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Michael Kors Q2 Earnings Top Estimates on Sustained Growth

Michael Kors Holdings Ltd. (KORS) has effectively maintained its streak of strong quarterly performance. The company’s second-quarter fiscal 2015 earnings per share of $1.00 came miles ahead of the Zacks Consensus Estimate of 88 cents per share while rising 40.8% year over year.

Our quantitative model had correctly predicted that Michael Kors would beat the Zacks Consensus Estimate, as it has the right combination of two key ingredients – a positive Earnings ESP and a Zacks Rank #3 (Hold).

However, shares fell over 8% in the pre-market trading as the company’s operating margins deteriorated on account of ‘normalizations’ as mangement had warned earlier. The company’s announcement of $1 billion worth of share repurchase authorization over a two-year time frame was completely overshadowed.

The company’s quarterly revenues of $1,056.6 million handily surpassed the Zacks Consensus Estimate of $978 million and grew nearly 42.7% year over year. Consistent robust performance across all segments and geographies facilitated this growth.

Comparable-store sales (comps) increased 16.4% in the quarter, making this the 34th straight quarter of comps growth.

Gross profit surged 43.4% year over year to $645 million, while gross margin grew 20 basis points (bps) to 61%. Operating profit increased 38% year over year to $305.6 million, but operating margin shrunk 100 bps to 28.9%.

Segment Performance

Net sales generated in the Retail segment increased 39.4% year over year to $495.6 million due to 121 new stores openings over the past year and comps growth of 16.4%. Operating profit increased 23.5% to $127.3 million.

For the Wholesale segment, revenue increased 46.1% to $514.1 million while operating profit grew 59% to $156.7 million.

Licensing segment revenues rose 42.8% to $46.9 million while operating profit grew 8.9% to $21.6 million.

Regional Performance

Revenues across North America grew 29.8% to $802.2 million while comps jumped 10.8%.

In Europe, constantly increasing brand recognition and demand led to a whopping 108.6% rise in revenues, which came in at $237.9 million. Comps in the region stood out registering a 41.1% growth over the past year.

Lastly, revenue grew 106.3% year over year to $16.5 million in Japan with a 52.9% rise in comps.

Other Financial Data

As of Sep 27, 2014, Michael Kors had cash and cash equivalents of $1,012.4 million and shareholders’ equity of nearly $2,245.1 million.

At the end of second quarter, Michael Kors, which competes with Coach Inc. (COH), Hanesbrands Inc. (HBI) and Ralph Lauren Corp. (RL), operated 649 stores across the globe, inclusive of licensed locations.

Guidance


Driven by stellar quarterly results, management raised the fiscal 2015 guidance. For the full year, revenues are likely to be in the range of $4.3–$4.4 billion as against earlier projection of $4.25–$4.35 billion.

Comps are projected to increase in the mid teens. Earnings are expected to be in the range of $4.13–$4.18 against the earlier projection of $4.00–$4.05 per share. The Zacks Consensus Estimate is pegged at $4.05 per share, which could see an upward revision in the coming days.

Further, management expects third-quarter fiscal 2015 revenues to be in the $1.27–$1.3 million range, comps to increase in the low-double digits and earnings per share to be in the band of $1.31–$1.34. The tax rate is likely to be around 32.5%. The Zacks Consensus Estimate is pegged at $1.33 per share.

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