Michael Kors Seeks to Prove Luxury Isn't Dead

By Dan CaplingerFool.com

Image: Michael Kors.

Luxury retailers have had a rough time lately, and Michael Kors Holdings is the poster child for the boom and bust at the upper end of the business over the past couple of years. Following the stock's stratospheric rise, Kors has lost almost 40% of its value since early 2014 as slowing growth has made investors fearful about its future prospects. Even as economic growth in the U.S. continues, conditions abroad remain far from ideal, and the strong dollar has weighed on Kors' results and stemmed the flow of shoppers from Europe and Asia coming to the New World to spend money. As the retailer prepares to report its fiscal-fourth-quarter results on Wednesday, let's look at how Kors has fared in recent months and what it's likely to say in its report.

Continue Reading Below

Stats on Michael Kors Holdings

Source: Yahoo! Finance.

Can Kors keep its streak of earnings surprises alive?Despite the retailer's track record of lowballing expectations and then providing positive surprises, investors remain cautious about Kors earnings, having cut their fiscal-fourth-quarter projection by a penny per share and reducing their fiscal 2016 estimate by about 2%. The stock has taken even more damage since we last checked in with the retailer, down 11% since mid-February.

Kors' fiscal-third-quarter results that month continued the troubling trend that has made so many investors nervous about the luxury retailer's future. At first glance, Kors appeared to be firing on all cylinders, with 30% revenue growth helping to provide a huge bump in earnings that far surpassed what most of those following the stock had anticipated. The problem, though, is that Kors has drawn most of its revenue gains from store expansion, and the retailer's once-amazing comparable-store sales growth has greatly slowed. For the quarter, comps rose just 10.9% even after adjusting for adverse currency fluctuations, and a 6% comparable-store sales gain in the U.S. pointed to the weakness in Kors' home market.

Image: Michael Kors.

Once again, investors will want further proof that Kors can keep doing well internationally in order to assess its future growth potential. Comps in its stores in Japan and Europe have been impressive. While Japan represents just 1% of the company's total revenue, Europe has become a much more important part of the overall business, with the portion of sales coming from the continent likely to hit 20% in the near future. If Kors can keep doing well abroad even with economic conditions far from ideal, it could be set for a big bounce when things return to normal.

The drastic decline in Kors stock over the past year has led to a tug-of-war on Wall Street about the company's future. On one hand, earnings multiples have fallen to rock-bottom levels, inspiring some value-conscious investors to take a closer look at the stock as it trades around 13 times forward earnings estimates. Yet the stock has also attracted substantial interest from short-sellers, with about 5% of its stock currently sold short. Even as skeptics point to the past failures of some of its rivals, Kors supporters believe the company still has fashion value that many of its more unfortunate peers lack.

This quarter, investors in Kors should look at the retailer's breakout of U.S. results versus its international business. As important as its foreign expansion is for its long-term growth prospects, Kors must find ways to shore up its position domestically and ensure that it won't become a purely international phenomenon. By continuing to take a truly global approach, Kors will have its best chance to recover from its recent woes.

The article Michael Kors Seeks to Prove Luxury Isn't Dead originally appeared on Fool.com.

Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Michael Kors Holdings. The Motley Fool owns shares of Apple and 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.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.