Investment Analysis: Stick to your KOR
Investment Analysis: Stick to your KOR October 23rd, 2015 Mohammad Ali Shaikh www.moshaikh.com
Investment Overview Strong cash flow attached with strings: high premium, risky market, uncertain margins Michael Kors (tic: KORS)
• Headquarters: New York, USA
Share Price: USD $39.64
Trading Multiples: 9.33x P/E, 5.0x EV / EBITDA
• 2015 revenue: $14.2 bn
Profit: $1.3 bn
Unlevered 2015 Free Cash flow: $400 mm
• North America slow down: two-year comp stack slowed six/last seven quarters, 60%% of stores reaching maturity in 2015
Shrinking Growth
Investment Thesis
• Oversaturation in market: Wholesale doors in NA approximately doubled, 96% vs goal, Kors in 75% of department stores • Competitors and Fast Fashion: With increasing traction fast fashion brans such as Zara and H&M continue to land grab and take away market share at various price points. This places continued pressure on volumetric sale and price. Strong balance sheet and Free Cash Flow, But how does one continue to grow? Financial projections indicate that KORS’s intrinsic value is captured in its current share price. The company has a clean balance sheet and generate significant cash flow, as KORS continues to mature it will not grow at its’ 5 year historical levels. In order to make the case for attractive LBO returns a PE firms has to go beyond financial engineering and be able to make the case to create value. I am recommending against an LBO for block shares in the company fore three reasons: 1. Unattractive Economics for an LBO: The entry premium of ~40% in my base case does not conclude in an IRR north of +20% 2. North America Sales Declining: NA sales which make up ~80% of Sales is declining, indicating declining brand equity 3. Oversaturation in a late cycle economy: 95% penetration in NA Kors can’t pull this lever, growth in Asia
Valuation & Deal Size Returns
Valuation: 55.44 / share (a 40% premium to current market price) Deal size: Total $ 10,724 mm Ownership: 100%
Investment horizon: 5 Years Exit EV / EBITDA multiple: 5x (current EV / LTM EBITDA multiple of comp set) IRR:
Investment Overview Strong cash flow attached with strings: high premium, risky market, uncertain margins Michael Kors (tic: KORS)
• Headquarters: New York, USA
Share Price: USD $39.64
Trading Multiples: 9.33x P/E, 5.0x EV / EBITDA
• 2015 revenue: $14.2 bn
Profit: $1.3 bn
Unlevered 2015 Free Cash flow: $400 mm
• North America slow down: two-year comp stack slowed six/last seven quarters, 60%% of stores reaching maturity in 2015
Shrinking Growth
Investment Thesis
• Oversaturation in market: Wholesale doors in NA approximately doubled, 96% vs goal, Kors in 75% of department stores • Competitors and Fast Fashion: With increasing traction fast fashion brans such as Zara and H&M continue to land grab and take away market share at various price points. This places continued pressure on volumetric sale and price. Strong balance sheet and Free Cash Flow, But how does one continue to grow? Financial projections indicate that KORS’s intrinsic value is captured in its current share price. The company has a clean balance sheet and generate significant cash flow, as KORS continues to mature it will not grow at its’ 5 year historical levels. In order to make the case for attractive LBO returns a PE firms has to go beyond financial engineering and be able to make the case to create value. I am recommending against an LBO for block shares in the company fore three reasons: 1. Unattractive Economics for an LBO: The entry premium of ~40% in my base case does not conclude in an IRR north of +20% 2. North America Sales Declining: NA sales which make up ~80% of Sales is declining, indicating declining brand equity 3. Oversaturation in a late cycle economy: 95% penetration in NA Kors can’t pull this lever, growth in Asia
Valuation & Deal Size Returns
Valuation: 55.44 / share (a 40% premium to current market price) Deal size: Total $ 10,724 mm Ownership: 100%
Investment horizon: 5 Years Exit EV / EBITDA multiple: 5x (current EV / LTM EBITDA multiple of comp set) IRR:
