Michael Kors Looks Sharp In Earnings, But Its Outlook Sags

Investor's Business Daily

Michael Kors (KORS) rode its deftly managed expansion in Europe to better-than-expected earnings and sales in its latest quarter, but cautious holiday guidance gave some investors pause Tuesday.

Kors shares fell 5% in premarket trading but rebounded to close up 0.9%.

The fashion house said earnings in its second quarter ended Sept. 29 vaulted 123% to 49 cents a share. Analysts expected 40 cents. Sales jumped 74% to $532.9 million, above forecasts for $519 million.

Sales growth was the best since Kors' Dec. 15 IPO. Kors has been a leader among apparel manufacturing stocks, a leading group.

Same-store sales, or sales in stores open at least a year, rose 45%. North American same-store sales also climbed 45%. European sales surged 97% as Kors expanded its brand in the region.

'Excited' About Europe

"We are excited about what is happening in Europe. Our numbers are outstanding," CEO John Idol said in a conference call. "By this time next year, we anticipate to be the most accessible handbag luxury brand in Europe.

Europe's economic problems haven't affected Kors as much as some high-end retailers. Kors, which is based in Hong Kong but generates most of its sales in the U.S., only does 10% of its business in Europe. Its European sales also rely less on Asian tourist money than other brands like the U.K.'s Burberry. The flow of tourists from Asia has slowed as the Chinese and South Korean economies have cooled.

Kors' well-planned entry into Europe boosted sales.

"They understand the distribution model in Europe. They started as a wholesale brand and are now rounding out into retail," said Piper Jaffray analyst Erinn Murphy . "They also took a country-specific approach to expansion to address each country's unique distribution structure. This strategy has helped it develop into a pan-European brand.

Kors' "accessible luxury" price point helped it penetrate Europe and maintain strong U.S. sales.

Its handbags range from under $200 to $500 or more. Fossil (FOSL) has a licensing deal to make watches under the Kors brand name that can sell for over $200.

Kors aims to build its high-margin accessories business to bring in 85% of sales, vs. 79% now.

Ready For The Holidays

Murphy believes Kors is well-positioned to gain market share in the crucial holiday season.

Kors sees Q3 earnings of 37-39 cents a share, putting the midpoint below analyst expectations of 39 cents. It remains cautious on consumer sentiment after Hurricane Sandy.

"It's too early to tell about the hurricane affecting stores," Idol said. "New York City seems to be rebounding quickly, but our concerns are not just free-standing stores but department stores" in New Jersey and Long Island.

Saks (SKS), the upscale department store, did not fare as well as Kors in its latest quarter. It said Tuesday that third-quarter EPS rose 9% to 12 cents, in line with forecasts. But sales rose just 3% to $713 million, under forecasts of $726 million.

Saks sees flat same-store sales in the current quarter.

"As the overall macroeconomic environment remains very uncertain, we continue to approach the future cautiously," said CEO Stephen Sadove. "Sales trends have been soft for the first two weeks of November in the aftermath of Hurricane Sandy."

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