Will Michael Kors Finish Off Fiscal 2014 With Another Record-Setting Quarter?

Michael Kors (NYSE: KORS  ) , the world-renowned designer and retailer of handbags, apparel, and accessories, has watched its stock outperform the overall market in 2014 and earnings have played a key role in its rise. The company has just announced that it will release its fourth-quarter earnings on May 28 and the current expectations call for its fourth record-setting quarter of the fiscal year. Let's break down the most recent earnings release, the expectations for the upcoming report, and go over comments made by one of Michael Kors' manufacturing partners, Fossil (NASDAQ: FOSL  ) , to determine if we should be initiating long-term positions right now.

Source: Michael Kors' Facebook

The third-quarter blowout
On Feb. 4, Michael Kors released its third-quarter report and the results soared past analysts' expectations; here's a summary:

Metric Reported Expected
Earnings Per Share $1.11 $0.86
Revenue $1.01 billion $859.94 million

Source: Benzinga

Michael Kors' earnings per share increased 73.4% and revenue increased 59% year-over-year, driven by a 27.8% growth in comparable-store sales; this marked the 31st consecutive quarter of positive comparable-store sales growth. Also, it is worth noting that this was the best third quarter in the company's history and the first time it achieved $1 billion in revenue in a single quarter.

Source: Michael Kors' Instagram

Gross profit increased 61.6% to $619.50 million and the gross margin showed great strength, expanding 100 basis points to 61.2%; this is very impressive given the highly promotional retail environment of the holiday season.

Also, 56 new stores were opened during the quarter to bring its total store count to 533 worldwide, which also brought it closer to its long-term expansion goals.

Overall, it was an absolutely incredible quarter for Michael Kors and its stock reacted by rising more than 17% in the next trading session. The shares continued higher over the next few weeks, reaching a peak of $101.04 on Feb. 25, but have since fallen and now sit nearly 10% below this high.

Expectations & what to watch for
Fourth-quarter results from Michael Kors are due out before the market opens on May 28 and analysts currently expect significant growth on both the top and bottom lines; here's an overview:

Metric Expected Year Ago
Earnings Per Share $0.68 $0.50
Revenue $821.28 million $597.15 million

Source: Estimize

These expectations call for earnings per share to increase 36% and revenue to rise 37.5% year-over-year; these estimates seem well within reach after the performance we saw in the third quarter, but other than the key metrics, there will be three other statistics and updates to watch for:

Source: Michael Kors' Instagram

  1. It will be very important for Michael Kors to provide guidance for the first quarter of fiscal 2015 that is within or above analysts' expectations; currently, the estimates call for earnings per share of $0.79 and revenue of $817.68 million, which represent year-over-year increases of 29.5% and 27.6%, respectively.
  2. While providing adequate first-quarter guidance, it will also be crucial for Michael Kors to provide full-year guidance for fiscal 2015 that is within or above expectations; these estimates currently call for earnings per share of $3.79 and revenue of approximately $4 billion.
  3. Watch for the number of new stores opened during the quarter and the company's total store count at the end of the quarter. Michael Kors had said that it plans to have 700 company-owned locations over the long term, which would bring its total count to well over 1,000 with licensed locations, so investors will want to make sure that it is still on track.
I believe Michael Kors will surpass analysts' expectations once again while also satisfying the three elements above, which will cause its stock to rise back toward its previous highs and set new highs in the coming weeks; for these reasons, I would be a buyer of Michael Kors right now and would add to the position on any weakness in the days leading up to the report.

A sign of strength for Michael Kors
Fossil is a leading designer, manufacturer, marketer, and distributor of fashion accessories and apparel worldwide, with presences in over 150 countries. On top of manufacturing its own product lines, Fossil also manufactures products for numerous other brands that include the company in focus here, Michael Kors.

Source: Fossil

On May 13, Fossil released first-quarter earnings results which gave great insight into the condition of the industry and Michael Kors in particular; here's a summary of the report:

Metric Reported Expected
Earnings Per Share $1.22 $1.17
Revenue $776.50 million $771.55 million

Source: Benzinga

Source: Fossil

Fossil's earnings per share increased 0.8% and revenue increased 14% year-over-year, driven by sales growth across all of the company's segments. The company noted that the watch category showed the most strength, with sales increasing 17% and both the Fossil brand and its partner brands "delivering solid increases."

Although Fossil did not speak of Michael Kors in the earnings release, it mentioned the brand numerous times on the conference call; here's two of the most notable comments:

Michael Kors continued to be a strong driver of growth and the brand is gaining significant momentum in many of our international markets. We expect this strength to be ongoing as we continue to expand the brand's presence in our global network. -- Kosta Kartsotis, Chairman & CEO

We have a great relationship with the Michael Kors company. The business is very, very strong right now. We are really focused on putting strategies and resources in place in order to develop the business all over the world. -- Kosta Kartsotis, Chairman & CEO

As you can see, Fossil had great things to say about Michael Kors and it is as committed as Michael Kors is to growing its brand worldwide. This is a strong indicator going into Kors' upcoming earnings release and further supports the idea of investing in it today.

The Foolish bottom line
Michael Kors is one of the greatest growth stories in the market today and it is gearing up to release record-setting fourth-quarter results. The current estimates seem quite attainable for a brand with the momentum of Michael Kors and I believe this will propel it to its 10th consecutive earnings beat and send shares much higher. Foolish investors should strongly consider initiating positions right now and holding onto them for the long term.

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