Michael Kors Closes Stores After Posting Weak Sales, Earnings

One of the biggest victims of the collapse of the luxury retail industry has been Michael Kors Holdings (NYSE: KORS). Recently, the retailer has struggled to keep declines in its revenue manageable, but a tough environment in the shopping world, especially in the U.S., has made things a lot more difficult for Kors.

Coming into Wednesday's fiscal fourth-quarter financial report, Kors investors had no illusions that the quarter would be anything but ugly. But the strategic moves that Kors announced in response to tough conditions did come as a shock to some of those following the stock. Let's look more closely at Michael Kors to see how it did and what to expect in the future.

Image source: Michael Kors.

Kors keeps falling back

Just about the only positive thing one can say about Michael Kors' fiscal fourth-quarter results is that they weren't quite as bad as many had feared. Total revenue was down more than 11% to $1.20 billion, but that was slightly better than the nearly 13% decline that investors were expecting to see. Similarly, adjusted net income dropped by more than a third to $118 million, and that worked out to $0.73 per share. Despite being down sharply from year-ago levels, the bottom-line figure was still $0.03 better than the consensus forecast among those following the stock.

Taking a closer look at the results, Kors saw a particularly poor number on the comparable sales front. Overall, comps plunged 14.1%, accelerating from their previous pace of declines in recent quarters. Retail net sales climbed by 0.5%, due largely to the acquisition of stores in China and surrounding areas of the region. But wholesale net sales plummeted 23%, and the licensing unit suffered a 6% drop in revenue.

The Americas were again especially weak for Kors. Sales in the Americas were down 18% from year-ago levels. Yet the worst news came from Europe, which had in the past been a bastion of strength but which this quarter nearly matched the poor performance in the Western Hemisphere, posting a 15% drop. Asia continued to do well, seeing sales nearly double from year-ago levels, but much of that again came from acquisition activity that didn't necessarily reflect the actual fundamental performance in the region.

CEO John Idol was ready to put fiscal 2017 behind him. "We continued to operate in a difficult retail environment with elevated promotional levels," Idol said, and "in addition, our product and store experience did not sufficiently engage and excite customers." The CEO acknowledged the necessity of taking action in order to stay fashionable and keep its shoppers interested in the Kors experience.

Can Kors climb back?

Kors will take major steps to reinvent itself, but the process will take time. As Idol put it, "Fiscal 2018 will be a transition year in which we establish a new baseline before returning to long-term growth." The company intends to use the power of the Michael Kors brand to put itself back into the fashion spotlight in the industry.

Part of Kors' retrenchment will come from what it called "retail fleet optimization," which is shorthand for store closures. Kors expects to shut down 100 to 125 of its full-price retail stores over the next two years, with annual savings of $60 million offsetting one-time costs of $100 million to $125 million from the closures.

Yet guidance for the coming year reflects the long road that Kors will have to take to find new success. For the first quarter, revenue should be between $910 million and $930 million, with comps falling high single-digit percentages. The full 2018 fiscal year will look similar, including guidance for $4.25 billion in revenue, high single-digit percentage drops in comps, and earnings of $3.57 to $3.67 per share -- all well below what investors were looking to see.

Shareholders weren't happy with the news from Kors, and the stock fell more than 7% in pre-market trading following the announcement. Without a quicker turnaround, Michael Kors could continue to disappoint investors in the near-term until it can demonstrate that its efforts will eventually have a more lasting positive impact on the retailer's business fundamentals.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool has a disclosure policy.