KORS SURPRISES WITH UPBEAT EARNINGS BUT SOFT GUIDANCE IMPLIES UNCERTAINTY

In Industry News, What's New by Lauren Parker

Michael Kors flagship store New Delhi India at Emporio Mall

Michael Kors flagship store New Delhi India at Emporio Mall

The news is in: Michael Kors Holdings Ltd has reported better-than-expected profit and revenue for its fiscal fourth quarter, sending shares (which had been beaten down 25% over the past three months) surging 10% in premarket trade, after the company reported better-than-expected profit and revenue for its fiscal fourth quarter. The handbag maker posted earnings of 98 cents per share on revenue of $1.2 billion. Analysts polled by Reuters expected the firm to post earnings of 96 cents on revenue of $1.15 billion.

But that’s not the whole story.

While the quarter was surprisingly positive, guidance for Q1 FY2017 was weak, noting that the future isn’t necessarily rosy (guidance was $940-$950 million in revenues versus existing expectations of $1.03 billion). Why the shortfall? It was noted to be a “planned reduction in wholesale shipments as well as renewed same-store-sales shrinkage (at a mid-single-digits pace),” according to Seeking Alpha. Both watch and handbag sales have been hurt by an overall decrease in retail foot traffic, both at Kors’ own stores and department stores, not to mention reports that Nordstrom majorly reduced its major Kors position in handbags.

The stronger dollar also has dented results, making products pricier abroad and slowing spending by tourists, an important Kors customer.  Gross margin fell to 58.2% from 58.4% a year earlier, hurt by foreign currency exchange rates.

While Kors’ revenue figure represents a 10.9% Q4 increase year over year, Conlumino CEO Neil Saunders noted not to be fooled, according to CNBC.

“Most of the uplift is thanks to the fact the company opened some 142 new stores over the past year and has also expanded its online operations. When these are factored out, underlying growth is anemic—rising by just 0.3% over the prior year,” he said in a note to clients.

“Such a soft comparable number is disappointing, especially as it comes off the back of a very weak comparative in the prior year when same-store sales dropped by 5.8%. Licensing revenue also shrank, down by 13.6% on a year-over-year basis. That growth only came from expansionary activities rather than from underlying productivity gains shows on the bottom line where net income fell by 3.5%,” Saunders said.

LOOKING AHEAD

“Looking ahead, we see multiple growth opportunities, including the expansion of our international markets, the growth of our digital e-commerce flagships, the build-out of our men’s business, the launch of Michael Kors ACCESS wearable technology line, and the continued design innovation of our luxury fashion product,” Chief Executive John Idol said in a statement. The company is now expecting first-quarter EPS of 62 cents to 66 cents, and adjusted EPS of 70 cents to 74 cents. The current FactSet consensus is for first-quarter EPS of 93 cents. Shares have gained 6.6% in the year to date, while the S&P 500 has gained 2.6%.

KORS also guided for a strong drop in operational profitability. For FY2017, operating margin is supposed to drop from 28.8% of revenues to 21.5% of revenues.