Michael Kors (KORS) Beats On Q2 Earnings, Outlook Bleak

Michael Kors Holdings Ltd. (NYSE:KORS) continued with its positive earnings surprise streak for the sixth consecutive quarter, when it posted second-quarter fiscal 2017 results. Total revenue also surpassed the estimate for the fifth quarter in row. However, despite witnessing better-than-expected results, investors’ sentiments were hurt by the year-over-year decline in both the top and the bottom line, along with bleak outlook. As a result, stock lost over 4% during after-market trading on Nov 10.

The luxury lifestyle retailer delivered quarterly earnings of 95 cents a share that outperformed the Zacks Consensus Estimate of 88 cents but fell about 6% from the year-ago period. Total revenue of $1088.2 million came ahead of the Zacks Consensus Estimate of $1,082 million but declined 3.7% from the prior-year quarter. On a constant currency basis, total revenue decreased by an equivalent rate.

Further, we observed that Michael Kors’ second-quarter revenue and earnings results came above management’s earlier projection. The company had anticipated revenue in the range of $1.07–$1.085 billion and earnings between 84 cents and 88 cents a share.

During the quarter under review, the company introduced the Michael Kors ACCESS line of smartwatches and fitness trackers, the new Wonderlust fragrance and new fall handbag collections, and expanded men’s offerings. Moreover, it enhanced its online penetration with the launch of digital flagships in most of the European countries. However, management pointed out that results were persistently hurt by sluggish mall traffic and fall in tourism along with reduced sell-in of inventory to the U.S. wholesale channel.

Although gross profit fell 3% to $644.7 million, gross margin expanded 40 basis points to 59.2% due to the favorable impact of foreign currency translation and transaction. Operating income declined 25.4% to $203.7 million and operating margin contracted 550 basis points to 18.7%.

Segment Performance

Retail net sales came in at $597.2 million, up 12.1% year over year. The upside was mainly driven by 198 net new stores openings since the end of second-quarter fiscal 2016, which includes 137 outlets related to the company's buyout in Greater China and South Korea. Comparable sales declined 5.4%. On a constant currency basis, retail net sales increased 12.1%, while comparable sales fell 5.6%.

Wholesale net sales plunged 18.4% to $452.2 million, while on a constant currency basis, it plummeted 18.5%. Licensing revenue tumbled 10.2% to $38.8 million.

Regional Performance

Total revenue in the Americas declined 11.1% to $745.1 million on a reported basis and by the same rate on a constant-currency basis. European revenues increased 1.9% to $248 million on a reported basis and 3.5% on a constant currency basis. Revenues in Asia soared 96.5% to $95.1 million on a reported basis and 87.5% on a constant currency basis.

Other Details

Michael Kors ended the quarter with cash and cash equivalents of $186.4 million, short-term debt of $384.4 million and shareholders’ equity of $1,680.5 million, excluding non-controlling interest of $2.8 million.

As of Oct 1, 2016, the company operated 787 retail outlets (392 in the Americas, 188 in Europe and 207 in Asia), including concessions. The company had 118 additional retail outlets, including concessions, operated through licensing partners. Thus, the total number of Michael Kors stores globally stood at 905 at the end of the quarter under review.

During the second quarter, Michael Kors bought back 5,019,083 shares for approximately $250 million. As of Oct 1, 2016, the company still had $350 million remaining under its share buyback program.

Guidance

Michael Kors envisions fiscal 2017 total revenue to be approximately $4.55 billion and comparable sales to decrease in the mid-single-digit range. Operating margin is projected to be about 20.7% on a non-GAAP basis. Management anticipates non-GAAP earnings in the band of $4.37–$4.43 per share for the fiscal year.

Earlier, management had projected fiscal 2017 revenue to be about $4.71 billion and earnings in the range of $4.56–$4.64 per share on a non-GAAP basis.

For the third quarter, Michael Kors forecast total revenue between $1.365 billion and $1.380 billion and expects comparable sales to decline in the mid-single-digit range. Operating margin is anticipated to be approximately 25%. Management projects earnings in the range of $1.61 to $1.65 per share for the third quarter.

The Zacks Consensus Estimate for the third quarter and fiscal 2017 is currently pegged at $1.77 and $4.56, respectively, which may witness a downward revision in the coming days.

MICHAEL KORS Price and EPS Surprise

MICHAEL KORS Price and EPS Surprise | MICHAEL KORS Quote

Zacks Rank and Key Picks

Michael Kors currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the retail sector include Dick's Sporting Goods Inc. (NYSE:DKS) , Hibbett Sports, Inc. (NASDAQ:HIBB) and ULTA Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dick's Sporting Goods delivered an average positive earnings surprise of 4.7% in the trailing four quarters and has a long-term earnings growth rate of 12.3%.

Hibbett Sports delivered an average positive earnings surprise of 3.9% in the trailing four quarters and has a long-term earnings growth rate of 11.1%.

ULTA Salon, Cosmetics & Fragrance delivered an average positive earnings surprise of 7.7% in the trailing four quarters and has a long-term earnings growth rate of 19.5%.

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