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Shares of Michael Kors (KORS) surged following its second quarter fiscal 2014 earnings report. The company reported earnings and revenue ahead of analyst estimates, with strong comparable sales growth. While all operating metrics improved, this was the fourth consecutive quarter of revenue growth slowdown, as well as a slowdown in comp growth, and third consecutive quarter of earnings growth slowdown. However, this is not a major cause of concern, since it would be hard for any company to keep up with the growth Kors was showing in recent years. I am confident in the company's long-term prospects, especially when you consider that Kors is thriving in a very poor environment and delivering the strongest growth in the weakest market - Europe.

Q2 fiscal 2014 earnings highlights

Kors delivered $0.71 earnings per share, 45% higher than in Q2 2013 and ahead of analyst estimates for $0.68, but close to the low range of my own projected range of $0.70 to $0.75. Revenue grew 39% to $740 million, also ahead of consensus estimates and management guidance. Revenue growth has slowed down in the last four quarters, while earnings growth has slowed down for three consecutive quarters. There is no surprise here, since the growth slowdown was expected by both the analysts and management. However, this is the weakest quarter for Kors since going public in terms of earnings and revenue surprise rate, when compared to previous management guidance. Kors reported earnings and revenue 12.7% and 5.7%, respectively, ahead of management's mid-range guidance. Earnings surprises ranged from 30% to 100% in the last six quarters, while revenue surprises ranged from 7.6% to 20.1%.

Gross margin was down 120 basis points sequentially to 60.8%, but it increased 150 basis points over Q2 2013. Operating margin and net margin expanded 30 and 135 basis points year-over-year to 29.9% and 19.7%, respectively.

Sales in North America increased 31% on comparable store sales growth of 21%. The company's wholesale net sales increased 29.9% to $351.9 million, driven by accessories and footwear categories and a continued sales lift from shop-in-shop conversions in department stores. In Europe, sales grew 101%, with comparable store sales growth of 45%. This is an outstanding achievement, given the overall weakness in Europe's economy.

Kors continues to gain traction in Japan, with revenue growth of 64% on a 15% comp increase. The company has also continued its retail expansion in the Far East through regional licenses, opening 10 locations during the quarter. The company remains well positioned to grow further into these areas, which remain underpenetrated, and Kors should see increased sales as its store count and brand awareness expands in the coming years.

Management guided third quarter earnings in the range of $0.83 to $0.85, which was ahead of consensus estimates of $0.82. The company expects revenue in the range of $845 million to $855 million, ahead of analyst estimates of $837 million. Comparable stores sales are expected in the range of 15% to 20%, the same rate as in the previous quarter. Management also lifted full year earnings guidance to $2.77-$2.81, and expects revenue between $2.9 billion and $3 billion.

Kors is pushing Fossil's growth too, while Coach suffers

When you look at two other companies, Kors' strength becomes more evident. Kors has a licensing partnership with Fossil (FOSL), and when Kors is doing well, especially if you see strength in Kors' licensing segment, this is usually a good indication that Fossil will do good as well. Fossil's third quarter earnings and revenue grew 25% and 18%, respectively, a great showing in a tough market for retail companies. Fossil should thrive from Kors' strength, especially in Europe, where Kors is showing excellent growth. Kors' licensing segment was up 65% year-over-year on strength in luxury watches and jewelry, and Kors plans to roll out additional watch/jewelry shops in its wholesale channel. Although Fossil delivered above its earnings and revenue estimates, shares are down 5% at the time of this writing, probably because of weak fourth quarter guidance.

On the other hand, this is bad news for Coach (COH), since Kors is taking Coach's market share. I wrote about Coach's weakness in my previous article on Kors, and you can read more about it here.

Conclusion

Kors continues to execute its growth strategy very well. Although a growth slowdown is evident, it is not a cause to be concerned. The company is still delivering above what it is promising and what analysts are expecting, and it continues to expand into new markets. Strong growth in Europe and untapped growth potential in Japan and the Far East give the company more room to expand its footprint, and deliver long-term gains for its shareholders.

Source: Michael Kors: Should You Be Concerned About The Growth Slowdown?