IPOs, Initial Public Offerings: pre & post IPO

Michael Kors (KORS)

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UPDATE: We concluded KORS was a buy in the IPO after-market the first day it traded (December 15, 2011), below $25 at an average price of $24.50Kors recently traded up 70% in the IPO after-market at $41.32. 

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KORS pre-IPO report
BUY/AVOID RECOMMENDATION
We recommend getting KORS on the IPO.  It’s large IPO with a $751 million size.  We expect KORS to move up in the after market, over time.

Based in Hong Kong, China, Michael Kors (proposed KORS) scheduled a $751 million IPO with a market capitalization of $3.4 billion at a price range mid-point of $18 for Thursday, December 15, 2011.

SUMMARY
KORS recent growth is based on implementation of two very good strategic decisions
. In 2004 expanded from apparel into accessories (including handbags, small leather goods, eyewear, jewelry and watches) and footwear, which together now account for the majority of wholesale and retail sales.
. Grew form 73 stores as of March 20, 2009 to 203 stores as of October 2, 1011.  Growth potential is to expand from 203 stores to 600 stores, including 400 in the U.S., 100 in Europe and 100 in Japan.

VALUATION
The best comparison is with Coach (COH) because it has a comparable product line sold through retail stores and distribution, similar to KORS.

KORS, however, has better growth potential in retail stores and believes its retail store potential is 600, up from the current 203.

There is a concern that 100% of the IPO proceeds are going to selling shareholders.  However, compared COH — notice the price to tangible book value is about the same at 12.  KORS increased it’s equity from $85 million to $302 million for the 12 months ended September 2011, in preparation for the KORS IPO.

It’s no coincidence that KORS price to tangible book value is just a little more than COH’s, which means there is enough equity to run the business.  Should KORS need more equity for expansion, it would be easy for KORS to do a secondary offering after the IPO.

KORS is priced at a discount to COH in terms of price-to-annualized sales (3.1 versus 8.6) and on a price/earnings basis is priced at a premium to COH (34 versus 22).
.

CompareValuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

Annualizing Sept 6 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

Michael Kors (KORS)

$3,438

3.1

34

11.4

12.6

Coach(COH)

$18,000

8.6

22

9.9

12.3

Ralph Lauren (RL)

$13,580

2.0

16

4.0

4.7

Note: Coach is the best comparable because it has retail stores & wholesale distribution

.
CAVEATS
Comparable store sales growth has been extremely high, in the 40+% category.  While this bodes well for making new stores profitable soon, we believe the comparable store sales growth will decline over time.
.

March 30 fiscal

Sept 6 mos

Sept 6 mos

Comparable store sales

2009

2010

2011

2010

2011

sales growth

6%

19%

48%

40%

42%

Shareholders equity ($mm)

$11

$49

$125

$85

$302

.

BUSINESS
KORS is a rapidly growing global luxury lifestyle brand led by a world-class management team and a renowned, award-winning designer. Since launching his namesake brand 30 years ago,

Michael Kors has featured distinctive designs, materials and craftsmanship with a jet-set aesthetic that combines stylish elegance and a sporty attitude.

Mr. Kors’ vision has taken the Company from its beginnings as an American luxury sportswear house to a global accessories, footwear and apparel company with a presence in 74 countries.

RECENT DEVELOPEMENTS
As of November 26, 2011, KORS had 184 North American retail stores, including concessions, and 37 international retail stores, including concessions, in Europe and Japan. For the period from October 2, 2011, the first day of KORS’ third fiscal quarter of Fiscal 2012, to November 26, 2011, comparable store sales increased by 31.2% for this period.

MARKET
KORS operates in the growing global luxury goods industry, which, according to the Altagamma Studies, is predicted to grow from $230.1 billion in 2010 to between $299.3 billion and $305.9 billion in 2014, representing a 7% compound annual growth rate.

While apparel makes up an important part of KORS business, it has  a growing focus on luxury accessories and footwear, positioning KORS to participate in what was the most resilient and fastest growing product category within the global luxury goods industry from 2005 to 2010.

In 2010, the accessories product category generated sales of $57.5 billion, representing 25% of total sales for the industry. The majority of KORS current sales come from North America, and KORS has built, and continue to build, its business and brand awareness in Europe and Asia.

BUSINESS SEGMENTS
KORS operates its business in three segments—retail, wholesale and licensing—and has a strategically controlled global distribution network focused on company-operated retail stores, leading department stores, specialty stores and select licensing partners.

As of October 1, 2011, the retail segment included 169 North American retail stores, including concessions, and 34 international retail stores, including concessions, in Europe and Japan.

As of October 1, 2011, the wholesale segment included wholesale sales through 1,801 department store and specialty store doors in North America and wholesale sales through approximately 549 department store and specialty store doors internationally.

The remaining revenue is generated through the licensing segment, through which KORS licenses to third parties certain production, sales and/or distribution rights.

During the first six months of Fiscal 2012, the licensing segment accounted for 5.2% of total revenue and consisted primarily of royalties earned on licensed products and geographic licenses.

WHOLESALE CUSTOMERS
KORS partners with leading wholesale customers, such as Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus, Holt Renfrew, Bloomingdale’s, Nordstrom and Macy’s in North America; and Harrods, Harvey Nichols, Selfridges and Galeries Lafayette in Europe.

RETAIL STORE EXPANSION PLAN
KORS grew form 73 stores as of March 20, 2009 to 203 stores as of October 2, 1011.  Growth potential is to expand from 203 stores to 600 stores, including 400 in the U.S., 100 in Europe and 100 in Japan.

USE OF PROCEEDS
100% to selling shareholders

March 30 fiscal

Sept 6 mos

Sept 6 mos

Comparable store sales

2009

2010

2011

2010

2011

sales growth

6%

19%

48%

40%

42%

Shareholders equity ($mm)

$11

$49

$125

$85

$302

Note: shareholders equity increased 255% for the year ended Sept 30, 2011
Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

Annualizing Sept 6 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

in IPO

Michael Kors (KORS)

$3,438

3.1

34

11.4

12.6

22%

CompareValuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

Stock

Annualizing Sept 6 mos

Cap (mm)

Sales

Earnings

BookValue

TangibleBV

YTD

Michael Kors (KORS)

$3,438

3.1

34

11.4

12.6

Coach(COH)

$18,000

8.6

22

9.9

12.3

12%

Ralph Lauren (RL)

$13,580

2.0

16

4.0

4.7

33%

Note: Coach is the best comparable because it has retail stores & wholesale distribution
SCORECARD

Mgt

Market

Market Do-

Proprie-

Total

1-5, 5 is high

Growth

mination

tary

rating

20 is perfect

3

2

2

1

8

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