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Michael Kors Strategic Efforts Bode Well, Drab Comps Woes

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Michael Kors Holdings Limited‘s (KORS - Free Report) positive earnings surprise, store optimization and global expansion has kept it afloat amid a competitive environment. Further, the company’s decision to acquire Jimmy Choo gives an indication that it is focused on international fashion brands. However, waning top-line along with dismal comps and wholesale segment performance continues to act as headwinds. Let’s delve deeper and analyze the issues influencing the stock.

Driving Factors

Michael Kors better-than-expected first-quarter fiscal 2018 earnings aided the company to provide upbeat fiscal 2018 view. The company now envisions fiscal 2018 total revenues to be approximately $4.275 billion, up from the previous estimate of approximately $4.25 billion and expects comparable sales to decrease in the mid-single digit range, compared with the previous estimate of decline in the high-single digit range. Operating margin is still projected to be about 16%. 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.

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 order 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 an opportunity worth $1 billion 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 due 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. 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 top-line performance. After registering meager growth of 0.2% in first-quarter fiscal 2017, it had declined 3.7%, 3.2% and 11.2% in the second, third and fourth quarters of fiscal 2017. In first-quarter fiscal 2018, revenues declined 3.6%.

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