Kors Soars on Unexpected EPS Growth, but Challenges Linger

By Dan CaplingerFool.com

Image: Michael Kors Holdings.

The rise and fall of luxury stocks is something that we've seen time and time again. For years, many saw luxury retailer Michael Kors Holdings in stark contrast to competitor Coach , with Kors having inherited high-growth status even as Coach's business fell off dramatically. More recently, Kors has had to deal with its own plunge in interest among shoppers, and coming into its fiscal second-quarter financial report on Wednesday, shareholders expected to see further declines in earnings per share along with a near-standstill in revenue growth. Kors managed to deliver much better performance than that, sending the stock higher, but some still fear that the retailer hasn't recovered entirely. Let's look more closely at the latest from Michael Kors and whether investors can see this report as the beginning of the end for its long slump.

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These results sent Kors higherMichael Kors' second-quarter results showed the continued pressure that the retailer has been under lately, even though they weren't as weak as feared. Total revenue climbed nearly 7% to $1.13 billion, more than tripling the 2% growth rate that most investors were expecting to see from Kors. Net income went the other way, falling 7% to $193.1 million, but the company's efforts to buy back shares paid off, as share counts dropped so much that earnings per share rose 1% to $1.01, defying the consensus forecast for earnings to shrink to $0.89 per share.

The most alarming thing about Kors' results remains its weak comparable-store sales. Comps fell 8.5% for the quarter, and even after taking the strength of the U.S. dollar into account, constant-currency comparable-store sales were down 3.4% from the year-ago period. It took 116 new stores over the past four quarters to help support the modest gains in revenue that Kors has enjoyed, along with strength in the company's e-commerce sales.

Geographically, Kors continues to see strength in its overseas markets, even though currency impacts reduced their positive effect. In North America, revenue rose 4.5%, but Japanese sales rose 36% even after taking into account nearly 25 percentage points of currency-related downward revisions. European sales grew 21% in constant-currency terms, but that equated to growth of just 2.3% due to the weak euro.

CEO John Idol discussed the results in positive terms. "Our North American digital flagship sales continued to accelerate this quarter," Idol said, "and we drove sequential improvement in our comp performance." Idol also pointed to expansion efforts in driving "our compelling fashion products and jet-set shopping experience."

Can Kors keep up its momentum?Idol expects even better things for the coming quarter. "We believe we are well-positioned for a positive holiday period," Idol noted, "with our exciting new product introductions and gifting assortments in addition to a captivating marketing campaign." Ideally, Kors can use that support to build up its brand and reignite demand for its luxury products.

At the same time, Kors gave mixed guidance that didn't entirely reflect that confidence, at least in the short-term. Kors expects fiscal third-quarter revenue of $1.33 billion to $1.35 billion, which is $50 million to $70 million less than the current consensus forecast among those following the stock. Earnings of $1.44 to $1.48 per share would also be below analyst estimates for $1.53 per share, as Kors follows its traditional pattern of guiding lower and then surpassing lowered expectations.

For the full year, Kors sees better times ahead. Revenue of $4.6 billion to $4.65 billion would be just on the low side of investor expectations, and earnings guidance of $4.38 to $4.42 per share is actually above the current forecast. On the other hand, Kors doesn't expect comps to go positive this year, and foreign currency impacts will keep pressuring its results.

Skeptics aren't sure why investors are celebrating the results. In many ways, Kors has followed the same strategy that Coach did, increasingly using discounts to get rid of unwanted inventory. In Coach's case, those efforts watered down the glitter of its brand, with the loss of a sense of exclusivity weighing on its fashion cachet. Both Coach and Kors have recently had to deal with poorer economic conditions among luxury shoppers, and Coach still hasn't figured out how to break a slump that has cut its stock in half since early 2012.

Nevertheless, Kors stock jumped 12% in the opening hours of the trading session following the announcement, showing how excited investors are about the company. Nevertheless, only the holidays will truly tell whether Kors is back on course or merely enjoying a reprieve from tougher conditions ahead.

The article Kors Soars on Unexpected EPS Growth, but Challenges Linger originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Coach. 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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