A Michael Kors store front.

Tuesday was a banner day for shareholders of Michael Kors Holdings Ltd.

Following the reporting of quarterly results, shares of the fashion firm skyrocketed 21.5 percent to $45.25, adding more than $1 billion of value to the company.

Kors is testing the $1,000 handbag market and said the early response from consumers has been positive.

According to John D. Idol, chairman and chief executive officer, the company “had tremendous sell-throughs on this product, which we’re very excited about. It’s an expensive product averaging approximately $1,000 on a bag, and that’s really showed us the power of the brand and the customers’ desire when the product is right. And that product, by the way, is made 100 percent in Italy, and so we’re really going after product that has craftsmanship as we’ve talked about in our whole brand positioning.”

Idol made those comments Tuesday morning during the company’s conference call to Wall Street after it reported first-quarter earnings results that bested Wall Street’s consensus estimates. Idol also spoke about the company’s plan to become a global fashion luxury group, and its planned acquisition of the Jimmy Choo brand.

For the three months ended July 1, net income fell 14.7 percent to $125.5 million, or 80 cents a diluted share, on a total revenue decline of 3.6 percent to $952.4 million. Excluding one-time charges, adjusted diluted EPS was 90 cents. Wall Street was expecting 62 cents a diluted share on revenues of $918.6 million.

The company also raised full-year fiscal 2018 guidance and projected diluted EPS at $3.62 to $3.72, up from prior guidance of $3.57 to $3.67 on May 31 when it posted fourth-quarter results.

And while the early read was “encouraging” enough to raise guidance, Idol did acknowledge that the initiatives are “still early in the process,” meaning that fiscal 2018 will continue to remain a “transition year.”

Last month, the company said it would acquire the Jimmy Choo brand for $1.35 billion, which is set to close in the third quarter. Idol, who said the high-end luxury brand can reach $1 billion in revenue over time, spoke about working with Jimmy Choo ceo Pierre Denis and creative director Sandra Choi in building the brand’s presence online, expanding its retail footprint and accelerating growth in the accessories and men’s categories. Idol also said the Jimmy Choo brand has “strong cash flow generation.”

Thomas J. Edwards — who holds the titles executive vice president, chief financial officer, chief operating officer and treasurer — said the free cash flow generation of Jimmy Choo would be immediately accretive on a cash flow basis, although dilutive to EPS in fiscal years 2018 and 2019 before turning accretive to EPS in fiscal 2020. He also said the expectation is for “incremental value of approximately $275 million for the second half of fiscal 2018,” with incremental value at $570 million to $580 million for fiscal 2019.

Edwards said Michael Kors also generates “significant free cash flow,” and is committed to maintaining an “investment-grade” credit profile. He told Wall Street that the priority once the deal closes would be the use of free cash flow for debt repayment so it can “rapidly de-lever” to achieve its targeted adjusted leverage ratio of between 2.0 to 2.25 times.

Jefferies analyst Randal J. Konik said, “Results and outlook were better than expected, but what’s most important is there are definitive signs management’s strategic formula is working.” Wells Fargo analyst Ike Boruchow said, “On the heels of their recent Jimmy Choo acquisition, the [Michael] Kors story is beginning to gain some clarity, as management has taken their medicine and begun to take the right steps to improving their brand positioning.” He has a “Market Perform” rating on the stock.

During the call, Idol also said the company in the fall will introduce globally a “major new fragrance” called Sexy Ruby. That’s on top of the expansion of the presence of the Michael Kors brand in women’s ready-to-wear, footwear, men’s sportswear, men’s leather goods and in its Access smartwatch offerings. The chairman also said that products performing well are those that have opportunities for customization and personalization. “Consumers continue to take advantage of the opportunity to personalize their leather goods through our monogramming services, which we offer in our digital flagships and select retail stores,” Idol said.

The initiatives are all part of the company’s Runway 2020 strategic plan, which is aimed at elevating product innovation, brand engagement and customer experience to turn around the company’s fortunes. He said the women’s ready-to-wear business is “very, very strong,” while footwear is also seeing great response.

As for its core handbag offerings, the company has been pulling back on promotions and exiting select wholesale doors. Idol noted that the company is taking out “hundreds of millions of dollars” of products from the marketplace for Michael Kors handbags. “That is going to create a bit more scarcity and we believe a bit more desire,” Idol said.

He also said that backpacks are a favorite among men and women, which is impacting the women’s tote business. And he said that with different payment plan options becoming available, there’s less need for consumers to carry cash and, in some cases, even credit cards. The chairman added that has had an impact on larger wallet sales as the smaller counterpart has become more popular among consumers.

For the balance of the year, the company is planning on $200 million in capital expenditures for select new store opening, renovations to its retail store fleet and investment in information system enhancements. It also expects one-time charges of $100 million to $125 million over the next two years for the closure of 100 to 125 stores. It expects to shutter between 20 to 40 stores in fiscal 2018, primarily in the fourth quarter.


The Jimmy Choo brand will become part of the Michael Kors portfolio during Q3.  Shutterstock / Kobby Dagan


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