Shares of Michael Kors Holdings Limited (KORS - Free Report) have underperformed the industry in the past three months. The stock has gained 1.7%, underperforming the industry’s rise of 12.9%. Analysts pointed that year-over-year decline in the bottom line during the fourth quarter of fiscal 2018 hurt investor sentiment. Further, the company continues to witness dismal wholesale segment performance. Along with these, the contraction in margin adds to the woes.
To overcome these bottlenecks, this Zacks Rank #3 (Hold) company has been constantly deploying resources to expand product offerings, open stores and upgrade the e-commerce platform. The company’s project Runway 2020 strategic plan, which focuses on product innovation, brand engagement and customer experience, is well on track as well.
What Hurt the Stock?
Dismal Wholesale Segment Performance
We note that the wholesale segment continues to lack luster. After declining 8.9% in the third quarter of fiscal 2018, wholesale revenues were down 3.2% (or 6.1% on a constant currency basis) in the final quarter. The company now expects wholesale revenue decline in the mid-single digits during fiscal 2019.
The company has been strategically slowing down its promotional activity, which has resulted in lower shipments within the wholesale channel. Meanwhile, licensing revenues plunged 11.1% in the fourth quarter. The company expects the same to decline in the high single-digits on account of transition to a more elevated jewelry line and fashion watch trends.
Michael Kors continues to invest heavily in new store openings, expand existing outlets and fortify international operations, digital flagships and global infrastructure. As a result, operating costs are expected to rise, which may compress margins. Operating margin contracted 110 basis points to 13.1% in the final quarter of fiscal 2018. For fiscal 2019, management expects operating margin to decline 100 basis points to 17.7%.
Initiatives Adopted to Lift the Stock’s Performance
This London, UK-based company’s commitment toward deploying resources to expand product offerings, build “shop-in-shops”, and upgrade its information system and distribution infrastructure should drive sales. This along with the “Runway 2020” plan, cost containment efforts, inventory management, focus on e-commerce platform and accretive buyouts such as that of Jimmy Choo bode well. Moreover, Michael Kors is also expanding its product mix beyond handbags, into men’s, footwear and women’s ready to wear.
Meanwhile, the acquisition of Jimmy Choo has provided Michael Kors avenues for international growth, strong base in the luxury footwear segment and diversification of product portfolio. With a network of more than 240 stores, Jimmy Choo has a strong presence in Europe, the Middle East, the Americas and Asia.
Management sees opportunity to boost Jimmy Choo sales to $1 billion annually and operating margin rate growth in the low teens over the long haul. We believe that the company may pursue other such strategic buyouts in the future.
Michael Kors’ Runway 2020 strategic plan, which focuses on product innovation, brand engagement, fleet modernization, digital innovation and customer experience, has been progressing well.
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