Walk before you run; crawl before you walk. Michael Kors Holdings Ltd (KORS) could learn a lot from the old adage.
Yes, there was a time when Michael Kors was running, but the brand hit a headwind several quarters ago, forcing it to re-learn how to walk in the apparel and accessory game.
While the numbers released Tuesday morning don’t indicate the company is walking just yet, it is at least crawling in the right direction, making KORS stock an interesting (if still risky) proposition for investors.
But whether the glass is half-full or half-empty is largely a matter of perspective.
Michael Kors Q3 Earnings
The Good News: Michael Kors mustered a 6.3% improvement of year-over-year revenue, growing its top line from $1.3 billion to $1.4 billion. Profits per share ramped up from $1.48 to $1.59 per share, with a stock buyback juicing those results a bit. That figure also topped estimates of $1.46 per share, while the top line beat estimates of $1.36 billion.
The Bad News: Total net income fell from Q3 2015’s $303.7 million to $294.6 million. Same-store sales growth was better than the expected 4.4% year-over-year dip, but still rolled in 0.9% lower for the quarter.
What’s more, Kors guided between 93 cents and 97 cents per share on sales between $1.13 billion and $1.15 billion for the current quarter. Those numbers fall short of average estimates for a dollar per share and $1.16 billion in revenue.
As was noted, the glass truly could be half-full or half-empty. But in light of the 18% gain KORS stock is dishing out Tuesday, clearly traders decided the glass was half-full.
The Turnaround Takes Hold
In a media vacuum, the bullish response to mediocre earnings and a tepid outlook would raise eyebrows. There’s a method to the market’s madness, though. Michael Kors is (for lack of a better term to describe it) a turnaround story in the making. Last quarter’s earnings and sales beat is the first tangible evidence toward the overhaul taking hold.
It’s not your usual turnaround, however. Unlike most turnaround stories, Michael Kors hasn’t reported a year-over-year decline in quarterly revenue in years. It has been posting increasingly-weaker sales growth rates since early last year, however, and profit growth has been scant. The end result? Prior to the big jump on earnings, KORS stock was down 60% from its early-2014 peak.
As for the future, its improved digital presence and lower prices are resonating with consumers. And there’s more where that came from.
Although his list of bullish catalysts was posted before Kors unveiled last quarter’s earnings, Deutsche Bank analyst Dave Weiner’s outlook instantly looked plausible in light of the company’s fiscal Q3 results.
Specifically, Weiner believes next week’s preview of the fall fashion lineup could be met with open, excited arms now that the rhetoric has turned positive, and promotion-cost comparables are now leveling off. Meanwhile, Weiner believes the U.S. sales slowdown and lower price points have been fully factored into the stock’s low price.
In other words, Michael Kors seems to have found a winning formula for the current state of consumer spending.
Bottom Line for KORS
From a valuation perspective, even after today’s big jump, KORS stock is still valued at a palatable forward price-earnings ratio of 10.8. That doesn’t make it a buy, though, even if one had confidence in the rebuilding effort.
Perhaps first and foremost, “not losing ground” isn’t inherently the same as “gaining ground.” While Michael Kors does appear to have stopped the bleeding, the jury is still out regarding a compelling degree of actual future growth.
Second, whether KORS stock is worth its current price of $47 per share or not, an 18% jump in one day — with a big gap left behind — invites profit-taking. If nothing else, would-be buyers may want to wait for the inevitable dip before stepping in.
Nevertheless, it’s a name that’s re-earned a spot on investors’ watchlists, if not yet their portfolios.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
