Oversaturated? North America Drowning In Michael Kors, Analyst Downgrades Stock

Apparently you can have too much of a good thing.

At least, that’s how Deutsche Bank justified its Monday downgrade of Michael Kors Holdings Ltd KORS. Citing market oversaturation, the research firm offered a Hold rating with a lowered price target of $40.

Analysts Paul Trussell and Tiffany Kanaga pointed particularly to the North American wholesale channel, on which Kors depends for 31 percent of revenue, coupled with lacking handbag innovation as catalysts for continued comp weakness. For comparison, Coach Inc COH’s comparable market exposure is about 4 percent, while Kate Spade & Co KATE is 20 percent.

“We believe that KORS is suffering from overexposure in its home market,” Trussell and Kanaga wrote in a Deutsche note. “We acknowledge that the brand is working to alleviate this issue by reducing wholesale shipments and promotions. In addition, we believe management has recognized that its accessories offering needs to be more differentiated and is introducing elevated design elements to its handbags.”

However, they noted a need for more drastic shipment reduction — a “reset” to such a degree that it shakes the firm’s upcoming Investor Day.

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As yet, sales are waning in the company’s primary product channels, as confirmed by the earnings reports of relevant retailers. Macy’s Inc M, which supports 12.7 percent of Michael Kors revenue, recently testified to quarterly handbag underperformance, while Fossil Group Inc FOSL noted a similar drop in Michael Kors watch sales.

Although Trussell and Kanaga foresee growth in other categories, such as apparel and footwear, they expect the initiatives to be slow in demonstrating intended effects.

“Waiting for these initiatives to play out will require patience, and we expect pressure in North America to weigh on near-term results,” they wrote.

The firm also recognizes great opportunity for Michael Kors in the undersaturated Asian market, which could support a 59-percent increase in eastern stores. “Yet, at 8 percent of sales, Asia is still too small to counteract weakness in North America,” Deutsche reported.

Financial Expectations

Considering the various market factors, the research firm lowered its fourth-quarter EPS estimate from $0.94 to $0.69 and its 2018 EPS estimate from $4.45 to $3.85.

Company comps are expected to fall to the low-teens in the fourth-quarter, and although Deutsche predicts improvement in the next fiscal year, it does not anticipate inflection. Risks to the thesis include slowdown in accessory purchases and early reacceleration of comps.

Michael Kors was trading down 0.8 percent around $36.45 at the time of publication, just weeks ahead of the company’s fourth-quarter earnings report and June 9 Investor Day.

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