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Wall Street to Michael Kors: “Show Me the Margins”

Is Michael Kors’ sizzling hot growth starting to cool? Many investors fear that might be the case.

The affordable “jet-set luxury” brand released its first-quarter financial results on Monday, and the news for the three months ending June 28 was certainly impressive. Revenue grew by 43 percent to $919 million. Gross margin edged up 20 basis points, and operating income surged by 40 percent. Operating margins rose to 30 percent. Net income was $187.7 million, or $.91 per share. Sales and earnings per share both beat consensus estimates by a comfortable margin.

The company was pleased with sales growth across all of its geographic regions. In its earnings release, CEO John Idol said, “In North America, revenue increased 30 percent, with comparable store sales growth of 18.7%. In addition, the 30 percent growth in our North American wholesale segment reflects ongoing momentum in our brand as well as the continued benefit from our shop-in-shop conversions. In Europe, we were extremely pleased with our revenue growth of 128 percent, which was driven by a comparable store sales increase of 54.2%, as well as strength in our wholesale business. Lastly, revenue in Japan increased 89%, driven by comparable store sales growth of 48.8%.”

However, the company lowered gross margin estimates for the second quarter, which fueled suspicions by many analysts that the company is expanding too rapidly, and that increased markdowns are taking a toll on margins.

Earlier this summer, Barclay’s and Citigroup both published reports that in June Kors had doubled the square footage in its stores devoted to discounted goods. Barclays also reported that Google data showed the Kors search frequency, once among the highest in the industry, has declined, a possible indication that consumer interest in the brand is waning.

Idol tried to quell these concerns during the quarterly earnings conference call, reminding analysts that management had “told everyone that the operating margins were not sustainable” and that the company is now seeing more normalized rates in some stores.

Investors seemed skeptical, though, sending shares lower after the call. KORS closed down 5.9% to $77.01, 24 percent below its 52-week high, and a year-to-date decline of about 5 percent.