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Michael Kors CEO: We're Actively Looking At M&A Options

Michael Kors CEO: We're Actively Looking At M&A Options

Luxury apparel and accessories maker Michael Kors Holdings Ltd (NYSE: KORS) is slumping over 13 percent on Tuesday following the release of its third-quarter results. Stung by weak retail traffic trends, the geopolitical uncertainty in Europe and currency fluctuation, the company reported a sales miss for its third quarter, which encompasses the key holiday selling season.

The company also issued weak guidance for the fourth quarter and the full year, with the weakness centered on North America and Europe. The company also revealed on its call that it is actively seeking M&A options.

M&A Thirst Fueled By Compulsions

As early as January this year, unconfirmed rumors, which Benzinga reported, suggested that Michael Kors might be seeking a M&A transaction.

Bloomberg reported in January, citing people familiar with the matter, that luxury handbag maker Kate Spade & Co (NYSE: KATE), which has put itself on the block, might be pursued by high-end retailers, including Michael Kors and Coach Inc (NYSE: COH).

The acquisition drive seen in the luxury retail space is forced by several factors, including weaker store traffic, waning tourist interest in purchases and heavy promotion and discounting, which is eating into the margins.

Q3 Sales Miss Amid Sore North America And Europe

Michael Kors announced Tuesday ahead of the open third-quarter net income of $1.64 per share, ahead of the $1.59 per share it earned in the year-ago quarter. The bottom-line results pipped past the analysts' estimate of $1.63 per share. Revenues fell 3.2 percent to $1.35 billion, with constant currency revenues down a more modest 2.6 percent. This was below the $1.36 billion consensus forecast.

Retail sale, accounting for 62 percent of the total revenues rose 9.2 percent to $836.7 million, helped by net new store openings and recent acquisitions in Greater China and South Korea. Comps fell 6.9 percent. Wholesale net sales, making up 35 percent of the total revenues fell 17.8 percent.

Region-wise, the Americas, which fetched 73 percent of the revenues, saw a 7.4 percent slide in revenues and European revenues (19 percent of the total) fell 7 percent. However, revenues from Asia climbed 89.1 percent to $112.3 million. The company termed Asia as a $1 billion opportunity even as it expressed disappointment over comp performance of its North American and European operations.

Gross margin was at 59.6 percent, almost flat with last year's 59.5 percent.

More Weakness Likely

For 2017, the company expects revenues of $4.48 billion on a high-single-digit range decline in comps. Non-GAAP earnings per share are estimated at $4.15–$4.19. The guidance for 2017 trailed the consensus estimates, which called for earnings of $4.38 per share on revenues of $4.55 billion.

The company also released its fourth quarter guidance, expecting earnings per share of $0.68–$0.72 on revenues of $1.035 billion to $1.055 billion. Analysts, on average estimate earnings of $0.93 per share on revenues of $1.11 billion.

Commenting on the outlook, Michael Kors chairman and CEO John Idol said, "We believe that headwinds in these markets will continue throughout the Spring season as we face reduced traffic trends in shopping malls, currency fluctuation, uncertainty surrounding certain political changes in European countries and the implementation of our reduced promotional cadence in North America."

At last check, shares of Michael Kors were down 13.20 percent at $35.83 on over 5 times their average volume.

Image Credit: By Designerschuhe, Taschen und Accessoires from Deutschland - Michael Kors Fulton LG Shoulder Tote Shopper 30H3SFTE3L Kalbsleder grau / pearl grey (3), CC BY 2.0, via Wikimedia Commons


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