Michael Kors (KORS) Q2 Earnings Beat, Sales Lag Estimates

Michael Kors Holdings Limited (NYSE:KORS) maintained its positive earnings surprise streak for the 14th straight quarter, when it reported second-quarter fiscal 2019 results. On the contrary, revenues fell short of the Zacks Consensus Estimate, after six successive quarters of beat. Analysts pointed that the company’s sluggish performance in Europe might have hurt the top line to an extent. Nevertheless, total revenue improved year over year, however, this failed to restrain the decline in the bottom line that was marred by higher operating expenses.

As a result, shares of this Zacks Rank #3 (Hold) company are down more than 11% during pre-market trading hours. In the past three months, the stock has plunged about 18%, while the industry declined 3.2%.

This designer, marketer, distributor and retailer of branded apparel and accessories delivered adjusted quarterly earnings of $1.27 per share that surpassed the Zacks Consensus Estimate of $1.09 but fell from $1.33 reported in the year-ago quarter. Nonetheless, management raised its fiscal 2019 earnings view citing better-than-expected performance for both the Michael Kors and Jimmy Choo brands.

Total revenues of $1,253.8 million grew 9.3% year over year but came below the Zacks Consensus Estimate of $1,259.3 million. Top line includes revenue contribution of $1,137.1 million from Michael Kors, down 0.8% year over year and $116.7 million from Jimmy Choo. On a constant currency basis, total revenues were up 9.9%.

Adjusted gross profit jumped 10.8% to $765.4 million. Meanwhile, adjusted gross margin increased 80 basis points (bps) to 61%. Adjusted operating income declined 8.6% to $216.9 million, while operating margin contracted 340 bps to 17.3%.

Segment Performance

MK Retail revenue came in at $643.9 million, down 0.2% year over year. Comparable sales (comps) slid 2.1%. The company witnessed positive performance in the Americas and Asia, offset by decline in Europe. On a constant currency basis, retail revenue inched up 0.5%, while comps fell 1.3%.

MK Wholesale revenue fell 1.3% to $457.8 million, while on a constant currency basis, the same edged down 0.9%. The positive performance in the Americas and Asia was offset by decline in EMEA.

MK Licensing revenue decreased 6.8% to $35.4 million due to soft performance in the Americas, partly offset by marginally better performance in EMEA from the year-ago period.

Other Financial Details

Michael Kors ended the quarter with cash and cash equivalents of $155.2 million, long-term debt of $504.6 million and shareholders’ equity of $2,179.7 million, excluding non-controlling interest of $3.6 million.

Store Update

As of Sep 29, 2018, there were 1,058 stores (854 Michael Kors stores — 398 in the Americas, 195 in Europe and 261 in Asia — and 204 Jimmy Choo stores).

Guidance

Management now envisions third-quarter fiscal 2019 total revenue to be about $1,460 million, comprising incremental revenue of $165 million from Jimmy Choo. Retail revenue for Michael Kors is projected to improve in the low-single-digits.

On a reported basis, management forecasts third-quarter comps to decline in the low-single-digits. The company expects wholesale revenue to decline in the high-single-digits, and licensing revenue to fall in the mid-teens.

Third-quarter operating margin is projected to be approximately 20.8%. The company forecast earnings in the band of $1.52-$1.57 per share, including accretion from Jimmy Choo of approximately 4-6 cents. The Zacks Consensus Estimate for the third quarter currently stands at $1.80, which may witness a downward revision in the coming days.

For fiscal 2019, management continues to project total revenue to be approximately $5,125 million, comprising incremental revenue of $580-$590 million from Jimmy Choo. Comparable sales for Michael Kors are expected decline in the low-single-digits. Operating margin is now expected to be roughly 18.2%.

Management envisions earnings in the range of $4.95-$5.05 per share, including dilution from Jimmy Choo of approximately flat to 5 cents. The company had earlier guided earnings in the range of $4.90-$5.00 per share. The Zacks Consensus Estimate for fiscal 2019 is pegged at $5.02.

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