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Michael Kors Expansion Plan Bode Well, Drab Comps Woes Linger

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Michael Kors Holdings Limited‘s positive earnings surprise, upbeat guidance, store optimization and global expansion bode well. However, waning top-line along with dismal comps and wholesale segment performance continues to act as headwinds. Let’s delve deeper.

Hidden Catalyst

Shares of Michael Kors took a sharp “U–turn” following the company’s positive earnings streak for the ninth straight quarter and upbeat fiscal 2018 guidance. Revenues also came ahead of the estimate for the second quarter in row on account of robust retail sales performance. The company now envisions fiscal 2018 total revenue to be nearly $4.275 billion, up from the previous estimate of about $4.25 billion. Management anticipates earnings in the band of $3.62–$3.72 per share for the fiscal year, up from earlier estimate of $3.57–$3.67 per share.

Michael Kors’ acquisition of Jimmy Choo will help diversify portfolio and tap international markets. The buyout is likely to be accretive in the low single digits in fiscal 2020. In a bid to drive top-line growth, Michael Kors has been focusing on store expansion. In fiscal 2016, the company opened 142 new stores, which included 47 in the Americas and 95 worldwide. In fiscal 2017, it opened 159 net new stores openings, which includes 111 outlets related to the acquisition of the earlier licensed operation in Greater China. Given the scope for high profitability from company-owned stores, management is putting more emphasis on opening retail outlets. Sales from Asia have shown tremendous improvement. The company had stated that it will continue with the expansion drive in Asia and also believes it has a $1 billion opportunity in the long term.

In an effort to increase the profitability in stores fleet, the company has announced its intention to close between 100 to 125 full priced retail stores over the next two years. Moreover, the company stated that it will incur one-time costs of nearly $100–$125 million related to store closures. Meanwhile, the company anticipates annual saving of $60 million owing to store closures as well as fall in depreciation and amortization related with these impairment charges.

Hurdles to Cross

Michael Kors’ wholesale segment continues to pose concern for the investors. In first-quarter fiscal 2017 wholesale segment sales declined 23% to $303.6 million primarily due to dismal performance of Americas, European and Asia region, while on a constant currency basis, it fell 22.7%. In the fourth, third, second and first quarter of fiscal 2017, wholesale segment sales declined 22.8%, 17.8%, 18.4% and 7%, respectively.

Stiff competition, falling comps, aggressive promotional environment and waning mall traffic are making things tough for Michael Kors. We noted that comparable sales had fallen 5.9% in the first quarter of fiscal 2018, following declines of 14.1%, 6.9%, 5.4% and 7.4% in the fourth, third, second and first quarters, respectively.

Michael Kors which shares space with Gildan Activewear Inc. (GIL - Free Report) , PVH Corp. (PVH - Free Report) and Lululemon Athletica Inc. (LULU - Free Report) is struggling with its top-line performance. After registering a meager growth of 0.2% in the first quarter of fiscal 2017, it had declined 3.7%, 3.2% and 11.2% in the second, third and fourth quarters of fiscal 2017. In the first-quarter of fiscal 2018, revenues declined 3.6%.

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