For years, luxury retailers defied the sluggish economic recovery with market-beating performance, and Michael Kors Holdings (NYSE:CPRI) stood out as one of the best performers in the space. Recently, though, Kors' huge growth run has slowed, and coming into its fiscal fourth-quarter financial report Wednesday morning, shareholders worried the company's challenging trends might further hold back gains in profit and sales. In a departure from past quarters, Kors failed to meet investor expectations on the earnings front, and concerns about future guidance sent the stock falling to new multiyear lows. Let's look more closely at Michael Kors and why shareholders are more nervous than ever.
Kors can't live up to the hype
As in past quarters, Michael Kors' results didn't look all that bad. Total sales rose almost 18% to $1.08 billion, matching the amount anticipated by most of those following the stock. A 13% spike in net income, to $182.6 million, equated to earnings of $0.90 per share. Yet for the first time in a long while, the earnings number missed expectations; even though it was by just a single penny per share, the result flew in the face of past perceptions that Kors encouraged lower estimates from analysts in order to set a lower bar for it to overcome.
A closer look at the results, though, shows the cause for investor panic over Kors' future. Comparable-store sales decreased by a substantial 5.8%, and even after taking into account the stronger dollar, comps fell 1.7% from a year ago. Kors particularly felt the full extent of the damage close to home, with North American comparable-store sales dropping 6.7%. The retailer also failed to get the usual lift from its international segment, as comps in Europe declined by 5.6% and Japanese comp growth slowed to just 12.4%.
Even with the poor results in comparable-store sales, Kors still found ways to grow overall, thanks to its expanding network of stores. Total revenue in North America climbed 14%, and sales in Europe climbed by more than a third. Japan, where Kors still has a limited presence, posted the best raw growth numbers, with sales climbing 43% even when factoring in the strength of the U.S. dollar.
CEO John Idol refused to let the sluggish results dampen his enthusiasm. "Fiscal 2015 marked another year of sales and earnings growth in excess of 30%," Idol said in the earnings press release, and "while we were faced with a number of headwinds in the fourth quarter, we were pleased with the strong performance across our segments and geographies."
Will Kors recover?
Idol also tried to put the best spin possible on the current fiscal year. "Looking at fiscal 2016, this will be a year of strategic investments," Idol said, "as we continue to develop our powerful platform to support the numerous growth initiatives that are now under way." Idol specifically pointed to expansion, e-commerce, new stores, and wearable technology as potential growth areas.
Yet Kors' guidance left much to be desired in most investors' minds. First-quarter sales should come in between $930 million and $950 million, bringing overall growth down to just 1% to 3% -- well below the 18% growth rate investors wanted. Even taking currency impacts into consideration, Kors thinks comps will fall by mid-single-digit percentages for the quarter, and earnings per share of $0.74 to $0.78 would be about a quarter below investors' $1.03 projection. Kors' full-year fiscal 2016 outlook isn't much better, with forecast total sales of $4.7 billion to $4.8 billion rising by just 7.5% to 10% from fiscal 2015. Earnings guidance of $4.40 to $4.50 per share is similarly below the $4.70 per share consensus.
The market quickly punished Michael Kors for its poor outlook, sending the stock down 12% in the first hour of pre-market trading after the announcement. With shares potentially headed for levels not seen since 2012, long-term investors need to assess whether Kors has what it takes to rebound from its weakness. As the share price tumbles, the potential payoff from a turnaround gets even larger for investors who have the courage of their convictions.