It has been about a month since the last earnings report for Michael Kors Holdings Limited (KORS - Free Report) . Shares have added about 10.6% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is KORS due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Michael Kors Beat Earnings and Sales Estimates in Q4
Michael Kors Holdings Limited maintained its positive earnings surprise streak for the 12th straight quarter, when it reported fourth-quarter fiscal 2018 results. Revenues also came ahead of the Zacks Consensus Estimate for the fifth straight quarter. The results were driven by robust performance by the Michael Kors and Jimmy Choo brands.
However, in spite of reporting better-than-expected results the company’s fiscal 2019 earnings per share projection came below analysts’ expectations.
This designer, marketer, distributor and retailer of branded apparel and accessories delivered quarterly earnings of 63 cents a share that surpassed the Zacks Consensus Estimate of 60 cents but declined 13.7% from the year-ago quarter. This follows an increase of 7.9% in the preceding quarter. We note that rise in cost of goods sold and higher interest expense might have hurt the bottom line. Even an increase in the top line failed to act as a savior.
Total revenues of $1,179.5 million outpaced the Zacks Consensus Estimate of $1,144 million and improved 10.8% year over year. Top line includes revenue contribution of $107.9 from Jimmy Choo. Excluding the same total revenue grew 0.6%. On a constant currency basis, total revenues were up 7.2%.
Comparable sales grew 2.3% but decreased 1.7% on a constant currency basis. Global e-commerce benefited comparable sales by 160 basis points.
Adjusted gross profit jumped 14.9% to $712.3 million. Meanwhile, adjusted gross margin came expanded 220 basis points (bps) to 60.4% on account favorable channel mix attributable to increased proportion of retail sales and higher Retail and Wholesale gross margins. Jimmy Choo contributed 80 basis points to overall gross margin. Michael Kors retail gross margin surged 110 basis points.
Adjusted operating income rose 2% to $154.2 million, while operating margin contracted 110 bps to 13.1%. Michael Kors brand generated higher income from operations. This was offset by increased investments in marketing, e-commerce and store openings with respect to Jimmy Choo.
Retail revenue came in at $600.6 million, up 4.4% year over year. Management pointed that since fourth-quarter fiscal 2017, the company had opened 50 outlets, principally in Asia. It further notified that 48 outlets were closed down during the period. Comparable sales improved 2.3% buoyed by growth in the accessories, footwear, ready-to-wear and men's categories. On a constant currency basis, retail revenue inched up 0.1%, while comparable sales fell 1.7%.
Wholesale revenue were down 3.2% to $441.3 million, while on a constant currency basis, the same declined 6.1%. Licensing revenue plunged 11.1% to $29.7 million.
Other Financial Details
Michael Kors ended the quarter with cash and cash equivalents of $163.1 million, total long-term debt of $874.4 million and shareholders’ equity of $2,017.7 million, excluding non-controlling interest of $3.8 million. The company repaid $320.2 million of debt in the final quarter.
During the quarter under review, Michael Kors bought back 3,157,459 shares for approximately $200 million. As of March 31, 2018, the company still had $642.2 million remaining under its share repurchase program.
Management expects to incur capital expenditures of approximately $250 million. This reflects the opening of 60 Michael Kors outlets and 30 Jimmy Choo stores with a focus on Asia.
As part of fleet optimization strategy for Michael Kors, the company plan shutter roughly 25 stores in fiscal 2019.
As of March 31, 2018, the company operated 829 retail outlets (379 in The Americas, 198 in Europe and 252 in Asia), including concessions. The company had 151 additional retail outlets, including concessions, operated through licensing partners. Thus, the total number of global Michael Kors stores was 980 at the end of the quarter under review. Jimmy Choo had 182 retail stores, including concessions, at the end of the quarter. Further, Jimmy Choo operated 61 additional retail outlets, including concessions, through licensing partners.
Management now envisions first-quarter fiscal 2019 total revenue to be about $1,135 million, comprising incremental revenue of $140-$145 million from Jimmy Choo. Comparable sales for Michael Kors are expected to be flat with retail revenue to increase in the low single digits. Wholesale revenue to increase in the high single-digit, while licensing revenue to decline in the high single-digits.
Operating margin is projected to be approximately 15.2%. The company forecast earnings in the band of 90-95 cents a share, including anticipated benefit of 1-3 cents from Jimmy Choo.
For fiscal 2019, management projects total revenue to be approximately $5.10 billion, comprising incremental revenue of $570-$580 million from Jimmy Choo. Comparable sales for Michael Kors are expected to be approximately flat with retail revenue to increase in the mid-single digits. Wholesale revenue to decline in the mid-single digits and licensing revenue to decrease in the high single-digits.
Operating margin is expected to be roughly 17.7%. Management envisions earnings in the range of $4.65-$4.75 per share, including dilution from Jimmy Choo of approximately 5-10 cents.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter.
Michael Kors Holdings Limited Price and Consensus
At this time, KORS has a poor Growth Score of F, however its Momentum is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate that the stock is more suitable for momentum investors than value investors.
Estimates have been trending upward for the stock and the magnitude of these revisions looks promising. Notably, KORS has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.