Canaccord Genuity Sees Further Downside Risk For Michael Kors

In a report published Thursday, Canaccord Genuity analyst Camilo Lyon discussed

fourth quarter results which underscores his concern that the brand is weakening. Lyon noted that weak traffic in North America was the key driver of the company's negative 6.7 percent comps (versus his expectations for flat) which was "exacerbated" by a slow-down of tourism in key markets. In addition, the analyst argued that Michael Kors also suffered from a pack of product differentiation and "newness." "Despite a couple of one-time issues that negatively affected comps (e.g. port delays and e-commerce fulfillment issues due to weather disruptions) we believe the underlying trend will continue to deteriorate through fiscal 2016," Lyon wrote. Lyon continued that expectations for a mid-single-digit growth in North American wholesale is "too optimistic" and subject to downward revisions. As such, the analyst is not convinced the company's 2016 earnings per share guidance of $4.40 to $4.50 fully captures the downside potential if North American wholesale turns negative. Finally, the analyst sees further risk to gross margins as Michael Kors "seems unwilling" to re-calibrate its supply of product into the market to match current levels of demand and/or contract its distribution. Looking past 2016, Lyon sees further downside earnings risk in 2017 when the company's retail square foot growth plans reaches a ceiling and comp growth is the sole driver of retail. As such, the analyst suggested investors shouldn't "chase" shares following Wednesday's "sharp" 24 percent decline in shares. Shares remain Hold rated with a price target lowered to $48 from a previous $64.