Michael Kors Holdings (KORS) is trading up sharply today (+18%) after reporting strong 1Q18 (Jun) 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 will 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 also provides a more balanced portfolio with greater product diversification for KORS, which is not big in luxury footwear.
Turning to the JunQ report, EPS came in at $0.80, well ahead of prior guidance of $0.60-0.64. Revenue fell 3.6% year/year to $952.4 mln, but that was also much better than prior guidance of $910-930 mln. Retail net sales increased 10.1% to $619.9 mln driven in large part by 67 net new store openings since the end of the prior year period and the impact of the acquisition of the Greater China license. Comps decreased -5.9%.
Wholesale net sales decreased 23.0% to $303.6 mln. Licensing revenue decreased 5.6% to $28.9 mln. The guidance was impressive as well as KORS expects 2Q18 (Sep) EPS of $0.80-0.84 and revenue of $1.035-1.055 bln, both numbers are better than market expectations.
KORS says its JunQ performance exceeded internal expectations, driven largely by better than anticipated retail comps in both North America and Europe. While encouraged by its 1Q18 (Jun) performance, KORS continues to believe that FY18 will be a transition year for the company, as it focuses on laying the foundation for the future by executing on its strategic plan, Runway 2020. While it is still early in the process, KORS is making meaningful progress enhancing its assortments, deepening its connection with consumers, and elevating its jet set luxury experience in its stores and digital flagships.
In addition, KORS says it's pleased to have recently announced plans to form a global fashion luxury group. Its deal to acquire Jimmy Choo will bring together two iconic brands that are industry leaders in style and trend. Jimmy Choo has a rich history as a luxury brand with a 20-year track record. Developing a global fashion luxury group will result in a more diverse product portfolio, an increase in KORS' exposure to international markets and it should unlock additional opportunities for future growth.
In sum, this was a surprisingly good quarter for KORS. The company is going through a transition phase, with more of a focus on the upscale luxury market in order to flght back against its brand having suffered in recent years as too basic. KORS had gotten too everyday 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 report was a very nice start, but it will take more time to see if it'll be successful.