Michael Kors posts stronger quarter, but weaker guidance

michaelkorsPremium apparel and accessories retailer Michael Kors has posted a better than expected fourth quarter but has disappointed the market on flat FY19 forecasts.

Delivering its financials for the quarter ended 30 May in the US overnight, the designer handbag giant said it expects flat comparable sales growth in the next fiscal year and diluted earnings per share to be between $4.65 – $4.75 – just within consensus estimates.

Shares fell six per cent in the hours after the announcement, despite a surprising bump in fourth quarter sales, up 10.8 per cent to US$1.18 billion.

Net income for the three months ended 31 March was $44.5 million, up from a $26.8 million loss this time last year.

Fourth quarter comparable sales were up 2.3 per cent on strength in accessories, footwear and men’s categories, but fell 1.7 per cent on a currency corrected basis.

Michael Kors has been investing heavily in transitioning its business model following the acquisition of Jimmy Choo last year, with chairman and chief executive John D. Idol saying on Wednesday that a solid foundation had been created.

“We created a global luxury group with the acquisition of Jimmy Choo and completed the first year of our Runway 2020 strategic plan for the Michael Kors brand, ending the year significantly ahead of our expectations,” he said.

“Looking to fiscal 2019, we have a number of initiatives planned to drive growth in both of our luxury brands.

“Overall, we are well-positioned to deliver long-term growth and enhance shareholder value by executing on the strategies in place for both Michael Kors and Jimmy Choo,” Idol continued.

The company expects building momentum to deliver first quarter revenue of around US$1.13 billion, with a US$140-US$145 million contribution from Jimmy Choo’s circa 182 stores.

FY19 revenue is expected to be around $5.1 billion, which would be an eight per cent increase on the US$4.72 billion recorded for FY18.

Michael Kors’ wholesale business struggled in FY18, with revenue down 7.7 per cent to US$1.64 billion, although retail revenue was up 5.4 per cent to US$2.7 billion.

Comparable sales decreased 3.7 per cent for the financial year on a currency corrected basis.

GlobalData managing director Neil Saunders said that the addition of Jimmy Choo had masked weakness in Michael Kors sales figures for FY18.

“While the headline growth number from Michael Kors looks strong … it is flattered by the addition of Jimmy Choo sales; when these are stripped out, the growth plummets to a lacklustre 0.6 per cent,” Saunders said.

“This anemic underlying growth rate comes off the back of a dire performance last year when revenues plunged by 11.2 per cent. Taking account of all these things, the fashion brand is ending its fiscal year with soft growth.”

Store renovations, expansion into new luxury concepts, a renewed focus on e-commerce and the launch of a new loyalty program have emerged as key pillars of the company’s 2020 strategic plan.

But it continues to negotiate divergent regional trends, with Asia emerging as the strongest growth region in FY18, offsetting ongoing weakness in its largest market, the Americas.

Asian sales increased 17.5 per cent to US$137.7 million in the fourth quarter and were up 33.7 per cent to US$469 million for the year.

In comparison, Americas sales declined by 2.5 per cent to $US$342.8 million in the fourth quarter and by two per cent to US$1.67 billion for the year.

“Perhaps the most damning figure is the Americas retail sales number,” Saunders said.

“A particularly worrying outcome given the 18 per cent decline posted in the prior year. In our view, this number clearly indicates that Michael Kors is not back to full strength and still has a lot of work to do on its proposition.”

Encouragingly, retail growth and the addition of Jimmy Choo bolstered margins in FY18, resulting in a 14.5 per cent increase in gross profit.

Jimmy Choo sales were $107.9 million worldwide in the fourth quarter and US$222.6 million for the full year, with Europe and the Middle East driving turnover.

There were 1,011 stores in Michael Kors business as at 31 March, including 829 Michael Kors stores.

UPDATED – 11:36 AEST

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