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Kors Q3 Revenue Cruises Higher, but Comps, Guidance Come in for Soft Landing

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Michael Kors Holdings Limited (KORS) announced third-quarter earnings on Thursday that skyrocketed past Wall Street expectations, but tempered earnings guidance slightly for the fourth quarter, which sent the stock down 2.2% on the day.

Total revenue at the company that calls its flagship label a “jet-set luxury brand” soared 29.9% to $1.26 billion from $965 million in the prior year’s third quarter, slightly missing analyst estimates of $1.3 billion. On a constant currency basis, total revenue increased by 32.6%.

Retail net sales increased 37 percent to $689.4 million, driven by 114 net new store openings since the end of the third quarter of the prior year’s third quarter and e-commerce sales growth of 73 percent from the recently launched company-owned U.S. e-commerce site.

However, the 8.6% increase in comparable store sales, which did not include e-commerce, disappointed those on Wall Street who were expecting a 12.6% increase, and fueled the ongoing concern that the company is over-expanding to the point at which its brand might be too ubiquitous.

The accessories business remained strong in the quarter thanks to trend-right handbags, and enjoyed a double-digit comparable store sales increase in the quarter.

Wholesale net sales increased 24.4% to $573.8 million, and licensing revenue increased 8.6% to $51.5 million.

North American revenue increased 22.6% to $1.1 billion, with a 6 percent increase in comparable store sales, their lowest rate since the company went public in 2011. On the quarterly earnings conference call, chairman and CEO John Idol told analysts that comparable store sales in its North American wholesale business were actually higher than those in its retail stores, but that retail comps were negatively impacted by e-commerce returns to retail stores.

European revenue grew 72.1% to $241.4 million, with comparable store sales increasing 21.2%. On a constant currency basis, revenue in Europe grew 86.3%, with a 29.9% increase in comparable store sales. Revenue in Japan increased 72.1% to $16 million, with comparable store sales growth of 35.4%. On a constant currency basis, revenue in Japan grew 96.3%, with a 54.4% increase in comparable store sales.

Gross profit increased 29.2% to $800.1 million, and as a percentage of total revenue fell for the first time ever to 60.9% from 61.2% in the prior year’s quarter.

Net income rose 32 percent to $303.7 million, or $1.48 per diluted share, from $229.6 million, or $1.11 per diluted share, in the prior year period, zooming past analyst expectations of $1.33 per share.

As of the end of the quarter, the company operated 509 retail stores, including concessions, compared to 395 retail stores, including concessions, at the end of the same prior-year period. The company had 194 additional retail stores, including concessions, operated through licensing partners. Including licensed locations, there were 703 Michael Kors stores worldwide at the end of the third quarter.

In a statement, Idol said, “Our third quarter marked the 13th consecutive period of growth in revenue, comparable store sales and earnings, since our initial public offering. We had a strong holiday season, with comparable stores sales performance led by double digit growth in our accessories category, both in our retail and wholesale channels. We also saw continued momentum across our operating segments and geographies driven by our compelling fashion product offering and jet-set luxury experience that resonated well with customers.”

Idol went on to point out that the relaunched e-commerce site, which previously had been outsourced, exceeded management expectations. “Had we included e-commerce in our comparable store base, North America comparable store sales results would have been 380 basis points higher, which we believe is a more accurate reflection of our performance.”

The company plans to launch an e-commerce site in Canada later this year, and sites in Europe and Japan in 2016.

For the fourth quarter of fiscal 2015, the company expects total revenue to be in the range of $1.05 billion to $1.08 billion and full-year revenue of $4.4 billion. Earnings per share are expected to be in the range of $0.89 to $0.92 for the fourth quarter, below current analyst estimates of $0.93 per share. This assumes 203 million weighted average diluted shares outstanding and a tax rate of approximately 30 percent.

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