Michael Kors Drops as Lower Mall Traffic Weighs on Forecast

Updated on
  • Company sells less to department stores to counter promotions
  • CEO Idol says challenges will remain through spring season

Michael Kors Holdings Ltd. fell the most in more than a year-and-a-half after cutting its annual profit forecast, signaling that dwindling retail traffic and a plan to reduce its reliance on the troubled department-store industry will continue to weigh on results.

Profit will be as much as $4.19 a share, excluding some items, in the fiscal year through March, the London-based company said Tuesday. That was down from its November forecast and trailed analysts’ average projection.

Michael Kors is trying to trim its dependence on department stores, where a lack of customers has resulted in the use of discounts that hurt the designer’s margins and brand image. The fashion house, known for its luxury handbags, is removing all friends-and-family sales from February and has introduced new products, such as the Mercer line, to entice customers to pay full price. Still, Chief Executive Officer John Idol said that challenges -- including falling customer traffic, currency fluctuations, and political uncertainty in some European countries -- will remain through the spring season.

Michael Kors fell as much as 15 percent to $35.12 in New York, the biggest intraday decline since May 2015. The stock dropped 20 percent in the 12 months through Monday.

The negative trends took a toll on last quarter’s results as well. While profit of $1.64 a share topped analysts’ average estimate by a penny, revenue of $1.35 million missed projections.

Sales Challenges

Revenue decreased 7.4 percent in the Americas and slid 2.7 percent in Europe on a constant-currency basis. Comparable sales dropped 6.9 percent during the quarter, more than the 5.4 percent decline predicted by analysts, according to Consensus Metrix.

Idol said he was pleased with the response to Michael Kors’s holiday handbag collections, smartwatches and Wonderlust fragrance, but that he was disappointed with the comparable-store sales performance in Europe and North America. On a conference call Tuesday, Idol said he’s “very concerned” that the upcoming elections in Germany and France may hurt consumer sentiment.

The company’s plan to boost profitability also has yet to show much progress. The gross margin was 59.6 percent last quarter, little changed from 59.5 percent a year earlier and will drop to 59.3 percent, Chief Financial Officer Joseph Parsons said on the conference call.

Margin Pressure

The results show that Michael Kors will continue to struggle with slowing sales and pressure on its margins, said Betty Chen, an analyst at Mizuho Securities.

“While the reduction in wholesale shipments was supposed to aid consolidated gross margin, third-quarter results were disappointing,” she said in a note to clients.

The company has been trying to diversify its business by expanding its menswear line and increasing its offerings of accessories such as smartwatches and fragrances, while sales of handbags dwindled.

Idol expects to lose market share in the handbag business as it reduces its shipments to department stores, while sales of smartwatches, which are made by Fossil Group Inc., will become sizable. He said he has a goal of eventually making Michael Kors the world’s second-largest smartwatch brand.

Idol has said the company is looking for acquisitions, though the first priority for its capital is to buy back shares.

“We are actively looking at a number of different things,” Idol said on the conference call. “We certainly have the capacity to do sizable transactions or smaller transactions.”

However, small deals are less likely as they won’t create the kind of value shareholders look for, he added.

Michael Kors and rival Coach Inc. were speaking to their boards about the feasibility of bidding for Kate Spade & Co., people familiar with the matter said last month.

(Updates with CEO’s comments starting in seventh paragraph.)
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