Michael Kors faces a tough 2017 as holiday comps plunge


Luxury retail has been a hard place to make money lately, and Michael Kors Holdings (NYSE: KORS) has struggled to regain its footing after the high-growth favorite fell out of fashion among investors. Despite some signs of a potential recovery, Kors stock has recently fallen back toward its lowest levels in years, and shareholders remain fearful about the state of the retail industry.

Coming into Tuesday's fiscal third-quarter financial report, Kors investors didn't expect a turnaround in sales, but they wanted to see profit growth from the key holiday season. Kors didn't entirely disappoint on that front, delivering higher earnings. But falling sales and weak guidance weighed on investor sentiment about the future. Let's take a closer look at Michael Kors and what its results mean for investors going forward.

Kors' comps collapse

Michael Kors' fiscal third-quarter results were mixed, but the negative news seemed to outweigh the positive. Total revenue fell 3.2% to $1.35 billion, which was slightly weaker than most investors had expected to see. Net income fell 8% to $271.3 million, but a dramatic reduction in the number of outstanding shares Kors had helped boost its earnings per share to $1.64, topping the consensus forecast by $0.01 per share.

Looking more closely at Kors' report, what stunned some investors was the retailer's decline in comparable store sales. Kors said that comparable sales fell 6.9% during the holiday quarter, which was even worse than what the retailer had reported in the previous quarter. It took 193 net new store openings since the year-ago quarter to push overall retail net sales up by 9%, including the acquisition of previously licensed Chinese and South Korean stores. The strong dollar again weighed on Kors' results, but the downward impact was less than a percentage point both on comps and on revenue growth.

Kors' other segments were even weaker. Net sales from wholesale activity plunged 18%, continuing an adverse trend we've seen in previous quarters. Licensing arrangements produced 23% less revenue for Kors than they did in the year-ago quarter, accelerating on the downside as well.

From a geographical perspective, Kors faced challenges nearly everywhere. In the Americas, revenue fell 7%, with currency effects actually helping the retailer very slightly. European sales were also down 7%, facing a much heavier currency headwind of four percentage points. Asian revenue was up almost 90%, but that was again due to Kors' Chinese and South Korean acquisitions.

CEO John Idol tried to put a positive spin on the results. "We delivered earnings per share results that were in line with our expectations," Idol said, "and we continued to focus on our growth pillars, which are centered on consistently delivering innovative fashion products for our customers and enhancing consumer engagement with the Michael Kors brand worldwide." The CEO also pointed to strong showings for its fall and holiday handbag collections and initiatives elsewhere as encouraging signs for the business in the long run.

RELATED: Notable stores that no longer exist like they used to:

8 PHOTOS
Notable stores that no longer exist like they used to
See Gallery
Notable stores that no longer exist like they used to
Signage is displayed at a Filene's Basement store in Chicago, Illinois, U.S., on Wednesday, Nov. 16, 2011. Bankrupt discount-clothing retailer Syms Corp. and its Filene's Basement LLC unit won court approval to conduct going-out-of-business sales to liquidate their inventory. Photographer: Tim Boyle/Bloomberg via Getty Images
A Circuit City store is seen in Dallas, Texas in this file photo taken June 19, 2008. U.S. electronics retail chain, Circuit City is considering closing at least 150 stores and cutting jobs, the Wall Street Journal said on October 20, 2008, citing people familiar with the company. REUTERS/Jessica Rinaldi/Files (UNITED STATES)
NORRIDGE, IL - JANUARY 30: KB Toys signage is visible atop the entranced to its store January 30, 2004 in Norridge, Illinois. Pittsfield, Massachusetts-based KB Toys says it will close 375 stores nationwide including this Norridge, Illinois store. (Photo by Tim Boyle/Getty Images)
ALEXANDRIA, VA - AUG 14: An Ames Department Store stands August 14, 2002 in Alexandria, Virginia. Ames Chairman and CEO Joseph R. Ettore in announced that the discount chain would close all 327 store locations leaving 22,000 unemployed. (Photo by Mike Theiler/Getty Images)
The Blockbuster movie rental store is open for business in the Denver suburb of Broomfield, Colorado April 6, 2011. Dish Network Corp won Blockbuster Inc in a bankruptcy auction for about $320 million, boosting the satellite TV provider's online features and marketing reach. Dish, the second-largest U.S. satellite TV company after DirecTV, trumped at least three other bidders, including activist investor Carl Icahn, for the one-time leader in video rentals. REUTERS/Rick Wilking (UNITED STATES - Tags: BUSINESS)
A Sports Authority store is shown in Encinitas, California on March 2, 2016. Sports Authority Inc. said it had filed for Chapter 11 bankruptcy protection and hired liquidators to begin closing up to 200 of its 463 locations. REUTERS/Mike Blake
Customers walk into the Hollywood Video store that is scheduled for closing in Springville, Utah, U.S., on Wednesday, May 12, 2010. Movie Gallery Inc., the owner of Hollywood Video stores, plans to shutter operations and liquidate assets after filing for bankruptcy for the second time since 2007. Photographer: George Frey/Bloomberg via Getty Images
HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

What's next for Kors?

Yet the problem is that Kors still faces an uphill battle for now. Idol believes that the difficult conditions that held down comps in North America and Europe "will continue throughout the spring season, as we face reduced traffic trends in shopping malls, currency fluctuation, uncertainty surrounding certain political changes in European countries, and the implementation of our reduced promotional cadence in North America."

Once again, Kors had to cut its guidance for fiscal 2017. For the full year, the company now expects $4.48 billion in sales, with a high single-digit percentage drop in comparable sales for the year. Adjusted earnings of $4.15 to $4.19 per share represents a $0.22 to $0.24 per share drop in guidance compared to Kors' previous forecast, even taking into account the recent reductions in share count that Kors has achieved lately.

For the fiscal fourth quarter in particular, Kors warned of poor conditions. The retailer expects revenue of between $1.035 billion and $1.055 billion, and comps are expected to fall in the low-teens. Adjusted earnings of $0.68 to $0.72 per share are disappointing, and both figures are well below the $1.11 billion in sales and $0.93 per share in earnings that investors had hoped to see.

As a result, Kors saw its stock fall dramatically on the news, dropping more than 7% in pre-market trading following the announcement. Again, Michael Kors investors will have to wait longer before the luxury retailer can demonstrate its ability to mount a stronger turnaround effort.

10 stocks we like better than Michael Kors Holdings
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Michael Kors Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

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

Read Full Story

Can't get enough business news?

Sign up for Finance Report by AOL and get everything from retailer news to the latest IPOs delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.