Michael Kors: A Strong History Of Smashing Guidance

Jul.29.14 | About: Michael Kors (KORS)

Summary

Michael Kors has delivered above its revenue and earnings guidance for every period so far.

It appears to take a very conservative approach to guidance, handily beating even its updated guidance from late in the quarter in the two cases where it provided an updated.

Despite this track record, analyst consensus has typically closely followed guidance.

If this trend continues, Michael Kors should deliver a solid beat versus expectations in Q1 2015.

Michael Kors (NYSE:KORS) has a strong track record of easily exceeding its revenue and earnings guidance. Despite continued excellent growth, margin concerns have recently dragged its share price down to the $80 to $85 range from a high of around $100.

In the short-term, there is a high likelihood that Michael Kors will beat analyst expectations for Q1 2015. Michael Kors has typically provided very conservative guidance even when a significant portion of the quarter is complete by the time it provides its guidance. For Q1 2015, eight out of thirteen weeks were already complete when it provided guidance. This increases the chance that it should handily exceed its guidance. Meanwhile, analyst consensus is quite close to guidance, so exceeding guidance by a fair amount will also translate to a solid beat versus consensus.

Revenue Guidance History

Michael Kors has exceeded its quarterly revenue guidance by anywhere from 6% to 20%, with an average beat of 13%. Michael Kors has also exceeded its initial annual revenue guidance by 25% in FY 2013 and 23% in FY 2014. Below is a table showing revenue guidance by period (based on the midpoint of guidance) and the actual results.

Revenue By Period

Guidance ($ Million)

Actual ($ Million)

% Beat

Q4 2012

$353

$380

8%

Q1 2013

$365

$415

14%

Q2 2013

$495

$533

8%

Q3 2013

$530

$637

20%

Q4 2013

$520

$597

15%

Q1 2014

$560

$641

14%

Q2 2014

$700

$740

6%

Q3 2014

$850

$1,012

19%

Q4 2014

$795

$917

15%

Q1 2015

$845

2013

$1,750

$2,182

25%

2014

$2,700

$3,311

23%

2015

$4,050

Click to enlarge

Even when Michael Kors has provided updated guidance within a quarter, the updated guidance has ended up being on the low side. For example, in Q4 2012 it updated guidance from a range of $350 to $355 million to a range of $350 to $360 million and ended up with actual revenue of $380 million. In Q2 2013, it updated guidance from a range of $490 to $500 million to a range of $510 to $520 million and ended up with actual revenue of $533 million. Given that these two updates were done when 11 of the 13 weeks in the respective quarters were already completed, accurate guidance should have theoretically been easy to achieve. Michael Kors's significant beats in these two examples seem to indicate that its revenue guidance is very conservative.

Despite this past history, average analyst estimates have closely followed guidance, with consensus revenue estimates averaging 3% above guidance (1% to 5% range). As a result, actual revenues have often come in substantially above consensus, with double-digit beats in six of nine quarters.

Guidance ($ Million)

Consensus ($ Million)

Actual ($ Million)

Consensus Vs. Guidance %

Actual Vs. Consensus %

Q4 2012

$353

$364

$380

3%

4%

Q1 2013

$365

$368

$415

1%

13%

Q2 2013

$495

$519

$533

5%

3%

Q3 2013

$530

$541

$637

2%

18%

Q4 2013

$520

$541

$597

4%

10%

Q1 2014

$560

$571

$641

2%

12%

Q2 2014

$700

$723

$740

3%

2%

Q3 2014

$850

$860

$1,012

1%

18%

Q4 2014

$795

$823

$917

4%

11%

Click to enlarge

Source: Estimize

Earnings Guidance

Since Michael Kors has often delivered revenues well above guidance, it comes as no surprise that its earnings have also come in well above guidance. It has beaten its quarterly earnings guidance by anywhere from $0.08 to $0.27 per share with an average beat of $0.16 per share. Michael Kors has also exceeded its initial annual earnings guidance by $0.87 per share in FY 2013 and $0.77 per share in FY 2014.

Guidance ($)

Actual EPS ($)

Beat ($)

Q4 2012

$0.11

$0.22

$0.11

Q1 2013

$0.19

$0.34

$0.15

Q2 2013

$0.34

$0.49

$0.15

Q3 2013

$0.38

$0.64

$0.26

Q4 2013

$0.33

$0.50

$0.17

Q1 2014

$0.47

$0.61

$0.14

Q2 2014

$0.63

$0.71

$0.08

Q3 2014

$0.84

$1.11

$0.27

Q4 2014

$0.64

$0.78

$0.14

Q1 2015

$0.79

2013

$1.10

$1.97

$0.87

2014

$2.45

$3.22

$0.77

2015

$3.88

Click to enlarge

The following table is a bit complicated. It attempts to determine what Michael Kors's earnings would have been without the additional revenue that it delivered above guidance. For example, in Q4 2012 revenues came in $27 million above guidance. Michael Kors had 57.7% gross margin during the quarter and a 43.5% tax rate, so that $27 million in additional revenue translated into $8.8 million in additional net income if we assumed that the gross margin rate of the additional revenue was the same as the quarter average and the effective tax rate on that income was the same as well. There is also the assumption for simplicity that the additional revenue did not come with an increase in operating expenses.

Subtracting the $8.8 million in net income from Q4 2012's numbers would give us earnings of $0.18 per share without the effect of that additional revenue. This compares to guidance of $0.11 per share, indicating that in Q4 2012, Michael Kors's earnings were positively influenced by both stronger revenues and better operating margins than what was implied in its guidance. The earnings beat of $0.11 per share versus guidance ($0.22 per share actual) is composed of $0.07 per share from operating margins and $0.05 per share (rounded up) from stronger revenues.

The trend in the last few quarters does indicate that some of the concern over margins is probably warranted. Taking out the effect of the extra revenue gets us to an earnings number that is below guidance during the last two quarters. This could be caused by the additional revenue having lower than average gross margin, the overall gross margin for Michael Kors coming in below plan, or the additional revenue being tied to increased operating expenses versus plan. The latter is the best scenario for Michael Kors as the other two explanations could result in (or be a result of) brand cheapening. At this point however, the increased revenues are more than offsetting any additional expenses or margin erosion.

Revenue ($ Million Above Guidance)

Gross Margin %

Tax Rate %

Effect on Net Income ($ Million)

Earnings Without Effect of Additional Revenue ($ Per Share)

Earnings Guidance ($ Per Share)

Q4 2012

$27

57.7%

43.5%

$8.80

$0.18

$0.11

Q1 2013

$50

60.5%

38.6%

$18.57

$0.25

$0.19

Q2 2013

$38

59.3%

37.9%

$13.99

$0.42

$0.34

Q3 2013

$107

60.2%

36.0%

$41.22

$0.44

$0.38

Q4 2013

$77

59.7%

34.6%

$30.06

$0.35

$0.33

Q1 2014

$81

62.0%

36.6%

$31.84

$0.46

$0.47

Q2 2014

$40

60.8%

34.1%

$16.03

$0.63

$0.63

Q3 2014

$162

61.2%

33.1%

$66.33

$0.79

$0.84

Q4 2014

$122

59.9%

34.6%

$47.79

$0.55

$0.64

Click to enlarge

Below is a similar look at how revenue above consensus affects earnings compared to consensus. The main takeaway for me is that analysts have largely followed Michael Kors's implied guidance for gross margin and operating expenses as well. In quarters where Michael Kors would have beaten earnings guidance without the effect of additional revenue, it would have beaten consensus too. In more recent quarters where Michael Kors would have missed earnings guidance without the effect of additional revenue, it would have fallen short of consensus earnings.

Revenue ($ Million Above Consensus)

Gross Margin %

Tax Rate %

Effect on Net Income ($ Million)

Earnings Without Effect of Additional Revenue ($ Per Share)

Earnings Consensus ($ Per Share)

Q4 2012

$16

57.7%

43.5%

$5.22

$0.20

$0.16

Q1 2013

$47

60.5%

38.6%

$17.46

$0.26

$0.20

Q2 2013

$14

59.3%

37.9%

$5.16

$0.46

$0.40

Q3 2013

$96

60.2%

36.0%

$36.99

$0.46

$0.40

Q4 2013

$56

59.7%

34.6%

$21.86

$0.39

$0.37

Q1 2014

$70

62.0%

36.6%

$27.52

$0.48

$0.49

Q2 2014

$17

60.8%

34.1%

$6.81

$0.68

$0.68

Q3 2014

$152

61.2%

33.1%

$62.23

$0.81

$0.86

Q4 2014

$94

59.9%

34.6%

$36.82

$0.60

$0.68

Click to enlarge

Source: Estimize

Effect on Q1 2015 Expectations

Michael Kors offered its outlook for Q1 2015 earnings during its Q4 2014 earnings report. This took place approximately eight weeks into Q1, meaning that Michael Kors would have already completed over 60% of the quarter when it provided guidance. As noted above, Michael Kors has a history of providing conservative guidance even when it has completed most of the quarter. Therefore if past trends hold true, guidance for $845 million in midpoint revenue would indicate actual revenues coming in at $940 million to $970 million. This would translate into earnings of approximately $0.87 per share to $0.93 per share. For comparison, analyst consensus is for earnings of $0.81 per share and $851 million in revenue, while the Estimize consensus is for earnings of $0.85 per share and $878 million in revenue.

Conclusion

Michael Kors has typically easily exceeded its conservative guidance. Since the majority of the quarter was completed when it issued its guidance for Q1 2015, I'd expect a similar result this quarter. Much attention will also be paid to gross margin and future guidance. Q2 guidance has typically been less conservative (although with only Q2 2013 and Q2 2014 in the sample size), but actual revenues have still averaged about 7% above guidance.

Disclosure: The author is long KORS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.