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Why Michael Kors' Shares Are in the Doghouse

Michael Kors reports its fiscal first-quarter results on August 5. Analysts, according to Thomson Reuters expect the company to post earnings of 81 cents a share for the quarter, up 34%, on $853 million of revenue, up 33% from last year. For the full year, analyst expect the company to earn $3.97 a share on revenue of $4.204 billion, an increase of 27% year over year.

Unlike its competitor Coach, Michael Kors still has "significant top-line momentum" at the moment, Sterne Agee's Boruchow wrote.

"The company has been a major beneficiary of COH's struggles, with significant (and accelerating) market share gains over the past 12 months. Though U.S. sales growth has moderated somewhat and is likely to continue moderating over time, the company's domestic comps remain among the best in retail today (we model a 17% U.S. comp for Q1), and we may see persistently solid top-line results from KORS over the coming quarter," the analyst wrote in the note.

The retailer's semi-annual sale appears to be broader than last year, Boruchow wrote, suggesting that the company cannot get rid of merchandise at full price, leaving it with excess inventory, which includes not only "slow sellers" and seasonal fashion bags but core products as well.

Michael Kors sells its merchandise through retail stores as well as through wholesale accounts like Macy's (M) and Nordstrom (JWN) and through licensing agreements. Boruchow noted that in the first quarter there were "far more markdowns" at its wholesale partners than last year.

Company management warned at the end of May that gross margin in the first quarter would be slightly lower than last year and that its operating expense rate would be slightly higher as its high growth. The company continues to invest in its brand by opening stores, particularly in Europe. Management gave first-quarter guidance between 78 cents and 80 cents a share.

"Although it is tough to critique a [quarter] with a 26% comp and 64% EPS growth, one thing to note is that [gross margin] was up only 20bps compared to increases of 100bps or more in prior [quarters]. This could be a sign that markdown levels are finally beginning to normalize," Wells Fargo Securities analyst Paul Lejuez wrote in May.

--Written by Laurie Kulikowski in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
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