Why Michael Kors' Return to Comps Growth Isn't Satisfying Investors

Michael Kors Holdings (NYSE: KORS) has gone through a lot recently. After surviving a terrible period for the retail industry, in general, and for luxury retail, in particular, Kors has worked hard to recover. Between its acquisition of industry peer Jimmy Choo and the development of its Runway 2020 strategic plan for its legacy business, Kors has sought to get itself back on the right foot and rediscover the growth that made the company such a game changer in past years.

Coming into Wednesday's fiscal fourth-quarter financial report, Kors investors wanted to see continued strong momentum for the retailer as it built on a holiday season that included some signs of success. Kors' numbers had their good points and bad points, but on the whole, shareholders seemed nervous about whether the pace of the retailer's recovery is fast enough to justify the company's current optimism.

How Michael Kors finished its fiscal year

Michael Kors' fiscal fourth-quarter results were mixed, continuing to show both the opportunities and the challenges that the company faces. Sales were up nearly 11%, to $1.18 billion, and that was better than the 8% growth rate that most of those following the stock were expecting from the company. Yet adjusted net income was down 18% from year-ago levels, and the resulting adjusted earnings of $0.63 per share were down $0.10 from the fourth quarter of fiscal 2017. Even so, the consensus forecast on the bottom line was just $0.60 per share, indicating that Kors outpaced expectations.

The big problem for Kors was the fact that most of its growth came from acquisitions. Jimmy Choo accounted for about $108 million of Kors' total sales; without it, the retailer would have posted revenue gains of less than 1%. Foreign-currency impacts also provided a lift for Kors' top line, adding almost 4 percentage points to growth rates.

The key retail business had some pros and cons for Michael Kors. Overall, retail segment revenue was higher by 4.4%, with comparable sales climbing 2.3% on strength in accessories, footwear, ready-to-wear items, and the men's category. Yet comps would have been down 1.7% on a currency-neutral basis. Sales in the Americas were also poor, falling 2.5% and offsetting double-digit percentage gains for both Europe and Asia.

Kors' other revenue sources performed badly. The wholesale unit suffered a 3% drop in sales following Kors' strategic reduction in inventory levels, with the intent of driving greater sales at full price rather than flooding the market with discount goods. In wholesale, declines in the Americas were even steeper, entirely erasing a more than 70% jump in wholesale revenue from Asia. Licensing revenue fell a steeper 11% to become an even less significant part of the overall business model for the retailer, and figures in Kors' home market again were particularly weak.

CEO John Idol tried to provide historical context. "We created a global fashion luxury group with the acquisition of Jimmy Choo and completed the first year of our Runway 2020 strategic plan for the Michael Kors brand," Idol said, "ending the year significantly ahead of our expectations."

Can Kors grow faster?

Kors also is enthusiastic about the new fiscal year. As Idol sees it, "We expect growth to be led by our retail business" at Michael Kors, while Jimmy Choo will require "strategic investments to expand our retail fleet globally." The CEO also believes that there's a place for further strategic acquisitions to boost the size of Kors' portfolio of stores further.

Yet not everyone was happy with guidance for the coming year. Kors said it expects full-year revenue of $5.1 billion, with $570 million to $580 million coming from Jimmy Choo. Comps likely will stay flat, and earnings per share of $4.65 to $4.75 won't provide a whole lot of growth for the retailer's bottom line.

First-quarter numbers include revenue of $1.135 billion and earnings of $0.90 to $0.95 per share. Although the numbers aren't totally out of line, the full-year earnings number was short of what many were looking to see.

Shareholders weren't happy with the news, and the stock dropped 12% on Wednesday following the announcement. Kors really needs to double down on its longer-term strategic vision in order to keep shoppers coming in the door, while making investors happy about their investments. That'll take dedication, but it could pay off with continued recovery if it's successful.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool has a disclosure policy.