Michael Kors Starts Fiscal 2019 in Style

Michael Kors Starts Fiscal 2019 in Style
Michael Kors Starts Fiscal 2019 in Style

By S onya Bells
Aug 10, 2018. 05:54 PM


Michael Kors Stock Rose after Strong First-Quarter Results

Snapshot of the series

Michael Kors (KORS) stock has been surging ever since the company announced its first-quarter
2019 results on August 8. KORS cruised well ahead of both the top-line and bottom-line
expectations during the quarter and also raised its earnings guidance for the full fiscal year. As a
result, its stock price increased 6.7% on August 8 and another 3.3% on the next trading day.

Adjusted earnings per share stood at $1.32, which was $0.37 more than estimates. Total sales
increased 26.3% YoY (year-over-year) to $1.21 billion, beating the consensus by $70 million. The
results relate to the three-month period ended June 30, 2018.




Read part two and three of this series to know more about the company’s performance in the
first quarter. Read part four for a view of the revised fiscal 2019 guidance, recent stock price
movement, and analyst action on the company after Q1 results.

Valuations

KORS is currently trading at a one-year forward price-to-earnings (or P E) ratio of 14.3x versus a
three-year average of 11.1x. It is, however, trading at the middle of its 52-week P E range of
11.2x to 17.3x.



https://marketrealist.com/2018/08/what-boosted-michael-kors-margins-in-q1
Michael Kors Starts Fiscal 2019 in Style
Rival Tapestry (TP R) continues to be slightly expensive and is valued at 17.2 times the next-12-
month earnings. Other apparel and accessories stocks are also trading at a premium to KORS.
P VH (P VH), V.F. C orp (VFC ), and Ralph Lauren (RL), for instance, are currently valued at 16.6x,
25.7x, and 20.5x, respectively.

About Michael Kors

Established in 1981, Michael Kors is a luxury fashion brand that designs and sells handbags,
apparel, and fashion accessories. The company operates close to 850 retail stores, including
concessions, in more than 100 countries.

In July 2017, KORS announced the acquisition of Jimmy C hoo for $1.2 billion. Jimmy C hoo is a
premier luxury footwear and accessories brand with a strong presence in Europe, Asia, and North
America.

ETF investors seeking to add exposure to KORS can consider the iShares Edge MSC I Multifactor
C onsumer Discretionary ETF (C NDF), which invests 2.3% of its portfolio in the company.

Strength in Jimmy Choo Footwear Boosts Michael Kors' Q1 Top Line

Discussing Michael Kors first-quarter top line

Michael Kors Holdings (KORS) reported results for the first quarter of 2019 on Wednesday, August
8. The company delivered one of its strongest quarters in the past three years. Its total sales
increased 26.3% YoY (year-over-year) to $1.20 billion. Wall Street, in comparison, was expecting a
19.4% YoY increase in sales to $1.137 billion.




About 67% of the increase in sales, around $172 million, was due to the contribution from the



https://marketrealist.com/2018/08/what-boosted-michael-kors-margins-in-q1
Michael Kors Starts Fiscal 2019 in Style
Jimmy C hoo integration. Jimmy C hoo exceeded analyst expectations as well as company
guidance during the quarter as the brand’s footwear business delivered a strong performance.
The business also benefitted from a shift in the timing of wholesale shipments from the second
quarter to the first quarter.

What drove Michael Kors brand sales

Revenue from the company’s namesake brand Michael Kors increased 8% YoY during the
quarter. Retail sales increased 3.2% YoY to $639.5 million, driven by nine net new store openings
and comparable sales growth of 0.2%. However, comparable sales growth was mainly due to the
positive impact of currency. Excluding the foreign exchange impact, sales comps declined 2.1%.

Retail sales grew at a low-single-digit rate in the Americas driven by low-single-digit growth in
comparable-store sales. Asia retail also remained strong as growth was fueled by new store
openings and low-single digit improvement in comps. Europe retail sales, however, declined during
the quarter as the company took steps to reduce inventory and lower promotional sales.

Wholesale revenue jumped 19.5% YoY during the quarter to $362.8 million, driven by strength in
overall business and a shift in wholesale shipment timing from the second to the first quarter.

ETF investors seeking to add exposure to KORS can consider the First Trust C onsumer
Discretionary AlphaDEX Fund (FXD), which invests 0.6% of its portfolio in the company.

Read the next section for a view on the quarter’s profitability.

What Boosted Michael Kors' Margins in Q1?

Michael Kors outperforms earnings expectations for the 13th
straight quarter

Michael Kors (KORS) reported a 46% YoY (year-over-year) increase in Q1 2019 earnings to $1.32.
The company did better than Wall Street expectations of a 5.6% YoY increase to 95 cents per
share. This was the 13th consecutive bottom-line beat for the handbag maker.

“We are encouraged by our first quarter performance, with growth in revenues, gross margin,
operating margin as well as earnings per share all exceeding our expectations,” said John D. Idol,
the company’s chair and C EO. “Our global fashion luxury group continues to see the benefits of
our long term growth strategy which is driven by both the Michael Kors and Jimmy C hoo brands,”
he added.




https://marketrealist.com/2018/08/what-boosted-michael-kors-margins-in-q1
Michael Kors Starts Fiscal 2019 in Style
What drove the gross margin?

First-quarter adjusted gross profit increased 31.1% to $753.2 million, while the gross margin
improved 230 basis points to 62.6% of sales. This improvement was driven by a 170-basis-point
improvement in Michael Kors’ gross margin and a 60-basis-point benefit from the Jimmy C hoo
acquisition.

Gross margin at the Michael Kors retail business improved 110 basis points, while that of the
wholesale business improved a whopping 530 basis points driven by lower costs and reduced
allowances.

Operating margins

Adjusted operating income increased 56% to $233 million, while the operating margin improved by
370 basis points. Michael Kors’ operating margin increased 450 basis points to 20.2%, driven by
gross margin expansion and cost leverage. Jimmy C hoo’s operating margin stood at 14.3% of
sales and was 80 basis points dilutive to the consolidated operating margin of the company.

ETF investors seeking to add exposure to KORS can consider the Guggenheim S& P 500 Equal
Weight C onsumer Discretionary ETF (RC D), which invests 1.4% of its portfolio in the company.

KORS Stock Surges on Strong Results and Optimistic Guidance

Michael Kors’ fiscal 2019 guidance

As discussed in this series, Michael Kors (KORS) did better than the consensus expectations on
both the top and bottom lines during the first quarter of 2019. Buoyed by the first quarter results,
the management also raised full fiscal 2019 guidance. It raised the upper and the lower end of the



https://marketrealist.com/2018/08/what-boosted-michael-kors-margins-in-q1
earnings guidance by 25 cents and now expects $4.90 to $5.00 in full-year earnings per share.

Total sales are now projected at $5.125 billion versus $5.1 billion guided earlier. $580 million to $590
million could come from the Jimmy C hoo acquisition. Michael Kors’ comps are likely to stay flat as
guided earlier.




The stock price impact of results

Investors reacted positively to Michael Kors’ strong results and positive guidance. Its stock soared
6.7% on August 8 and another 3.3% on the next trading day. The company is now sitting at YTD
(year-to-date) gains of 15%.

C ompetitor Tapestry (TP R) has also gained 8% so far this year, while apparel players P VH C orp
(P VH) and VF C orporation (VFC ) have surged 14% and 29%, respectively. The S& P 500 Apparel
and Accessories Index has gained 18.8% YTD, outperforming the broader S& P 500 Index at
6.7%.

Analyst action

Michael Kors’ strong results were followed by a host of target price increases from Wall Street
analysts. Brokers that raised their price targets included:

         C owen and C ompany raised its target price from $74 to $78.

         Telsey Advisory raised its target price from $67 to $75.

         Nomura raised its target price from $80 to $85.

         RBS raised its target price from $68 to $74.



https://marketrealist.com/2018/08/what-boosted-michael-kors-margins-in-q1
C anaccord Genuity raised its target price from $84 to $90.

There weren’t any rating changes for the company. ETF investors seeking to add exposure to
KORS can consider the Guggenheim S& P 500 Equal Weight C onsumer Discretionary ETF (RC D),
which invests 1.4% of its portfolio in the company.




https://marketrealist.com/2018/08/what-boosted-michael-kors-margins-in-q1
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