Michael Kors (KORS) describes itself as “a rapidly growing global luxury lifestyle brand.” That’s a fairly good description of this clothing and accessories company, though it paints over some important details. To start at the beginning, as they say, Michael Kors, the company, began with Michael Kors, the designer, more than 30 years ago and his focus on luxury sportswear. Since that time, the company has grown, rapidly over the last few years, to offer both high-end and upper mid-level products primarily through its own stores and department stores. Its product lineup has expanded from clothing to include accessories and footwear. Through all of this growth, Michael Kors, the man, has remained an important figure—a benefit so far, but also a risk.

Michael Kors’ namesake company is little different from any other fashion house. Image is important and keeping up with fashion trends in a competitive environment is vital. While the company employs a design team, it is Kors’ name that gets put on every item and, thus, his image is virtually inseparable from the company’s image. To this end, the company has benefited from its founder’s appearance on a popular fashion television show. In fact, it is a stated goal of the company to manage Kors’ appearances in such a way as to enhance the brand. Clearly, if Mr. Kors were to tarnish his own image, the image of the company named after him would also be damaged.

The company offers two levels of product, a high-end collection that is sold through the company’s “Collection” stores and high-end department stores like Harrods and Bergdorf Goodman, and the MICHAEL Collection sold at upper-mid tier department stores, such as Bloomingdale’s (Owned by Macy’s (M)) and Nordstrom (JWN), and in its own “Lifestyle” stores. The company also has an outlet store format. This setup is similar to many other fashion apparel companies, with controlled stores seemingly competing with department stores. Although not unusual, these relationships demand careful management. In fiscal 2011, department stores accounted for just over 50% of revenues, with company owned stores representing about 43%—up materially in recent years because of aggressive store expansion.

The effort to reach beyond the high end of the marketplace to gain more customers is another common goal in the luxury design market. There are a limited number of consumers available at the top of the retail market, so shifting lower is a necessity if Michael Kors wishes to reach more customers. The founder’s role as a judge on a fashion reality show has been an important part of the company’s ability to reach a broader audience with an aspirational product placed at the high-end of the mid-tier. Still, like the relationship outlined above, it is a balancing act to keep the image and quality of the mid-level product lineup high enough to warrant premium pricing without turning off customers because of cost. It is also a difficult road keeping high-end customers happy with the differentiation of the products being marketed to them so that mid-tier products don’t tarnish the brand’s high-end image. So far the company appears to have been successful at achieving the many balancing acts it faces, though any missteps could result in top- and bottom-line weakness.

It is also notable that Michael Kors manufactures most of the products it sells. This opens the company up to input cost pressures, which could pinch the bottom line if manufacturing costs rise. To offset such manufacturing cost increases, price increases at the retail end would likely be necessary. This could hurt sales. If cost increases can’t be pushed through, an important issue since about half of sales are derived from retailers the company doesn’t control, profit margins would be squeezed and the bottom line would suffer. Overhead could be reduced, of course, but this could hurt the product creation process, product quality, or customer service, none of those options would be good for a high-end brand. Moreover, foreign manufacturers are used to produce Michael Kors products, which introduces risks from distribution to how the manufacturers treat their employees.

The company’s product lineup has expanded over the years to include more than just clothing. The Michael Kors imprint being placed on more and more product categories has proven successful, as customers have taken to accessories (handbags, belts, etc.) and shoes with the Kors name, but could be a problem if taken too far afield. For example, putting the moniker on cookware might prove too much of a stretch. New product categories, however, have been an important consideration in the company’s growth.

Also important has been store expansion. Adding stores can materially benefit the top line, but at some point over saturation can become a concern. Although the company appears far away from this problem, as an investor, it is important to keep an eye on expansion plans, costs, and results. To that end, same store sales is a useful metric, as it gives a glimpse at sales growth at stores that have been open for more than one year. International expansion has allowed Kors to continue opening new stores without affecting its domestic operations, too. Still, there are only so many markets and only so many stores that can be supported overseas, even though more and more countries are seeing incomes rise.

Debt levels are another issue to consider with regard to expansion. Although the company has little debt now, the fickle nature of consumers makes the use of too much leverage a risky endeavor. This single issue has been the bane of many once popular retailers from food stores to clothing retailers.

Michael Kors has also begun to license its name. While licensing is a highly profitable proposition, this effort runs the risk of poor quality (or inappropriate) merchandise being created with the Kors name on it. It will be important for the company to closely monitor this now relatively small segment of its business because it could have a disproportionate impact if things go awry.

Taking all of the above into consideration, it is interesting that the company’s design acumen in a highly competitive marketplace will likely trump everything else. A fashion misstep could cost the company dearly and relegate its products to “last year’s fashion” status. Which brings the story all the way back to Michael Kors, the designer. Many design stars have proven popular for years only to fade from the spotlight because the brand doesn’t resonate with new consumers. Kors appears to be in a sweet spot right now, but it is important to monitor an investment here or risk being caught owning an old or tarnished brand. Interested subscribers should monitor Value Line’s quarterly coverage of the company, while keeping an eye out for Supplementary reports highlighting late-breaking news.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.