Shares of Michael Kors (KORS) are sliding after Morgan Stanley analyst Kimberly Greenberger downgraded the stock to Equal Weight as she is less confident in the company's earnings per share achievability after its 2017 guidance cut.

EPS ACHIEVABILITY: In a research note to investors, Morgan Stanley's Greenberger downgraded Michael Kors to Equal Weight from Overweight, saying she is now less confident in the company's future earnings per share growth following its 2017 earnings per share guidance cut. The analyst added that she remains cautious on the overall U.S. handbag market given slower growth, ongoing promotional pressures in both the retail and wholesale channels, and wholesale channel destocking, which likely continues into next year. Furthermore, Europe's deceleration is a new development which also adds to top-line concerns, Greenberger argued. The analyst noted that she is "increasingly concerned" Michael Kors no longer has the operating levels it once had to achieve its earnings per share numbers, primarily on the SG&A line. She also lowered her price target on the shares to $52 from $69, saying the lack of earnings visibility now deserves a lower multiple.

TAKEOVER RUMORS: Greenberger told investors that over the last few weeks, some media reports have emerged pointing to a possible acquisition of Michael Kors by LVMH (LVMUY). While the analyst has no knowledge of any transactions, Greenberger said she can understand why others would view the company as an attractive takeout candidate, given the stock's valuation comfortably below peers, Michael Kors's own history, its 2017 free cash flow yield, and its name, which remains well recognizable and carries great fashion credibility.

FUNDAMENTALS CONTINUE TO DIVERGE: In a research note of her own, Oppenheimer analyst Anna Andreeva also commented on the handbag market, saying that manufacturers' fundamentals continue to diverge. While she sees Coach's (COH) store comp improving at better margin as the foreign tourism drag finally turned to a slight tailwind, the analyst noted that Kate Spade (KATE) is seeing an opposite trend, with gross margins missing on elevated outlet promotions and flat store comp at its lowest levels in recent history. Additionally, Andreeva pointed out that Michael Kors' foreign tourism impact is more evident at full-price, with store comps in North America down high-single digits, retail margins getting cut in half, and Europe following North America with comps down low-double digits the last two quarters. Nonetheless, she acknowledged that smartwatch sales are above plan at Michael Kors, which is also a positive read for Fossil (FOSL).

PRICE ACTION: In morning trading, shares of Michael Kors have dropped almost 5% to $47.34.