Michael Kors Beats Analysts Expectations

One more time, expectations are more important for investors than the reality. The American manufacturer of luxury bags, Michael Kors, announced that its fiscal second-quarter profit fell 6.7% to $193 million, or $1.01 per share. Despite the fall, the truth is that experts expected a major setback (to $0.89 per share), which provoked a strong rebound in the stock market.

Sales also beat forecasts, growing by almost 7% to $1.13 billion (compared to forecasts of $1.07 billion). The company was hurt by the exchange rate: eliminating this effect, revenues would have increased by over 12%.

The buyer euphoria we saw in the stock market can only be understood from the point of view of the depressed outlook dragging the company, because the results were not as good as could be expected seeing that reaction. Comparable sales (which are produced in shops that have been open at least twelve months) went unnoticed: fell 8.5% from a year earlier. That means growth came exclusively by new openings: 116 stores opened in the last 12 months.

In addition, the company itself admitted that it was suffering a change in the buyer´s preferences: now they prefer to purchase smaller bags, less expensive (such as product line Jet Set Crossbody), which was penalizing its margins. Thus, the average price of each sale made in North America, the company’s main market, fell by 15% in the quarter.

It also warned that its stores have fewer visitors, although this is a general trend in the sector due to the drop in the number of tourists by the strong dollar. Finally, the company identified other problem that could complicate the situation in the future: the increase of stocks by around 15%. This means that sales grow quite less than manufacturing and could means an increase of costs for shops and warehouses, as well as a future decrease of orders by them. Michael Kors closed the analysts conference reducing its forecasts for both sales and earnings for the current quarter and the full year.

For the third fiscal quarter expected a profit of between $1.44 and $1.48 per share, with revenue between $1.33 and $1.35 billion. For the full year it expects to reach an annual profit of between $4.38 and $4.42 per share on revenue of up to $4.65 billion. In any case and despite the expected decline, it would beat the market consensus, which estimates an annual profit of $4.31 per share.

The company´s shares gained more than 8% after the announcement, though they still loses nearly 45% so far this year. This punishment, which exceeded 50% of its market capitalization, would explain the advance of the last session. Today the company is worth just over $8.2 billion.

Disclosure: The Luxonomist is not responsible for the views expressed in the article. The text was written freely expressing ideas, without receiving any compensation. The author has no business relationship with any of the companies whose shares are listed in this article.