Michael Kors Celebrates the Holiday Season

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The holidays are an important time for every retailer, but for Michael Kors Holdings (NYSE: KORS), the last three months of 2017 were an especially important period for the luxury retailer to prove itself. With the acquisition of Jimmy Choo, Kors aimed to expand its brand presence while taking advantage of a hoped-for recovery after a long, tough time for the retail sector overall.

Coming into Wednesday's fiscal third-quarter financial report, Kors investors were ready to handle some ongoing difficulties in the business, but they wanted to see signs that the retailer's turnaround efforts have started to make a difference fundamentally. Kors' results were stronger than anticipated, and that has investors feeling more confident about the company's prospects. Let's take a closer look at Michael Kors and what its latest results really say about the current environment.

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Happy holidays for Michael Kors

Michael Kors' fiscal third-quarter results were solid. Revenue climbed by 6.5% to $1.44 billion, which was triple the 2% growth rate that most investors were expecting to see. Adjusted net income inched higher by about 1% to $273.4 million, but a big drop in share count lifted adjusted earnings per share to $1.77, comparing quite favorably with the consensus forecast among those following the stock for $1.29 per share.

Once again, though, Kors saw cross-currents in the way that its segments performed. The core retail segment excluding Jimmy Choo saw just a 1% rise in sales, requiring strong gains in Europe and Asia to offset weakness in the North American market. Kors' wholesale channels suffered a 9% drop in revenue, however, with modest gains in Asia unable to offset high single-digit percentage declines in both the Americas and Europe as Kors made a strategic decision to reduce inventory levels. A nice boost in licensing made an incremental boost to sales, but it took $114.7 million in revenue from Jimmy Choo to produce overall revenue gains for Kors.

Operationally, Kors also struggled. Operating income was down 8%, and although segment operating margin held steady in the key retail division, poor performance in the wholesale channel along with low margin figures for Jimmy Choo weighed on overall operating margin. Comparable sales fell 3.2%, accelerating from fiscal second-quarter declines even after incorporating some positive currency impacts.

Yet Kors is still banking on growth. The number of Kors store locations climbed to nearly 1,000 when you include licensed stores, and Jimmy Choo added 234 stores of its own worldwide.

CEO John Idol put the numbers into perspective. "The Michael Kors brand continued to make progress on Runway 2020 initiatives across product innovation, brand engagement, and customer experience," Idol said, and "our innovative fashion luxury product offerings for the holiday season created excitement among customers." The CEO also pointed to the successful integration of Jimmy Choo as a key factor in a more favorable outlook.

What's next for Kors?

In particular, Kors called out several achievements that it believes should keep it moving forward. New products were received well by consumers, and that helped boost accessories sales above the company's forecast. The women's footwear and ready-to-wear businesses stood out for their strength, giving Kors confidence in its fashion prowess, and the retailer managed to use less promotional activity in its sales efforts.

In response to its projections, Kors once again increased its guidance. For fiscal 2018 on the whole, the retailer sees $4.66 billion in revenue, higher by $70 million from its most recent guidance, with between $225 million and $230 million in additional revenue from Jimmy Choo. Earnings of $4.40 to $4.45 per share are roughly $0.50 to $0.55 higher than the previous range that Kors provided. By contrast, fiscal fourth-quarter revenue projections of $1.11 billion to $1.13 billion and quarterly earnings of $0.50 to $0.55 per share are a bit less than the consensus forecast among investors but still represent a solid performance.

Shareholders were pleased with the news, and the stock jumped 9% in pre-market trading following the announcement. If the retailer can keep up the more positive aspects of its recovery into the 2018 calendar year, then Kors should be in position to continue making progress on its turnaround plans.

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

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