The Street's Confidence In Michael Kors Shaken After Guidance Cut

Michael Kors Holdings Ltd KORS earned itself a downgrade from Morgan Stanley to Equal-Weight after the luxury handbag maker slashed its FY 2017 EPS outlook.

The guidance cut suggests lack of earnings visibility for the company that operates in an industry already plagued by slower demand, shift to lower priced products, geographical headwinds, wholesale channel destocking and stiff competition.

Michael Kors now expects full year EPS in the range of $4.37-$4.43 vs. $4.56-$4.64 prior. Morgan Stanley also cut its FY 2017 EPS estimate to $4.37 (from $4.58 prior).

“[W]e are increasingly concerned KORS no longer has the operating levers it once had to achieve its EPS numbers, primarily on the SG&A line. When KORS was growing sales +DD, having the ability to quickly flex SG&A dollars was less of an issue. However, with negative revenue growth, SG&A likely delevers 410 bps this year alone,” analyst Kimberly Greenberger wrote in a note. She cut the price target to $52 from $69.

In addition, the analyst views the acquisition of the China business could curtail the company’s expense flexibility.

Greenberger is concerned with the company’s disappointing commentary on European retail sales trends despite the majority of luxury peers called out improvement in Europe this quarter, especially in the UK driven by a weaker Sterling.

Commenting on the speculation of a Michael Kors takeover by LVMH, the analyst pointed out that Morgan Stanley’s European Luxury analyst Louise Singlehurst does not believe the company would be interested in buying KORS for two reasons:

• LVMH owns the Marc Jacobs brand which is its primary focus in the °accessible' luxury market. “
• LVMH is also in the process of divesting accessible luxury brand DKNY, which suggests less confidence in that segment of the market.”

On the positive side, Greenberger expects a dividend announcement over the next 4-6 quarters is possible, which could provide a catalyst for the stock.

That said, the Street’s confidence in the company is diminishing, with Canaccord Genuity recently downgrading the stock. The negative sentiment on the stock is likely to persist unless the company shows significant operational improvements.