It's been a tough couple of years for Michael Kors Holdings (NYSE: KORS), as the luxury retailer has faced extremely tough conditions in the industry. Yet recently, the stock has started to rebound, and coming into Thursday's fiscal second-quarter financial report, Kors investors were cautiously optimistic that they might see signs of continued improvement even if results didn't bounce back immediately. Kors' report wasn't entirely bad, but it did point to the idea that weakness in the top line could persist throughout the remainder of the current fiscal year. Let's look more closely at Michael Kors with an eye toward figuring out what its latest results say about its future.
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Image source: Michael Kors.
Kors can't get itself to move higher
Michael Kors' fiscal second-quarter results were somewhat disappointing for those expecting a faster turnaround. Total revenue was down almost 4% to $1.09 billion, which was almost exactly in line with what most of those following the stock had expected. Net income fell by 17% to $160.7 million, and that produced earnings of $0.95 per share. That figure was down from year-ago levels, but it was still far better than the $0.88 per share consensus forecast among investors.
Taking a closer look at how Kors did, there were several areas of weakness. Even though retail net sales were up 12%, comparable sales were down by 5.4%. As we've seen in past quarters, the reason for the movement in opposite directions was the fact that Kors made acquisitions that accounted for two thirds of the gain of almost 200 net new store openings since the year-ago period. Meanwhile, wholesale net sales were down an even sharper 18%, and revenue that Kors earned from licensing arrangements were down more than 10%. The negative impact of foreign currency that plagued Kors for years has now almost entirely disappeared, leaving the retailer with one less excuse to use for its sluggish top-line performance.
Moreover, the home Americas market for Kors continued to underperform its international operations. Revenue in the Americas was down 11% from the year-ago period. By contrast, sales in Europe were up 2%, and Asia-related revenue came very close to doubling from year-ago levels, again because of the acquisitions in Greater China and South Korea.
CEO John Idol was actually pleased with the company's performance. "We continued to deliver innovative luxury fashion product," Idol said, "and further expand our footprint worldwide." The CEO also pointed to the debut of its Wonderlust fragrance, new handbag collections for the fall, and more products on the men's side of the business.
Can Kors bounce back?
Nevertheless, even Kors understood that it faces ongoing challenges. As Idol explained it, "Our results continued to be impacted by the declines in mall traffic and tourism in certain major cities, as well as our strategic decision to reduce sell-in of inventory to the U.S. wholesale channel."
Kors' guidance reflected some of those concerns. For the fiscal third quarter, Kors set expectations for revenue of between $1.365 billion and $1.38 billion, which is less than the $1.4 billion consensus forecast among investors. Comparable sales are likely to fall by mid-single digit percentages compared to the year-ago period, and earnings of $1.61 to $1.65 per share would be far below the $1.79 per share that most investors are looking to see.
Similar issues affected Kors' guidance for the full year. The company cut its adjusted earnings projections by about $0.20 per share, with a new range of $4.37 to $4.43 per share. Expectations for a mid-single digit percentage drop in comparable-store sales for the full year shows that it will take longer than most had hoped for Kors to bounce back fully.
Kors shareholders weren't happy about the report, sending the stock down more than 4% in after-market trading following the announcement. Until the luxury retailer can demonstrate its ability to recover fully from poor industry conditions, Michael Kors will have to overcome skepticism among many investors who've gotten burned by the stock in recent years.
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