When I wrote about investor expectations for Michael Kors (KORS +3.71%) earnings earlier this week, I kind of thought that simply by my acknowledging the insane strength that the company has shown thus far, it would invariably falter. That turned out to be as far from reality as possible. Kors' earnings yesterday highlighted all of the good that the designer has offered without any of the weakness.
Kors grew revenue, saw a strong spike in comparable sales, and even managed to increase its already high margins. The earnings put a nice cap on a good week for the luxury sector, and Kors investors should be happy. Shares were up more than 3% during the day, and the strength should help the company keep on running for the next fiscal year.
Making the most out of every chance
Kors' success wasn't an accident or a stroke of good weather -- it was pure planning. The earnings started out strong, with comparable sales rising 36.7% on the back of the brand's continued strength. That foot-traffic increase was then buoyed by a rise in operating income, which hit 26% on the quarter. All that trickled down to earnings per share of $0.50, which was a 124% increase from last year's fourth quarter.
To manage all that growth, Kors really had to hit every opportunity square on the head. Comparable sales growth came mainly from a few areas, with women's handbags driving the bulk of the revenue increase. However, Kors management said that the real volume increase came from small leather goods, which both drive new customers into the store and can act as add-on items for existing customers. Along with the small goods, Kors saw a strong increase in watch sales, which bodes well for both it and Fossil, which provides Kors with timepieces.
Looking ahead
Turning to the forecast for the next few quarters, Kors is starting by focusing on its biggest business, North America. According to the conference call, the company is going to expand its retail store count from its current 231 locations by close to 50 new stores. That still gives the company a ways to grow, as management estimates that the North American market can handle at least 400 stores.
Beyond its retail expansion, Kors also plans to push forward on two other fronts. First, it's going to expand its shop-in-shop business from 500 North American locations to 1,000 locations. That's going to help the business take advantage of the strong demand on the domestic front. Last quarter, comparable sales in North America grew by 35%.
Second, Kors is going to pull its online operations in-house. Currently, the company relies on Neiman Marcus for its e-commerce business, but it wants to change that in fiscal 2014. That's going to add to the company's bottom line, and should have an impact on gross margin as well.
One last point that investors need to watch out for is the coming promotional environment. Management said once again that it was expecting to have to go on the offensive price-wise, but that the time hadn't yet come. At some point, margins are going to take a hit, but that time hasn't come yet.
Overall, Kors is well poised to take advantage of the momentum that it's built up. As long as the company can continue to keep out in front of competitors, it should have no trouble bringing strong returns to investors.
