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A Look at Michael Kors’ Earnings Expectations and Valuations

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Earnings to fall 30% in 1Q18

As we discussed, Michael Kors (KORS) is slated to report its first-quarter results on August 8. Management has guided for $0.60 to $0.64 in earnings per share. At the midpoint, this translates to a ~30% YoY (year-over-year) decline over the same quarter last year. Behind this drop are the company’s falling revenues (which we discussed in the previous part of this series) and rising operating expenses.

Wall Street is in line with management and is expecting a 30% YoY decline in EPS to 62. In fiscal 2017, the company’s earnings fell 4.5% to $4.24.

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The Jimmy Choo acquisition

Michael Kors announced its acquisition of Jimmy Choo (CHOO) on July 25. The company agreed to pay $1.2 billion or 896 million pounds for the premier luxury footwear and accessories brand.

Acquiring Choo would diversify Michael Kors’s portfolio and allow it to serve an entirely different segment. Also, it would give Michael Kors greater exposure to European and Asian markets, where Jimmy Choo has a strong presence. The transaction is expected to close by the fourth quarter of 2017 and is subject to customary closing conditions.

The deal comes just two months after handbag rival Coach (COH) acquired smaller competitor Kate Spade (KATE) for $2.4 billion.

Valuations and earnings expectations

Michael Kors is currently valued at a one-year-forward price-to-earnings ratio of 10x versus a three-year average of 11.7x. In comparison, Coach is sitting at almost double these valuations. The company is trading at 20x. This gap reflects the near-term earnings potential of the two companies.

Michael Kors’ earnings per share are predicted to fall more than 15% over the next 12 months. However, Coach is likely to post an 11% rise in next-12-month EPS.

ETF investors seeking to add exposure to KORS and COH can consider the First Trust Consumer Discretionary AlphaDEX Fund (FXD), which invests ~2% of its portfolio in the two companies.

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