Herb Greenberg Talks Michael Kors, SolarCity and Share Buybacks

TheStreet.com and CNBC's Herb Greenberg was a very special guest on Benzinga's #PreMarket Prep show on Wednesday, May 28.

Greenberg brings over 40 years of financial media experience and is one of the most respected and vocal journalists covering the stock market today.

Jumping straight in to it, Greenberg discussed Michael Kors' KORS fourth quarter results, which were reported on Wednesday. The company solidly beat analysts' expectations on revenue and earnings per share but shares were little changed after the opening bell.

Greenberg “red flagged” shares of Michal Kors back in April through his Reality Check service, and Wednesday's earnings report merely confirmed his negative views on the stock.

'Reality Check' is a subscription-based service managed by Greenberg and is intended for serious investors looking to minimize risk and gain access to premium research.

Greenberg noted that Michael Kors reported gross margins of 59.9 percent that fell below analyst expectations. Gross margins also fell short of last year's 60.1 percent in the first quarter last year.

Michael Kors reported that its fourth quarter revenue rose 53.6 percent year over year to $917.5 million.

Additionally, Michael Kors guided for a slightly “lower-than-expected” margin in the current quarter.

“It was really lagging the revenue growth,” Greenberg explained before adding that this could serve as an indication that Michael Kors has engaged in discounting activity.

“There is a heck of a lot of discounting going on at a company that you wouldn't expect to see discounting in,” Greenberg argued before speculating that analysts may come out and defend the company's gross margin.

See also: Herb Greenberg Weary On SolarCity Couponing

Many companies had introduced discounts in their product selling prices in an attempt to appease investors and make results look more attractive.

In Michael Kors' case, according to Greenberg, the company previously stood out as an outlier. Michael Kors has outperformed its peers over the past few quarters and survived in an environment where mall traffic has declined, and otherwise stellar retailers like Macy's M are facing challenges.

Until now.

“In order to keep that going, they have to discount,” Greenberg argued. “They have to discount more. And you don't want to see discounting in a growth company”

Greenberg insisted on talking about SolarCity SCTY while on the topic of discounting.

SolarCity issued a press release on Wednesday to promote a partnership with Groupon GRPN in which SolarCity is offering a $400 discount to new customers through the group-deal site.

Greenberg has previously covered SolarCity and his bearish views and initiated a “red-flag” alert on the stock back in January. Despite a bearish view on SolarCity, Greenberg said that Wednesday's announcement “made my jaw drop.”

Greenberg explained that companies from every industry only utilize the discounting or "couponing" route when business is weak. Naturally, SolarCity fits in this category.

Greenberg noted on his blog that SolarCity “was throwing a Hail-mary pass to divert attention from an apparent slowdown.”

SolarCity is the largest public company that supplies solar power products and services. However, Greenberg noted there are many private companies engaged in the same business which provides steep competition for SolarCity, whose business model of providing free solar panels upfront to the consumer may not even be sustainable.

Greenberg was asked by a participant in the chat-room what his thoughts are on share buybacks and its effect on earnings.

Greenberg noted that in some cases, companies buying back shares are a good move. However,in some cases the cash could be better utilized through acquisitions or investing back in the business.

Buybacks, Greenberg further argued, could also be used as a defense mechanism to help boost up the price of the stock.

The Street is fixated on the headlines on how a company has performed in any given quarter. As such Greenberg advises investors to compare a quarterly result to those of a year ago particularly if revenues are declining while earnings per share are rising because of buybacks.

“The Street looks at what the Street want to,” Greenberg said.

Check out the video below for a full recap of Herb Greenberg's interview on Benzinga's #PreMarket Prep: