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Michael Kors’ Fourth-Quarter Margins

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Michael Kors outperforms earnings expectations

Michael Kors (KORS) reported a 13.7% decline in fourth-quarter earnings, which stood at $0.63. The company, however, delivered better than Wall Street expectations of a 17.8% YoY (year-over-year) decline to 60 cents.

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How were the margins?

The fourth-quarter consolidated gross margin increased by 220 basis points to 60.4% of sales. A favorable channel mix, higher retail and wholesale gross margins, and the benefit (80 basis points) from the Jimmy Choo acquisition—a higher-margin business—drove this improvement.

The retail gross margin of the Michael Kors business improved by 110 basis points, fueled by strong international growth and a lower cost of sales. The wholesale gross margin increased by 150 basis points, reflecting higher sell-throughs.

Tapestry (TPR), which reported its quarterly results in early May, recorded a 190 basis point decline in its gross margin. The deterioration was mostly a result of the Kate Spade integration (~120 basis points), which has a lower gross margin profile.

However, Tapestry has a higher gross margin than KORS. Its trailing-12-month gross margin stands at 66%, compared to 60.6% for KORS.

Operating margins

Despite an improvement in its gross margin, Michael Kors’s operating margin continues to decline. Its adjusted operating margin fell 110 basis points during the quarter to 13% of sales, mainly due to accelerated investments in the Jimmy Choo brand. We saw the sixteenth consecutive quarter of operating margin declines for the company.

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