Before the open this morning, high-end apparel and accessory
company Michael Kors (KORS 59.57, -8.65, -12.68%) posted solid, upside 4Q18 results and also issued
better-than-expected guidance for 1Q19. Results were bolstered by the company’s
recent acquisition of Jimmy Choo, a luxury footwear and accessory designer and
marketer. However, shares sank lower during morning trade, touching down to losses
of over 13%.
There are several possible explanations for this weakness, even though it follows impressive Q4 results. First, the stock had been in rally-mode over the past few weeks heading into the print this morning. Since May 8, shares had popped higher by 11%, with the stock trading near 52-week highs. Accordingly, a "sell-the-news" type of reaction could be in play here.
Secondly, investors may be somewhat disappointed with KORS' FY19 EPS and comparable sales guidance. Specifically, the company guided for EPS of $4.65-$4.75 vs. the $4.74 consensus, which includes $0.05-$0.10/share dilution from Jimmy Choo. Using the mid-point, KORS essentially issued downside EPS guidance of $4.70.
And for comparable sales, KORS is expecting both 1Q19 and FY19 results to be about flat following a 2.3% increase in Q4 comps. The general concern here is that as the impact from the Jimmy Choo acquisition plays out, KORS’ organic growth may not look overly impressive to growth-oriented investors. Therefore, the company may need to look to other (possibly expensive) acquisition possibilities to stimulate growth.
As for the good news, KORS’ Q4 results were indeed solid. EPS came in at $0.63/share, beating consensus by $0.03, with gross margin improving to 60.4% from 58.2% year/year. This was driven by favorable channel mix due to a higher proportion of retail sales, expanded MK Retail, and the inclusion of Jimmy Choo, which contributed 80 basis points to the increase.
On the top line, revenue was up 11% to $1.18 bln, also ahead of the $1.15 bln consensus. Comparable sales were up 2.3%. The company credited sales growth to a strong response to its accessories, footwear, ready-to-wear, and men's categories. Also driving revenue growth was the addition of 50 new MK Retail stores since 4Q17, most of which were in Asia.
To conclude, there was plenty to like in regard to KORS' Q4 results; the Jimmy Choo acquisition continues to pay dividends for the company. But the concern, based on downside FY19 EPS guidance and flat comp guidance, is that the Jimmy Choo catalyst may be about to run out of steam. KORS’ growth may not be fully capable of enticing investors until or unless KORS finds another attractive acquisition candidate.
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