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Kors a $16B Firm; European and Men’s Each $1B Opportunity

Shares surged 5.8 percent Tuesday to $79.13 in trading on the New York Stock Exchange following a second-quarter earnings report that had investors cheering.

NEW YORK — Sixteen billion dollars.

That is now the market capitalization of Michael Kors Holdings Ltd. after its shares surged 5.8 percent Tuesday to $79.13 in trading on the New York Stock Exchange following a second-quarter earnings report that had investors cheering.

The company beat Wall Street’s consensus estimates for second-quarter earnings per share and revenues, and raised fiscal 2014 guidance. In intraday trading, shares of Kors rose as high as $80, in comparison with the 52-week low of $46.66 on Nov. 15, 2012.

For the quarter ended Sept. 28, the company posted a 49 percent rise in net income to $145.8 million, or 71 cents a diluted share, from $97.8 million, or 49 cents, last year. Wall Street’s consensus estimate pegged second-quarter EPS at 68 cents.

The company said total revenues rose 38.9 percent to $740.3 million from $532.9 million last year. Wall Street had expected revenues of $725.9 million. Net sales in the period rose 37.9 percent to $707.4 million from $513.1 million, which included a 29.9 percent gain in wholesale net sales to $351.9 million and a retail net sales increase of 46.8 percent to $355.6 million.

Comparable-store sales rose 22.9 percent, representing the company’s 30th consecutive quarter of growth. That was driven in part by 83 net new store openings since the second quarter of last year, with 24 of those stores open in the second quarter of fiscal year 2014. The balance in total revenues was from licensing income, which increased 65.4 percent to $32.9 million. Licensing revenues were driven by strength in Kors’ luxury watch and jewelry businesses.

For the six months, net income rose 62.7 percent to $270.8 million, or $1.32 a diluted share, from $166.5 million, or 83 cents, a year ago. Total revenues rose 45.7 percent to $1.38 billion from $947.8 million.

John D. Idol, chairman and chief executive officer, told analysts during a conference call, “Our exceptional second-quarter results demonstrate Michael Kors’ leading position within the global luxury market.”

He said the company continues to execute on its six key strategies noted in prior conference calls, which include conversion of department store doors globally into branded shops-in-shop, and growing brand recognition in Europe, in which “total revenues grew 101 percent on a 45 percent comparable-sales increase.” He also said that the European market will “achieve revenue growth in excess of $1 billion in the next few years.” Kors’ European business is about $114 million currently.

According to Idol, the company expects a “continuation of strong sales trends in our wholesale business as we convert additional doors to shop-in-shops as they highlight the Michael Kors brand and bring the jet-set environment we offer in retail stores to department stores.”

He noted that the Kors brand has nearly 10 million Facebook fans, compared with just 1.8 million a year ago, and 1.5 million Twitter followers, versus 900,000 last year.

For the third quarter, the company forecast diluted EPS at between 83 cents to 85 cents, with revenues in the range of $845 million to $855 million. For fiscal 2014, the company raised guidance, with diluted EPS estimated at $2.77 to $2.81 on a revenue range of $2.9 billion to $3 billion. That’s up from prior estimates of diluted EPS of $2.67 to $2.69 on a revenue range of $2.8 billion to $2.9 billion when the company posted first-quarter results in August.

Oliver Chen at Citigroup has a “buy” rating on Kors’ stock, noting the brand is one of the few companies “we expect to raise guidance for holiday.”

In addition to expectations for the European business — with an initial focus on the U.K., Germany, France and Italy — Chen said Kors is “likely to hire a global men’s president” to build out the men’s business. Idol said previously that men’s could be a $1 billion opportunity over the next few years.

In contrast, Wells Fargo Securities analyst Paul Lejuez said, “Kors has numerous growth opportunities, which we believe are attractive given the momentum of the brand. However, though we believe Kors business trends remain strong, we do not believe the company is immune to macro factors and this could result in less impressive earnings beats.”

He has a “market perform” rating on the stock, the equivalent of a “hold” as the “stock appears appropriately valued.”

Lejuez noted some positives, which include management’s expectations of normalization of markdown levels, even though that hasn’t happened yet, and a strong fragrance launch in the second quarter, which achieved a “top five rank in the U.S. fragrance category.”

Specialty retail analyst Ike Boruchow at Sterne Agee has a “neutral” rating on shares of Kors: “On the positive side, comps remain 20 percent plus, gross margins were solid [up 150 basis points] and [third-quarter] guidance hit the Street. On the negative side, the [second quarter] beat was the smallest beat as a public company, wholesale growth was below expectations and inventories ended up 45 percent. With the stock back at its highs, we remain sidelined on valuation.”