5 Things Michael Kors' Management Wants You to Know

Don't-miss quotes from the fast-growing luxury lifestyle retailer's fiscal first-quarter 2015 conference call.

Aug 15, 2014 at 10:30AM

Those who follow Michael Kors (NYSE:KORS) have likely already read the company's first-quarter fiscal 2015 earnings results, which were released last week.

The fast-growing luxury lifestyle brand easily breezed by both revenue and earnings estimates, and increased its fiscal 2015 revenue and earnings guidance. However, the market punished the stock, no doubt due to the forecast slowing for comparable-store sales growth for both the current quarter and the full year, as well as concerns about the company's margins.

Kors' earnings conference call provided some additional color on its results. Here are five things from the call you should know:

Kors Ad

Source: Michael Kors.

1. Kors sees significant opportunities in menswear

Fom CEO John Idol's prepared remarks:

And you will see [a greater emphasis on the men's business] clearly displayed in our new soon-to-open SoHo flagship store, which will feature an entire floor devoted to men's. From there we will begin to test freestanding men's stores next year and believe that there may be the potential for as many as 500 men's stores worldwide over the long term.

To lead the development of this important strategy we recently brought Mark Brashear on board ... Mark's background with Hugo Boss and Nordstrom makes him a perfect fit to lead our men's extension. With the right team in place I believe that we have the potential to be leading global menswear brand. 

According to Kors' management, there's plenty of growth potential left on the women's side, both with new products and with the rather nascent international expansion. However, the company's long-term growth potential should be greatly enhanced if Kors is as successful on the men's side as it has been with high-end women's fashions and accessories.

Later in the call Idol revealed that the flagship store in the SoHo section of New York City mentioned above is slated to open in October.

2. Management wants investors to understand that gross margins were unsustainable

There was a lot of back-and-forth on the call about the company's margins. This is a key issue for investors to understand, so let's take a look at gross margin and operating margin separately (in the next section). The following quote is from Idol's response to an analyst's request that the company clarify the main driver for the expected decline in fiscal 2015 gross margin.

As we said earlier on the call we believe that there's just some more normalized selling rates that are happening inside the stores. Those [previous margins] were unsustainable gross margins. We told everyone that for multiple quarters.

Kors' guidance for both its fiscal second quarter and its full-year 2015 calls for gross margin to drop 50 basis points -- half a percentage point -- from the respective year-ago periods. The company's gross margins have been running in the low 60% range, so half a percentage point is nothing to be concerned about, but a faster than expected reduction in gross margin, in my opinion, could be cause for concern.

The discounting of merchandise is usually the main driver of reduced gross margins in a retail environment, and merchandise is usually discounted when it isn't selling as well as anticipated. Fashion is an especially fickle business, and what's "hot" can turn rather quickly into what's passe -- at least among a certain sizable segment of the population. Most indications are that Kors has plenty of time to shine, but it's always smart to monitor gross margins. 

Kors' gross margin actually expanded a bit in the first quarter to 62.2%, up from 62% in the year-ago period. 

3. Management wants investors to understand that operating margins were unsustainable

Idol's response to an analyst's question:

[W]e have said all along from again, the day we went public. We never believed that a 30% operating margin was a sustainable margin for the company. And by the way, we don't want that. ... we don't think that's the right way to run our business.

Idol elaborated on the importance of investing in the business and the company's plans to continue doing so. Long-term investors should be OK with a slightly decreased operating margin, as long as the reduction comes from spending intended to fuel long-term growth. Kors has been increasing its store base, expanding select stores, converting to or expanding existing shops-in-shops, and improving its distribution centers and technology. Additionally, it now plans to more aggressively enter the men's market. So it shouldn't surprise anyone that operating expenses as a percentage of revenue have ticked up, and that the company foresees that continuing.

Kors expects second-quarter operating margin to decrease 200 basis points -- or 2% -- from the year-ago period, and for full-year margin to decrease 150 to 200 basis points from fiscal 2014. The company's operating margin was 30.1% in the first quarter, down from 30.8% in the year-ago period.

As for the long-term operating margin, Idol said "we think that 28% to 29% range is a more sustainable range for us." He also noted that this is still "best in class" -- and he's right. For context, Coach, the company most similar to Kors in terms of product lines, sports a 26% trailing-12-month operating margin -- and Coach is well-known for its fat margin. Ralph Lauren has a 15% margin.

4. More emphasis will be put on jewelry and watches, which are powering results

This quote is from Idol's prepared remarks:

[We] rolled out an additional 30 watch and jewelry shop-in-shops in department stores worldwide during the first quarter.

We now have 155 watch and jewelry shops globally and continue to believe that there is an opportunity for approximately 500 shop-in-shops globally over the long term.

The company cites strength in jewelry and watches for helping to drive strong results across all segments -- retail, wholesale, and licensing. Idol added that jewelry has been the main driver in increasing the average transaction size.

Later in the call, Idol added:

We're going to upsize approximately 41 stores and the primary reason we're doing that is really we're enlarging the handbag spaces in the stores, we're enlarging watches and jewelry, footwear and our women's ready-to-wear and the early results of that are quite strong.

Investors should get a better idea over the next couple of quarters as to how well these strategies are paying off.  

5. Kors believes its e-commerce site can significantly help grow the brand 

This quote is from Idol's prepared remarks:

We are also on track to bring our North American e-commerce site in-house this fall which we see as a tremendous opportunity to grow our brand. 

In response to an analyst's question, Idol further expounded:

We're on track to launch the e-commerce site in the beginning of September ... This site looks phenomenal and as I said to you previously, we really did not think we were best-in-class in our current e-commerce experience.

... I just might add that we view this as very substantial for the business long term. We ultimately think that this can be up to 20% of our global revenues generated in the retail side from e-commerce. 

I'm on board with the company's optimism about the potential of its relatively new e-commerce site. Statistics show that consumers are increasingly embracing online shopping, and this is generally more true of affluent shoppers.  

Foolish final thoughts
There's a wealth of information an investor can glean from tuning into conference calls, as the numbers in earnings releases never tell the entire story. In Kors' case, the news about how Kors plans to keep its growth game intact over the long-term doesn't show up in the current numbers, but was discussed at length during the call.

Don't miss this stock that has been performing like Kors, but is much less well known. 
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. A new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement. Its stock is up more than 100% over the last year, but it's still early in the game. Click here for full details.

Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coach and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers