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Michael Kors (KORS) Stock Up on Q1 Earnings Beat, Upbeat View

Zacks

Michael Kors Holdings Ltd. KORS continued with positive earnings surprise streak for the ninth consecutive quarter, when it posted first-quarter fiscal 2018 results. Further, the company revenues also came ahead of the estimate for the second straight quarter. The results were driven by robust retail sales.

Following better-than-expected results, the company raised fiscal 2018 guidance. Consequently, the stock is up over 16% during pre-market trading session. However, its shares have declined 2.7% in the past six months, against the industry‘s gain of 11.4%.

The luxury lifestyle retailer delivered quarterly earnings of 80 cents a share that surpassed the Zacks Consensus Estimate of 62 cents but decreased 11.1% from the year-ago period. Total revenue of $952.4 million came above the Zacks Consensus Estimate of $918 million but declined 3.6% year over year. On a constant currency basis, total revenue decreased by 2.6%.


Gross profit decreased 2.8% to $574.7 million. Meanwhile, gross margin came in at 60.3%, up 40 basis points (bps) year over year. Foreign currency translation impacted gross margin by nearly 10 bps. Operating income declined 24.6% to $149.4 million, while operating margin contracted 440 bps to 15.7%.

Jimmy Choo Acquistion

Michael Kors had entered into a deal to acquire Jimmy Choo, a global luxury footwear and accessories brand. Per the accord, shareholders of Jimmy Choo will receive 230 pence a share, with an enterprise value of about USD $1.350 billion.

Segment Performance

Retail net sales came in at $619.9 million, up 10.1% year over year. The upside was mainly driven by 67 net new stores openings since the end of first-quarter fiscal 2017 and also due to the company's acquisition of the earlier licensed operation in Greater China. Comparable sales declined 5.9%. On a constant currency basis, retail net sales increased 11.6%, while comparable sales fell 4.9%.

Wholesale net sales slumped 23% to $303.6 million, while on a constant currency basis, it fell 22.7%. Licensing revenue declined 5.6% to $28.9 million.

Regional Performance

Total revenue in the Americas declined 8.2% to $634.1 million on a reported basis and fell 7.9% on a constant currency basis. European revenue dropped 10.2% to $201.2 million on a reported basis and 7.5% on a constant currency basis. Revenue in Asia soared 60.2% to $117.1 million on a reported basis, while it advanced 61.9% on a constant currency basis.

Other Details

Michael Kors ended the quarter with cash and cash equivalents of $273.7 million, short-term debt of $155.8 million and shareholders’ equity of $1,580.9 million, excluding non-controlling interest of $0.4 million.

As of Jul 1, 2017, the company operated 838 retail outlets (399 in the Americas, 203 in Europe and 236 in Asia), including concessions. The company had 141 additional retail outlets, including concessions, operated through licensing partners. Consequently, total number of Michael Kors stores globally is pegged at 979 at the end of the quarter under review.

During the first quarter, Michael Kors bought back 4,543,500 shares for approximately $157.8 million. As of Apr 1, 2017, the company had completed previously authorized share repurchase program. However, on May 25, 2017, its Board of Directors authorized a new $1 billion share buyback program. The company still has $842.2 million left under current authorization.

Michael Kors Holdings Limited Price, Consensus and EPS Surprise

Michael Kors Holdings Limited Price, Consensus and EPS Surprise | Michael Kors Holdings Limited Quote

Guidance

Management raised fiscal 2018 guidance. Michael Kors now envisions fiscal 2018 total revenue to be approximately $4.275 billion, up from the previous estimate of approximately $4.25 billion and expects comparable sales to decrease in the mid-single digit range, compared with the previous estimate of decline in the high-single digit range. Operating margin is still projected to be about 16%. Management anticipates earnings in the band of $3.62–$3.72 per share for the fiscal year, up from earlier estimate of $3.57–$3.67 per share.

For the second quarter, Michael Kors forecast total revenue between $1.035 billion and $1.055 billion and expects comparable sales to decline in the mid-single range. Operating margin is anticipated to be approximately 14.3%. Management projects earnings in the range of 80–84 cents per share for the second quarter.

The Zacks Consensus Estimate for the second quarter and fiscal 2018 is currently pegged at 78 cents and $3.55, which may witness upward revision in the coming days.

Zacks Rank and Key Picks

Michael Kors currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Gildan Activewear Inc. GIL, PVH Corp. PVH and Lululemon Athletica Inc. LULU. All three of them carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Gildan Activewear, with long-term earnings per share growth rate of 13.5%, has delivered positive earnings surprise in the last three quarters.

PVH delivered an average positive earnings surprise of 6.5% in the trailing four quarters and has a long-term earnings growth rate of 12.6%.

Lululemon Athletica delivered an average positive earnings surprise of 5.6% in the preceding four quarters and has a long-term earnings growth rate of 12.6%.

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