Bad news, bargain shoppers: Michael Kors Holdings Ltd. (KORS) limited its sales and promotions this year, and the tactic is working, even though comp sales are down.
Shares are up 14% Monday morning, Nov. 6, after the retailer posted better-than-expected earnings in its second-quarter report.
The retailer reported earnings of $1.33 per share, up by a pretty margin from analysts' predictions of 83 cents. The company's total revenue increased 5.4% to $1.15 billion, also exceeding Wall Street estimates of $1.05 billion.
While net retail sales rose 8% to $645 million, comp sales dropped by 1.8%. This was because of the company's decision to reduce promotional activity by fewer days, CEO John Idol said in the earnings call. The fewer promotions contributed to a higher average unit retail, or AUR, according to Idol. It's part of Michael Kors' Runway 2020 strategic plan, which focuses on product innovation, brand engagement and customer service.
Reducing promotional activity will "protect the long-term image of our brand," said CFO Thomas Edwards.
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Kors saw double-digit growth in e-commerce, according to the company, but failed to give specific figures. Idol shot down the idea of partnering with Amazon.com Inc. (AMZN) to boost digital sales. "Our position as we are focused on our own digital communications with the consumer," he added, "and ... certainly we are showing a strong double-digit growth."
In the third quarter, Michael Kors completed its $1.2 billion acquisition of the Jimmy Choo brand. The company believes it could increase the shoe line's global revenue to $1 billion, calling it a "platform for future acquisitions." In fiscal 2018, Choo is anticipated to contribute between $105 million and $110 million to total revenue of between $1.36 to $1.39 billion.
From here, Kors can only go up, Wall Street seems to think.
Jefferies analyst Randal Konik said the stock has an upside of nearly 50% after the earnings release, praising the company's decision to limit promotions.
The company's turnaround is starting to happen, according to Canaccord Genuity analyst Camilo Lyon, who upgraded the stock to buy from hold on Sept. 27. It's now on a "multi-step [profit and loss] march upward that will manifest through both comps and gross margins over the next few years," Lyon wrote.
Michael Kors first announced the Runway 2020 plan in May, after quarters of slow sales and a tarnished brand. Its first step? Limit department store inventory at retailers like Macy's Inc. (M) . The plan also calls for diversifying products to include more apparel and fewer purses, and investing in digital marketing to drive e-commerce sales.
"Social media is a cornerstone of our communication efforts and remains a principal focus," Idol said. Kors' latest brand ambassador, for instance, is Chinese actress Yang Mi, who boasts 70 million followers on her social media outlets in China.
In August, the retailer got a first hint that its plan is on track, posting a lower-than-expected decline in earnings and same-store sales.
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