Michael Kors Margin to Drop as Fall Goods Fail to Appeal

Michael Kors Holdings Ltd. Chief Executive Officer John Idol said profitability will decline this year because an experiment to bring in fall products earlier in the season didn’t work.

Gross margin, or earnings left after subtracting the cost of goods, will be down 50 basis points in the period ending in March 2015 from a year earlier, Idol said on the luxury goods maker’s earnings conference call today.

The shares declined as the comments overshadowed profit and sales that beat analysts’ estimates last quarter after Kors took market share from rivals including Coach Inc. Before today, Kors’s stock had already dropped 9 percent in a month on concerns that sales growth would decelerate and that the fast-growing brand was becoming over-exposed.

Kors “did not enter the deep discounting fray,” Idol said on the call.

The Hong Kong-based company must continue to invest in the business even though it will bring down its long-term operating margin to 28 percent to 29 percent, from 30 percent, Idol said.

“We need to build the company for the long-term,” Idol said. “To do that, you have to invest.”

Idol’s comments imply a gross margin of about 60.4 percent in the current year, compared with 60.9 percent a year ago. In the first quarter ended June 28, the margin widened to 62.2 percent from 62 percent a year earlier, Kors said today in a statement.

The shares declined 5.9 percent to $77.01 at the close in New York.

Sales Rise

First-quarter revenue advanced 43 percent to $919.2 million, topping the $851.6 million average of 23 analysts’ estimates compiled by Bloomberg. Earnings rose to 91 cents a share last quarter. Analysts projected 81 cents, on average.

Coach, the No. 1 U.S. handbag maker, will report a 10 percent decline in quarterly revenue tomorrow, according to analysts’ predictions.

Profit per share this year will be $4 to $4.05, up from a previous forecast of $3.85 to $3.91, Kors said. Analysts predicted $3.95.

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