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Michael Kors (KORS) Tops Q3 Earnings, View Hurts Stock

Zacks Equity Research

Michael Kors Holdings Ltd. KORS continued with its positive earnings surprise streak for the seventh-consecutive quarter, when it posted third-quarter fiscal 2017 results. However, total revenue came in line with the Zacks Consensus Estimate. Though the company witnessed better-than-expected earnings and in line revenues, investors’ sentiments were hurt due to year-over-year decline registered in the top line and the bleak outlook. As a result, the stock is down over 9% during pre-market trading session.

 

The luxury lifestyle retailer delivered quarterly earnings of $1.64 a share that outperformed the Zacks Consensus Estimate of $1.62 and rose 3.1% from the year-ago period. Total revenue of $1,352.8 million came in line with the Zacks Consensus Estimate but declined 3.2% year over year. On a constant currency basis, total revenue decreased by 2.6%.

 

Further, we observed that Michael Kors’ third-quarter earnings came in line with the company’s projection but revenues missed the company’s forecast. The company had anticipated revenue in the range of $1.365–$1.380 billion and earnings between $1.61 and $1.65 per share.

During second-quarter fiscal 2017, the company introduced Michael Kors ACCESS line of smartwatches and fitness trackers, debuted new Wonderlust fragrance, new fall handbag collections and expanded men’s offering. Moreover, the company augmented online penetration, with the launch of digital flagships in most of the European countries. During the third quarter, the company witnessed favorable response to new Fall as well as holiday handbag collections and the launch of Michael Kors ACCESS line of wearable technology. The company stated that it will continue with its expansion drive in Asia and further believes that it has a $1 billion opportunity over the long term.

 

However, management announced that results were hurt by comparable sales performance of North American and European market. Further, Michael Kors stated that headwinds in the aforementioned market will continue throughout the Spring season primarily due to sluggish mall traffic, currency fluctuation and uncertainty surrounding certain political changes in European countries.

 

Gross profit dropped 3.1% to $805.7 million, however, gross margin expanded 10 basis points (bps) to 59.6% favorably impacted by foreign currency translation and transaction. Operating income declined 16.5% to $341.9 million, while operating margin contracted 400 bps to 25.3%.

Michael Kors Holdings Limited Price, Consensus and EPS Surprise

 

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

 

Segment Performance

 

Retail net sales came in at $836.7 million, up 9.2% year over year. The upside was mainly driven by 193 net new stores openings since the end of third-quarter fiscal 2016, which includes 143 outlets related to the company's buyout in Greater China and South Korea. Comparable sales declined 6.9%. On a constant currency basis, retail net sales increased 10%, while comparable sales fell 6.4%.

 

Wholesale net sales slumped 17.8% to $473.1 million, while on a constant currency basis, it fell 17.5%. Licensing revenue tumbled 22.9% to $43 million.

 

Regional Performance

 

Total revenue in the Americas declined 7.4% to $983.8 million on a reported basis and fell 7.5% on a constant currency basis. European revenue dropped 7% to $256.7 million on a reported basis and 2.7% on a constant currency basis. Revenue in Asia soared 89.1% to $112.3 million on a reported basis, while it surged 84% on a constant currency basis.

 

Other Details

 

Michael Kors ended the quarter with cash and cash equivalents of $368.8 million, short-term debt of $147.8 million and shareholders’ equity of $1,852.1 million, excluding non-controlling interest of $2.4 million.

 

As of Dec 31, 2016, the company operated 816 retail outlets (397 in The Americas, 199 in Europe and 220 in Asia), including concessions. The company had 128 additional retail outlets, including concessions, operated through licensing partners. Consequently, total number of Michael Kors stores globally stands at 944 at the end of the quarter under review.

 

During the third quarter, Michael Kors bought back 2,069,706 shares for approximately $100 million. As of Dec 31, 2016, the company still had $250 million remaining under its share buyback program. 

 

Guidance

 

Michael Kors now envisions fiscal 2017 total revenue to be approximately $4.48 billion and expects comparable sales to decrease in the high-single digit range. Operating margin is now projected to be about 19.9%, on a non-GAAP basis. Management anticipates non-GAAP earnings in the band of $4.15–$4.19 per share for the fiscal year.

 

Earlier, management had projected fiscal 2017 revenue to be about $4.55 billion and earnings in the range of $4.37–$4.43 per share, on a non-GAAP basis.

 

For the fourth quarter, Michael Kors forecast total revenue between $1.035 billion and $1.055 billion and expects comparable sales to decline in the low-teens range. Operating margin is anticipated to be approximately 14%. Management projects earnings in the range of 68–72 cents per share for the fourth quarter.

 

The Zacks Consensus Estimate for the fourth quarter and fiscal 2017 is currently pegged at 93 cents and $4.36, which may witness a downward revision in the coming days.

 

Zacks Rank and Key Picks

 

Michael Kors currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the retail sector include Lululemon Athletica Inc. LULU, Barnes & Noble, Inc. BKS and Staples, Inc. SPLS all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

Lululemon Athletica delivered an average positive earnings surprise of 3.9% in the trailing four quarters and has a long-term earnings growth rate of 15.9%.

 

Barnes & Noble delivered an average positive earnings surprise of 4% in the trailing four quarters and has a long-term earnings growth rate of 10%.

 

Shares of Staples have surged nearly 18% in the past three months.

 

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