Yahoo Finance Will Michael Kors Strategy to Gain Share Hurt Margins? - Analyst Blog
Michael Kors Holdings Limited (KORS) is a fast-emerging brand in the retail arena of affordable luxury. The company is on a massive penetration drive across the globe, which had resulted in a streak of strong quarterly performances.
However, over the last couple of quarters, the impact of this expansion drive has started reflecting on its margins, which now are decelerating from their historic highs. Even comparable store sales have begun to slow down.
Does this spell trouble for the retailer?
We believe that the company’s margins and comps hover at extremely high levels which may be hard to sustain in the long run. Increasing investments across board will run down the benefits from favorable product mix and overseas expansion leading to fall in margins. Further, the company’s aggressive promotions will dent margins.
Management had already warned about “normalizations” in margins. This is reflected in the company’s outlook for fiscal 2015, where management expects gross margins of the retail segment to decrease 50 basis points (bps) and operating margins to come down to 29%, a 150 bps drop from last year.
Moreover, a similar trend is visible in the company’s comparable-store sales growth story. After excellent performances for 34 straight quarters, the growth rate drastically deteriorated in the second quarter of fiscal 2015.
Second-quarter comps growth was 16.4%, as against 24.2% reported in the first quarter of fiscal 2015, 26.2% in fourth quarter fiscal 2014 and 27.8% in third quarter of fiscal 2014. As domestic retail trends weakened, comps growth decelerated.
Moreover, the company lowered its comps guidance for fiscal 2015. Anticipating foreign exchange headwinds in the second half, the company anticipates comps to grow in mid-teens as against earlier expectations of high teens. The company expects comps to grow in the low-double digits in the upcoming quarter, which includes the crucial holiday season, in contrast to 27.8% comps growth reported in the third quarter of fiscal 2014.
That said, Michael Kors is capturing market share and outpacing its peers. Apart from its signature handbag business, the company is rapidly expanding in to other avenues like jewelry, fragrances and men’s apparel. Moreover, to keep in sync with changing trends, Michael Kors unveiled its domestic online portal in September last year.
At present, Michael Kors is Zacks Rank #2 (Buy) stock and is well positioned from earnings beat perspective. In the trailing 10 quarters, the company has beaten the Zacks Consensus Estimate in all the quarters at an average of 28.6%.
Other Favorable Stocks
Other retail stocks worth consideration include G-III Apparel Group, Ltd. (GIII), Columbia Sportswear Co. (COLM) and Hanesbrands Inc. (HBI). G-III Apparel Group sports a Zacks Rank #1 (Strong Buy) wheras Columbia Sportswear and Hanesbrands carry a Zacks Rank #2.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
MICHAEL KORS (KORS): Free Stock Analysis Report
COLUMBIA SPORTS (COLM): Free Stock Analysis Report
HANESBRANDS INC (HBI): Free Stock Analysis Report
G-III APPAREL (GIII): Free Stock Analysis Report
To read this article on Zacks.com click here.
