Are Michael Kors Shares Still Too Cheap Not To Own?

After a tough start to 2017 for Michael Kors Holdings Ltd KORS and the rest of the U.S. retail sector, retail stocks have been on the comeback trail in recent weeks. But even with Michael Kors shares up more than 33 percent in the past three months, Oppenheimer analyst Anna Andreeva said Tuesday there is still plenty of upside for Kors.

According to Andreeva, Kors shares have been weighed down over the past couple of years by disappearing profits. However, now that average unit retail has hit a positive inflection point, she believes Michael Kors margins have bottomed. At the same time, market sentiment is extremely low, suggesting it could be relatively easy for the company to surprise to the upside (see Andreeva's track record here).

“For the past 2+ years, valuation has stayed inexpensive (tight 10-11x range on P/E basis) as profitability kept eroding (EBIT margins declined from 30% in '14 to 16.5% we model this year; COH's profitability troughed at 17-18%),” Andreeva wrote.

Part of the winning recipe for Michael Kors has been dialing back its promotional days by 56 percent while launching new higher-end, higher-margin handbags, such as the $398 Mercer and the $400 Sadie. Andreeva says the company’s struggling Friends & Family segment should benefit from lapping its poor fiscal 2017 performance. Despite a 19 percent decline in the most recent quarter, Andreeva said she expects declines to moderate to the 8 to 10 percent range for the rest of the fiscal year.

Michael Kors' Jimmy Choo segment was also a strong point in the most recent quarter, and Oppenheimer is now guiding for fiscal 2019 EPS of $3.85 with Choo factored in.

Oppenheimer maintains an Outperform rating on Michael Kors stock and has raised its price target from $44 to $55.

At time of publication, shares of Michael Kors were up 4.46 percent at $46.65.

Related Link: The Handbag Pair Trade Revisited: Jefferies Picks Kors Over Coach