Will Moderating Margins Hurt Michael Kors Quarterly Run? - Analyst Blog


On Aug 29, 2014, we issued an updated research report on Michael Kors Holdings Limited ( KORS ) following the company's first-quarter fiscal 2015 results. In spite of an earnings beat, management maintains a cautious outlook on margins.

Management expects gross and operating margins to decrease 50 and 200 bps, respectively, in the second quarter. The company hinted, that though the margins are currently very high, over time, it might face "markdowns" leading to "normalizations," which might run down the benefits from favorable product mix and overseas expansion. Although no striking slowdowns will occur, we believe that the company could suffer from an intense promotional backdrop, which might prevail on a long-term basis in the retail sector.

Coming to earnings, Michael Kors reported earnings per share of 91 cents per share that came miles ahead of the Zacks Consensus Estimate of 81 cents, while rising 49.2% year over year. Revenues of $919.2 million handily surpassed the Zacks Consensus Estimate of $850 million and grew nearly 43.4% year over year. Consistent robust performance across all segments and geographies facilitated this growth.

Michael Kors is fast emerging as a giant in the luxury retail space. The company is best known for its handbags and small leather goods collection, which is rapidly gaining market share in North America and outpacing its peers. Moreover, the company's collection of watches is a key contributor to revenues. In order to diversify its portfolio, the company recently started venturing in other avenues like jewelry, fragrances and Men's apparel. Management believes that it will be able to grow the Men's business to a whopping $1 billion and around 500 stores.

Moreover, to capitalize on opportunities presented by its ever-increasing popularity, especially in the overseas locations, Michael Kors is on a store expansion drive across the globe. Going forward, Michael Kors anticipates opening 45 stores in North America and expects the count to reach 400 over the long term. Internationally, the company is eyeing the markets of Europe, Japan and China.

The recovering European market has provided a boost to the company, as reflected from a 128% rise in sales in the region during the quarter under review. Fashion-conscious Europe presents considerable opportunities and hence, management has rightly been seeking opportunities to open 55 stores in Europe in fiscal 2015 and over the long term, taking the count to an impressive 200.

Currently, Michael Kors has a Zacks Rank #2 (Buy).

Key Picks from the Sector

Other better ranked retail stocks worth consideration include Hanesbrands Inc. ( HBI ), V.F. Corp. ( VFC ) and Vince Holding Corp ( VNCE ). Hanesbrands sports a Zacks Rank #1 (Strong Buy) whereas V.F. Corp and Vince Holding carry the same rank as Michael Kors.

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MICHAEL KORS (KORS): Free Stock Analysis Report

V F CORP (VFC): Free Stock Analysis Report

HANESBRANDS INC (HBI): Free Stock Analysis Report

VINCE HOLDNG CP (VNCE): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: KORS , VFC , HBI , VNCE



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