The sell-off of shares of Michael Kors Holdings Ltd. is an example of just how hard it is to please investors these days.
At the close of trading on Wednesday, shares of Michael Kors were down 11.5 percent to $60.40. That’s despite the fact that the company seemed to easily beat Wall Street’s consensus estimates for the fourth quarter. Earlier in the morning, before the equity markets opened, Kors posted earnings results that swung back to the black from a year-ago loss.
Kors said net income was $44.1 million, or 29 cents a diluted share, on a revenue gain of 10.8 percent to $1.18 billion. Adjusted EPS was 63 cents. Wall Street was expecting adjusted EPS of 60 cents on revenues of $1.15 billion.
Looking ahead, a review of future expectations versus company guidance suggests that earnings are still within range.
For Kors, analysts were estimating fourth-quarter EPS at 88 cents on revenues of $1.09 billion. The company guided diluted EPS to between 90 cents to 95 cents, on revenues of $1.14 billion. For fiscal 2919, analysts pegged EPS at $4.74 on revenues of $5.01 billion. The company forecasted diluted EPS at between $4.65 to $4.75, on revenues estimated at $5.10 billion.
So why the stock selloff?
It looks as if investors had been expecting company guidance to be higher, given what appears to be a solid fourth quarter beat. More specifically, the fiscal year outlook was coming in at the lower end of the consensus estimate.
The company did note that higher spending for marketing of its Jimmy Choo brand would weigh on earnings in fiscal 2019. And Kors chairman and chief executive officer John D. Idol said on the conference call to analysts that the new elevated store concept, with an updated layout, shows that the “renovated locations are outperforming the balance of the chain.” Based on this, the company will invest in the Kors brand by accelerating its store renovation program, “with the goal of renovating 200 locations in the next two years,” he said.
Dana Telsey of Telsey Advisory Group said the fiscal 2019 outlook “appears conservative,” noting too that while comps growth for the Michael Kors brand of 2.3 percent was ahead of the consensus estimate for a 1 percent decline, comps were actually down 1.7 percent on a constant currency basis. She pointed out that company guidance for the year fell short of the consensus estimate at the midpoint. She said that “Kors’ strong momentum has stalled so far this year, and the conservative guidance provided may continue that pattern over the near term.”
Randal J. Konik at Jefferies said fourth-quarter results showed that the “brand is strong, new product in resonating, inventory is well controlled and management is thoughtfully investing to sustain long-term growth.” He also noted that the business throws off a lot of cash that can be used to grow the company, including more acquisitions, which Idol said the company would continue to explore with the aim of complementing its existing “luxury portfolio.”
What Konik didn’t like was that Jimmy Choo revenues at $108 million missed Wall Street’s estimates by $5 million. That said, Konik concluded: “We think management continues to look to under-promise and over-deliver.”
During the call, Idol said that the watch and jewelry category contributed to half of the comp-store decline on a constant-currency basis last year, but that other classifications “are very healthy.” He also said, “We’re eliminating our fashion jewelry business to bring in a fine jewelry business that’s going to significantly increase the [average unit retail].”
In terms of product offerings at the Kors brand, Idol said the company increased its level of fashion innovation and luxury offerings, with accessories seeing 65 percent of its spring assortment consisting of new styles, up from 20 percent last year. That drove higher AURs in the company’s retail channel. He said the company also “capitalized on the floral trend, offering prints as well as novelty texture through the use of embroidery, appliques, sequins and eyelets.”
In January the company began its Kors VIP loyalty program, which helped grow its global database by 24 percent versus a year ago. The company also ended the year with 41.5 million followers across social media channels, an increase of 14 percent versus a year ago, Idol said.
Turning to its Jimmy Choo brand, Idol said the company expects to growth the business 10 percent on a pro forma basis in fiscal 2019. That will be achieved in part through an increase in the pace of store openings, or about 30 net new locations in fiscal 2019. “Given Jimmy Choo’s significant global recognition, we believe there is meaningful opportunity to expand our global presence, with a particular focus on Asia,” Idol said. The ceo added that the company has expanded the design team for the Jimmy Choo brand as its sees the accessories category as a “pillar of our growth strategy.”