Image: Michael Kors.
Investors in hard-hit luxury retailer Michael Kors Holdings (CPRI -0.11%) came into the holiday season with low expectations, but that gave Kors a great opportunity to defy skeptics and produce solid results in the key period at the end of the calendar year. Just as fellow accessories specialist Coach (TPR 0.03%) recently gave investors some long-awaited good news, Kors shareholders were hoping that its fiscal-third-quarter financial report on Tuesday would show some signs of a turnaround.
Kors did indeed get over the lowered bar during the quarter, and investors celebrated, despite the fact that the retailer still has plenty of work to do to put in a full recovery. Let's take a closer look at how Michael Kors Holdings did and what's ahead for the luxury retailer going forward.
Why Kors investors are excited
Michael Kors' third-quarter results managed to allay investors' fears that the retailer's long slowdown would continue. Revenue jumped 6.3% to $1.40 billion, doubling the growth rate that most of those following the stock had expected from Kors. The company's net income fell 3% to $294.6 million, but because of the extensive stock repurchases that the retailer has made over the past year, earnings of $1.59 per share were both up 7% from the year-ago quarter and ahead of the consensus forecast by $0.13 per share.
Looking more closely at the numbers, Kors is clearly moving in the right direction, although it didn't quite get to where investors want it to be. Comparable-store sales remained weak with a decline of 0.9%, but that was far better than the 8.5% drop that Kors suffered during the previous quarter. Moreover, when you adjust for the impact of weak foreign currencies, comps actually rose 2%. Nevertheless, Kors is still relying on expansion to produce growth, and it brought 114 new stores into its network over the past year.
Kors' main source of strength remains outside the U.S., and the Japanese market is by far its strongest grower. Sales in the Americas rose just 0.4%, but European sales climbed 14% even on a dollar basis. Japanese revenue soared 59% in dollar terms. Weakness in the euro cost the company almost 15 percentage points of growth in Europe, and the falling yen resulted in a nine-percentage-point reduction in Kors' growth rate in Japan.
CEO John Idol pointed to Michael Kors' lineup of accessories for the holiday season. "Our performance was driven primarily by strong consumer response to our luxury fashion product offering," Idol said, "particularly in our accessories and footwear categories." The CEO also noted that much of Kors' progress came from "the continued momentum in our digital flagship business and outstanding growth in our international markets."
What's next for Kors?
Idol has high hopes for 2016. The CEO pointed to Kors' spring collections as driving further interest in the brand, and the retailer is still working to capitalize fully on its efforts to utilize all of its sales channels fully.
Yet Kors' guidance followed its usual pattern of appearing underwhelming, setting a low bar that the retailer can hopefully surpass. For the fiscal fourth quarter, Kors expects revenue of $1.13 billion to $1.15 billion, resulting in earnings of $0.93 to $0.97 per share. Both figures are below the consensus estimates among investors, and calls for flat comparable-store sales also aren't particularly encouraging.
Still, investors have seen better signs from competitors. In its earnings release in late January, Coach reported its first year-over-year increase in overall revenue in 10 quarters. Coach experienced continued pressure in North America, but the company managed to post higher sales internationally even despite seeing a five-percentage-point headwind from the strong dollar. Kors investors hope that Coach's improvement indicates strength in the luxury retail market that will carry over throughout the industry.
Optimism about the results was clear from the 18% jump in Kors' share price in pre-market trading following the announcement. With a relatively successful holiday season under its belt, Kors has many investors looking for a continued turnaround from the luxury retailer for the remainder of 2016.
