In some cases, investing in a troubled sector can be mitigated by picking the best example. However, for Michael Kors Holdings Ltd (NYSE:KORS), that investing logic hasn’t panned out. Despite its hot-brand presence, KORS stock is down 13% year-to-date. In contrast, the otherwise vanilla benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) is up double digits. Can Michael Kors turn the tables on its bad luck?
The troubles for KORS stock certainly aren’t caused by lack of trying. The fashion designer recently announced plans to “acquire luxury shoe maker Jimmy Choo,” according to InvestorPlace’s William White.
The news was a boon for Jimmy Choo, whose London-traded shares jumped to a 63% YTD performance. Even shares of Michael Kors saw a boost, which has gained more than 5% since the announcement.
However, the financial markets are extremely ugly for KORS stock overall. Although early investors are still doing well, anyone that bought KORS over the last five years has likely lost money. Since hitting its peak in February 2014, shares have lost around 62%. Under the best of circumstances, it’s extremely difficult to come back from such steep losses. Multiply that sentiment eight-fold in the fashion retail sector.
Consumers are no longer incentivized to shop in physical stores. Lackluster performances for Nordstrom, Inc. (NYSE:JWN) and Macy’s Inc (NYSE:M) confirm retail bearishness. Fashion leaders such as Ralph Lauren Corp (NYSE:RL) possess legions of fans, but aren’t making friends on Wall Street. On the flipside, competitors Coach Inc (NYSE:COH) and Burberry Group plc (OTCMKTS:BURBY) prove you can still make money in this sector, if you have the right branding.
Will the upcoming Michael Kors earnings report prove the doubters wrong?
Recent KORS Earnings Reports Were Disappointing
For the first quarter of fiscal 2018, analysts expect earnings-per-share to come in at 62 cents. The consensus target is right in the middle of the estimate spectrum, which ranges from 60 cents to 64 cents. Fittingly, recommendation trends for KORS stock are overwhelmingly middle-of-the-road, with most analysts opting to rank it as a “hold.”
On paper, Michael Kors earnings reports appear successful. You have to go back all the way to Q4 FY 2015 to see its last miss. Even then, the performance wasn’t that terrible. Actual EPS came in one penny short of a consensus estimate of 91 cents.
So why are the markets so bum on KORS stock? Since Q1 FY 2015, which was reported on August 4, 2014, Michael Kors earnings estimates have consistently declined. At that time, Wall Street called EPS at 81 cents. A year later, it dropped to 75 cents. In Q1 FY 2017, it slipped a penny to 74 cents. Currently, the EPS estimate is down more than 23% from three years ago.
The revenue picture doesn’t provide much confidence, either. Consensus estimates peg Q1 sales at $918.8 million, against a range of $885.9 million to $934 million. The forecast leans slightly towards the higher end of the spectrum. However, astute investors will recognize the fact that the present sales estimate is 7% lower than the year-ago quarter.
Thanks to its strong profitability margins relative to fashion-industry competitors, and its earnings performance history, I expect another beat. At the same time, I wouldn’t hang my hopes on this latest Michael Kors earnings report. Guidance will mean everything, and I don’t know how management can paint a rosy picture.
Michael Kors Facing Stingy Consumers
President Trump promised to make America great again, but those words apparently don’t apply to retail. Contrary to presidential tweets, consumer sentiment declined since Trump took office. Other factors, primarily real estate and rental costs, have prevented consumers from translating a robust job market into discretionary spending. Also, the ongoing healthcare debate in Washington isn’t helping matters.
Another important factor to consider is national inflation expectations. Compared to prior generations, this metric is quite low. Generally speaking, a bearish inflation expectation implies that consumers aren’t incentivized to buy products if they don’t have to. And with other living expenses moving higher, consumption appetite is lacking.
In my opinion, the market for fashion is shrinking. Some companies, like Coach or Burberry, are making it work. Others, like Michael Kors, are not. For KORS stock to move higher, management must convince investors that they’ve discovered the secret formula. But years of steep losses prevent that message from widespread distribution.
Ultimately, I think the retail sector is extraordinarily ugly, and the upcoming Michael Kors earnings report won’t change that sentiment. To survive here, a company must possess not only street smarts, but certain intangibles that motivate customers. The problem, of course, is that it’s very difficult to spark such emotion, especially in a bearish sector. That’s why I’m staying away from KORS stock, irrespective of the earnings report.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
