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Michael Kors: Reflections on a Mistimed Investment

Michael Kors (NYSE: KORS) was a mistimed investment on my part. The original thesis was to buy an unloved stock which had a low P/E and a large buyback looming. The company has consistently outperformed its category in terms of same store sales. But, looking back, the deceleration of growth in America was natural because the high metrics were unsustainable. Usually the transition from being treated as a growth stock to becoming a value stock is difficult, but I believed the decline from the high nineties to the sixties was all of the pain the stock would incur.

The main reason for the decline in the stock was the negative same store sales in North America which was caused by the strong dollar. The strong dollar caused foreign travelers to curtail their spending in the Kors flagship stores in New York and Las Vegas. Normally this would have a minimal negative effect on the stock, but because there had already been a narrative of the brand being oversaturated and overexposed causing it to go out of style, normal valuation metrics were thrown out the window. The reason why investors usually ignore currency factors is because they tend to be short term in nature. Unfortunately for Kors shareholders, the narrative will only be reversed by a strong upturn in same store sales metrics. Given the poor guidance the expectation for this possibility has been squashed and investors have nearly given up on Kors stock.

The thesis behind buying Kors is unchanged. The company raised its buyback by $500 million. I believe growth from Asia and Europe will drive earnings growth as the North American same store sales begin to stabilize. Because investors often are left grasping for information in the fashion industry, stocks often become misvalued. When investors are valuing Kors they are trying to take the risk of a further earnings decline into account. I don’t believe Michael Kors needs to become as hot as it once was a couple of years ago for the stock price to increase. It just needs to show an end to the negative same store sales growth trend. The entire luxury space is doing poorly, so I don’t agree with the narrative which states the brand is declining. I believe in buying stocks that are unloved, so I am not selling my shares. In fact I am considering purchasing more.

Alex Pitti writes for Seeking Alpha and Instavest where you can view and copy his holdings.