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Kors Sees Turnaround Progress

Michael Kors Holdings (NYSE: KORS) has had to deal with a lot of turmoil lately. Not only has the entire retail industry gone through massive disruptions that have resulted in a lot of pressure for retailers generally, but Kors in particular has seen even bigger impacts in the luxury retail space and its particular niche. Yet with the recently announced acquisition of Jimmy Choo, Kors hopes to get shoppers excited about its fashions again.

Coming into Tuesday's fiscal first-quarter financial report, Kors investors expected to see earnings and revenue decline from year-ago levels, but they wanted to see signs that a turnaround was taking shape. Kors was able to do better than the low expectations that investors had, and that helped create some positive sentiment about the stock that could build up momentum going forward. The stock was up roughly 18% at 9:45 a.m. Tuesday. Let's take a closer look at Michael Kors and what its latest results mean to its recovery efforts.

Image source: Michael Kors.

Kors takes a stand

Michael Kors' fiscal first-quarter results still reflect tough conditions, but they also showed the progress that the luxury retailer has made. Revenue was down almost 4% to $952.4 million, but that wasn't as bad as the 7% drop that most investors were expecting to see. Similarly, net income fell about 15% to $125.5 million, but a drop in share count limited the decline in per-share figures, and the $0.80 per share in earnings that Kors announced was far higher than the consensus analyst forecast for $0.62 per share.

Looking more closely at Kors' numbers, the retailer still had to deal with some ugly numbers from a fundamental perspective. Comparable sales were down 5.9%, although that was quite a bit better than the double-digit percentage drop Kors suffered in its previous quarter. Retail net sales rebounded sharply, climbing more than 10% on the strength of 67 new store openings and Kors' acquisition of its primary licensee partner in the Greater China region. The wholesale segment took the brunt of the hit to Kors' results, seeing net sales plunge 23%. Licensing revenue was down a more modest 6%.

Kors continued to see previous trends play out in terms of its geographical exposure. Asia was the best region for Kors, seeing a 60% revenue jump, although as we've seen in previous quarters, strategic activity was largely responsible for those gains. Elsewhere, Kors was weak, posting an 8% drop in total revenue in the Americas and a 10% sales decline in Europe.

Operationally, Kors made some progress. Operating margin fell due to one-time costs related to the China licensee acquisition, but when you adjust for those impacts, margin figures picked up by more than a full percentage point, climbing above the 20% mark.

CEO John Idol was pleased with the way the new fiscal year started. "Our first quarter performance exceeded our expectations," Idol said, "driven largely by better than anticipated retail comparable sales results in both North American and Europe."

What's next for Kors?

Yet even more exciting in Kors' view is what's coming. Idol was careful to repeat his belief this fiscal 2018 will be a "transition year for our company as we focus on laying the foundation for the future by executing on our strategic plan, Runway 2020." Moves to enhance fashion assortments, deepen relationships with shoppers, and build up the luxury experience in its stores will be front and center over the next couple of years.

At the same time, the Jimmy Choo acquisition has a lot of promise, and Kors intends to make it part of a broader initiative to build up a global fashion luxury group. By diversifying its product lines, Kors hopes to take the strong reputation that Jimmy Choo has built up and use it both to enhance the Choo brand's results and to encourage cross-selling potential with existing Kors products.

Kors will still have to endure some sacrifices in the short run to get to a better endpoint. Second-quarter guidance included revenue estimates of $1.035 billion to $1.055 billion, with earnings of $0.80 to $0.84 per share. Those numbers would be down from year-ago levels, but are still better than the consensus forecast among analysts. Kors boosted its full-year revenue guidance by $25 million, to $4.275 billion, and it now expects only mid-single digit percentage declines in comps and earnings of $3.62 to $3.72 per share -- $0.05 higher than its previous guidance.

Shareholders were ecstatic about the news, and Kors stock quickly jumped Tuesday morning. The luxury retailer has seen fits and starts before, and there's still the potential for future disappointment. For now, though, Kors has shareholders excited about the future for the first time in a while, and that could help propel interest in the company both among luxury shoppers and as an investment.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool has a disclosure policy.