Michael Kors Outperformed Expectations in 3Q18



Michael Kors outperformed expectations

Michael Kors (KORS) reported a jump of ~8% in its third-quarter EPS (earnings per share), which stood at $1.77 during the quarter. The company cruised ahead of its own expectations and Wall Street analysts’ forecast. On average, analysts expected $1.29 in quarterly EPS. In 3Q18, Michael Kors beat the bottom line for the eleventh consecutive time.

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What drove the 3Q18 gross margins?

The second quarter consolidated gross margin increased by 190 basis points to 61.5% of sales. The improvement was driven by a higher retail mix, improved retail gross margin, and the benefit (30 basis points) from the Jimmy Choo acquisition. Jimmy Choo has higher gross margins.

Michael Kors’s retail gross margin improved by 310 basis points, primarily due to reduced promotional activity. The wholesale gross margin decreased by 170 basis points, which reflected Michael Kors’s greater sell-through pricing initiatives.

Tapestry (TPR) reported its quarterly results the day before Michael Kors. Tapestry’s gross margin declined by 160 basis points. The fall was mostly due to the Kate Spade integration (~120 basis points). Kate Spade has a lower gross margin profile. However, Tapestry’s gross margin of 67% was better than Michael Kors’s gross margin.

Why did the 3Q18 operating margin fall?

Despite an improvement in the gross margin, Michael Kors’s adjusted operating margin declined by 130 basis points to 24% of sales. The deterioration was mainly due to a rise by 330 basis points in operating expenses. The higher operating expenses were due to the deleverage on lower sales in the Michael Kors Wholesale segment and the impact of the Jimmy Choo acquisition.

ETF investors seeking to add exposure to Michael Kors can consider the First Trust Consumer Discretionary AlphaDEX Fund (FXD). FXD invests 1% of its portfolio in Michael Kors.


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