Shares of the global luxury lifestyle brand, Michael Kors Holdings Limited (KORS), jumped 17.3% yesterday after the company announced spectacular third-quarter fiscal 2014 results following an impressive holiday sale season owing to strong demand for its luxury brands. The company’s earnings per share came in at $1.11, cruising ahead of the Zacks Consensus Estimate of 86 cents and surging 73.4% year over year.
The company’s revenues for the first time surpassed the $1 billion mark, at $1.01 billion, handily beating the Zacks Consensus Estimate of $860 million and growing nearly 59% year over year. Strong performance across all segments and geographies facilitated this growth.
Comparable store sales (comps) increased 28% in the quarter, making this the 31st straight quarter of comps growth.
Gross profit surged 61.6% year over year to $619.5 million, while gross margin grew 100 basis points (bps) to 61.2% primarily on the back of a favorable shift in product mix. Operating profit surged 68% year over year to $343.2 million and operating margin grew 170 bps to 33.9%.
Segment performance
Net sales for the Retail segment grew 51.3% year over year to $503.4 million aided by a comps rise of 27.8% and 98 new stores opened over the past year. Operating profit increased 57.1% to $171.3 million.
For the Wholesale segment, revenue increased 68.2% to $461.4 million while operating profit grew 83.2% to $140.7 million. Revenues increased primarily due to conversion of department store doors to shop-in-shops and sustained sturdy performance of both, specialty and department stores, with increased demand especially for luxury accessories and footwear products.
Licensing Segment revenues rose 59% to $47.4 million while operating profit was $31.3 million, up 64.3% year over year. Growth was attributable to strong performance of luxury watch and eyewear business.
Regional Performance
Revenues across North America (U.S. and Canada) grew 50.5% to $862.6 million while comps jumped 24% driven by solid demand for watches and accessories. Additionally, the region’s wholesale also contributed to the rise with improved sales in accessories and footwear as well as the ongoing transformations of shop-in-shops into department stores.
In Europe, increasing brand recognition and demand led to whopping 144% rise in revenues, which came in at $140 million. Comps in the region stood out registering a 73% growth over the past year.
Lastly, revenue grew 53.8% year over year to $9.3 million in the Other Regions, which include the markets of Japan, Latin America and the Far East.
Other Financial Data
As of Dec 28, 2013, Michael Kors had cash and cash equivalents of $828.3 million and shareholders’ equity of nearly $1,624 million. The company has no outstanding borrowings under its credit facilities. Capital expenditure for the quarter was $53.4 million.
Store Update
During the quarter, the company inaugurated 43 new retail stores, including concessions, with about 20 in North America, 19 in Europe and 4 in Japan. This brought the company-owned retail stores count, including concessions, to 395 at the end of 2013. Additionally, the company operated 138 retail stores, including concessions, operated by licensees.
Going forward, Michael Kors expects to open 57 stores in North America and predicts the count to reach 400 over the long term.
Outlook
A splendid third quarter performance prompted management to provide an upbeat fourth quarter and full-year 2014 guidance. Management expects fourth-quarter revenues to be $790–$800 million, comparable store sales to increase 15%–20% and earnings per share to be 63–65 cents. The tax rate is likely to be around 33.5%. The Zacks Consensus Estimate is pegged at 65 cents that dovetails with the company’s upper end of the guidance range.
For the full year, revenues are likely to be in the range of $3.18–$3.19 billion, while comps are projected to increase 25%. Earnings are forecasted in the range of $3.07– $3.09 per share. The tax rate is likely to be around 34.0%. Capital expenditures are likely to be $200 million for fiscal 2014. The Zacks Consensus Estimate is pegged at $2.83 which could see upward revision in coming days.
Further, the company anticipates capital expenditures of about $200 million for fiscal 2014. Capital spends in the upcoming quarter are expected to be diverted towards the opening of 9 new retail stores as well as its ongoing shop-in-shop conversions and investments to develop infrastructure and systems.
Our Take
Michael Kors has performed stupendously well in the last few quarters. The company is seeking to carve its niche in the high-end retail sector by broadening its footprint in strategic markets and offering merchandise that caters to elite fashion.
In addition to its watch and handbag collection, Michael Kors is now focusing on enhancing apparel, footwear and other miscellaneous categories to compete better with peers like Coach Inc. (COH), Hanesbrands Inc. (HBI) and Ralph Lauren Corporation (RL).
Currently, Michael Kors carries a Zacks Rank #2 (Buy).
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