Michael Kors (KORS) reported Street-beating results Monday before the start of trading, but a warning about margin compression led KORS stock to quickly reverse its premarket gains. After Michael Kors closed the day below a key support line, active traders and investors can now look to play the stock from the short side on oversold bounces.
Specifically, Michael Kors came in with earnings per share that grew 50% year-over-year to 91 cents, beating Wall Street analysts’ consensus estimates by a dime. Revenues grew 43% to $919.2 million, which also easily beat estimates for $852.45. Those revenues came on same-store sales growth of 24.2%, and wholesale sales that improved by 40%.
Michael Kors also had some rosy guidance for Q2 revenues, raising its target from $950 million to $960 million, which compares favorably to analyst estimates of $956 million.
Doesn’t all that sound rosy?
However, CEO John Idol said during the conference call that Kors’ margins will shrink because of investments in store expansions in Europe, and that’s where things got ugly.
KORS stock was up more than 10% in premarket trading at one point, but those gains quickly vanished on the comments of shrinking margins. When it was all said and done, Michael Kors’ shares closed the day lower by nearly 6% on thick volume. The heavily traded stock usually sees about 3.5 million shares trade hands on any given day, but on Monday volume stood close to 22 million shares.
Michael Kors Stock Charts
On the chart stretching back to Michael Kors’ initial public offering date in late 2011, note that since June 2013, KORS stock became further and further extended above its black trendline. This ultimately led the stock to top in February, which was further confirmed with a lower high in May. Monday’s selloff in KORS stock took it below the black trendline for the first time ever.
The longer-term chart is thus now broken, so traders can use any oversold bounces to play the stock from the short side, as a better mean-reversion move could easily take the stock back into the high $60s or low $70s.
To be clear, this is not a call that KORS stock will fall apart — it’s merely a tactical trade to take advantage of a stock in mean-reversion mode.
On the daily chart, note that KORS stock already broke below its 200-day simple moving average (red line) in mid-July (also for the first time ever), and after a little bounce, shares proceeded lower again with Monday’s selling. However, Monday’s move also took the stock to a next lateral support area in the mid-$70s, where an oversold bounce is possible.
Regardless of the immediate-term direction of KORS stock, active investors can use any oversold bounces as shorting opportunities with downside targets in the high $60s or low $70s, as the stock looks to be in a more meaningful mean-reversion move.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
