Kors shares jump as less bad is good enough

Shares of Michael Kors shot up more than 20 percent Tuesday, after the handbag maker reported sales and profits that easily topped Wall Street’s expectations during the holiday quarter.

More importantly, despite aggressive promotions that permeated across the broader handbag sector, the affordable luxury maker also reported better-than-feared gross margins.

A Michael Kors retail store on Market Street in San Francisco.

Adam Jeffery | CNBC
A Michael Kors retail store on Market Street in San Francisco.

What’s more, management indicated that the brand’s inventory build decelerated from the first half of the year, as it dials back on the amount of product it places in the troubled department store space.

“Given the big bottom-line beat, we expect the stock to be up significantly today. And deservedly so,” Citi analyst Paul Lejuez told investors. “They put up good numbers in a tough environment.”

Analysts have been cautious on Kors for several quarters, mainly due to fears that the brand has become oversaturated in the U.S. Many have drawn a parallel between the trajectories of Michael Kors and Coach, which is still trying to recover from a steep sales decline from its over penetration. Coach’s revenues have similarly shown recent signs of life, with the brand last week reporting its first sales increase in more than two years.

But investors were also cautious on Kors because of its disproportionate exposure to the department store channel, where sales fell 2 percent in 2015. While U.S. wholesale revenues account for just 5 percent of Coach’s sales, they make up roughly 40 percent of Kors’ total revenues, according to Citi estimates.

[“source -cncb”]