Michael Kors shows the naysayers, reporting surging sales

August 4, 2014, 12:27 PM UTC
Michael Kors Celebrates The Opening Of New Robertson Boutique
Photograph by Charley Gallay —Getty Images

So much for Michael Kors (KORS) being a has-been.

Concerns that the fashion company’s days of torrid growth could be soon coming to an end evaporated after Kors on Monday reported stronger-than-expected comparable sales in North America and Europe and raised its sales and profit forecast for the fiscal year.

Since going public in late 2011, Kors has been a Wall Street favorite, reporting quarter after quarter of double-digit sales gains and snatching away many of Coach’s (COH) customers with its handbags, eyewear and shoes. But shares, which rose in premarket trading, came under intense pressure last month when several Wall Street firms put out notes saying they were seeing much more Kors merchandise on discount and that the retailer was slower to refresh its assortment. As of the close of trading on Friday, Kors shares were about 20% below a 52-week high.

They needn’t have worried: Kors reported total revenue rose 43.4% to $919.2 million in the first fiscal quarter ended June 28. That includes an 18.7% increase in comparable sales in North America, by far its biggest market, and above the 17.6% Wall Street analysts were expecting, according to Consensus Metrix. (In contrast, Coach, which is in the middle of radical reset to win big its customers, is expected to report a 21% drop in North America when it reports its results on Tuesday.)

What’s more, Kors’ gross profit margin rose slightly, increased 0.2 percentage points to 62.2% of sales, likely meaning Kors did not have to resort to as much price cutting as feared. Kors’ European comparable sales rose 54.2%, an encouraging sign for what is a nearly untapped market so far for the company and one in which Coach has only a tiny presence.

Kors now expects revenues of $4.25 billion to $4.35 billion for the fiscal year that will end in late March, $250 million more than in its initial forecast. It also raised its profit forecast.

A few weeks ago, veteran retail analyst Robin Lewis predicted the Kors brand would at some point crash because of its aggressive expansion: “Michael Kors, the brand, is becoming ubiquitous, and that’s the kiss of death for trendy fashion brands, particularly those positioned in the up-market younger consumer sectors,” Lewis wrote in a blog post.

And while it looks like the Kors party will continue for at least a little while longer, several analysts on Twitter pointed out a detail in the retailer’s results that could portend trouble later on: Sales inventories rose 65% compared to a year earlier, far outstripping sales growth, and therefore setting the company up for potentially having to discount, discount, discount if its locomotive starts running out of steam. And on the call, executives warned investors that its gross margin at its own stores would fall in the coming quarters because of more discounting”

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