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Michael Kors Expands Distribution; Beats Q1 Estimates

Growing brand awareness and distribution, such as expansion into new markets, is a strategic initiative that is helping the firm post quarterly profits.

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Michael Kors Holdings Ltd. sees no slowdown ahead.

Reporting an 82.1 percent increase in first-quarter profits, the accessories and fashion brand on Tuesday forecast a 15 to 20 percent comparable-store gain in the second quarter and a 20 percent increase for the full year. Kors predicted diluted earnings per share in the range of 62 to 64 cents in the second quarter, with total revenue estimated between $695 million and $705 million. For fiscal year 2014, the company guided diluted EPS in the range of $2.67 to $2.69, with total revenue between $2.8 billion and $2.9 billion.

Shares of Kors rose 3.7 percent Tuesday to close at $70.39 in Big Board trading.

The growth is being fueled by expanding distribution worldwide and the introduction of new product categories. During the first quarter, Kors opened stores in Brazil and India.

Kors chairman and chief executive officer John Idol told analysts during a conference call following the posting of first-quarter earnings results that Kors now has its first store in Village Mall in Rio de Janeiro.

“We have seen strong demand among Brazilian tourists traveling globally, and therefore believe this will be an excellent market with the Michael Kors brand. The store marks our further development of this region and we believe that we’ll ultimately have 40 concessions and freestanding retail stores in Central and South America,” Idol said.

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The ceo also told Wall Street analysts that the company last month opened its first Michael Kors store in DLF Emporio Luxury Mall in India through its licensed partner Genesis Luxury Fashion.

“The New Delhi store is the first venture into this growing market with a sophisticated consumer who will appreciate glamour, luxury and the versatility of the Michael Kors brand. We believe this market will play a key role in the long-term global growth of the company,” Idol said.

The company is still in the very early stages of growth in Asia, working with regional partners to open stores particularly in Greater China and other countries often referred to as “emerging Asian Tigers,” such as South Korea and Singapore.

Rounding out the BRIC countries (Brazil, Russia, India and China), Kors does have a handful of stores in Russia, with two in Moscow, one in Kotelniki City, one in Rostov and one in St. Petersburg. It also has two in neighboring Soviet Republics that were once part of the Soviet Union, one each in the Ukraine and Kazakhstan, according to the company Web site.

Idol said the company opened 24 stores during the quarter, bringing the total to 75 store openings since the end of last year’s first quarter. The current quarter ended with 328 company-owned global retail stores and 442 Michael Kors stores worldwide, including licensed locations.

For the three months ended June 29, net income was $125 million, or 61 cents a diluted share, from $68.6 million, or 34 cents, a year ago. The consensus estimate was 49 cents. Total revenue rose 54.5 percent to $640.9 million from $414.9 million, which included a net sales gain of 55.1 percent to $616.2 million from $397.4 million.

The company said retail sales rose 51.5 percent to $325.7 million, driven by a 27.3 percent gain in comps and 75 net new store openings. Wholesale net sales jumped 59.3 percent to $290.6 million, while licensing revenue rose 40.7 percent to $24.6 million.

Also helping the quarter’s results was a healthy gross profit increase of 58.3 percent to $397.3 million.

Idol said, “Our exceptional first quarter financial results demonstrate the sustained strong demand for the Michael Kors luxury brand.”

Idol said the North American wholesale business rose 50 percent, while in Europe sales increased 144 percent as “growing brand awareness led to comparable-store sales growth of 56 percent.”

Growing square footage is just one part of the story. While the company said it can open about 500 shops-in-shop globally for watches and jewelry, it also launched a Michael Kors fragrance and beauty collection this month. Starting in North America, the line will expand globally to 20 countries this year, followed by South America and Asia next year. This push is expected to “increase our global penetration in fragrance and cosmetics,” Idol said.

Camilo Lyon, analyst at Canaccord Genuity, said that while first quarter results were outstanding, the “company will have to execute well over the next two to four years in order to realize” its store growth objectives. Lyon also noted that Kors has been generating “comp growth of 40 percent-plus for the past two years. We do not expect this rate of growth to continue.” He also noted that expansion into international markets has its share of challenges. “Broad international acceptance for U.S. brands has been elusive. While early signs for Kors are encouraging, we acknowledge the inherent risk of creating a global brand. If the international growth were to stall, we would have to reassess our long-term growth thesis,” Lyon said.

Rebecca Duval, analyst at BlueFin Research Partners, said, that it appeared once again that the “women’s handbag business continued to perform the best of all product categories” and that there was a strong selling trend in women’s apparel.

The Kors handbag and apparel trends compare favorably to the strong sales at privately held Tory Burch and are in contrast to the 12 percent drop in fourth-quarter income reported by handbag and accessories firm Coach Inc. last month. Kors, Tory Burch and Coach are viewed as competitors in the American accessible luxury space, although Coach remains by far the dominant player in the handbag category.

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