Michael Kors Holdings Ltd. remains on the hunt for acquisitions, but first it has to fix an urgent problem: sliding comparable-store sales in its core brand.
There’s no easy fix ahead, though, and Wall Street expressed its concern, sending Michael Kors shares down 10.8 percent to $36.82 on Tuesday after the company reported drops in profits and revenues for the third quarter and lowered guidance for fiscal 2017.
John D. Idol, the company’s chairman and chief executive officer, insisted there is a plan to turn things around. In fact, there’s a five-step plan — involving everything from improved design elements in handbags; an expanded footwear offering in its larger stores, and a new dress section on its e-commerce site.
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On a conference call with analysts, Idol explained the five new strategic initiatives the company hopes will reverse the negative comp trends, which include new design elements to enhance handbag offerings in the $398 to $498 price points.
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Idol said founder and designer Michael Kors and the design team have “introduced new design elements in accessories to provide a more elevated and layered assortment.” He said the “unique and innovative techniques” for the higher-end price points include upgrading the craftsmanship of the bags, signature hardware details and intricate mixed-media leathers. At the lower price point for the $298 medium-size range, the company will focus on its five core handbag groups: Hamilton; Selma; Savannah; Cynthia, and Mercer.
Another initiative will be the expansion of its “new Jet Set Signature accessories in our stores, which will include multiple layers for the fall season,” Idol said. He noted that initial results of the new deliveries for the spring season “have been very strong. This is an iconic element for our brands, and we will capitalize on this strength and increase the presence of this category in key stores.”
The third focus will see an increase in the footwear selections in the firm’s largest volume doors. “As one of the leading fashion footwear companies globally, we intend to capitalize on this strength and increase the presence of this category in key stores,” Idol said.
For fall 2017, Michael Kors will have a new online dress shop. Idol said the initiative would focus on the company’s “fast-growing dress category as an iconic cornerstone of our women’s ready-to-wear….This category will represent approximately 50 percent of our ready-to-wear assortments in our stores.”
For the fifth strategic initiative, Idol said the company will “significantly increase our digital marketing spend to fuel our fast-growing e-commerce business globally.”
Essentially, all five prongs of the new plan are expected to “drive increased store and site visits as well as increased average unit retails and deepen our engagement with consumers in our retail channel to improve comparable sales in North America and Europe,” Idol said. He said he was confident the company has significant incremental revenue opportunity as it builds out Asia to a $1 billion business and expands the men’s business, which he maintained could be a $1 billion business over time.
Idol said there was continued strong response to the firm’s new Michael Kors Access line of wearable technology. Other highlights from the quarter were fragrance, led by the brand’s new Wonderlust fragrance, and the expansion of leather goods offerings in the men’s business.
The emphasis on a new strategy is a reversal of Michael Kors executives’ past confidence in the path they were charting as they focused instead on growth pillars rather than turnaround methods. While the five steps outlined Tuesday are aimed at fixing the brand, Idol made it clear that acquisitions or mergers remained a potential tool for the group to grow.
The ceo told analysts the company is “actively looking at a number of different things” and would do a deal if it would be the right one for shareholders. There has been ongoing speculation that Michael Kors — as well as rival Coach Inc. — had eyed Kate Spade & Co., although Idol did not address that on the call.
“We certainly have the capacity to do sizable transactions or smaller transactions, but what we said to you in the past is that we probably won’t do anything small [that] we think that would be a distraction for us and really not create the kind of value we think the shareholders look for from us. So, again, we are actively looking and we’ll see what transpires,” Idol said.
First, though, Michael Kors has to reverse the declines it has been seeing in the last few months. For the three months ended Dec. 31, net income was down 7.9 percent to $271.3 million, or $1.64 a diluted share, as net revenues fell 3.2 percent to $1.35 billion, which included a net sales decrease of 2.4 percent to $1.31 billion.
Retail net sales were essentially flat in the Americas and Europe — $584.2 million versus $589.6 million a year-ago in the Americas and $150.9 million versus $151.1 million in Europe — as comparable-store sales dropped 6.9 percent, reflecting a mid-single-digit decrease in North America and a mid-teens decline in Europe. Comps were offset by a mid-single digit rise in Asia, which also saw a spike in retail net sales to $101.6 million from $25.5 million a year ago.
The company forecast GAAP diluted earnings per share for fiscal year 2017 at $4.09 to $4.13, on revenue guidance of $4.48 billion. That’s down from prior guidance when the company posted second-quarter results in November of EPS at $4.32 to $4.38 on revenues of $4.55 billion.
For the fourth quarter, Michael Kors guided diluted EPS to 68 cents to 72 cents, on revenue forecasts of $1.04 billion to $1.06 billion. That’s a drop from Wall Street’s consensus of 93 cents on revenues of $1.11 billion.
Mizuho analyst Betty Chen has a “neutral” rating for shares of Michael Kors. Chen said, “We expect shares of Kors to be under pressure today on a disappointing fourth-quarter guide that signals ongoing comparable store sales deceleration and gross margin pressure.”
The chairman also said the company would continue to buy back shares to reduce its share base outstanding and create value for shareholders.
Jefferies analyst Randal J. Konik maintained his “Buy” rating on shares of Kors. The analyst said expectations are starting to bottom, and noted that with a “solid strategy in place to improve long-term positioning in a category with few key competitors, we are bullish long term. With shares at current levels, management should buy back more shares and consider a dividend.”