Michael Kors' insiders bailed out before retailer's Q3 miss

Is Michael Kors Holdings (KORS) running out of runway?

A fashion and Wall Street sensation in recent years, the accessories-and-apparel company reported an impressive 40% jump in quarterly profits, but squandered investors’ favor with a steep slowdown in same-store sales and a relatively downbeat outlook for the current quarter.

Kors shares, which had quintupled from their $20 IPO price in December 2012 to an all-time high near $100 in February, were already down more than 20% from that peak before Tuesday’s report and were knocked for a further drop of 8% to beneath $72.

Investors are clearly being forced to ask whether the Kors brand is nearing the kind of overexposure and customer fatigue that often slows the growth of successful fashion brands. One well-informed shareholder, however, was able to take profits ahead of the latest investor gut check. Sportswear Holdings, a private investment firm and early backer of Michael Kors, sold its entire 5.7% stake in the company in a September stock offering for nearly $900 million. Sportswear’s two representatives on the Kors board stepped down upon the liquidation of the stake.

As discussed in the attached video, there is nothing untoward about a longtime investor cashing in on a fabulously successful position. Yet it underscores the importance of watching what savvy insiders do with their shares in a highly valued company.

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Retail analysts and growth-stock investors are most concerned now with whether Michael Kors is destined to follow the hot-then-not trajectory traced out by Coach Inc. (COH), a Wall Street darling that rode the “affordable luxury” niche to years of breakneck growth through the 2000s before stumbling hard.

Coach shares went from a split-adjusted $2.55 in late 2000 to an all-time high above $77 in early 2012, and have since been cut by more than half at a recent $33.25. For its part, Kors is citing a broad reduction in mall traffic and a trend of heavy discounting that it declines to participate in.

Kors chief executive John Idol told analysts and investors on the post-release conference call: “There was definitely a reduction in mall traffic. We’ve kind of been seeing that for the last couple of quarters, but it was more significant in this quarter than we had anticipated.”

And, on refusing to play the aggressive discounting game, Idol added, ““When you don’t take a promotional posture, obviously some of the business goes in different directions. We think that’s the right thing for us to do as a luxury brand.”

It is by no means a forgone conclusion that Kors’ heady growth phase is over, or that it will be squeezed in the awkward middle between true high-end luxury labels and lower-priced everyday brands.

Even with its tempered guidance for the coming holiday quarter, Kors is anticipating a same-store sales increase in the mid-teen percentages. That’s a disappointment given the high-teens targets of Street analysts, but is still remarkable given scant overall consumer-spending growth.

With the decline in Kors shares, much of their once-towering valuation premium has been bled away. The stock is now just under 18-times forecast earnings for the current fiscal year ending next March – virtually the same as Coach’s fiscal 2015 multiple, yet with superior current growth prospects.

The holiday season might be the test of whether the Kors brand is strong enough to generate continued enthusiasm even at full price, or whether the Kors label has been spread so far and wide that it’s seen as too “basic” by trend-alert shoppers.

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