Will Michael Kors (KORS) Pull A Surprise In Q4 Earnings?

Michael Kors Holdings Limited (NYSE:KORS) is slated to report fourth-quarter fiscal 2016 results on Jun 1. The big question facing investors now is, whether the company will be able to post a positive earnings surprise in the quarter to be reported.

In the last quarter, the company delivered a positive earnings surprise of 8.9%. Notably, the company surpassed the Zacks Consensus Estimate in three of the last four quarters, with an average beat of 9.6%. Let’s see how things are shaping up for this announcement.

Zacks Model Shows Unlikely Earnings Beat

Our proven model does not conclusively show that Michael Kors Holdings’ is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Michael Kors Holdings has an Earnings ESP is -2.08% as the Most Accurate estimate stands at 94 cents whereas the Zacks Consensus Estimate is pegged higher at 96 cents. So, although Michael Kors Holdings carries a Zacks Rank #3, a negative ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors Influencing this Quarter

In an effort to drive the top line, Michael Kors has been focusing on store expansion. In the third quarter of fiscal 2016, the company opened 34 new stores, which includes 15 in the Americas, 16 in Europe and three in Japan. These stores should help the company generate higher revenues.

However, the new stores opening will increase operating costs, which in turn, will contract margins going ahead. Moreover, investments across the board will lead to an increase of about 230 basis points in operating expense as a percentage of total revenue in fiscal 2016.

Michael Kors generates a portion of its net sales outside the U.S. Given its exposure to international markets, the company remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside of the U.S. An increase in price may have an adverse impact on the demand for the products. Management cautioned that foreign currency headwinds would adversely impact revenues by $180 million and hurt earnings by 20 cents per share in fiscal 2016. Earnings are projected in the range of 93 cents–97 cents per share for the fiscal fourth quarter. The company anticipates 2 cents per share impact on earnings from currency headwinds.

Stocks that Warrant a Look

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Ctrip.com International Ltd. (NASDAQ:CTRP) has an Earnings ESP of +17.91% and a Zacks Rank #3.

Nike Inc. (NYSE:NKE) has an Earnings ESP of +2.08% and a Zacks Rank #3.

Fastenal Company (NASDAQ:FAST) has an Earnings ESP of +17.91% and a Zacks Rank #3.