
tourism; (2) A stronger dollar is a hindrance to revenue growth from overseas stores.

20

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods

Appendix A Revenue Assumptions, Key Ratios & DuPont Analysis


Projected
FY15E
FY16E
FY17E
FY18E
FY19E
FY20E
FY21E
FY22E
$ 7,278 $ 9,323 $ 11,466 $ 13,730 $ 15,752 $ 17,172 $ 18,556 $ 19,650
66.5%
28.1%
23.0%
19.7%
14.7%
9.0%
8.1%
5.9%

Revenue Assumptions
Total Revenue
YoY Growth Rate
Revenue by Segments
Retail
Wholesale
Licensing
Total Revenue

3,361
3,694
223
7,278

Retail stores
Increase during period
Growth YoY
Post-toggle Growth YoY
Average Sales per Retail Store
Growth YoY
Post-toggle Growth YoY

473 576 680 784 857 919 972 1,017


100 103 104 104 73 62 53 45
6.4%
3.0%
1.0%
0.0%
-30.0%
-15.0%
-15.0%
-15.0%
3.0%
1.0%
0.0%
-30.0%
-15.0%
-15.0%
-15.0%
7.8 8.2 8.4 8.7 8.7 8.4 8.1 7.6
6.0%
6.0%
3.0%
3.0%
1.0%
-3.0%
-3.0%
-6.0%
5.5%
5.5%
2.5%
2.5%
0.5%
-3.5%
-3.5%
-6.5%

Outlet Stores
Increase during period
Growth YoY
Post-toggle Growth YoY
Average Sales per Outlet Store
Growth YoY
Post-toggle Growth YoY

182 213 245 278 312 346 380 414


29 31 32 33 34 34 34 34
6.0%
6.0%
4.0%
4.0%
2.0%
0.0%
0.0%
0.0%
6.0%
6.0%
4.0%
4.0%
2.0%
0.0%
0.0%
0.0%
18.5 20.1 21.9 23.5 25.1 25.9 26.6 27.4
9.0%
9.0%
9.0%
7.0%
7.0%
3.0%
3.0%
3.0%
9.0%
9.0%
9.0%
7.0%
7.0%
3.0%
3.0%
3.0%

Licensing Segment
Growth YoY

223 290 348 418 460 506 556 584


30.0%
30.0%
20.0%
20.0%
10.0%
10.0%
10.0%
5.0%

Financial Ratios
Profitability Ratios
Return on Assets
Return on Capital
Return on Equity

FY10A

FY11A

FY12A

4,287
4,745
290
9,323

FY13A

FY14A

5,375
5,742
348
11,466

FY15E

6,526
6,786
418
13,730

FY16E

7,837
7,455
460
15,752

FY17E

8,952
7,714
506
17,172

FY18E

FY19E

10,126
7,874
556
18,556

FY20E

11,363
7,703
584
19,650

FY21E

FY22E

25.8%
39.9%
83.2%

29.2%
43.7%
50.7%

40.1%
51.7%
52.9%

36.0%
44.2%
46.4%

32.0%
38.8%
43.5%

38.0%
45.6%
45.6%

32.6%
38.6%
38.6%

28.6%
33.2%
33.2%

25.6%
29.1%
29.1%

23.3%
26.2%
26.2%

20.2%
22.3%
22.3%

17.9%
19.5%
19.5%

15.9%
17.2%
17.2%

2.4 x
7.9 x
11.1 x
33.0
3.9 x
93.0
N/A
N/A
N/A

2.4 x
9.0 x
12.6 x
29.1
3.6 x
101.2
9.1 x
39.9
90.3

2.2 x
10.6 x
13.1 x
27.9
3.9 x
94.7
11.6 x
31.3
91.3

1.9 x
11.2 x
13.1 x
27.8
3.7 x
97.8
11.4 x
31.9
93.7

1.8 x
9.6 x
13.2 x
27.6
3.6 x
100.2
12.0 x
30.3
97.5

1.7 x
7.6 x
15.8 x
23.2
4.5 x
81.0
14.4 x
25.4
78.7

1.5 x
5.8 x
14.6 x
25.0
4.2 x
87.7
12.3 x
29.7
83.0

1.3 x
4.3 x
14.3 x
25.5
4.1 x
89.3
12.1 x
30.3
84.5

1.2 x
3.2 x
14.2 x
25.8
4.0 x
90.4
11.9 x
30.6
85.5

1.1 x
2.5 x
13.9 x
26.3
4.0 x
92.2
11.7 x
31.2
87.2

0.9 x
2.0 x
13.6 x
26.9
3.9 x
94.4
11.4 x
32.0
89.4

0.8 x
1.6 x
13.5 x
27.0
3.8 x
94.8
11.4 x
32.1
89.7

0.7 x
1.3 x
13.4 x
27.3
3.8 x
95.8
11.2 x
32.5
90.6

Margin Analysis
Gross Margin
SG&A Margin
EBITDA Margin
EBIT Margin
Net Income Margin

55.5%
34.8%
20.7%
17.5%
9.0%

57.8%
35.7%
22.2%
19.3%
11.3%

59.9%
28.5%
31.4%
28.9%
18.2%

60.9%
28.0%
32.9%
30.5%
20.0%

60.6%
28.6%
31.9%
28.8%
20.2%

58.9%
29.0%
29.9%
27.9%
18.3%

58.9%
29.0%
29.9%
28.3%
18.6%

58.9%
29.0%
29.9%
28.5%
18.7%

58.9%
29.0%
29.9%
28.7%
18.9%

58.9%
28.0%
30.9%
29.9%
19.6%

58.9%
28.0%
30.9%
29.9%
19.6%

58.9%
28.0%
30.9%
30.0%
19.7%

58.9%
28.0%
30.9%
30.0%
19.7%

Short Term Liquidity


Current Ratio
Quick Ratio

1.9 x
0.8 x

2.8 x
1.4 x

6.0 x
4.1 x

5.8 x
4.1 x

6.1 x
4.1 x

6.1 x
4.6 x

6.7 x
5.2 x

7.1 x
5.5 x

7.1 x
5.6 x

7.5 x
5.9 x

7.8 x
6.2 x

7.9 x
6.3 x

8.0 x
6.5 x

Long Term Solvency


Total Debt/Capital
Total Liabilities/Total Assets
EBIT/Interest Expense
Total Debt/EBITDA

47.7%
68.6%
75.6 x
0.7 x

4.7%
32.4%
167.9 x
0.1 x

NM
18.8%
NM
NM

NM
18.5%
NM
NM

NM
16.8%
NM
NM

NM
16.8%
NM
NM

NM
14.7%
NM
NM

NM
13.0%
NM
NM

NM
11.6%
NM
NM

NM
10.2%
NM
NM

NM
8.9%
NM
NM

NM
8.0%
NM
NM

NM
7.1%
NM
NM

DuPont Analysis
Net Income Margin
Total Asset Turnover
Equity Multiplier
ROE

9.0%
2.4 x
3.9 x
83.2%

11.3%
2.4 x
1.8 x
50.7%

18.2%
2.2 x
1.3 x
52.9%

20.0%
1.9 x
1.2 x
46.4%

20.2%
1.8 x
1.2 x
43.5%

18.3%
1.7 x
1.5 x
45.6%

18.6%
1.5 x
1.4 x
38.6%

18.7%
1.3 x
1.3 x
33.2%

18.9%
1.2 x
1.3 x
29.1%

19.6%
1.1 x
1.3 x
26.2%

19.6%
0.9 x
1.2 x
22.3%

19.7%
0.8 x
1.2 x
19.5%

19.7%
0.7 x
1.2 x
17.2%

Efficiency Ratios
Total Asset Turnover
Fixed Asset Turnover
Accounts Receivable Turnover
DSO
Inventory Turnover
DIO
Accounts Payable Turnover
DPO
CCC

21

Quantum Capital Advisors

Equity Research
Apparel, Accessories and Luxury Goods

Bibliography
Michael
Kors
Holdings
Ltd.
(n.d.).
Retrieved
November
5,
2015,
from
http://www.marketwatch.com/investing/stock/kors/financials/cash-flow#

Michael
Kors
Holdings
Ltd.
(n.d.).
Retrieved
November
5,
2015,
from
http://www.marketwatch.com/investing/stock/kors/financials/balance-sheet

Michael
Kors
Holdings
Ltd.
(n.d.).
Retrieved
November
5,
2015,
from
http://www.marketwatch.com/investing/stock/kors/financials

http://s2.q4cdn.com/702269136/files/doc_financials/annual_report/2015-Annual-Report-10K.pdf

LaFreniere, M. (2015, September 4). Michael Kors Outlet Pricing Class Action Lawsuit Settlement.
Retrieved November 5, 2015, from http://topclassactions.com/lawsuit-settlements/open-lawsuit-
settlements/147346-michael-kors-class-action-lawsuit-settlement/

Kapner, S. (2015, May 27). Michael Kors Shares Plunge as Fashion Company Posts Rare Sales Drop.
Retrieved November 5, 2015, from http://www.wsj.com/articles/michael-kors-gives-another-
disappointing-forecast-1432727499
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