Michael Kors Holdings Ltd. (KORS - Free Report) continued with its positive earnings surprise streak for the eighth consecutive quarter, when it posted fourth-quarter fiscal 2017 results. Further, the company revenues came ahead of the estimate after missing the same in preceding two quarters.

Though the company witnessed better-than-expected results, investors’ sentiments were hurt due to year-over-year decline registered in both the top line and bottom line along with the bleak outlook. Consequently, the stock is down over 8% during pre-market trading session. In fact, the company’s shares have declined 21.5% in the past six months, underperforming the Zacks categorized Textile-Apparel Manufacturing Industry’s decrease of 12.4%.

The luxury lifestyle retailer delivered quarterly earnings of 73 cents a share that outperformed the Zacks Consensus Estimate of 70 cents but decreased 28.4% from the year-ago period. Total revenue of $1,064.8 million came above the Zacks Consensus Estimate of $1,048 million but declined 11.2% year over year. On a constant currency basis, total revenue decreased by 10.6%.

Gross profit dropped 11.1% to $619.7 million. Meanwhile, gross margin came in at 58.2%, flat year over year. Foreign currency translation impacted gross margin by nearly 20 basis points (bps). Adjusted, operating income declined 68.7% to $151.2 million, while operating margin contracted 710 bps to 14.2%.

Store Optimization Plan

In an effort to increase the profitability in stores fleet, the company has announced its intention to close between 100 to 125 full priced retail stores over the next two years. Moreover, the company stated that it will incur one-time costs of nearly $100-$125 million related to store closures. Meanwhile, the company expects annual saving of $60 million on account of store closures as well as fall in depreciation and amortization related with these impairment charges.  

Segment Performance

Retail net sales came in at $575.3 million, up 0.5% year over year. The upside was mainly driven by 159 net new stores openings since the end of fourth-quarter fiscal 2016, which includes 111 outlets related to the company's acquisition of the earlier licensed operation in Greater China. Comparable sales declined 14.1%. On a constant currency basis, retail net sales increased 1.1%, while comparable sales fell 13.6%.

Wholesale net sales slumped 22.8% to $456.1 million, while on a constant currency basis, it fell 22.3%. Licensing revenue declined 6.2% to $33.4 million.

Regional Performance

Total revenue in the Americas declined 18% to $721 million on a reported basis and fell 18.3% on a constant currency basis. European revenue dropped 15.3% to $215.2 million on a reported basis and 11.5% on a constant currency basis. Revenue in Asia soared 96.3% to $128.6 million on a reported basis, while it advanced 95.1% on a constant currency basis.

Other Details

Michael Kors ended the quarter with cash and cash equivalents of $227.7 million, short-term debt of $133.1 million and shareholders’ equity of $1,592.6 million, excluding non-controlling interest of $2.4 million.

As of Apr 1, 2017, the company operated 827 retail outlets (398 in the Americas, 201 in Europe and 228 in Asia), including concessions. The company had 133 additional retail outlets, including concessions, operated through licensing partners. Consequently, total number of Michael Kors stores is globally pegged at 960 at the end of the quarter under review.

During the fourth quarter, Michael Kors bought back 6,641,815 shares for approximately $250 million. As of Apr 1, 2017, the company had completed previously authorized share repurchase program. However, on May 25, 2017, its Board of Directors authorized a new $1 billion share buyback program.

Guidance

The company provided both first quarter and fiscal 2018 guidance. Michael Kors envisions fiscal 2018 total revenue to be approximately $4.25 billion and expects comparable sales to decrease in the high-single digit range. Operating margin is projected to be about 16%. Management anticipates earnings in the band of 3.57–$3.67 per share for the fiscal year, sharply below the fiscal 2017 earnings per share of $4.48.

For the first quarter, Michael Kors forecast total revenue between $910 million and $930 million and expects comparable sales to decline in the high-single range. Operating margin is anticipated to be approximately 13%. Management projects earnings in the range of 60–64 cents per share for the first quarter.

The Zacks Consensus Estimate for the first quarter and fiscal 2018 is currently pegged at 75 cents and $3.93, which may witness a downward revision in the coming days.

Michael Kors Holdings Limited Price, Consensus and EPS Surprise

Michael Kors Holdings Limited Price, Consensus and EPS Surprise | Michael Kors Holdings Limited Quote

Zacks Rank and Key Picks

Michael Kors currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the retail sector include Gildan Activewear Inc. (GIL - Free Report) , Burlington Stores, Inc. (BURL - Free Report) and Guess', Inc. (GES - Free Report). All three of them carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Gildan Activewear, with long-term earnings per share growth rate of 12.3%, has delivered positive earnings surprise in the last two quarters.

Burlington Stores delivered an average positive earnings surprise of 22.6% in the trailing four quarters and has a long-term earnings growth rate of 15.9%.

Guess' delivered an average positive earnings surprise of 33.3% in the preceding four quarters and has a long-term earnings growth rate of 17.5%.