Can Michael Kors Earnings Stop the Stock's Freefall?

Image: Michael Kors.

In the fashion world, the new hot item one moment can be completely out of style the next. Sometimes, stocks behave similarly, and for luxury retailer Michael Kors Holdings , the past few quarters have been a nightmare of epic proportion. Coming into Thursday's fiscal first-quarter financial report, Michael Kors has seen its stock price plunge by more than half in just over a year, and investors wondered whether the retailer would ever recover from its fall from grace. Let's take a closer look at what Michael Kors is likely to tell us in its earnings report and whether a rebound is likely for the stock in the near future.

Stats on Michael Kors Holdings

Source: Yahoo! Finance.

Will Michael Kors earnings get back on track? Investors are feeling gun-shy about Kors earnings, given the fact that the company failed to exceed expectations last quarter for the first time in a long while. Over the past few months, investors have slashed their fiscal first-quarter earnings projections by more than a quarter per share, and they've made even more dramatic reductions to their view for the 2016 and 2017 fiscal years. Meanwhile, the stock has kept falling, with declines of more than 37% since late April.

For Michael Kors, the retailer's fiscal fourth-quarter results in May showed just how unforgiving longtime investors have been about its slowing growth. Revenue for the quarter climbed 18%, and net income growth of 13% was also within the range of results that many retailers would kill to achieve. Yet investors punished the stock because Kors missed earnings estimates by a single penny per share. More importantly, Kors saw same-store sales decrease by 5.8%, with a 6.7% drop in its key North American market. Even taking some currency headwinds into account, Kors failed to achieve positive comps, and that came as a shocking surprise even though the retailer continued its expansion efforts in order to produce overall sales growth. In response, the stock lost a quarter of its value in a single day, and Kors' guidance going forward seemed only to confirm the worst fears for shareholders.

Some argue that Michael Kors has been a victim of its own success. By making its product available not just as its luxury retail stores but also at locations like outlet malls, Kors lost some of its exclusive cachet, and that might have led to its alienating its core premium customer base. Given just how difficult it is to win back a reputation once it's lost, even the huge declines that the stock has already seen don't seem out of line if Michael Kors truly can't engineer a turnaround.

Of course, some of Kors' expansion plans actually make sense. Branching out into menswear is a natural move to try to capitalize on the prestige of the Michael Kors brand, and even with the value of that brand coming into question, it still makes sense for the retailer to play out its strategy. Even if it doesn't succeed in doubling its potential audience, the additional sales potential will likely prove worth the effort.

In order to emerge from its identity crisis, Michael Kors needs to figure out which audience it wants to target. If it wants to make a transition toward a more mainstream group of potential customers, then it will have to keep executing well on its global e-commerce platform initiatives and make other moves to broaden its appeal with rank-and-file shoppers around the world. On the other hand, if it wants to try to win back luxury shoppers, then Kors will have to do an about-face on some of its aggressive expansion plans and instead focus on the exclusive areas that will make the biggest difference to its traditional core customers.

In the Michael Kors report, be sure to watch closely for the company to give details on a potential turnaround strategy. Long-term investors have thus far heard the company stick to its broader strategic vision, but the severity of the recent downturn for the stock warrants a more aggressive response from company management. Without an assertive response, Kors investors could easily start to lose hope in the luxury brand's ability to regain its lost glory.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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