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01/10 16:25
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call revealed stabilization in Michael Kors' business and strategic initiatives driving positive full-price comps. However, the company faces challenges with tariffs, outlet repositioning, and geographic uncertainties, particularly in Japan and China. The guidance reflects increased expenses and slightly positive operating margins, but the lack of specific geographic guidance and challenges in key markets temper enthusiasm. The market cap suggests a moderate reaction, leading to a neutral stock price movement prediction.
Total Company Revenue Decreased 2.5% year-over-year to $856 million. The decline was attributed to a higher-than-anticipated effective tax rate and valuation allowance position.
Michael Kors Revenue Decreased 2% year-over-year. Retail channel trends were consistent with the first quarter, while wholesale trends improved due to shipment timing. Revenue in the Americas decreased 7%, EMEA increased 4%, and Asia increased 25%.
Jimmy Choo Revenue Decreased 6% year-over-year. Retail sales improved sequentially, but wholesale revenue declined mid-teens due to shipment timing. Revenue in the Americas decreased 3%, EMEA declined 6%, and Asia decreased 12%.
Gross Margin Declined 130 basis points to 61%. Higher tariff rates negatively impacted gross margin by approximately 120 basis points.
Michael Kors Gross Margin Declined to 59.3% from 61.1% last year, primarily due to the impact of tariffs.
Jimmy Choo Gross Margin Increased to 70.2% from 68.6% last year, driven by channel mix and higher full-price sell-throughs.
Operating Expense Decreased by $8 million year-over-year, primarily due to a cost reduction program. However, as a percentage of revenue, it increased to 58.6% from 58.1% last year due to expense deleverage on lower revenue.
Operating Margin Total company operating margin was 2.3%, down from 4.2% last year. Michael Kors operating margin was 10.1%, down from 11.8%, and Jimmy Choo operating margin was negative 6.9%, down from negative 3.6%.
Tax Rate Increased to 112% due to delays in implementing a revised global tax structure, impacting net income by $24 million and earnings per share by $0.20.
Inventory Totaled $766 million, a 2.8% decline year-over-year, attributed to higher tariff rates and foreign currency exchange rates.
Net Debt Stood at approximately $1.6 billion, with cash of $120 million and debt of $1.8 billion.
Michael Kors product updates: Introduced new accessories groups like Hamilton Moderne, Leila, and Nolita styles, which are performing well. Footwear trends improved with strong performance in fashion boots and casual footwear. Ready-to-wear revenue increased, driven by seasonal styles and outerwear.
Jimmy Choo product updates: Launched Bar Hobo handbag and Tylor loafer, with strong initial consumer response. Accessories like Bon Bon and Cinch groups performed well. Expanded casual footwear offerings, including Scarlett kitten heels and Jelly ballerina flats.
Geographic performance: Michael Kors saw revenue growth in Europe and Asia, with a 25% increase in Asia wholesale shipments. Jimmy Choo experienced sequential improvement in retail sales across all regions, though Asia revenue decreased 12%.
Brand awareness: Michael Kors achieved 5.5 billion impressions globally during New York Fashion Week and saw a 9% increase in its global consumer database. Jimmy Choo also saw a 9% increase in its consumer database, supported by influencer partnerships and localized brand experiences.
Store renovation plan: Michael Kors plans to renovate 50% of its store fleet over three years, including flagship locations in New York and London. Early results show increased traffic and sales.
Financial performance: Total company revenue decreased 2.5% to $856 million. Gross margin declined to 61%, impacted by tariffs. Operating margin was 2.3%, down from 4.2% last year.
Debt reduction and share repurchase: Proceeds from the Versace sale will be used to repay debt, with a new $1 billion share repurchase program authorized for fiscal '27.
Focus on growth: Strategic initiatives are aimed at stabilizing the business in fiscal '26 and returning to growth in fiscal '27, with investments in store renovations, technology, and digital enhancements.
Macroeconomic Environment: The company acknowledges the dynamic global macroeconomic environment, which could impact stabilization and growth efforts.
Tax Rate Challenges: A higher-than-anticipated effective tax rate negatively impacted net income by $24 million and earnings per share by $0.20 in the second quarter.
Revenue Decline: Total company revenue decreased 2.5% year-over-year, with Michael Kors and Jimmy Choo both experiencing revenue declines.
Tariff Impacts: Higher tariff rates negatively impacted gross margin by approximately 120 basis points.
Wholesale Shipment Timing: Revenue was affected by shipment timing, particularly in the wholesale channel, which caused fluctuations in quarterly performance.
Store Renovation Costs: The company plans to invest $350 million over the next three years in store renovations, which could strain financial resources in the short term.
Debt Levels: The company has $1.6 billion in net debt, which it plans to reduce using proceeds from the Versace sale, but this remains a financial risk until executed.
Jimmy Choo Performance: Jimmy Choo's revenue decreased 6.4%, with wholesale revenue declining mid-teens, indicating challenges in this brand's performance.
Inventory Management: Year-end inventory levels are expected to increase slightly, which could pose risks if demand does not align with inventory levels.
Operating Margins: Operating margins for both Michael Kors and Jimmy Choo declined, with Jimmy Choo operating at a negative margin.
Revenue Expectations: The company expects total revenue for fiscal 2026 to be between $3.375 billion and $3.45 billion, with Michael Kors revenue between $2.8 billion and $2.875 billion and Jimmy Choo revenue between $565 million and $575 million. For the third quarter, total company revenue is expected to be between $975 million and $1 billion.
Gross Margin Projections: Full year gross margin is anticipated to be approximately 60.5% to 61%. The company expects gross margin declines to moderate through the remainder of the year, reflecting traction from strategic initiatives, sourcing cost efficiencies, and targeted price increases. Third quarter gross margin is expected to decline by approximately 200 to 250 basis points versus the prior year.
Operating Margin Projections: For fiscal 2026, Michael Kors operating margin is expected to be in the high single-digit range, while Jimmy Choo's operating margin is anticipated to be in the negative mid-single-digit range. For the third quarter, Michael Kors operating margin is expected to be in the low teens range, and Jimmy Choo's operating margin is expected to be in the negative low to mid-single-digit range.
Capital Expenditures: The company plans to invest approximately $350 million over the next three years in store renovations, technology, digital enhancements, and other brand-building initiatives.
Debt Reduction and Share Repurchase: Proceeds from the Versace sale will be used to significantly reduce debt. A new $1 billion share repurchase program has been authorized and is expected to begin in fiscal 2027.
Market Trends and Business Segment Performance: Retail trends are expected to improve in the back half of fiscal 2026, positioning the company to return to growth in fiscal 2027. Long-term, the company remains optimistic about the sustainable growth potential of Michael Kors and Jimmy Choo.
Share Repurchase Program: The Board of Directors has authorized a new $1 billion share repurchase program, which the company expects to begin implementing in fiscal '27.
The earnings call revealed stabilization in Michael Kors' business and strategic initiatives driving positive full-price comps. However, the company faces challenges with tariffs, outlet repositioning, and geographic uncertainties, particularly in Japan and China. The guidance reflects increased expenses and slightly positive operating margins, but the lack of specific geographic guidance and challenges in key markets temper enthusiasm. The market cap suggests a moderate reaction, leading to a neutral stock price movement prediction.
Despite some challenges like declining operating margins and no expected growth in certain channels this year, the earnings call highlights positive elements. The sale of Versace will reduce debt and potentially boost shareholder returns. The company is focusing on strategic initiatives like store renovations, product innovation, and pricing strategies, which are expected to improve margins and growth in the future. Positive consumer engagement and improved sell-throughs for Michael Kors, alongside the promising outlook for Jimmy Choo, suggest a positive stock price movement in the short term.
The earnings call presents a challenging outlook, with declining revenues, negative operating margins, and high debt levels. Despite some positive indicators in retail sales, the weak financial performance and tariff impacts overshadow these. The Q&A reveals optimism in Michael Kors' retail but lacks clarity on mitigating tariff impacts. The reinstatement of a share repurchase program is positive, but overall, the financial health and guidance concerns lead to a negative sentiment. Given the market cap, the stock is likely to react negatively, potentially in the -2% to -8% range.
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