Michael Kors Bounces Back but Still Has a Long Way to Go

Image: Michael Kors Holdings

Luxury retailer Michael Kors Holdings has gone through a lot lately, with the former growth darling having fallen from grace and seen its stock crushed over the past year and a half on concerns that its long run of high-paced expansion could be coming to an end. Coming into its fiscal first-quarter financial report Thursday morning, Michael Kors investors were so concerned that they'd bid shares down to their worst levels in more than three years, expecting only tepid sales growth and a big drop in earnings. Kors managed to outdo those pessimistic numbers, with stronger sales growth despite a slight net income decline. Let's take a closer look at how Michael Kors Holdings did and whether shareholders should really be happy.

Kors gets back on its feetMichael Kors opened its fiscal 2016 year on a fairly positive note. Revenue climbed 7% to $986 million, which was a much better result than the 3% growth that represented the consensus estimate among investors. Net income once again struggled under the weight of the strong U.S. dollar, which hit Kors' foreign-currency results and led to a 7% drop on the bottom line. Earnings came in at $0.87 per share, which was down from year-ago figures but still more than a dime per share higher than most investors had expected.

Yet looking more carefully at Kors' results still reveals that shareholders have cause for alarm. Comparable-store sales remained extremely weak, with a 9.5% fall that dramatically worsened from the previous quarter. Even taking currency impacts into account, adjusted comps fell 5%. More than 100 new store openings in the past year and strong sales through Kors' e-commerce portals in North America led to an overall 9% increase in sales, but even though they were able to offset the negative pressure from the company's brick-and-mortar retail operations, Kors can't keep up its new-store pace forever.

Kors did see its international segments outperform dramatically once again. Compared to a tiny rise in North American sales, Europe saw revenue climb 17% even after taking into account 25 percentage points of currency pressure. Japan fared even better, with sales climbing 23% on a currency-neutral basis. Still, even solid results overseas have slowed dramatically in just the past few quarters.

CEO John Idol was happy to talk about the stronger than expected results. "On a global basis we saw solid growth in accessories and footwear," Idol said, "as these categories performed well in our retail stores, and we experienced strong sell-through in our wholesale channel." With wholesale net revenue rising 4% and licensing revenue climbing more than 20%, Idol said that the quarter showed that Kors still has opportunities throughout the world.

Is this the first step in Michael Kors Holdings' recovery?Looking forward, Idol pointed to some promising steps for the future. "We will continue to execute on our multiple growth initiatives," Idol said, "including global expansion of our digital flagships, growing our international presence, and building upon our core categories, as well as further developing our men's women's, and footwear businesses." He sees Michael Kors as a powerful brand and asserted that it still commands leadership in luxury fashion.

Still, Kors once again followed its usual pattern of issuing guidance that's well below the current consensus estimates for the retailer. Sales projections of between $1.06 billion to $1.08 billion undershot the $1.11 billion forecast among investors, and earnings of $0.86 to $0.90 per share would be as much as 10% below the $0.97 consensus currently. In particular, operating expense increases could amount to as much as 5% of total revenue, as Kors makes huge investments aimed at improving performance in the company's store network and digital offerings.

Kors nevertheless thinks its stock is a good value, with a massive $350 million stock buyback that resulted in purchasing 6.96 million shares. The company still has almost $660 million left in its authorized repurchase program, suggesting that further buybacks could be on the way.

Shareholders were relatively pleased with Michael Kors' latest results, sending the stock up 7% in the first hour of premarket trading after the announcement. Nevertheless, Kors still has a long way to go before it can reestablish its past growth trajectory and start firing on all cylinders again. Patient investors will need to wait a while longer to see if Kors can truly turn itself around.

The article Michael Kors Bounces Back but Still Has a Long Way to Go originally appeared on Fool.com.

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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