Two Ways To Play The Lost Luster In Michael Kors (KORS)

Notes: Michael Kors (KORS) reported Q3 EPS of $1.48 vs the $1.33 per share consensus estimate on February 5th. Revenue of $1.26B fell short of Wall Street’s projection of $1.30B and comps of +8.6% were well below the +12.6% consensus from Retail Metrics. This was the 1st single digit rate for comparable same store sales in 5+ years. Management made a point of emphasis on 35 straight quarters of comp growth and the fact that they hit 16M “likes” on Facebook, but increased promotional activity still resulted in gross margins ticking lower by 30 basis points to 60.9%. The company issued Q4 guidance of $0.89-$0.92 in EPS vs the $0.94 estimate on revenue of $1.05B-$1.08B vs the $1.15B estimates. Despite the 30%+ correction in the stock, (KORS) trades at a P/E ratio of 16.50x (FY15 estimates), price to sales ratio of 3.46x, and a price to book ratio of 6.77x. Looking ahead to the next year Michael Kors is likely only to deliver low double earnings growth (+33% in FY15) with share buybacks and see sales push above $5B (+17.1% from +32.3%).

Michael Kors (KORS) Option Trade Ideas

Buy the Mar 20 $65/$70 bear put spread for a $1.50 debit or better

(Buy the Mar 20 $70 put and sell the Mar 20 $65 put, all in one trade)

Stop loss- None

1st upside target- $3.00

2nd upside target- $4.50

And/Or

Sell the Mar 20 $72.50/$75 bear call spread for a $0.60 credit or better

(Sell the Mar 20 $75 call and buy the Mar 20 $72.50 call, all in one trade)

Stop loss reference- A move above $73.50 in the stock

Upside target- $0.10 or less

Maximum gain potential- 32% (if spread expires worthless)

Details: Implied volatility is near the low end of the range at 27-28% (52 week range of 24.28-54.66%), so a debit trade is one to consider. The March bear put spread above offers a better than 3:1 reward/risk ratio with a breakeven $68.50 (roughly 3% below the current share price). Theta (time decay) is minimal at $0.02 and given the sharp moves (KORS) has had to the downside, one month is enough time for a move to mid to high $60’s play out. On the other hand a IV in the upper 20’s is still relatively high compared to the average stock, so by selling an out-of-the-money call spread you can take a higher probability trade for one month’s time. Using the short call’s delta there is about a 36% chance of (KORS) even hitting the $72.50 level by March monthly expiration. The $73.00-73.50 level is important as a stop loss reference has held as resistance since late January (area where the stock gapped lower on January 6th).

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