Michael Kors Holdings Ltd. shares shot up almost 15 percent in trading Monday after the company raised its fiscal-year outlook. While fewer promotions and more full-priced selling led to the boosted outlook, Kors cautioned on third-quarter margin pressures.
The company lifted its fiscal year 2018 outlook after beating Wall Street’s expectations for the second quarter ended Sept. 30, helped in part by reduced promotional activity. The company posted adjusted earnings per share of $1.33 on revenues of $1.15 billion for the second quarter, besting Wall Street’s consensus estimate of 83 cents on revenues of $1.04 billion.
That news was enough to raise fiscal-year guidance for a diluted EPS range of $3.85 to $3.95 on revenues of $4.59 billion, which includes between $215 million and $225 million in incremental revenue from the Jimmy Choo brand. The company recently closed on its acquisition of the footwear firm, and affirmed that it believes it can grow the brand’s revenue to $1 billion globally. The revised guidance compares with prior estimates of $3.62 to $3.72 in August when the company posted first-quarter results and an initial projection of $3.57 to $3.67 on May 31 when the company reported fourth-quarter results.
But the company also said during a conference call to Wall Street analysts that it was being cautious in its forecasts for the third quarter, which was guided to a diluted EPS range of $1.22 to $1.27 on revenues at between $1.36 billion and $1.39 billion, which includes $110 million of incremental contribution from the Jimmy Choo brand.
John D. Idol, chairman and chief executive officer, told analysts during a conference call that the strategy to reduce promotional activity resulted in 40 percent fewer promotional days, which he said had a negative impact on comparable sales. The reduction helped the brand “benefit [during the quarter] from increased [average unit retail] in our digital flagships and lifestyle stores, driven by midsingle-digit growth in accessories and double-digit growth in our ready-to wear.” Idol also attributed higher AUR to strong consumer response to new product innovation in the second quarter.
Looking ahead, Thomas Edwards, executive vice president, chief financial officer, chief operating officer and treasurer, explained to analysts that the third quarter will “anniversary the highest level of promotional activity in the prior year. In retail, our new promotional strategy will result in a 66 percent reduction in promotional days in our digital flagship and lifestyle stores compared to the prior year. We anticipate that will be a significant headwind to retail sales.”
What could be a hiccup to the third quarter didn’t faze investors, as shares of Kors closed at $54.62.
Instinet’s Simeon Siegel noted, “After the strong second quarter, third quarter’s light forecast would prove concerning though we note that Kors consistently sets low bar and (beatable) guides.”
Wells Fargo’s Ike Boruchow said, “The Kors narrative continues to improve. The company delivered on their second straight meaningful beat and raise, with management now highly focused on improving the quality of sale within their business as they eye top- and bottom-line inflection next fiscal year.”
As for the second quarter, Idol on the call attributed the “better than expected” results to progress on the company’s strategic initiatives plan, called Runway 2020. That plan is focused on three pillars: product innovation, brand engagement and customer service.
During the quarter, the company “capitalized on the strong sweater dress trend, offering an expanded array in a variety of seasonal styles and colors,” Idol said. Also doing well is the brand’s smartwatch category, with the new Sofie — Idol described it as lightweight and feminine, with a pavel bezel and a full round display — the top-selling watch in the company’s stores. He also said mirrored lenses in sunglasses continue to be a top performer in eyewear.
In men’s, sportswear and luxury leather goods saw strength in the quarter. The ceo also noted that backpacks remained the number-one selling silhouette in leather goods. The positive momentum in men’s keeps the company on track to reach “$1 billion in sales over time,” Idol said.
Looking ahead, Idol said the company is in the “initial stages” of renovating 100 locations globally. The refresh — which the company describes as a new retail concept — is essentially a move to a lifestyle approach in showcasing the components of the Michael Kors brand.
According to the ceo, the concept “reflects a refined take on glamour and a modern engaging environment. This new concept will feature salons that showcase our accessories and footwear, women’s wear, and men’s wear collections, while enhancing our sales associates’ ability to provide consumers with a unique and elevated styling experience.”
Idol added that while there is a limited number of stores that reflect this “new design concept, we are pleased with the initial response. I look forward to sharing more details about our fleet renovation plans with you in the coming quarters.”
Also on the horizon is the launch of the Bristol group, a top-handled bag crafted from pebbled leather and embellished with grommets, inside ties and a removable lock and key detail. Bristol will be featured in the brand’s national ad campaign. Also upcoming is the Voyager, a new group that represents an evolution of a bag the company refers to as the brand’s “jet set tote.”
The company also said it expects to close between 40 and 50 stores for fiscal year 2018.