Strong consumer response to its footwear and accessories, in particular, led Michael Kors Holdings Ltd. to a solid third-quarter performance, Chairman and CEO John Idol said.
At press time, Michael Kors’ stock had climbed over 23 percent, to $49.76, in response to a Q3 sales and profit beat.
Revenue advanced 6.3 percent, or 9.9 percent on a constant-currency basis, to $1.4 billion, from $1.31 billion in the comparable quarter. Analysts had predicted sales totaling $1.36 billion. While earnings declined 3 percent year-over-year, they were well above forecasts. Q3 profit totaled $294.6 million, or $1.59 per diluted share (EPS). On a constant-currency basis, diluted EPS was $1.65. Market watchers had expected EPS of $1.46.
“We are pleased with our third-quarter results, as we delivered revenue, comparable-store sales and earnings growth ahead of our expectations,” Idol said in a release. “Our performance was driven primarily by strong consumer response to our luxury fashion product offering, particularly in our accessories and footwear categories, the continued momentum in our digital flagship business and outstanding growth in our international markets.”
The company said its comparable-store sales fell 0.9 percent in the quarter, while Wall Street had estimated that comps would decline by over 4 percent.
Management reaffirmed its FY16 guidance, expecting total revenue in the range of $1.13 billion to $1.15 billion, but noted that Q4 EPS is now expected to be 93 cents to 97 cents, below Wall Street’s consensus estimates for EPS of $1.00.
“We are excited about our upcoming spring collections, which embody design innovation and underscore Michael Kors’ fashion leadership,” Idol said. “In addition, we remain focused on further developing our digital flagship strategy as we offer our customers a seamless omnichannel experience, the build-out of our men’s business and leveraging our strong brand awareness to expand our business globally. We believe the continued execution of these strategic initiatives positions us well to deliver long-term growth.”
Analysts had been down on Michael Kors and other handbag-centric brands in recent months as the excitement of owning an “it” handbag seemed to die down and consumers began displaying “handbag fatigue.”
Cowen & Co. analyst Oliver Chen wrote in a Jan. 20 note: “We reiterate caution on Michael Kors, reducing our price target to $40 (old target was $46) on lowered multiple and estimates for outer years, given [that] survey results suggest Kors’ brand momentum may be waning,”
Canaccord Genuity Inc. analyst Camilo Lyon was also concerned about the brand ahead of Tuesday’s earnings report.
“We remain concerned that Kors’ handbag inventory remains heavy in the North America department-store channel,” Lyon wrote Monday. “Discussions with our industry contacts suggest the department stores are shrinking the dollars they are committing to the handbag category as excess inventory has been slow to work down this past holiday season.”
Following Tuesday’s earnings release, Chen reiterated a market perform rating on Kors.