Michael Kors IPO: Bargain or bust?

December 8, 2011, 12:41 AM UTC

By Mina Kimes, writer

Michael Kors photographed by By Ed Kavishe

FORTUNE — Like any top American fashion designer, Michael Kors excels at spotting trends before they go stale. Kors’ latest forecast is that investors will continue to favor luxury stocks. His company, Michael Kors Holdings Ltd., announced Tuesday that it plans to raise nearly $800 million in an IPO and list its shares on the New York Stock Exchange under the ticker KORS.

Kors’ IPO is timed to capitalize on a boomlet in the luxury sector. The category has been a bright spot in 2011, a year in which upper and lower-tier consumer brands thrived while middle-market labels suffered. Wealthy shoppers in both developed and emerging countries continued to spend heavily, generating double-digit sales increases for companies like Coach (COH), Burberry, and Ralph Lauren (RL). The S&P Global Luxury Index has returned 2% year-to-date, vastly outperforming the S&P Global 1200’s -4.2% return.

Kors, which describes itself in its IPO filing as “a rapidly growing global luxury lifestyle brand,” has benefited from the largess of its upper class clientele. The company noted in the filing that its revenue hit $803.3 million in fiscal 2011, a 58.1% increase from the previous year. Even more impressive, comparable store sales, or sales at stores that have been open for at least a year, rose 48.2% last year. Kors said that the brand has generated positive same store sales growth in every quarter for the last five fiscal years.

A successful IPO would be a career landmark for Kors, a Fashion Institute of Technology dropout who launched his own line in the early 80’s. The designer, who is known for his simple, classic style, creates garments with inter-generational appeal. But his ascent, which was chronicled in a Fortune article last year, was not always smooth; Kors filed for Chapter 11 bankruptcy in 1993. (Michael Kors: Retail’s next billion-dollar man)

In recent years, though, Kors has had a string of big wins. His gig as a judge on the hit reality show Project Runway, which debuted in 2004, boosted his personal profile. That same year, he launched a lower-priced line that later bolstered his company during the recession. Kors has recently made a number of moves that have proven lucrative for luxury rivals Burberry and Ralph Lauren, such as shifting from wholesale to retail in order to exert greater control over his brand. He has also expanded production of higher margin accessories, like handbags.

Retail forecaster Catherine Moellering says Kors’ classic aesthetic resonates with shoppers right now. “If consumers are going to spend on a luxury item, they’re interested in items that have a timelessness,” says Moellering, an executive vice president at the Tobe Report. “It just feels safer.”

The guys behind Kors

The success of Kors’ IPO is contingent upon whether or not investors believe the uptick in luxury sales can continue in the United States. Though the company touts its presence in 74 countries, it still makes the vast majority of its money in the U.S. In its filing, Kors reports that more than 90% of its retail sales and just under 90% of its wholesale sales come from North America. Just a fraction of its sales originate outside the U.S., Europe, and Japan. Though luxury spending in developed markets has stayed healthy over the last year, a slump in the stock market would make affluent people feel less wealthy.

That could present problems for a stock offering that is priced for near perfection. Michael Kors is offering shares at $17 to $19. At the midpoint of that range, given that the company’s net income available for ordinary shareholders over the last twelve months is $85 million, its price to earnings ratio is 40. By contrast, Burberry trades at 36 times trailing earnings, Coach trades at 20, and Ralph Lauren trades at 21, according to Capital IQ.

The market will soon evaluate whether Kors deserves a hefty valuation. In the words of Kors’ fellow Project Runway star Tim Gunn, it’s a “make it work” moment for the burgeoning company.