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Michael Kors (KORS) Stock Up on Q2 Earnings Top, Upbeat View

Michael Kors Holdings Ltd. KORS continued with its positive earnings surprise streak for the 10th consecutive quarter, when it posted second-quarter fiscal 2018 results. Further, the company revenues came ahead of the estimate for the third straight quarter. The bottom line was driven by lower effective tax rate and strategic efforts taken by the company.

Following better-than-expected results, the company raised fiscal 2018 guidance. Consequently, the stock is up over 5% during pre-market trading session. In fact, its shares have gained 27.9% in the past three months, against the Industry‘s decline of 4%.

The luxury lifestyle retailer delivered quarterly earnings of $1.33 a share that comfortably surpassed the Zacks Consensus Estimate of 83 cents and also jumped 37% from the year-ago period. Total revenues of $1,146.6 million outpaced the Zacks Consensus Estimate of $1,046 million and also gained 5.4% year over year. On a constant currency basis, total revenues were up 4.4%.

Gross profit jumped 7.2% to $690.8 million. Meanwhile, gross margin came in at 60.2%, up 100 basis points (bps) year over year. Foreign currency translation favorably impacted gross margin by nearly 20 bps. Adjusted operating income increased 13.8% to $237.4 million, while operating margin expanded 150 bps to 20.7%.

Jimmy Choo Acquisition

Michael Kors has completed the acquisition of Jimmy Choo, a global luxury footwear and accessories brand. The company expects revenues from Jimmy Choo to grow by $1 billion worldwide.

Segment Performance

Retail net sales came in at $645 million, up 8% year over year. The upside was mainly driven by 56 net new stores openings since the end of second-quarter fiscal 2017. It was also aided by the rise in e-commerce sales from Europe and Asia. Comparable sales declined 1.8%. On a constant currency basis, retail net sales increased 7.2%, while comparable sales fell 2.5%.

Wholesale net sales were up 2.5% to $463.6 million, while on a constant currency basis, it inched up 1.2%. Licensing revenues declined 2.1% to $38 million.

Regional Performance

Total revenues in the Americas inched up 0.9% to $751.9 million on a reported basis and increased 0.6% on a constant currency basis. European revenues jumped 9.2% to $270.7 million on a reported basis and 4.6% on a constant currency basis. Revenues in Asia surged 30.4% to $124 million on a reported basis, while it advanced 33.5% on a constant currency basis.

Other Details

Michael Kors ended the quarter with cash and cash equivalents of $178.2 million and shareholders’ equity of $1,805 million, excluding non-controlling interest of $0.2 million.

As of Sep 30, 2017, the company operated 843 retail outlets (398 in the Americas, 201 in Europe and 244 in Asia), including concessions. The company had 142 additional retail outlets, including concessions, operated through licensing partners. Consequently, total number of Michael Kors stores globally is pegged at 985 at the end of the quarter under review.

Michael Kors Holdings Limited Price, Consensus and EPS Surprise

Guidance

Management raised fiscal 2018 guidance. Michael Kors now envisions fiscal 2018 total revenues to be approximately $4.59 billion, up from the previous estimate of approximately $$4.275 billion.  Further, it continues to expect comparable sales to decrease in the mid-single digit range. The company’s total revenues expectation includes $215-$$225 million of incremental Jimmy Choo revenue. Operating margin is still projected to be about 16%. Management anticipates earnings in the band of $3.85-$3.95 per share for the fiscal year, up from earlier estimate of $3.62-$3.72 per share.  

For the third quarter, Michael Kors forecasts total revenues between $1.355 billion and $1.385 billion and expects comparable sales to decline in the high-single range. The company’s third-quarter revenues include $105-$110 million of incremental Jimmy Choo revenues. Operating margin is anticipated to be approximately 17.5%. Management projects earnings in the range of $1.22-$1.27 per share for the third quarter.

The Zacks Consensus Estimate for the third quarter and fiscal 2018 is currently pegged at $1.50 and $3.74, which may witness upward revision in the coming days.

Zacks Rank and Key Picks

Michael Kors currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include V.F. Corporation VFC, Ralph Lauren Corporation RL and Lululemon Athletica Inc. LULU. All three of them carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

V.F. Corporation has delivered positive earnings surprise in the last four quarters, with an average surprise of 3.4%. The company also has long-term earnings per share growth rate of 9.8%.

Ralph Lauren delivered an average positive earnings surprise of 11.6% in the trailing four quarters. It has a long-term earnings growth rate of 15%.

Lululemon Athletica delivered an average positive earnings surprise of 8.5% in the preceding four quarters. The company also has a long-term earnings growth rate of 11.9%.

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