Is the Worst Over for Michael Kors?

Image source: Michael Kors.

Luxury retailer Michael Kors Holdings (KORS 1.50%) has seen its stock perform terribly over the past couple of years, as fickle shoppers stopped supporting the company's impressive growth rates and sent high-growth stock traders scurrying for the exits.

Coming into Wednesday's fiscal second-quarter financial report, Michael Kors investors think that the retailer will see continued declines in earnings as sales growth slows to a near standstill. Yet amid the gloomy outlook both for it and for industry peers like Coach (COH +0.52%), some are starting to think that at current levels, Kors stock might already reflect all the potential bad news that the retailer is likely to see, making it a potential bargain for value investors.

Let's look more closely at Michael Kors and what we're likely to hear from the retailer when it releases its latest report.

Stats on Michael Kors Holdings

Data source: Yahoo! Finance.

Can Michael Kors earnings lift the stock?
In recent months, investors have once again cut their views on Michael Kors earnings, cutting fiscal second-quarter projections by nearly a dime per share and reducing future estimates for fiscal 2017 by about 3%. The stock hasn't bounced back from big losses earlier in the year, but it has stopped falling as fast, with a decline of just 2% since late July.

Michael Kors' fiscal first-quarter results in August actually created some short-term enthusiasm about the retailer's long-term prospects. Sales climbed 7%, and even a 7% net income decline still produced earnings that were more than a dime per share better than most investors were looking to see. Even a substantial drop in comparable-store sales wasn't enough to prevent investors from thinking that the worst might be over for the luxury retailer, providing positive sentiment that has become increasingly rare in recent years.

In addition, Kors has started to attract attention from investors who are well known for making aggressive value calls. David Einhorn and his Greenlight Capital firm opened new positions in Michael Kors in August, and in his eyes, Kors "has multiple avenues of continued growth, including its international business and footwear." Einhorn blames the company's share-price decline in part on a winter product line he called "repetitive" as well as difficulties with a distribution center shutdown, and he believes that the fall product line looks a lot better and should be able to drive positive results going forward. With the stock having fallen so far, other value investors have also started taking a closer look at Kors.

Still, there's no denying that Michael Kors has a long way to go before it can actually declare victory on a potential turnaround. Efforts to reach out to a wider swath of customers, such as its men's segment expansion and its recent investment in its e-commerce platform, should help to bring incremental success stories to Kors' results. Yet in the long run, Kors has to get earnings moving back in the right direction, and that will require not only smart business management of the entire company but also the restoration of the Kors brand as a mark of quality and prestige. In order to do that, Kors will have to reverse some reputational damage that outlet-mall locations and other discounting practices have done in the past.

Fortunately, Kors has the resources it needs to stand up to competition and to move in whatever strategic direction it chooses. With no debt and considerable amounts of cash on its balance sheet, Kors can consider a wide variety of options, including strategic asset acquisitions or more widespread stock buyback activity. By contrast, Coach had almost $900 million in debt on its balance sheet at mid-year, and although it also had considerable cash on hand, Coach arguably doesn't have quite the same level of flexibility in considering its future direction.

In the Michael Kors report, investors will want to get a better sense of where the company sees itself going forward. With most of those following the stock expecting another fairly poor quarter from a fundamental standpoint, Kors has the potential to give shareholders another impressive stock price boost if it can surprise investors with unexpected outperformance. In the long run, Kors will have to restore its once-sparkling reputation in order to get back to the growth trajectory it once enjoyed.