Canaccord Is 'Cautious' Heading Into Michael Kors' Report

Canaccord Genuity’s Camilo Lyon maintains a cautious stance on Michael Kors Holdings Ltd KORS ahead of the company’s fiscal third-quarter results release on February 7, while maintaining a Buy rating on the company and a price target of $45.

FQ3 Expectations

The analyst expects the company to report its FQ3 EPS at $1.65, marginally ahead of consensus, with -5 percent comp, in line with the guidance and consensus, while warning that there could be downside to the estimates, given the “broad-based traffic challenges trends.”

“We are projecting gross margin expansion of 97bps (in line with guidance) but we will not be surprised if it comes in below expectations as our channel checks (online and in-store) indicated that KORS remained highly promotional during the holiday season, which could diminish the benefits from favorable geographic and channel mix shift,” Lyon stated.

In addition, the analyst believes the footwear category performed poorly, while the SG&A deleverage estimate of 519 bps reflects incremental expense associated with bringing the China business in-house, as well as continued investments in digital flagships, international expansion and global infrastructure.

On the other hand, Lyon expects Michael Kors to continue to manage its inventory “prudently.”

Reasons For Caution

The analyst explained that the cautious long-term stance was driven by factors such as the volatility in North American wholesale and impact of efforts to improve profitability by not running promotions.

“Partially offsetting these factors are (1) the company’s ability to generate high free cash flow (~$860 million in F16) and (2) the potential for a sale of the company,” Lyon noted.

The analyst also expects guidance to be at risk, based on the belief that traffic and overall demand trends have decelerated to a larger extent than expected in Q3 and into Q4, which puts the full year guidance at risk.