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Michael Kors Reducing Discounts Is Far Off; Fiscal Year 2018 Outlook Is At Risk

Michael Kors Reducing Discounts Is Far Off; Fiscal Year 2018 Outlook Is At Risk

Wedbush believes fiscal year 2018 comp forecast of Michael Kors Holdings Ltd (NYSE: KORS) as “overly optimistic” after the luxury retailer guided fourth quarter well below Street expectations due to continued softness in its retail and wholesale divisions.

Quarterly Earnings And Guidance

“The contrast in guidance commentary — from down low-teens SSS in fiscal 4Q17, to a resumption of top-line growth by FY18 — appears overly optimistic, in our view,” analyst Morry Brown wrote in a note.

Despite reporting a third-quarter EPS beat, Michael Kors’ quarterly sales came in below the consensus forecast. The company also sees fourth-quarter EPS of $0.68–$0.72 on revenues of $1.035 billion to $1.055 billion, also below consensus estimate of $0.93/$1.11 billion.

Michael Kors guided fourth-quarter SSS at down low-teens, well below Street view of down 4.1 percent.

For fiscal year 2018, the company sees modest top-line growth, high-teens EBIT margin, and modest EPS growth, driven by new designs, expanded Jetset collection, footwear penetration and increased digital marketing spend.

“Given the quick turn implied with this outlook, we see significant risk to positive sales and earnings in FY18,” Brown highlighted.

Analyst's Commentary

The analyst, who has a Neutral rating on the stock, suspects further retrenchment in distraction and unit volume will be necessary before growth resumption.

The company also reiterated its initiative to reduce wholesale exposure and refresh its promotional cadence. Though it is good for long-term, Brown believes it will take time to work through customer buying habits and overhaul assortment to drive improvements in full-price selling.

“We believe the big picture outlook remains somewhat clouded based on (1) ongoing heavy promotions in its largest market, North America, (2) EBIT margins remain under pressure, across both the retail and wholesale divisions, and (3) higher AUR is unlikely to drive comps positive on its own,” Brown added.

At last check, shares of Michael Kors climbed 3.72 percent to $38.19. Brown also cut his price target to $36 from $45.

Image Credit: By Pepsida - Own work, CC BY-SA 4.0, via Wikimedia Commons

Latest Ratings for KORS

Jan 2019MaintainsMarket PerformMarket Perform
Nov 2018DowngradesOutperformPerform
Nov 2018Initiates Coverage OnOutperform

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