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The 1 Thing Saving Michael Kors' Growth Prospects

By Dan Caplinger – Aug 8, 2018 at 11:03AM

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Find out how the retailer is working to move forward.

The retail business has been a tough one in recent years, and especially in the luxury goods space, competition has been fierce. After a long period of strength, Michael Kors Holdings (CPRI 0.75%) found itself on the outside looking in at newly ascending fashion icons, and the luxury retailer had to go through some major growing pains in trying to come up with a viable strategy to recover. Kors still has a lot of work to do, but one thing has proven to be a godsend in keeping its income statement looking strong: its acquisition of Jimmy Choo.

Coming into Wednesday's fiscal first-quarter financial report, Kors investors were optimistic that the company would be able to use Jimmy Choo to get its numbers moving higher. As it turned out, Kors really needed Jimmy Choo's contributions in order to deliver the results shareholders wanted to see. That's fine for now, but Kors will have to work harder to get better results from its legacy business as well if it wants truly sustainable growth.

Silver-tone Michael Kors store location as seen from interior of mall.

Image source: Michael Kors.

A nice start to fiscal 2019

Michael Kors' fiscal first-quarter results were extremely strong. Overall revenue jumped 26% to $1.20 billion, easily surpassing the 19% growth rate that most investors were looking to see from the luxury retailer. Net income soared by nearly half from year-ago levels to $186.4 million, and after accounting for some one-time items, adjusted earnings of $1.32 per share crushed the consensus forecast among those following the stock for just $0.95 per share on the bottom line.

There's no disputing the huge impact that Jimmy Choo's inclusion in Kors' results has had on the overall company. Revenue from the unit amounted to $172.7 million, accounting for 18 percentage points of the combined company's total growth. Comparable-store sales for Choo locations weighed in above what Kors had expected, with especially strong performance in its footwear category. Choo's biggest revenue contribution came from Europe, with only about 15% of segment revenue in Kors' core Americas region.

Meanwhile, Kors' namesake segments had more mixed performance. Retail revenue rose just 3%, slowing from the growth pace in the fourth quarter of fiscal 2018, and comparable sales were up just 0.2% even after factoring in more than two percentage points of upward support from favorable foreign currency impacts. Regionally, Kors' retail operations saw outright declines in Europe, and the Asia region, once a powerhouse, managed top-line growth of just 11% from year-ago levels. Licensing revenue continued its descent, falling another 5%, but the wholesale unit was a strong positive for Kors, posting revenue growth approaching 20% thanks to both fundamental and timing issues.

CEO John Idol sees Kors returning to the role it once played in the industry. "Our fashion leadership remains strong," Idol said, "which drove consumers to respond favorably to both new fashion introductions and core products." The CEO also pointed to the promise of the long-term strategy that the company has followed in using both the Kors and Choo brands successfully.

What's next for Kors?

Kors thinks it can sustain its positive momentum. Idol said simply, "We remain optimistic about our business for the remainder of fiscal 2019 and beyond."

That optimism showed up in an increase in the company's guidance for the full fiscal year. Kors boosted its full-year revenue estimate by $25 million to $5.125 billion, setting a new range of between $580 million and $590 million in Jimmy Choo revenue, which is $10 million higher than previously estimated. Comps for Kors will still be flat, but new earnings of $4.90 to $5 per share represent a $0.25 per-share increase in bottom-line guidance.

Shareholders celebrated the news, and the stock climbed 6% in early morning trading following the announcement. Now that Jimmy Choo has demonstrated its ability to be a game-changer for the company, Michael Kors now has to get its namesake business also moving forward more aggressively in order to take advantage of its new opportunity for sustained growth.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool has a disclosure policy.

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