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Michael Kors (KORS) Up 7.9% Since Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Michael Kors Holdings Limited KORS. Shares have added about 7.9% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Michael Kors Tops Q4 Earnings & Sales

Michael Kors Holdings continued with its positive earnings surprise streak for the eighth consecutive quarter, when it posted fourth-quarter fiscal 2017 results. Further, the company revenues came ahead of the estimate after missing the same in preceding two quarters.

Though the company witnessed better-than-expected results, investors’ sentiments were hurt due to year-over-year decline registered in both the top and bottom line along with the bleak outlook.

The luxury lifestyle retailer delivered quarterly earnings of $0.73 a share that outperformed the Zacks Consensus Estimate of $0.70 but decreased 28.4% from the year-ago period. Total revenue of $1,064.8 million came above the Zacks Consensus Estimate of $1,048 million but declined 11.2% year over year. On a constant currency basis, total revenue decreased by 10.6%.

Gross profit dropped 11.1% to $619.7 million. Meanwhile, gross margin came in at 58.2%, flat year over year. Foreign currency translation impacted gross margin by nearly 20 basis points (bps). Adjusted, operating income declined 68.7% to $151.2 million, while operating margin contracted 710 bps to 14.2%.

Store Optimization Plan

In an effort to increase the profitability in stores fleet, the company has announced its intention to close between 100 to 125 full priced retail stores over the next two years. Moreover, the company stated that it will incur one-time costs of nearly $100–$125 million related to store closures. Meanwhile, the company expects annual saving of $60 million on account of store closures as well as fall in depreciation and amortization related with these impairment charges.

Segment Performance

Retail net sales came in at $575.3 million, up 0.5% year over year. The upside was mainly driven by 159 net new stores openings since the end of fourth-quarter fiscal 2016, which includes 111 outlets related to the company's acquisition of the earlier licensed operation in Greater China. Comparable sales declined 14.1%. On a constant currency basis, retail net sales increased 1.1%, while comparable sales fell 13.6%.

Wholesale net sales slumped 22.8% to $456.1 million, while on a constant currency basis, it fell 22.3%. Licensing revenue declined 6.2% to $33.4 million.

Regional Performance

Total revenue in the Americas declined 18% to $721 million on a reported basis and fell 18.3% on a constant currency basis. European revenue dropped 15.3% to $215.2 million on a reported basis and 11.5% on a constant currency basis. Revenue in Asia soared 96.3% to $128.6 million on a reported basis, while it advanced 95.1% on a constant currency basis.

Other Details

Michael Kors ended the quarter with cash and cash equivalents of $227.7 million, short-term debt of $133.1 million and shareholders’ equity of $1,592.6 million, excluding non-controlling interest of $2.4 million.

As of Apr 1, 2017, the company operated 827 retail outlets (398 in the Americas, 201 in Europe and 228 in Asia), including concessions. The company had 133 additional retail outlets, including concessions, operated through licensing partners. Consequently, total number of Michael Kors stores is globally pegged at 960 at the end of the quarter under review.

During the fourth quarter, Michael Kors bought back 6,641,815 shares for approximately $250 million. As of Apr 1, 2017, the company had completed previously authorized share repurchase program. However, on May 25, 2017, its Board of Directors authorized a new $1 billion share buyback program.

Guidance

The company provided both the first quarter and fiscal 2018 guidance. Michael Kors envisions fiscal 2018 total revenue to be approximately $4.25 billion and comparable sales to decrease in the high-single digit range. Operating margin is projected to be about 16%. Management anticipates earnings in the band of 3.57–$3.67 per share for the fiscal year, sharply below the fiscal 2017 earnings per share of $4.48.

For the first quarter, Michael Kors forecast total revenue between $910 million and $930 million and expects comparable sales to decline in the high-single range. Operating margin is anticipated to be approximately 13%. Management projects earnings in the range of $0.60–$0.64 per share for the first quarter.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward trend in the last month with two estimates moving lower and one higher.

Michael Kors Holdings Limited Price and Consensus

 

VGM Scores

Currently, the stock has an average Growth Score of 'C', though it is lagging a lot on the momentum front with an 'F'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'B'. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. The stock has a Zacks Rank #5 (Strong Sell). We are expecting a below average return from the stock in the next few months.


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