The Exchange

Michael Kors: More huge numbers but shorts won't surrender

The Exchange
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Michael Kors: More huge numbers, but shorts won't surrender

For the first time in nearly two years, shares of Michael Kors (KORS) were catching up with Wall Street's ever-rising price target, covering a gigantic part of the gap with a nearly 20% post-earnings advance.

The action Tuesday was good for the second-biggest single day gain in the Hong Kong-based clothing and handbag seller's history, and it came after the latest quarterly numbers easily exceeded analysts' projections yet again. In Tuesday's trading, the stock was jumping as much as 19.4% to $91.57 amid heavy trading volume, reaching an all-time high in the process.

Coming into the day, analysts had a price target of $91.63 on the shares, so Kors has now achieved that. It last traded in line with the consensus target in early March 2012, back when it was in the $40s.

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Fashion from the Fall 2013 collection of Michael Kors is modeled.

So has it gotten too expensive at this point? Arguably no, at least not relative to its trading history. With a forward multiple of 27.1 times earnings, the shares change hands below the 31.1 average it normally has. Other metrics, including price-to-sales and trailing P/E, show the stock within the range of where traders usually have it.

But rest assured, there are doubters on the shares, and in all likelihood, the day's move was a combination of one part celebration and another part shorts fleeing. Here's why the latter's true. The run in Kors up roughly 277%, vs. 44% for the S&P 500, since it debuted in December 2011 has been extraordinary. It's also gotten the attention of a larger set of short sellers, and there's no doubt that was playing a part in the magnitude of the session's bounce. Short interest has increased 2.5 times since last year, while the days needed to cover that entire position got above three in late November and have stayed there. In summary, you've got more shorts, along with harder-to-get stock in order to cover those positions. That provides at least something of a floor.

Popularity contest

That said, it is very much also about what Michael Kors is doing as a business, and its execution looks essentially flawless. In the third quarter, revenue climbed 59% to $1.01 billion from $636.8 million in the prior-year period. The top line exceeded the consensus view of $859.5 million by 17.8%, which, according to FactSet data, was the widest beat in its public days. In its eight reported quarters, Kors hasn't missed on sales or earnings.

Meanwhile, same-store sales rose 27.8%, topping the 19.8% forecast. And that growth wasn't following a weak previous year, either. In last year's third quarter, comparable sales were up 41.4%, making this year's expansion all the more impressive. Kors earned $1.11 a share, well ahead of the 86-cent projection analysts had.

Looking to the fourth quarter, revenue should be $790 million to $800 million, with comp sales up 15% to 20% and earnings of 63 cents to 65 cents a share. Analysts who track the company are calling for revenue of $790.7 million, a same-store sales improvement of 18.9% and a profit of 65 cents. Full-year results are all but assured of coming in above the estimates that were in the market.

Eventually, the contrary approach on the stock may prove to be both rational and rewarding. For now, it's not working at all. But those betting against Kors do potentially have a few things in their favor. Analysts can't say enough about the brilliance of the stock, with the 18 available ratings on FactSet showing 14 buys or buy equivalents with four holds. That kind of optimism has a way of getting countered by Mr. Market, naturally when it's least expected. Then there's sales growth, always through the roof for Kors. Eventually, that has to slow. But when -- will 2014 be the year? At the moment, that sounds like a sizable stretch, though it can't be ruled out.

Here's why. The economy after the financial crisis has always been shaky. Not surprisingly though, well-heeled shoppers are better prepared to deal with any slowdowns than low- and middle-income consumers. Those in the upper stratum, of course, are the Kors demographic. But should the global economic jitters being reflected in stocks of late continue, this theoretically could have some drag on Kors a few months out, primarily for that segment of the higher middle class for whom its goods are an aspiration.

Recent retail results have been ragged, and the holiday shopping season was unkind to many brands from Walmart (WMT) to Kors competitor Coach (COH), which notably carved a similar 240% increase in the first two years after its initial public offering back in 2000. Still, the slightly more optimistic view in all this is that the retail sales data from the government have managed to be brighter than corporate America is suggesting. Don't be surprised if traders and investors put more weight toward what the companies are saying.

Michael Kors has had a stunning period on the market, there's no disputing that. It's clear its merchandise is in vogue, and its stores are drawing the crowd it covets. Just don't think you've seen the last of the shorts yet.

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