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Michael Kors’s Margins and Profitabilty Expectations for 3Q18

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Updated

Earnings to fall more than 20% in Q3

As we’ve discussed in this series, Michael Kors (KORS) is slated to report its 3Q18 earnings results on February 7. Management has guided for $1.22–$1.27 in earnings per share, including anticipated dilution of ~$0.04 from the Jimmy Choo acquisition. At the midpoint, this outlook translates to 24% YoY (year-over-year) decline in earnings versus the same period last year.

Wall Street’s average EPS numbers are slightly higher than management’s expectations. Analysts, on average, expect the company’s EPS to land around $1.28, down 22% YoY. Kors hasn’t missed Wall Street earnings expectations in any of the last ten quarters.

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Margins

Michael Kors reported an 80-basis-point improvement in its gross margin during the first six months of 2018. The company benefitted from the sales mix shift toward international sales, and a lower cost of goods. For the third quarter, management has guided for a gross margin of 60.5%, implying a 90-basis point improvement over the same quarter last year.

Despite the recent improvement, Michael Kors has a lower gross margin than competitor Tapestry (TPR), formerly known as Coach. While Kors has a trailing-12-month (TTM) gross margin of 59.6%, Tapestry’s TTM margin is 66.4%. Smaller competitor Guess (GES), however, has an even lower TTM gross margin of ~34%.

Coming to operating margins, we find that while the company reported a 440 basis point deterioration during the first quarter, its ongoing initiatives (which we discussed in the previous part of this series) drove a 150 basis point increase in adjusted operating margin during the second quarter. Its adjusted operating margin stood at 18.5% for the first six months of fiscal 2018. For the third quarter, management has projected an operating margin of ~17.5%.

ETF investors seeking to add exposure to KORS can consider the iShares Edge MSCI Multifactor Consumer Discretionary ETF (CNDF), which invests 2.4% of its portfolio in the company

Read on to the next part of this series to learn about the recent analyst action on the company.

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