Michael Kors: Can It Stay Above $30?

| About: Michael Kors (KORS)

Summary

Like many other luxury goods retailers, Kors has begun to feel the weight of Amazon.

There's a huge disparity between what Kors is forecasting and what Wall Street expects the company to do.

KORS stock won’t find a floor until Wall Street fully reconciles that KORS’ premium brand doesn’t mean it deserves a premium valuation.

Shares of high-end accessories retailer Micheal Kors (NYSE:KORS) are getting rocked in Wednesday's pre-market session, falling at one point as much as 8% to a session low $33. And to think, the London-based company beat Wall Street's fourth quarter estimates on both the top and bottom lines.

In the quarter that ended April, the company reported a loss of $26.8 million, or 17 cents per share, compared to earnings of $177 million, or 98 cents per share last year. KORS profits were weighed down by $193.8 million of non-cash impairment charges related to underperforming retail stores. Despite the loss, it still resulted to an earnings beat on an adjusted basis. Notably, this was KORS eighth earnings beat in a row. Revenue of $1.06 billion also topped forecast, though sales declined 11% year over year.

The problem? Like many other luxury goods retailers, namely Tiffany (NYSE:TIF) and Coach (NYSE:COH), Kors has begun to feel the weight of Amazon (NASDAQ:AMZN). And the company has resorted to discounts to keep revenues from cratering. The effect has pressured KORS margins, which during the fourth quarter, reversed last year's profit into a loss. And while these shares do look cheap on a forward-looking basis, KORS stock will struggle to stay above $30.

As evidenced by the 25% year-to-date decline, when factoring the fall in Wednesday's pre-market session, the bears are now in control of the company. And they will be for the foreseeable future, given the huge disparity that exists between what Kors is forecasting and what Wall Street expects the company to do.

Looking ahead, KORS sees first-quarter revenue of $910 million to $930 million, well below Street consensus of $941 million. And the company's EPS forecast range of 60 cents to 64 cents, is significantly lower than consensus of 81 cents. Plus, not only is that the company is forecasting same-store sales to decline in the high-single digit range, Kors announced plans to close 100 to 125 full-price stores over the next two years. The company had 827 retail locations as of April 1.

In other words, investors should expect Kors to record more non-cash impairment charges related to underperforming retail stores during that span. Accordingly, KORS estimates for the next twelve moths will need to come down. And when these analyst downgrades occur, which I expect to begin this afternoon, KORS stock will be in another free fall.

"Fiscal 2017 was a challenging year, as we continued to operate in a difficult retail environment with elevated promotional levels," CEO John Idol said in a statement. "In addition, our product and store experience did not sufficiently engage and excite consumers."

All told, the company is being punished for its aggressive expansion. And while Idol deserves tons of credit for admitting the nature of the disastrous quarter and for not trying to celebrate small accomplishments, KORS stock won't find a floor until Wall Street fully reconciles that KORS' premium brand doesn't mean it deserves a premium valuation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , Apparel Stores, Hong Kong
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here