Michael Kors Holdings Ltd. reported a sharp drop in first-quarter profits as a result of fewer shoppers at the mall and a decline in tourism, although the results beat Wall Street estimates.

Investors weren’t happy with the numbers, especially the firm’s guidance for the second quarter and fiscal 2017, and sent shares of Kors down 2.8 percent to $48.71 in trading Wednesday.

For the three months ended July 2, net income fell 15.7 percent to $147.1 million, or 83 cents a diluted share, from $174.4 million, or 87 cents, a year ago. On an adjusted basis, excluding one-time costs connected with its acquisition of the firm’s Greater China licensee, net income was $156 million, or 88 cents a diluted share. Total revenue inched up 0.2 percent to $987.9 million from $986 million, which included a 1.1 percent increase in net sales to $957.3 million from $947.3 million. The balance was from licensing income.

Wall Street was expecting earnings per share of 74 cents on total revenues of $953 million.

One problem that occurred during the quarter was that the wholesalers were very promotional, which in turn forced Kors to lower its prices in its own stores to compete, thus dragging gross margins down. John D. Idol, chairman and chief executive officer, said it would remove itself from all store couponing and all department store friends and family sales. Idol warned investors that the wholesale business would decline as the company cuts back on wholesale shipments.

Idol said he felt that customers were becoming confused as to the value of the Michael Kors brand with multiple promotions and it was negative for the brand image.

RBC Capital Markets analyst Brian Tunick said, “While units sold remain strong in the double digits, clearly the decline in Kors average unit retail over the past few years has investors worried that the brand has lost some of its status in the aspirational luxury handbag market.” He also noted that Coach is pushing units prices and now has 40 percent of its bags selling at over $400.

By segment, retail net sales rose 7.6 percent to $562.9 million, driven mostly by 221 net new store openings since the end of the year ago first quarter, including 145 stores associated with the company’s recent acquisitions in Greater China and South Korea and the consolidation of the Latin American operations. Comparable-store sales fell 7.4 percent. Wholesale net sales fell 7 percent to $394.4 million. Licensing revenue fell 20.9 percent to $30.6 million.

The licensing revenue drop was mostly due to the declines in the watch business. While Idol was enthusiastic about the upcoming smart watch launch, he conceded on the earnings conference call that smart watches wouldn’t offset the decline of the overall watch business.

Wall Street was less than thrilled with the company’s outlook as the company tried to give a positive spin, yet also lowering some guidance.  “Overall, we are on track to deliver on our revenue and earnings per share goals for the year,” Idol said.

For the second quarter, the company forecast diluted EPS in the range of 84 cents to 88 cents on expected revenues of between $1.07 billion to $1.09 billion. Consensus is at $1.03.

For fiscal 2017, the company guided diluted EPS to between $4.51 and $4.59, or $4.56 to $4.64 on a non-GAAP basis excluding one-time costs, on revenue expected to be flat versus the prior year. The company forecast a comp sales decline in the mid-single digit range, which is worse than the previous guidance for a decline of low single digits.

“We continue to believe the brand is overdistributed,” said Citi Research analyst Paul Lejuez, “And while the company is doing the right thing by reducing exposure to the wholesale channel, we believe much of the damage has been done (first-quarter 2017 sales per square foot in the U.S. are down approximately 30 percent versus first quarter 2015.)” Lejuez said he expects the stock to be down given the weakness in retail and reduction in rest of the year guidance.

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