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What Boosted Michael Kors’ Margins in Q1?

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Aug. 10 2018, Updated 3:55 p.m. ET

Michael Kors outperforms earnings expectations for the 13th straight quarter

Michael Kors (KORS) reported a 46% YoY (year-over-year) increase in Q1 2019 earnings to $1.32. The company did better than Wall Street expectations of a 5.6% YoY increase to 95 cents per share. This was the 13th consecutive bottom-line beat for the handbag maker.

“We are encouraged by our first quarter performance, with growth in revenues, gross margin, operating margin as well as earnings per share all exceeding our expectations,” said John D. Idol, the company’s chair and CEO. “Our global fashion luxury group continues to see the benefits of our long term growth strategy which is driven by both the Michael Kors and Jimmy Choo brands,” he added.

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What drove the gross margin?

First-quarter adjusted gross profit increased 31.1% to $753.2 million, while the gross margin improved 230 basis points to 62.6% of sales. This improvement was driven by a 170-basis-point improvement in Michael Kors’ gross margin and a 60-basis-point benefit from the Jimmy Choo acquisition.

Gross margin at the Michael Kors retail business improved 110 basis points, while that of the wholesale business improved a whopping 530 basis points driven by lower costs and reduced allowances.

Operating margins

Adjusted operating income increased 56% to $233 million, while the operating margin improved by 370 basis points. Michael Kors’ operating margin increased 450 basis points to 20.2%, driven by gross margin expansion and cost leverage. Jimmy Choo’s operating margin stood at 14.3% of sales and was 80 basis points dilutive to the consolidated operating margin of the company.

ETF investors seeking to add exposure to KORS can consider the Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (RCD), which invests 1.4% of its portfolio in the company.

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