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BMO Skeptical Of Michael Kors Ability To Expand Margins This Year

Michael Kors Holdings Ltd (NYSE: KORS) reported disappointing 1QF17 comps, reflecting tourism declines and weak mall traffic. “We remain skeptical about the company’s ability to meaningfully expand the retail gross margin in the back half,” BMO Capital Markets’ John D. Morris said in a report, citing the lack of near-term catalysts.

Analyst Morris maintained a Market Perform rating on Michael Kors, with a price target of $46.

Results And Guidance

The company reported its adjusted EPS for the quarter at $0.88, beating the BMO estimate of $0.76 and consensus expectation of $0.74. Michael Kors posted comp of -7.6 percent, on a constant currency basis, which was worse than the BMO estimate of -4 percent. The miss reflected weaker-than-expected mall traffic and a decline in tourism, Morris noted.

Michael Kors reported a 130-bp gross margin contraction, indicating that the markdown rate had risen 8 percent and that the average markdown was up 6 percent. Morris expressed concern regarding the company’s ability to achieve a meaningful expansion in the retail gross margin in 2H, due to "a lack of visibility on any near-term catalysts that could potentially boost results.”

The company had delivered an EPS beat mainly due to lower-than-expected SG&A expense, and has projected a reversal of this trend, guiding to a 790-810-bp increase in the SG&A rate in 2Q17 “as it continues to pull back on the wholesale channel and invest in infrastructure improvements,” the analyst wrote.

Management reduced its full-year comp guidance to a negative mid-single digit from a negative low- to mid-single digit, while maintaining its EPS projection at $4.56-$4.64.

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Aug 2016Goldman SachsMaintainsNeutral
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