MICHAEL KORS Equity

RESEARCH Report
Presented by: Jeremy Edwards, Skylar
Thomas, and James Nguyen

Michael Kors - 1 Year Price Perfomance

$90.00

Stock Profile

$80.00
$70.00
$60.00
$50.00
$40.00

$30.00
$20.00
$10.00
$0.00

Headquarters: New York, NY

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%

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.

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)

Highlights

Revenue Growth, FY08 - FY14

$90 B
$80 B

$75
$71

$70 B

$66

$68

$79

$83

8.0%
6.0%

$70

4.0%

$60 B

2.0%

$50 B

0.0%

$40 B

-2.0%

$30 B

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

$20 B

-4.0%

$10 B

-6.0%

Net Earnings: $2.2 billion, compared to $2.1 billion

in 2Q14

$0 B

-8.0%

Operating Margin: 14.7%

FY08A

FY09A

FY10A
Net Sales

FY11A

FY12A

FY13A

Revenue growth

FY14A

Net expenses (pretax): $92 million

Gain on sale (pretax): $144 million

SWOT Analysis
Strengths:

Weaknesses:

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

Opportunities:

Emerging international interest in luxury American

apparel makes foreign markets lucrative
Company sector organization allows management to

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

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
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

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

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.

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

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

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

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

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

Projected Projected
Reported Net Income
Revenue EBITDA
2014A
2015E
2016E
Growth Growth
$ 404 $ 510 $ 597
4.2%
11.1%
471 421 456
3.8%
6.0%
208 232 301
25.4%
26.2%
377 250 239
2.4%
4.1%
405 599 724
3.2%
6.7%
366 321 343
6.5%
5.9%
859 1,013 1,144
9.0%
13.0%
333 339 384
6.0%
6.9%
702 587 657
4.2%
8.1%
439 577 625
4.1%
4.6%

$ 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

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%

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%

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%

COH
1913
UA
FOSL
HBI
BRBY
RMS
BOSS
RL
PVH

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

KORS

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

$ 1,013
584
$ 465
326
232

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

25.4%
6.4%
4.2%
3.8%
2.4%

Maximum
75th Percentile
Median
25th Percentile
Minimum
Michael Kors

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

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

$ 1,144
649
$ 526
353
239

Valuation Statistics

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

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

P / E Multiple
2015E
2016E
17.6 x
15.0 x
24.5 x
22.7 x
88.7 x
68.3 x
10.4 x
10.9 x
21.4 x
17.7 x
29.0 x
27.2 x
9.2 x
8.1 x
27.5 x
24.3 x
15.9 x
14.2 x
16.2 x
14.9 x

$ 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

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)
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

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

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:

Annual Unlevered FCF Projection

FCFE:
FCFE, remaining periods:
Present Value of FCFE:
Sum of PV of FCFE:

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

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

83.0%

FY14A

16.3%

3.6%

-14.8%

20.3%

-4.1%

-22.6%

-5.8%

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

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 -
WACC, Optimal Capital Structure:
WACC, Current Capital Structure:
Average WACC:

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

Levered
% Equity Tax Rate
Beta
82.8%
34.4%
1.25
100.0%
34.4%
1.10
9.46%
10.97%
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

Michael Kors - Range of Implied Values Per Share

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:

Terminal EBITDA of 3.0 - 5.0 x:

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

$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

Valuation Summary Bear Case

Michael Kors - Range of Implied Values Per Share

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:

Min to 25th

LTM Reported P / E:

25th to Mean

12/31/2015E Reported P / E:

12/31/2016E Reported P / E:

Terminal EBITDA of 2.0 - 4.0 x:

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

$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

Conclusion
We think Michael Korss 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
Profitability Ratios
Return on Assets
Return on Capital
Return on Equity

FY10A

FY11A

FY12A

FY13A

FY14A

FY15E

FY16E

FY17E

FY18E

FY19E

FY20E

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