UPDATE 3-Michael Kors warns of margin pressure as it expands in Europe

Wed May 28, 2014 1:02pm EDT

* Fourth-quarter earnings $0.78/shr vs est. $0.68

* Revenue $917.5 mln vs est. $816.5 mln

* Gross margin 59.9 pct vs 59.7 pct

* Sees first-qtr revenue $840-$850 mln vs est. $826.1 mln

* Shares fall as much as 4 pct (Adds analyst comment, background; updates shares)

By Devika Krishna Kumar

May 28 (Reuters) - Michael Kors Holdings Ltd, whose trendy clutch bags and watches have taken Wall Street by storm, said it expected the cost of opening new stores in Europe to depress gross margins in the next few quarters.

A seemingly inexorable rise in the company's stock ground to a halt after a company executive said he expected gross margins to fall slightly in the current quarter from a year earlier.

But the company, founded by fashion designer Michael Kors, forecast higher-than-expected revenue and extended its unblemished record of growing sales by 40 percent or more every quarter since going public in December 2011.

"Their growth has been like nothing we've ever seen," Wells Fargo analyst Paul Lejuez told Reuters. "It's been one of the most impressive retail stories that I have seen in my career."

Michael Kors, which had 80 stores in Europe at the end of the fourth quarter, said margins would ease in the next few quarters as it opens an expected 55 new stores in the region through the year ending March 2015.

"After that, I believe that there will be an upside to the European retail operating margins," Chief Executive John Idol said on a post-earnings conference call.

Start-up expenses, such as leasing costs, would hurt its retail operating margins in Europe, the company said, prompting its shares to fall as much as 4 percent in morning trading.

The stock reversed course after rising 8 percent before the bell on Wednesday, when the company reported quarterly results that once again beat analysts' estimates.

Sales in Europe, which accounts for about 10 percent of its total revenue, more than doubled to $164.7 million in the fourth quarter ended March 29.

Sales in North America, its biggest market, rose 43 percent to $739.4 million on higher demand for its watches and small leather goods such as wallets and clutch bags.

The strong sales helped Michael Kors grab market share from Coach Inc, which last month reported its fourth straight quarterly decline in sales from North America.

Strong demand for clutches and wristlets costing around $100 right through to snakeskin handbags with a $3,000 price tag helped Michael Kors post fourth-quarter revenue of $917.5 million, beating the average analyst estimate of $816.5 million.

Michael Kors' first-quarter revenue forecast of $840 million-$850 million was also higher than the average analyst forecast of $826.1 million, according to Thomson Reuters I/B/E/S.

Net income rose 59 percent to $161 million, or 78 cents per share, in the fourth quarter. Analysts on average were expecting earning of 68 cents per share.

Michael Kors shares recovered to trade up 1.5 percent at $97.13 by afternoon on the New York Stock Exchange. The stock rose 54.5 percent in the year to Tuesday's close. (Additional reporting by Maria Ajit Thomas in Bangalore; Editing by Kirti Pandey, Savio D'Souza and Robin Paxton)

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