Shares of Michael Kors Holdings Ltd. fell nearly 4 percent in after-market trading following the company’s lowering of fiscal 2017 guidance.
The company now expects diluted earnings per share in the range of $4.37 to $4.43 on a non-GAAP basis, excluding onetime costs, and $4.32 to $4.38 on a GAAP basis. That’s lower than the non-GAAP range of $4.56 to $4.64, or $4.51 to $4.59 on a GAAP basis, projected in August when the company reported first-quarter results.
John Idol, chairman and chief executive officer, said results “continued to be impacted by the declines in mall traffic and tourism in certain major cities, as well as our strategic decision to reduce sell-in of inventory to the U.S. wholesale channel.”
The reduction in guidance caused investors to send shares down to the $49.79 range in after-market trading. Shares had closed up 3.2 percent to $51.76 Thursday in Big Board trading. The company reported second-quarter results after trading closed for the day.
Despite the lowered guidance, second-quarter results were good, with the company besting Wall Street’s EPS estimate by 7 cents, although it only just met revenue expectations.
For the three months ended Oct. 1, net income fell 16.7 percent to $160.9 million, or 95 cents a diluted share, from $193.1 million, or $1.01, a year ago. Total revenues slipped 3.7 percent to $1.09 billion from $1.13 billion, which included a 3.4 percent decrease in net sales to $1.05 billion from $1.09 billion. The balance of revenue was from licensing income.
Wall Street was expecting EPS of 88 cents on revenues of $1.09 billion.
In the quarter, wholesale net sales fell 18.4 percent to $452.2 million. The company said retail net sales rose 12.1 percent to $597.2 million, driven mostly by 198 net new store openings since the end of fiscal 2016, including the 137 stores connected with the firm’s acquisition of operations in Greater China and South Korea. Comparable sales fell 5.4 percent in the period.
For the six months, net income fell 16.2 percent to $308 million, or $1.78 a diluted share, from $367.5 million, or $1.88, a year ago. Total revenues slipped 1.9 percent to $2.08 billion from $2.12 billion.
Idol told Wall Street analysts during a conference call, “Our results exceeded our expectations in the second quarter. We continued to deliver innovative luxury fashion product and expanded our brand footprint worldwide.”
He added that the company was “extremely pleased” with the launch of its Michael Kors Access wearable line of watches and fitness trackers, although the fashion watch category continued to remain soft in the quarter, and said that consumer reaction to the new fall handbag collections, citing the new iconic Mercer line, had “exceeded expectations.”
The digital flagship in North America continued to deliver double-digit sales increases, while the company has also made available digital flagships in many of its European businesses. The company added digital flagships in the U.K. and Germany at the end of the quarter, and since then has added sites in France, Switzerland, Spain and Italy. He said the company plans additional digital sites in 16 other European countries in spring 2017.
Idol also noted that traffic in Europe continued to decline in certain markets and said “we believe the softness in this business was due to continued consumer uncertainty related to Brexit” as well as other geopolitical issues. As for Asia, he said the company still expects the continent to represent a “significant growth opportunity for the company and will ultimately reach $1 billion in revenue.”
Another growth area remains its men’s business, which Idol said includes 244 sportswear and leather goods shop-in-shops within its wholesale doors globally.
Idol said the company continues to rebalance its business to increase the average transaction value in it stores, and to reduce the number of units sold through the wholesale channels. “While these actions will result in short-term revenue declines, we believe they will enhance our brand equity over the long term. We will use this rebalancing as an opportunity to emphasize and extend our categories in our lifestyle portfolio of products as well as to expand our business internationally,” Idol said.
For the third quarter, the company said it expects revenue in the range of $1.37 billion to $1.38 billion, with comps decreasing in the midsingle-digit range. Diluted EPS guidance was estimated at between $1.61 and $1.65.
Canaccord Genuity consumer analyst Camilo Lyon said the company is facing challenging macro-industry headwinds domestically and internationally. He has a “hold” rating on shares of Kors due to the uncertainty around consumer response to the planned reductions in promotions at the wholesale channels and the company’s reliance on secondary category growth initiatives — wearable line of watches, fragrance, men’s and international — to overcome the challenges facing the core business.