Michael Kors Gives Investors Something to Cheer About — and It’s Not Jimmy Choo

Michael Kors fall 2017
Michael Kors fall '17 collection.
REX Shutterstock

Investors are loading up on Michael Kors Holdings Ltd. stock today after the firm pulled off a significant first-quarter earnings beat, bolstered by better-than-expected sales in North America and Europe. As of 11 a.m. ET, the company’s shares were up more than 20 percent, to $44.72.

Michael Kors — which recently raised eyebrows when it paid staggering multiples to acquire luxury footwear brand Jimmy Choo — produced Q1 earnings of $125.5 million, or 80 cents per share, on revenues of $952.4 million. The results represented year-over-year declines, 15 percent and 4 percent respectively, but were well above forecasts predicting earnings per share of 62 cents and revenues of $918.6 million. (Overall, comparable sales also declined 5.9 percent.)

In addition to the unexpected uptick in growth in North America and Europe, chairman and CEO John Idol suggested the firm’s Q1 results might be the first indication that its strategic plan, Runway 2020, designed “to reposition our company for future growth,” is taking hold.

These efforts are expected to drive improved financial performance as we generate even greater appeal for our fashion luxury assortments, deepen consumers’ connection with our brand and further elevate exceptional jet-set experience that we offer online and in our stores,” Idol told investors during a conference call. “It is still early in the process, but we have certainly begun to lay the foundation for future success. While we recognize that it will take time for our initiatives to bare fruit and meaningfully benefit our financial results, it’s encouraging that we have already seen early signs that our efforts are resonating with our consumers.”

Idol further cautioned that the year ahead will be one of transition. Undoubtedly, the addition and phasing in of the Jimmy Choo brand will add to the moving parts.

On July 25, Kors announced its plans to acquire the London-based luxury label for $1.2 billion, a price equal to about 17.5 times Jimmy Choo’s adjusted EBITDA for 2016.

Don’t think many would argue that [Michael Kors] underpaid and it remains to be seen what level of contribution they can achieve with Choo,” B. Riley & Co. LLC analyst Jeff Van Sinderen said last month.

Despite some mixed feelings on the deal, Idol today doubled down on his statements that the company plans to turn Choo into a billion-dollar brand and use the acquisition to form a “global fashion luxury group.”

[Our] acquisition of Jimmy Choo brings together two iconic companies [while] creating a platform for future acquisitions,” Idol said. “The foundation of our group will be built on fashion authority with craftsmanship and heritage at the core.”

He added, “Jimmy Choo embodies all of these elements and is an excellent fit for our group. The brand has been a leader in designing glamorous, innovative, expertly crafted footwear and accessories that have resonated with luxury trendsetters for more than 20 years.” (Idol plans to keep Jimmy Choo CEO Pierre Denis and creative director Sandra Choi at the label’s helm post-acquisition.)

Looking ahead, the firm predicts Q2 revenue between $1.035 billion and $1.055 billion, which includes a comparable sales decrease in the mid-single digits range. Diluted EPS are expected to be in the range of 80 cents to 84 cents.

For full year, the company expects total revenue of $4.275 billion and a comparable sales decline in the mid-single digits range.

Michael Kors’ outlook does not include any expectations related to the Jimmy Choo deal, as the transaction is not expected to close until the third quarter. Assuming the deal closes when expected, incremental revenue is expected to be $275 million for the second half of fiscal 2018. For fiscal 2019, the company expects incremental revenues of $570 million to $580 million.