Michael Kors Holdings (KORS) is trading up sharply today (+14%) after reporting strong 2Q18 (Sep) earnings results this morning. You're probably familiar with Michael Kors, but just in case, it's a designer of luxury accessories and ready-to-wear. His namesake company, established in 1981, currently produces a range of products under Michael Kors Collection, MICHAEL Michael Kors and Michael Kors Mens, including accessories, ready-to-wear, footwear, wearable technology, watches, and a full line of fragrance products. Michael Kors stores tend to operate in the most prestigious cities in the world. KORS sells via its own retail stores and it sells wholesale to department stores.
In order to combat what some would say is the Michael Kors brand having gotten too ubiquitous and basic, the company recently announced plans to form a global fashion luxury group. The company has decided to focus more on the upscale segment of the fashion market.
They kicked it off in a big way when, in late July 2017, KORS announced it would acquire Jimmy Choo, a premier global luxury footwear and accessories brand for an enterprise value of approximately US$1.35 bln. KORS sees an opportunity to grow Jimmy Choo sales to $1 bln. The deal, which closed on November 1, also provides a more balanced portfolio with greater product diversification for KORS, which is not big in luxury footwear.
Turning to the SepQ report, non-GAAP EPS came in at $1.33, well ahead of prior guidance of $0.80-0.84. Revenue rose 5.4% year/year to $1.15 bln, which also was much better than prior guidance of $1.035-1.055 bln. Retail net sales increased 8.0% YoY to $645 mln, driven in large part by 56 net new store openings since last year, as well as an increase in ecommerce sales in Europe and Asia. Comparable sales decreased -1.8%. Wholesale net sales increased 2.5% to $463.6 mln. Licensing revenue decreased 2.1% to $38.0 mln.
Looking ahead to 3Q18 (Dec), KORS expects revenue of $1.355-1.385 bln with comps in the high single digits. EPS is expected at $1.22-1.27, including $0.04 dilution from the Jimmy Choo acquisition. The guidance was below market expectations. Although perhaps the inclusion/timing of the Jimmy Choo numbers may account for some of the reason why the numbers are off, it's not entirely clear. Next quarter's report should be a cleaner comparison.
KORS says this is a transformative time for the company as it has established its global fashion luxury group and with the recently completed acquisition of Jimmy Choo. KORS believes that bringing together these two iconic brands further strengthens its growth opportunities, increases its product and geographic diversification, and importantly, creates a platform for future acquisitions.
Also, management says SepQ results were better than expected as they reflect the company's efforts across product innovation, brand engagement and customer experience, which are beginning to take hold. While KORS continues to expect fiscal 2018 to be a transition year for the Michael Kors brand, ultimately these efforts will drive improved financial performance.
In sum, this was a surprisingly good quarter for KORS. The company has now reported two large back-to-back beats in JunQ and SepQ. The company is going through a transition phase, with more of a focus on the upscale luxury market in order to fight back against its brand having suffered in recent years as too basic. KORS had gotten too every day and lost some panache and there have been too many discounts. KORS wants to reposition its brand back in the luxury category and the Jimmy Choo purchase is a big step in that direction. KORS will be interesting to watch as it attempts to turn around its business. The JunQ and SepQ reports were a very nice start, but it will take more time to see if it'll be successful.