A month has gone by since the last earnings report for Michael Kors Holdings (KORS). Shares have lost about 14.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Michael Kors Holdings due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Michael Kors Q2 Earnings Beat, Sales Lag Estimates
Michael Kors Holdings Limited maintained its positive earnings surprise streak for the 14th straight quarter, when it reported second-quarter fiscal 2019 results. On the contrary, revenues fell short of the Zacks Consensus Estimate, after six successive quarters of beat. Analysts pointed that the company's sluggish performance in Europe might have hurt the top line to an extent. Nevertheless, total revenue improved year over year, however, this failed to restrain the decline in the bottom line that was marred by higher operating expenses.
This designer, marketer, distributor and retailer of branded apparel and accessories delivered adjusted quarterly earnings of $1.27 per share that surpassed the Zacks Consensus Estimate of $1.09 but fell from $1.33 reported in the year-ago quarter. Nonetheless, management raised its fiscal 2019 earnings view citing better-than-expected performance for both the Michael Kors and Jimmy Choo brands.
Total revenues of $1,253.8 million grew 9.3% year over year but came below the Zacks Consensus Estimate of $1,259.3 million. Top line includes revenue contribution of $1,137.1 million from Michael Kors, down 0.8% year over year and $116.7 million from Jimmy Choo. On a constant currency basis, total revenues were up 9.9%.
Adjusted gross profit jumped 10.8% to $765.4 million. Meanwhile, adjusted gross margin increased 80 basis points (bps) to 61% due to 110 bps contribution on account of the inclusion of Jimmy Choo, offset by contraction of 30 bps at Michael Kors brand gross margin. MK wholesale gross margin increased 130 bps, while MK retail gross margin fell 150 bps.
Adjusted operating income declined 8.6% to $216.9 million, while operating margin contracted 340 bps to 17.3% due to the addition of Jimmy Choo.
MK Retail revenue came in at $643.9 million, down 0.2% year over year. Comparable sales (comps) slid 2.1%. The company witnessed positive performance in the Americas and Asia, offset by decline in Europe. Global e-commerce benefited comparable sales by 190 basis points. On a constant currency basis, retail revenue inched up 0.5%, while comps fell 1.3%.
MK Wholesale revenue fell 1.3% to $457.8 million, while on a constant currency basis, the same edged down 0.9%. The positive performance in the Americas and Asia was offset by decline in EMEA. Revenue from Europe fell due to the company's strategy to lower inventories and raise full-price sell-throughs.
MK Licensing revenue decreased 6.8% to $35.4 million due to soft performance in the Americas, partly offset by marginally better performance in EMEA from the year-ago period. Management highlighted that growth in Michael Kors ACCESS smart watches and launch of new slim fashion watches and jewelry failed to offset the continued sluggishness in fashion watches.
Other Financial Details
Michael Kors ended the quarter with cash and cash equivalents of $155.2 million, long-term debt of $504.6 million and shareholders' equity of $2,179.7 million, excluding non-controlling interest of $3.6 million.
Management incurred capital expenditures of approximately $49 million in new store development, refurbishment and enhancement of information technology and e-commerce. The company projects capital expenditures of approximately $225 million for fiscal 2019. This reflects the opening of 60 Michael Kors outlets and 30 Jimmy Choo stores.
As of Sep 29, 2018, there were 1,058 stores (854 Michael Kors stores - 398 in the Americas, 195 in Europe and 261 in Asia - and 204 Jimmy Choo stores).
Management now envisions third-quarter fiscal 2019 total revenue to be about $1,460 million, comprising incremental revenue of $165 million from Jimmy Choo. Retail revenue for Michael Kors is projected to improve in the low-single-digits.
On a reported basis, management forecasts third-quarter comps to decline in the low-single-digits. The company expects wholesale revenue to decline in the high-single-digits, and licensing revenue to fall in the mid-teens.
Third-quarter operating margin is projected to be approximately 20.8%, which includes 140 basis points of dilution from Jimmy Choo. The company forecast earnings in the band of $1.52-$1.57 per share, including accretion from Jimmy Choo of approximately 4-6 cents.
For fiscal 2019, management continues to project total revenue to be approximately $5,125 million, comprising incremental revenue of $580-$590 million from Jimmy Choo. Michael Kors retail revenue is expected to increase in the low single digits, while wholesale revenue is expected to decline in the low single digits. Licensing revenue is expected to decline in the low double digits. Comparable sales for Michael Kors are expected decline in the low-single-digits. Operating margin is now expected to be roughly 18.2%, which includes 170 basis points of dilution from Jimmy Choo.
Management envisions earnings in the range of $4.95-$5.05 per share, including dilution from Jimmy Choo of approximately flat to 5 cents. The company had earlier guided earnings in the range of $4.90-$5.00 per share.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -12.51% due to these changes.
At this time, Michael Kors Holdings has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Michael Kors Holdings has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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