Shares of Michael Kors Holdings Ltd. (KORS, Financial) plummeted after the company posted disappointing quarterly results Wednesday morning.Â
While adjusted earnings of $1.27 per share beat the Street's consensus of $1.10, revenue of $1.25 billion was just shy of expectations. Comparable store sales fell 2.1%, or 1.3% on a constant currency basis. Analysts had anticipated a 0.9% decline.
The New York City-based fashion brand has been actively acquiring companies to expand its target market and become a global fashion powerhouse. Revenues, however, are not growing in line with the company’s projections, so the stock has suffered.
In an effort to become a multi-brand fashion house, Kors announced in September it is acquiring Italian designer Versace for $2.2 billion. The company also acquired high-end shoemaker Jimmy Choo last year for approximately $1.2 billion. Following the Versace acquisition, Kors will be renamed to Capri Holdings Ltd., reflecting its new brand portfolio.
“The acquisition of Versace is an important milestone for our group,” Michael Kors CEO John Idol said in a statement. “We believe that the strength of the Michael Kors and Jimmy Choo brands, and the acquisition of Versace, position us to deliver multiple years of revenue and earnings growth.”
With Choo and Versace now under its umbrella, Kors is shifting its focus from being a relatively affordable fashion brand to a high-end luxury fashion brand. While the company will now have greater firepower in handling competition and changing consumer preferences, potential synergies might take longer than initially anticipated.Â
Kors said it plans to increase Versace’s revenue to about $2 billion annually by increasing the global retail footprint and accelerating e-commerce and omnichannel development. As a result, the company's overall revenues are expected to grow to about $8 billion.
Looking ahead to the third quarter, the company guided for earnings per share in the range of $1.52 to $1.57 on revenue of $1.46 billion. This is below analysts’ estimates of $1.82 in earnings per share and $1.48 billion in revenue. For the full year, it expects earnings to be in the range of $4.95 to $5.05 per share on $5.125 billion in revenue. Analysts projected earnings of $5.02 per share on $5.14 billion in revenue.
Coming to valuation, Kors currently floats a price-earnings ratio of 11.46 compared to the industry median of 18.38. Moreover, the forward price-earnings ratio of 10.62 is below the industry median of 16.78. The company has an operating margin of 19.08%, which is above the industry median of 6.02%.
Overall, Kors has strong fundamentals and an interesting growth pipeline. While it might take a bit longer than expected to realize synergies, the company’s market positioning makes it a fair long-term value play.
Disclosure: I do not own any of the stocks mentioned.
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