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Michael Kors Suffers First-Ever Drop in Comp Sales, Stock Plunges

Global aspirational luxury brand owner Michael Kors Holdings Ltd (KORS) announced financial results for its fourth quarter and fiscal year that were decimated by the strong dollar but still managed to beat Wall Street estimates on the top and bottom lines.

However, a drop in comparable store sales, a first for the company since going public in 2011, sent investors into a panic, reigniting worries that the company might be expanding too aggressively, making its brands overexposed and ultimately less desirable.

Also worrying Wall Street was the company’s tempered guidance for the current quarter and fiscal year. KORS shares plummeted 24 percent on the first day of post-announcement trading, its largest single-day decline since going public, resulting in an almost $3 billion drop in market value.

Total revenue for the three months ended on March 28 increased 17.8% to $1.1 billion from $917.5 million in the prior year quarter, slightly ahead of analyst consensus estimates. Correcting for currency fluctuations, the increase was 23.3%.

Retail net sales increased 14.9% (21.1% on a constant currency basis) to $469.4 million, driven by 121 net new store openings in the past year, and from a significant  increase in e-commerce sales from the recently launched company-owned U.S. e-commerce site.

Wholesale net sales increased 20.4% to $570.4 million, 25.8% in constant currency. Licensing revenue increased 16.5% to $41.3 million.

North American revenue increased 13.7% to $840.5 million. European revenue grew 33.5% to $219.8 million. On a constant currency basis, revenue in Europe grew by 59.5%. Revenue in Japan increased 42.7% to $19.2 million.

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Comparable store sales fell by a staggering 5.8% (1.7% on a constant currency basis), well below management’s prior guidance of a mid-single-digit increase. North American comps down 6.7% and European down 5.6% (up 11 percent in constant currency). Last year, first quarter comps rose by 26.2%.

North American comps were slammed by a slowdown in spending by tourists because of the strong dollar, and by a sharp decline in watch sales. In addition, there was a negative impact from delays in shipments of footwear, womenswear and small leather goods due to the West Coast port slowdown. European sales were impacted by a slowdown in tourist traffic from Russia and Eastern Europe.

On the quarterly earnings conference call, CEO John Idol told analysts that U.S. consumers had shifted their interest from watches to jewelry, which carries a lower retail price.

Gross margin fell by about 30 basis points to 58.4% of net sales, primarily due to foreign currency movement.

Operating income increased by four percent to $256.2 million, or 23.7% of total revenue, from $245.9 million, or 26.8% of total revenue, in the prior year fourth quarter, a drop of 310 basis points.

Net income increased to $182.6 million, or $0.90 per share, from $161 million, or $0.78 per diluted share, in the fourth quarter of last year.

For fiscal 2015, total revenue for the year increased 32 percent to $4.4 billion from $3.3 billion in fiscal 2014. Retail net sales gained 34 percent to $2.1 billion. Comparable store sales increased 10.3%. Wholesale net sales increased 30.9% to $2.1 billion, helped by the conversion of 570 wholesale doors to shop-in-shops. Licensing revenue increased 22.4% to $171.8 million. E-commerce sales grew by 63 percent in the year.

Gross margin for the year shrank by 30 basis points to 60.6% of total revenue. Operating income was $1.3 billion, or 28.8% of total revenue, down from 30.5% in the prior year. Net income for the year increased 33 percent to $881 million, or $4.28 per diluted share, from $661.5 million, or $3.22 per diluted share, in the prior year.

As of the end of March, the company operated 526 retail stores, including concessions, compared to 405 at the end of the same prior-year period. An additional 202 retail stores are operated through licensing partners, bringing the total number of worldwide Michael Kors stores to 728.

John D. Idol, the company’s chairman and chief executive officer, said, “Fiscal 2015 marked another year of sales and earnings growth in excess of 30 percent. While we were faced with a number of headwinds in the fourth quarter, we were pleased with the strong performance across our segments and geographies. We believe that our results demonstrate the strength of the Michael Kors brand as our luxury products continue to resonate with consumers worldwide.”

The company plans aggressive stock purchases to firm share prices. During the quarter, the Michael Kors repurchased 1,409,682 shares of the its ordinary shares for approximately $92 million in open market transactions and another almost 281,000 shares in connection with the Nov. 14, 2014 accelerated share repurchase program. The company’s board has authorized the repurchase of another $500 million in shares through mid-2017.

Kors delivered revised sales and earnings guidance for 2016 that was lower than Wall Street expectations. For the first quarter of fiscal 2016, the company expects a total revenue increase in the high single digit range to $950 million, well below analyst expectations of $1.1 billion in sales. Diluted earnings per share are expected to be in the range of $0.74 to $0.78 for the first quarter of fiscal 2016.

For fiscal 2016, the Kors expects total revenue of approximately $4.7 billion to $4.8 billion, below analyst expectations of more than $5 billion, and flat comparable store sales. Diluted earnings per share are expected to be in the range of $4.40 to $4.50.

“Looking at Fiscal 2016, this will be a year of strategic investments as we continue to develop our powerful platform to support the numerous growth initiatives that are now underway. We see multiple top line growth opportunities through international expansion, digital e-commerce flagships, new store openings and additional shop-in-shop conversions in our wholesale channel,” Idol said. “We plan to expand upon our ready-to-wear and footwear categories and fully develop our global men’s business. In addition, we plan to capitalize on wearable technology in watches and other categories, as innovation and demand in this area continue to advance. Longer term, as we execute on these growth strategies and begin to cycle our strategic investments, we expect to deliver accelerated and sustainable earnings growth and continue to return value to our shareholders.”