It has been about a month since the last earnings report for Michael Kors Holdings (KORS). Shares have added about 0.7% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Michael Kors Holdings 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. <p style="text-align: justify;"><strong>Michael Kors Beats on Q1 Earnings & Sales, Guides Up</strong><br /><br />Michael Kors Holdings Limited maintained its positive earnings surprise streak for the 13th straight quarter, when it reported first-quarter fiscal 2019 results. Revenues also came ahead of the Zacks Consensus Estimate for the sixth quarter in row. The results were driven by robust performance by the Michael Kors and Jimmy Choo brands. Following a stellar performance, the company provided an upbeat outlook for fiscal 2019.<br /><br />This designer, marketer, distributor and retailer of branded apparel and accessories delivered adjusted quarterly earnings of $1.32 per share that surpassed the Zacks Consensus Estimate of 94 cents and surged significantly from 80 cents reported in the year-ago quarter buoyed by top line growth. This follows a decline of 13.7% in the bottom line during the preceding quarter.<br /><br />Total revenues of $1,202.5 million outpaced the Zacks Consensus Estimate of $1,137 million and soared 26.3% year over year. Top line includes revenue contribution of $172.7 million from Jimmy Choo and $1,029.8 million from Michael Kors brand, which is up 8.1% year over year. On a constant currency basis, total revenues were up 24.1%.<br /><br />Adjusted gross profit jumped 31.1% to $753.2 million. Meanwhile, adjusted gross margin expanded 230 basis points (bps) to 62.6% due to higher MK Wholesale gross margins (up 530 bps) on account of reduced promotional activity and favorable product mix. Jimmy Choo contributed 40 basis points to overall gross margin. Management informed that MK retail margins also improved 110 bps during the quarter under review.<br /><br />Adjusted operating income surged 56.1% to $233.2 million, while operating margin increased 370 bps to 19.4% attributable to inclusion of Jimmy Choo in the current year, higher income from operations from Michael Kors brand and shift of certain costs from first quarter into second quarter.<br /><br /><strong>Segment Performance</strong><br /><br />MK Retail revenue came in at $639.5 million, up 3.2% year over year. Management pointed that since the end of first-quarter fiscal 2018, the company had opened 9 net new outlets. Comparable sales (comps) improved 0.2% buoyed by growth in the accessories, footwear, women's ready-to-wear categories. The company witnessed positive performance in the Americas and Asia, partly offset by declines in Europe. Global e-commerce benefited comparable sales by 250 basis points. On a constant currency basis, retail revenue inched up 0.7%, while comps fell 2.1%.<br /><br />MK Wholesale revenue jumped 19.5% to $362.8 million, while on a constant currency basis, the same improved 17.8%. The segment gained from shift in timing of certain wholesale shipments from second quarter into first quarter.<br /><br />MK Licensing revenue fell 4.8% to $27.5 million. Management highlighted that growth in Michael Kors ACCESS smart watches failed to offset the continued sluggishness in fashion watches.<br /><br /><strong>Other Financial Details</strong><br /><br />Michael Kors ended the quarter with cash and cash equivalents of $169.9 million, total long-term debt of $821.1 million and shareholders' equity of $2,037.9 million, excluding non-controlling interest of $3.6 million.</p><p style="text-align: justify;">During the quarter under review, Michael Kors bought back about 1.7 million shares for approximately $100 million. As of Jun 30, 2018, the company still had $542 million remaining under its share repurchase program.<br /><br />Management incurred capital expenditures of approximately $41 million in new store development, refurbishment and enhancement of information technology and e-commerce. The company continues to project capital expenditures of approximately $250 million. This reflects the opening of 60 Michael Kors outlets and 30 Jimmy Choo stores with a focus on Asia.<br /><br /><strong>Store Update</strong><br /><br />As of Jun 30, 2018, the company operated 847 retail outlets (395 in The Americas, 192 in Europe and 260 in Asia), including concessions. The company had 153 additional retail outlets, including concessions, operated through licensing partners. Thus, the total number of global Michael Kors stores was 1,000 at the end of the quarter under review. Jimmy Choo had 191 retail stores, including concessions, at the end of the quarter. Further, Jimmy Choo operated 61 additional retail outlets, including concessions, through licensing partners.<br /><br /><strong>Guidance</strong><br /><br />Management now envisions second-quarter fiscal 2019 total revenue to be about $1,260 million, comprising incremental revenue of $110-$115 million from Jimmy Choo. Retail revenue for Michael Kors is projected to improve in the low-single-digits.<br /><br />On a reported basis, management forecasts second-quarter comps to decline in the low-single-digits. The company expects comps to remain positive in the Americas and Asia, offset by expected decline in Europe. The company expects wholesale revenue to decline in the low-single-digits, and licensing revenue to fall in the high-single-digits.<br /><br />Second-quarter operating margin is projected to be approximately 16%. The company forecast earnings in the band of $1.03-$1.08 per share, including dilution from Jimmy Choo of approximately 9-11 cents. The bottom line expectation depicts the earlier wholesale shipments of about $35 million in revenues into the first quarter and operating expenses of roughly $15 million shifted into the second quarter.<br /><br />For fiscal 2019, management projects total revenue to be approximately $5.125 billion, comprising incremental revenue of $580-$590 million from Jimmy Choo. Comparable sales for Michael Kors are expected to be approximately flat. Retail revenue for Michael Kors is projected to improve in the mid-single digits. The company expects wholesale revenue to decline in the low-single-digits, and licensing revenue to fall in the high-single-digits.<br /><br />Operating margin is expected to be roughly 18%. Management envisions earnings in the range of $4.90-$5.00 per share, including dilution from Jimmy Choo of approximately flat to 5 cents.<br /><br />The company had earlier guided total revenue to be approximately $5.10 billion with earnings in the range of $4.65-$4.75 per share.</p>
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 -10.03% due to these changes.
Currently, Michael Kors Holdings has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. 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 #1 (Strong Buy). We expect an above average return from the stock in the next few months.
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