Watch Out Below? Piper Jaffray Cuts Michael Kors To Underweight

In a report published Friday, Piper Jaffray analyst Erinn Murphy downgraded shares of Michael Kors Holdings Ltd KORS to Underweight from Neutral with an unchanged $38 price target, despite the company reporting a sales and earnings per share beat in its first-quarter print.

According to Murphy, the challenging pressures (declining high-ticket sales, negative traffic trends, "normalized" brand demand) seen at Michael Kors' retail level could spill over to the wholesale business over the next six to nine months. The analyst continued that retail comps have been negative for two quarters while retail productivity fell 13 percent in the quarter (worse than a 7 percent decline seen in the prior quarter) while at the same time the brand's "momentum is slowing."

"Retail trends are a six to nine month leading indicator of wholesale," Murphy further explained. "We are already hearing about sell-through rates slowing at wholesale. A deceleration in wholesale (approximately 50 percent mix) concerns us given the size and margin profile it carries."

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Looking forward, Murphy suggested that even if the company continues to exceed retail expectations, it is a "near-term fix" that could be "detrimental" for margins overtime given the negative high single-digit comp trend.

Buckingham: L Brands Margins Also Under Pressure

Kelly Halsor of The Buckingham Research Group commented in a note that L Brands Inc LB also faces a tough selling environment that could pressure margins, despite an enviable 3 percent same-store sales growth in July.

According to Halsor, L Brands' merchandise margins at Victoria's Secret dipped in July where swim and beauty products underperformed as consumers found similar products at lower price points elsewhere. As such, the company "may have to rethink" its pricing strategy which could lead to margin declines in the near term

Halsor also suggested that the company's inventory is "moving slower than anticipated" as the company's inventory was flat at the end of July versus a 6 percent decline at the end of June.

Bottom line, the analyst is "incrementally more cautious" around any third-quarter guidance that may even come in below the Street's estimate which will add additional pressure on the stock.

Shares remain Neutral rated with a price target lowered to $80 from a previous $88.

Image source: Nic Taylor, Flickr