Bernstein Upgrades Michael Kors, But Says Core Brand Challenges Persist

Bernstein dropped its bearish stance on Michael Kors Holdings Ltd KORS, but said risks remain. 

The Analyst

Analyst Jamie Merriman upgraded Michael Kors from Underperform to Market Perform.

The Thesis

Michael Kors has a more balanced risk-reward profile at current valuation levels, Merriman said in the upgrade note. 

Still, key concerns surrounding the core Michael Kors brand are still in place, "as the brand turnaround remains elusive and as the margin recovery in retail has been difficult to maintain," the analyst said. 

Not including the recent $2.1-billion acquisition of Versace, the analyst said she anticipates flat to low single-digit growth in the retail and wholesale segment for the core Kors brand and expects the company’s licensing segment to continue to decline.

Kors reported a second-quarter sales miss that sent shares plunging over 15 percent last week. 

Comps for Michael Kors continue to decline, falling 1.3 percent in Q2, and Google trends data also fails to show evidence of brand traction, Merriman said. 

“On the margin front, management had successfully pulled back on promotions for four quarters, resulting in higher retail margins, but this has proved short-lived, as a fashion miss in Q2 2019 led to higher markdowns and a reversal of this improvement." 

The Price Action

Michael Kors shares were down 0.1 percent at $47.75 at the close Monday. 

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Photo by See-ming Lee/Wikimedia.