Be 'Very Cautious' On Michael Kors Amid Continued Sluggishness, Q3 EPS Seen Below Street

BlueFin Research’s Rebecca Duval expects the third-quarter earnings from Michael Kors Holdings Ltd KORS to miss the $1.64 consensus estimate on continued weak traffic at North American department stores and sluggish retail sales during the holidays.

Investors, Use Caution

The handbag maker gets about 29 percent of its revenue from North American department stores and 40 percent sales from retail stores.

Duval noted that promotional levels remain elevated and inventory in both channels appears to be high, while quarter-to-date domestic comps are trending below expectations of down 4.7 percent.

“While we think a few of the metallic and studded bags are selling well, the rest of the collection looks dated and not too appealing. We do hear that smartwatches, men’s and shoes are performing well, it’s won’t be enough to offset the general weakness in handbags,” Duval wrote in a note.

In addition, Duval believes the situation could get worse over the long-term as the company is heading down a “perilous path” where consumers expect deals to open their pocketbooks.

“Our longer term view on KORS isn’t any brighter as challenges that the retailer will be facing next year could be more daunting than investors may realize,” Duval continued.

Competition And Ex-North American Exposure

Further, the company faces stiff competition from Kate Spade & Co KATE and Coach Inc COH. Furthermore, growth is likely to slow as the wholesale outlet contraction will hit North American expansion. As EU offers only limited growth potential, the company is likely to pin its hopes on Asia.

Bottom Line

“All of these moving pieces are happening at a time when the perceived worth of the KORS brand has diminished after almost two consecutive years of negative comparable sales and margin decline. Suffice to say, we remain very cautious on KORS,” Duval added.

At last check, shares of Michael Kors were down 1.92 percent at $43.36.

Image Credit: By SPERA.de Designerschuhe, Taschen und Accessoires from Deutschland [CC BY 2.0], via Wikimedia Commons