kors equity research report
DESCRIPTION
An equity research project, researching the financials, valuation, projected statements, and stock recommendation for Michael Kors Holdings Limited.TRANSCRIPT
Date: 22 Oct 2015
Michael Kors (KORS)
Rating: OUTPERFORM* Current Price: 39.46 Target Price: 51.50 52-‐Week Range: 38.06 -‐ 78.59 Market Cap: 8,234.0 M Enterprise Value: 7,816.7 M *(for 12-‐18 months)
Investment Summary
▪ We initiate our report with an OUTPERFORM rating for Michael Kors. We think the company is underpriced due to investors’ overreaction to last Q4’s negative Same-‐store Sales. However, Michael Kors’s 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.
▪ Catalysts: 1) The return of the handbag trend – Due to heavy traffic to the firm’s 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 firm’s 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.
$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%
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
2
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 firm’s product line includes both men and women’s 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, Bloomingdale’s, Macy’s, among others.
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
3
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 company’s 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
4
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
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
5
Recent Financial Performance:
Historical ProjectedIncome Statement Units FY10A FY11A FY12A FY13A FY14A
Net Sales: $ Millions 803$ 1,302$ 2,182$ 3,311$ 4,371$ Revenue growth: % 58.1% 62.1% 67.5% 51.8% 32.0%
Cost of Sales: $ Millions 357 549 875 1,295 1,724 Gross Profit: $ Millions 446 753 1,307 2,016 2,648 Gross margin: % 55.5% 57.8% 59.9% 60.9% 60.6%
Operating Expenses:Selling, General and Administrative: $ Millions 280 465 622 927 1,251 Depreciation and Amortization: $ Millions 26 38 54 80 138
Total Operating Expenses: $ Millions 305 502 676 1,007 1,390
Operating Income (EBIT): $ Millions 141 251 631 1,010 1,258 Operating (EBIT) Margin: % 17.5% 19.3% 28.9% 30.5% 28.8%
Other Income/Expense:Interest and Investment Income: $ Millions -‐ -‐ -‐ -‐ -‐ Interest Expense: $ Millions (2) (2) (2) (0) (0)
Total Other Income/Expense: $ Millions (2) (2) (2) (0) (0)
Income/(Loss) from Affiliates: $ Millions -‐ -‐ -‐ -‐ -‐ Currency Exchange Gain/(Loss): $ Millions (2) 3 (1) (0) (3) Other Income: $ Millions -‐ -‐ -‐ -‐ 2
EBT Excluding Unusual Items: $ Millions 137 252 628 1,009 1,257 Impairment of Goodwill: $ Millions -‐ -‐ -‐ -‐ -‐ Asset Writedown: $ Millions (4) (3) (1) (1) (1)
Earnings Before Provision For Income Taxes: $ Millions 133 249 627 1,008 1,256 Provision for Income Taxes: $ Millions 61 101 230 346 375 Net Income: $ Millions 72 147 398 662 881 Effective Tax Rate: % 45.6% 40.8% 36.6% 34.4% 29.8%
Preferred Divididends/Other Adjustments: $ Millions 16 21 -‐ -‐ -‐ Net Income to Common: $ Millions 57 126 398 662 881
Weighted Average Common Shares: $ Millions 141 158 197 203 203 Basic Earnings Per Share: $ as Stated 0.40$ 0.80$ 2.02$ 3.27$ 4.35$ Diluted Weighted Average Common Shares: $ Millions 179 189 202 206 206 Diluted Earning Per Share (EPS): $ as Stated 0.40$ 0.78$ 1.97$ 3.22$ 4.28$
EBITDA: $ Millions 166 289 685 1,089 1,396 EBITDA Margin: % 20.7% 22.2% 31.4% 32.9% 31.9%
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
6
Historical ProjectedBalance Sheet Units FY10A FY11A FY12A FY13A FY14A
ASSETSCurrent Assets:Cash and Cash Equivalents: $ Millions 21 106$ 473$ 971$ 979$ Accounts Receivable: $ Millions 80 127 206 298 363 Inventories: $ Millions 117 187 267 427 520 Prepaid Expenses & Other Current Assets: $ Millions 20 32 35 50 127
Total Current Assets: $ Millions 238 453 981 1,747 1,990
Non-‐Current Assets:Net Property and Equipment: $ Millions 119 171 242 351 563 Other Intangibles & Goodwill: $ Millions 30 28 35 62 76 Deferred Tax Assets: $ Millions 9 15 13 34 30 Other Non-‐Current Assets: $ Millions 3 8 19 23 33
Total Non-‐Current Assets: $ Millions 161 222 309 470 702
Total Assets: $ Millions 399 674 1,290 2,217 2,692
LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Short-‐Term Debt: $ Millions 13 23 -‐ -‐ -‐ Accounts Payable: $ Millions 53 67 83 144 143 Accrued Expenses, Unearned Revenue & Others: $ Millions 43 67 72 117 158 Accrued Income Taxes: $ Millions 19 8 9 47 26
Total Current Liabilities: $ Millions 128 165 164 308 326
Non-‐Current Liabilities:Long-‐Term Debts: $ Millions 102 -‐ -‐ -‐ -‐ Other Long-‐Term Liabilities: $ Millions 39 47 65 97 110 Deferred Taxes Liabilities: $ Millions 5 6 13 6 14
Total Non-‐Current Liabilities: $ Millions 146 53 78 102 125
Total Liabilities: $ Millions 274 218 242 411 451
STOCKHOLDERS' EQUITYCommon Stock & APIC: $ Millions 40 228 424 527 637 Retained Earnings: $ Millions 81 229 626 1,288 2,169 Accumulated Other Comprehensive (Loss) Income: $ Millions 4 (1) (4) (6) (67) Treasury Stock: $ Millions -‐ -‐ -‐ (2) (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
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
7
Historical ProjectedCash Flow Statement Units FY10A FY11A FY12A FY13A FY14A
CASH FLOWS FROM OPERATING ACTIVITIESNet Income: $ Millions 73 147 398 661 881 Adjustments for Non-‐Cash Charges:Depreciation and Amortization: $ Millions 26 38 54 80 138 Other Amotization: $ Millions 0 0 1 1 1 (Gain) Loss From Sale Of Assets $ Millions -‐ -‐ 0 4 2 PP&E Write-‐off: $ Millions 4 3 1 1 1 Stock-‐Based Compensation Expense: $ Millions -‐ 28 21 29 49 Tax Benefits from Stock Options: $ Millions -‐ (32) (145) (55) (45) (Income) Loss on Join Venture: $ Millions -‐ -‐ -‐ (0) (0) Other: $ Millions 17 (6) 8 (21) 15
Changes in Operating Assets and Liabilities:Accounts Receivable: $ Millions (14) (48) (73) (104) (83) Inventories: $ Millions (51) (71) (81) (158) (112) Prepaid Expenses & Other Current Assets: $ Millions (9) (13) (4) (5) (20) Accounts Payable: $ Millions 18 15 18 56 6 Accrued Expenses & Other Current Liabilities: $ Millions 37 46 151 124 22 Other Non-‐Current Liabilities: $ Millions 10 10 15 25 10 Other Non-‐Current Assets: $ Millions (1) (2) 0 (4) (6)
Net Cash Provided by Operating Activities $ Millions 110 115 364 633 858
CASH FLOWS FROM INVESTING ACTIVITIESCapital Expenditure: $ Millions (57) (88) (121) (185) (356) Sale (Purchase) of Intangible assets: $ Millions (1) -‐ (9) (29) (29) Invest. in Marketable & Equity Securtities: $ Millions -‐ -‐ (3) (2) (3) Other Investing Activities: $ Millions -‐ -‐ (6) -‐ -‐
Net Cash Used in Investing Activities $ Millions (58) (88) (139) (216) (388)
CASH FLOWS FROM FINANCING ACTIVITIESShort Term Debt Issued: $ Millions 195 111 16 21 -‐ Long-‐Term Debt Issued: $ Millions -‐ -‐ -‐ -‐ -‐ Short Term Debt Repaid: $ Millions (230) (101) (39) (21) -‐ Long-‐Term Debt Repaid: $ Millions (2) -‐ -‐ -‐ -‐ Issuance of Common Stock: $ Millions -‐ 10 30 19 15 Repurchase of Common Stock: $ Millions -‐ -‐ -‐ (2) (495) Issuance of Preferred Stock: $ Millions -‐ 10 -‐ -‐ -‐ Dividends Paid: $ Millions -‐ -‐ -‐ -‐ -‐ Tax Benefits on Share Options: $ Millions (0) 30 143 55 45
Net Cash Used in Financing Activities: $ Millions (38) 59 151 71 (435)
Effect of FX Changes on Cash: $ Millions 1 (1) (2) (5) (27)
Change in Cash and Cash Equivalents: $ Millions 15 85 374 484 8 Beginning Cash: $ Millions 21 106 473 971 Ending Cash: $ Millions 106 480 956 979
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
8
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 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.
▪ 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
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
9
offset the loss.
Porter’s 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 it’s 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.
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
10
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 don’t seem likely with increased sales in most foreign markets for the most recent year, which makes threats of new entrants unlikely.
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
11
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 Capital’s calculation is based the firm’s 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.
Discounted Cash Flow Analysis
Base case assumptions:
▪ WACC of 10.21%, calculated using industry’s capital structure.
▪ Terminal EBITDA Multiple of 4.5 x and Terminal FCF Growth Rate of 2.0%.
▪ Mid-‐Year Convention method is utilized.
$0.00 $50.00 $100.00 $150.00 $200.00 $250.00
9.7% -‐ 10.7% Discount Rate, 1% -‐ 2% Terminal FCF Growth Rate:
Terminal EBITDA of 3.0 -‐ 5.0 x:
12/31/2016E Reported P / E:
12/31/2015E Reported P / E:
LTM Reported P / E:
12/31/2016E EV / EBITDA:
12/31/2015E EV / EBITDA:
LTM EV / EBITDA:
12/31/2016E EV / Revenue:
12/31/2015E EV / Revenue:
LTM EV / Revenue:
Michael Kors -‐ Range of Implied Values Per Share
25th to Mean
Mean to 75th
Comparable Company Analysis:
Multiple Method:
Discounted Cash Flow Analysis:
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
12
Financial Projections:
▪ Revenue is divided by segments and projected based on Numbers of Stores and Average Sales per Stores. Stores can be further divided into Retail and Outlet stores.
▪ We assume the number of new Retail stores open for the next 4 year is 400, and then decreases as new stores will no longer be more profitable or cannibalize other stores. New Outlet stores grow moderately.
▪ In the Base Case, we assume the abnormal growth disappear around year 7 due to brand saturation.
▪ CapEx grows aggressively for the next 4 years due to more open stores and then decreases.
▪ SG&A as % of Revenue stay flat/slightly decreases.
ProjectedIncome Statement FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E
Net Sales: 7,278$ 9,323$ 11,466$ 13,730$ 15,752$ 17,172$ 18,556$ 19,650$ Revenue growth: 66.5% 28.1% 23.0% 19.7% 14.7% 9.0% 8.1% 5.9%
Cost of Sales: 2,988 3,828 4,708 5,637 6,467 7,051 7,619 8,068 Gross Profit: 4,290 5,495 6,758 8,093 9,284 10,121 10,937 11,582 Gross margin: 58.9% 58.9% 58.9% 58.9% 58.9% 58.9% 58.9% 58.9%
Operating Expenses:Selling, General and Administrative: 2,111 2,704 3,325 3,982 4,410 4,808 5,196 5,502 Depreciation and Amortization: 145 153 160 165 170 175 180 186
Total Operating Expenses: 2,256 2,856 3,485 4,147 4,580 4,983 5,376 5,688
Operating Income (EBIT): 2,034 2,639 3,273 3,946 4,704 5,138 5,561 5,894 Operating (EBIT) Margin: 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: 2,034 2,639 3,273 3,946 4,704 5,138 5,561 5,894 Impairment of Goodwill: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ Asset Writedown: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐
Earnings Before Provision For Income Taxes: 2,034 2,639 3,273 3,946 4,704 5,138 5,561 5,894 Provision for Income Taxes: 700 908 1,126 1,357 1,618 1,767 1,913 2,028 Net Income: 1,334 1,731 2,147 2,588 3,086 3,370 3,648 3,867 Effective Tax Rate: 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: 206 206 206 206 206 206 206 206 Diluted Earning Per Share (EPS): 6.48$ 8.41$ 10.43$ 12.57$ 14.99$ 16.37$ 17.72$ 18.78$
EBITDA: 2,179 2,791 3,433 4,111 4,874 5,313 5,741 6,080 EBITDA Margin: 29.9% 29.9% 29.9% 29.9% 30.9% 30.9% 30.9% 30.9%
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
13
ProjectedBalance Sheet FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E
ASSETSCurrent Assets:Cash and Cash Equivalents: 1,749$ 2,639$ 3,550$ 4,301$ 5,209$ 6,067$ 6,698$ 7,279$ Accounts Receivable: 560 718 883 1,057 1,212 1,322 1,428 1,513 Inventories: 806 1,033 1,270 1,521 1,745 1,903 2,056 2,177 Prepaid Expenses & Other Current Assets: 117 148 181 215 237 258 279 295
Total Current Assets: 3,233 4,538 5,884 7,094 8,405 9,550 10,461 11,264
Non-‐Current Assets:Net Property and Equipment: 952 1,601 2,643 4,281 6,275 8,696 11,632 14,874 Other Intangibles & Goodwill: 76 76 76 76 76 76 76 76 Deferred Tax Assets: 30 30 30 30 30 30 30 30 Other Non-‐Current Assets: 43 53 64 76 89 96 104 109
Total Non-‐Current Assets: 1,101 1,760 2,813 4,463 6,469 8,899 11,841 15,089
Total Assets: 4,333 6,298 8,696 11,557 14,874 18,448 22,303 26,353
LIABILITIES AND STOCKHOLDERS' EQUITYCurrent Liabilities:Short-‐Term Debt: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ Accounts Payable: 273 350 431 516 592 645 697 738 Accrued Expenses, Unearned Revenue & Others: 224 283 345 411 454 494 533 564 Accrued Income Taxes: 35 45 56 68 81 88 96 101
Total Current Liabilities: 532 679 832 994 1,126 1,227 1,325 1,403
Non-‐Current Liabilities:Long-‐Term Debts: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ Other Long-‐Term Liabilities: 182 231 282 335 370 403 434 460 Deferred Taxes Liabilities: 14 14 14 14 14 14 14 14
Total Non-‐Current Liabilities: 197 245 296 349 384 417 449 474
Total Liabilities: 728 924 1,128 1,344 1,511 1,644 1,774 1,877
STOCKHOLDERS' EQUITYCommon Stock & APIC: 712 808 926 1,068 1,230 1,407 1,598 1,801 Retained Earnings: 3,503 5,234 7,381 9,969 13,055 16,425 20,073 23,940 Accumulated Other Comprehensive (Loss) Income: (112) (170) (241) (326) (424) (530) (645) (767) Treasury Stock: (498) (498) (498) (498) (498) (498) (498) (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
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
14
ProjectedCash Flow Statement FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E
CASH FLOWS FROM OPERATING ACTIVITIESNet Income: 1,334 1,731 2,147 2,588 3,086 3,370 3,648 3,867 Adjustments for Non-‐Cash Charges:Depreciation and Amortization: 145 153 160 165 170 175 180 186 Other Amotization: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ (Gain) Loss From Sale Of Assets -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ PP&E Write-‐off: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ Stock-‐Based Compensation Expense: 75 96 118 142 162 177 191 203 Tax Benefits from Stock Options: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ (Income) Loss on Join Venture: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ Other: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐
Changes in Operating Assets and Liabilities:Accounts Receivable: (197) (157) (165) (174) (156) (109) (107) (84) Inventories: (286) (227) (237) (251) (224) (157) (153) (121) Prepaid Expenses & Other Current Assets: 11 (31) (33) (34) (22) (21) (20) (16) Accounts Payable: 130 77 80 85 76 53 52 41 Accrued Expenses & Other Current Liabilities: 66 59 62 66 43 40 39 31 Other Non-‐Current Liabilities: 72 49 51 53 35 33 32 25 Other Non-‐Current Assets: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐
Net Cash Provided by Operating Activities 1,350 1,749 2,184 2,640 3,170 3,561 3,862 4,130
CASH FLOWS FROM INVESTING ACTIVITIESCapital Expenditure: (534) (801) (1,202) (1,803) (2,164) (2,597) (3,116) (3,428) Sale (Purchase) of Intangible assets: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ Invest. in Marketable & Equity Securtities: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐ Other Investing Activities: -‐ -‐ -‐ -‐ -‐ -‐ -‐ -‐
Net Cash Used in Investing Activities (534) (801) (1,202) (1,803) (2,164) (2,597) (3,116) (3,428)
CASH FLOWS FROM FINANCING ACTIVITIESShort 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: 770 890 911 751 908 858 631 581 Beginning Cash: 979 1,749 2,639 3,550 4,301 5,209 6,067 6,698 Ending Cash: 1,749 2,639 3,550 4,301 5,209 6,067 6,698 7,279
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
15
WACC Analysis
▪ 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 $4 in stock price.
Cost of Capital Risk-‐free Rate: 2.94%Market Risk Premium: 6.42%Beta: 1.25Cost of Equity: 10.97%Default Spread: 0.40%Pre-‐tax Cost of Debt: 3.34%Cost of Preferred Stock: 0.00%
Industry -‐ Unlevered BetaLevered Unlevered Beta % Debt % Equity Tax Rate Beta
Apparel, Accessories and Luxury Goods 0.97 17.2% 82.8% 35.0% 1.10
Michael Kors -‐ Levered Beta and WACC CalculationUnlevered Levered
Beta Debt % Debt Equity % Equity Tax Rate BetaOptimal Capital Structure: 1.10 1,395 17.2% 6,729 82.8% 34.4% 1.25Current Capital Structure: 1.10 -‐ 0.0% 8,123 100.0% 34.4% 1.10
WACC, Optimal Capital Structure: 9.46%WACC, Current Capital Structure: 10.97%Average WACC: 10.21%
0.109675 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%90.0% 10.1% 10.3% 10.5% 10.7% 11.0% 11.2% 11.4% 11.6% 11.8%80.0% 9.0% 9.2% 9.4% 9.7% 9.9% 10.1% 10.3% 10.5% 10.7%70.0% 7.9% 8.1% 8.3% 8.6% 8.8% 9.0% 9.2% 9.4% 9.6%60.0% 6.8% 7.0% 7.2% 7.5% 7.7% 7.9% 8.1% 8.3% 8.6%50.0% 5.7% 5.9% 6.1% 6.4% 6.6% 6.8% 7.0% 7.2% 7.5%40.0% 4.6% 4.8% 5.0% 5.3% 5.5% 5.7% 5.9% 6.1% 6.4%30.0% 3.5% 3.7% 3.9% 4.2% 4.4% 4.6% 4.8% 5.0% 5.3%20.0% 2.4% 2.6% 2.9% 3.1% 3.3% 3.5% 3.7% 3.9% 4.2%10.0% 1.3% 1.5% 1.8% 2.0% 2.2% 2.4% 2.6% 2.8% 3.1%
Debt
Cost of Capital
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
16
Unlevered FCF Projection:
Implied Share Price Calculation:
▪ Michael Kors does not have debts and have intention to issue debt or dividend at the time of valuation. As a result, FCFE projection is similar to that of FCFF. Implied share price from DCF will be lowered as we use Cost of Equity of 10.9% instead of Cost of Capital.
ProjectedAnnual Unlevered FCF Projection FY14A FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22ERevenue: 4,371$ 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%
Terminal Value -‐ Multiple Method Terminal Value -‐ Perpetuity Growth MethodTerminal EBITDA Multiple: 4.50 x Implied Terminal EBITDA Multiple: 4.20 xTerminal Value: 9,805 Terminal Value: 9,162 Implied Terminal FCF Growth Rate: 2.50% Terminal FCF Growth Rate: 2.00%
PV of Terminal Value: 4,755 PV of Terminal Value: 4,664 Present Value of FCFF: 4,717 Present Value of FCFF: 4,717
Implied Enterprise Value: 9,472 Implied Enterprise Value: 9,381
Plus: Cash & Cash-‐Equivalents: 1,012 Plus: Cash & Cash-‐Equivalents: 1,012 Less: Total Debt: -‐ Less: Total Debt: -‐
Implied Equity Value: 10,484 Implied Equity Value: 10,394
Diluted Shares Outstanding: 205.87 Diluted Shares Outstanding: 205.87
Implied Share Price from DCF: $50.93 Implied Share Price from DCF: $50.49Premium / (Discount) to Current: 29.06% Premium / (Discount) to Current: 27.95%
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
Terminal Value -‐ Perpetuity Growth MethodTerminal Value: 8,393 Terminal FCF Growth Rate: 2.00%
PV of Terminal Value: 4,075 Present Value of FCFE: 4,717
Implied Equity Value: 8,792
Diluted Shares Outstanding: 205.87
Implied Share Price from DCF: $42.71Premium / (Discount) to Current: 8.23%
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
17
Base Case Sensitivity Analysis:
Sensitivity Table: Discount Rate vs Terminal FCF Growth Rate and Implied Share Price
Terminal FCF Growth Rate50.48805 1.00% 1.25% 1.50% 1.75% 2.00% 2.25% 2.50% 2.75% 3.00%
9.20% 52.37 53.18 54.04 54.96 55.95 57.01 58.14 59.36 60.69 9.45% 51.15 51.91 52.71 53.56 54.47 55.44 56.49 57.61 58.82 9.70% 50.00 50.70 51.45 52.24 53.08 53.98 54.94 55.97 57.08 9.95% 48.92 49.57 50.26 51.00 51.78 52.61 53.50 54.45 55.47 10.20% 47.89 48.50 49.14 49.83 50.55 51.33 52.15 53.03 53.96 10.45% 46.91 47.48 48.09 48.72 49.40 50.12 50.88 51.69 52.56 10.70% 45.98 46.52 47.08 47.68 48.31 48.98 49.68 50.44 51.24 10.95% 45.10 45.60 46.13 46.69 47.28 47.90 48.56 49.26 50.00 11.20% 44.26 44.73 45.22 45.75 46.30 46.88 47.49 48.15 48.84
Sensitivity Table: Discount Rate vs Terminal EBITDA Multiple and Implied Share Price
Terminal EBITDA Multiple50.927165 2.50 x 3.00 x 3.50 x 4.00 x 4.50 x 5.00 x 5.50 x 6.00 x 6.50 x
9.20% 42.26 45.01 47.76 50.51 53.26 56.01 58.75 61.50 64.25 9.45% 41.86 44.56 47.26 49.96 52.67 55.37 58.07 60.78 63.48 9.70% 41.46 44.12 46.77 49.43 52.09 54.74 57.40 60.06 62.72 9.95% 41.07 43.68 46.29 48.91 51.52 54.13 56.74 59.36 61.97 10.20% 40.68 43.25 45.82 48.39 50.96 53.53 56.10 58.66 61.23 10.45% 40.30 42.83 45.36 47.88 50.41 52.93 55.46 57.99 60.51 10.70% 39.93 42.42 44.90 47.38 49.87 52.35 54.83 57.32 59.80 10.95% 39.57 42.01 44.45 46.89 49.34 51.78 54.22 56.66 59.10 11.20% 39.21 41.61 44.01 46.41 48.81 51.21 53.62 56.02 58.42
Discount Rate (WACC)
Discount Rate (WACC)
Sensitivity Table: Average Sales per Retail Store vs New Retail Store and Implied Share Price
Average Sales per Retail Store50.48805 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00%
50.48805 -‐2.00% -‐1.50% -‐1.00% -‐0.50% 0.00% 0.50% 1.00% 1.50% 2.00%-‐1.00% -‐4.00% 38.48 40.81 43.22 45.69 48.24 50.86 53.56 56.34 59.21 0.00% -‐3.00% 39.53 41.90 44.34 46.85 49.44 52.11 54.85 57.68 60.59 1.00% -‐2.00% 40.63 43.04 45.52 48.08 50.71 53.42 56.21 59.09 62.05 2.00% -‐1.00% 41.75 44.20 46.73 49.33 52.00 54.76 57.60 60.52 63.53 3.00% 0.00% 42.80 45.29 47.85 50.49 53.21 56.01 58.89 61.86 64.91 4.00% 1.00% 43.84 46.37 48.97 51.65 54.41 57.25 60.18 63.19 66.29 5.00% 2.00% 45.02 47.59 50.24 52.96 55.77 58.66 61.64 64.70 67.86 6.00% 3.00% 46.07 48.67 51.36 54.12 56.97 59.91 62.93 66.04 69.24 7.00% 4.00% 47.53 50.19 52.92 55.75 58.65 61.65 64.73 67.90 71.17
Sensitivity Table: Average Sales per Outlet Store vs New Outlet Store and Implied Share Price
Average Sales per Outlet Store50.48805 50.48805 7.00% 7.50% 8.00% 8.50% 9.00% 9.50% 10.00% 10.50% 11.00%
50.48805 -‐2.00% -‐1.50% -‐1.00% -‐0.50% 0.00% 0.50% 1.00% 1.50% 2.00%-‐6.00% -‐6.00% 25.60 28.20 30.87 33.62 36.45 39.37 42.36 45.45 48.62 -‐3.00% -‐5.00% 27.62 30.29 33.04 35.86 38.77 41.76 44.84 48.01 51.27 0.00% -‐4.00% 30.67 33.44 36.29 39.23 42.25 45.35 48.55 51.84 55.22 3.00% -‐3.00% 31.33 34.13 37.00 39.97 43.01 46.15 49.37 52.69 56.10 6.00% 0.00% 37.86 40.88 43.99 47.19 50.49 53.88 57.37 60.96 64.65 9.00% 3.00% 42.73 45.92 49.21 52.59 56.07 59.66 63.35 67.14 71.04 12.00% 4.00% 47.21 50.55 54.00 57.55 61.20 64.96 68.83 72.81 76.90 15.00% 5.00% 47.87 51.24 54.71 58.29 61.96 65.75 69.65 73.66 77.78 18.00% 6.00% 50.94 54.42 58.01 61.69 65.49 69.40 73.42 77.56 81.82
New Retail Store Growth
Rate
New Outlet Store Growth
Rate
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
18
Comparable Public Companies
▪ 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.
Sensitivity Table: Licensing Segment Growth vs SG&A as % Sales and Implied Share Price
Licensing Segment Growth50.48805 22.00% 24.00% 26.00% 28.00% 30.00% 30.00% 30.00% 30.00% 30.00%
50.48805 -‐8.00% -‐6.00% -‐4.00% -‐2.00% 0.00% 2.00% 4.00% 6.00% 8.00%25.00% -‐4.00% 73.54 74.05 74.62 75.26 75.96 76.75 77.61 78.57 79.63 26.00% -‐3.00% 67.24 67.74 68.29 68.91 69.59 70.35 71.19 72.12 73.15 27.00% -‐2.00% 60.94 61.43 61.96 62.56 63.23 63.96 64.78 65.68 66.67 28.00% -‐1.00% 54.65 55.11 55.63 56.21 56.86 57.57 58.36 59.23 60.19 29.00% 0.00% 48.35 48.80 49.31 49.87 50.49 51.18 51.94 52.79 53.72 30.00% 1.00% 42.05 42.49 42.98 43.52 44.12 44.79 45.52 46.34 47.24 31.00% 2.00% 35.75 36.17 36.65 37.17 37.75 38.39 39.11 39.89 40.76 32.00% 3.00% 29.45 29.86 30.32 30.82 31.38 32.00 32.69 33.45 34.29
` 33.00% 4.00% 23.15 23.55 23.99 24.47 25.01 25.61 26.27 27.00 27.81
SG&A Growth Rate
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$ 2,675$ 3,412$ 881$ 1,660$ 2,138$ 28.1% 27.6% 30.0% 36.8% 36.6%
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 2.7 x 2.1 x 9.2 x 4.9 x 3.8 x
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
19
Investment Thesis and Risks
We think the share price may reach higher levels within the next 12 -‐ 18 months for the following reasons:
▪ Michael Kors’s 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 firm’s 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 firm’s success.
▪ Too-‐Central Leadership: While Michael Kors is the main designer behind the firm’s 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.
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
20
Appendix A – Revenue Assumptions, Key Ratios & DuPont Analysis
ProjectedRevenue Assumptions FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E
Total Revenue 7,278$ 9,323$ 11,466$ 13,730$ 15,752$ 17,172$ 18,556$ 19,650$ YoY Growth Rate 66.5% 28.1% 23.0% 19.7% 14.7% 9.0% 8.1% 5.9%
Revenue by SegmentsRetail 3,361 4,287 5,375 6,526 7,837 8,952 10,126 11,363 Wholesale 3,694 4,745 5,742 6,786 7,455 7,714 7,874 7,703 Licensing 223 290 348 418 460 506 556 584
Total Revenue 7,278 9,323 11,466 13,730 15,752 17,172 18,556 19,650
Retail stores 473 576 680 784 857 919 972 1,017 Increase during period 100 103 104 104 73 62 53 45 Growth YoY 6.4% 3.0% 1.0% 0.0% -‐30.0% -‐15.0% -‐15.0% -‐15.0%Post-‐toggle Growth YoY 3.0% 1.0% 0.0% -‐30.0% -‐15.0% -‐15.0% -‐15.0%
Average Sales per Retail Store 7.8 8.2 8.4 8.7 8.7 8.4 8.1 7.6 Growth YoY 6.0% 6.0% 3.0% 3.0% 1.0% -‐3.0% -‐3.0% -‐6.0%Post-‐toggle Growth YoY 5.5% 5.5% 2.5% 2.5% 0.5% -‐3.5% -‐3.5% -‐6.5%
Outlet Stores 182 213 245 278 312 346 380 414 Increase during period 29 31 32 33 34 34 34 34 Growth YoY 6.0% 6.0% 4.0% 4.0% 2.0% 0.0% 0.0% 0.0%Post-‐toggle Growth YoY 6.0% 6.0% 4.0% 4.0% 2.0% 0.0% 0.0% 0.0%
Average Sales per Outlet Store 18.5 20.1 21.9 23.5 25.1 25.9 26.6 27.4 Growth YoY 9.0% 9.0% 9.0% 7.0% 7.0% 3.0% 3.0% 3.0%Post-‐toggle Growth YoY 9.0% 9.0% 9.0% 7.0% 7.0% 3.0% 3.0% 3.0%
Licensing Segment 223 290 348 418 460 506 556 584 Growth YoY 30.0% 30.0% 20.0% 20.0% 10.0% 10.0% 10.0% 5.0%
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%
Quantum Capital Advisors Equity Research Apparel, Accessories and Luxury Goods
21
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
D'Arpizlo, Claudia, Frederica Levato, Daniele Zito, and Joelle De Montgolfter. "Luxury Goods Worldwide Market Study -‐ Rise of the Borderless Consumer." Bain & Company Fall-‐Winter 2014 (2014). Print.