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Star managers battered by rocky ride in yields, currencies

NEW YORK Some of the biggest names in the investment world have been whipsawed by the recent rise in global yields and the strength in the euro against the dollar, with investors bracing for more sharp moves later this year stemming from central bank actions.

Pimco’s flagship Total Return Fund, which lost its crown as the biggest bond fund in the world in April, had been lagging its peer intermediate-term category and benchmark after going long German bunds and shorting euros against the dollar in recent months.

Even bond veterans Dan Fuss of Loomis Sayles and Bill Gross of Janus Capital Group Inc have run into a few snafus by their fixed-income and currency trades.

“The market is more volatile,” Fuss, 81, said in a telephone interview. “We don’t react or change strategies by the day – today, tomorrow or next week. Our focus on the bonds and currency markets are much, much longer.”

Top money managers and investment strategists have been warning the U.S. Federal Reserve was preparing markets for an interest-rate hiking cycle and that other central banks were embarking on loose policies that would trigger volatility. And yet, when rates rose at their fastest since the “taper tantrum” in 2013, many of those managers got caught flat-footed.

Fuss said his Loomis Sayles Bond Fund is lagging its peer multi-sector bond category and benchmark because 28 percent of the fund is in non-U.S. dollar assets.

“We don’t have any kind of shorts, leverage or derivatives in our fund,” Fuss said. “It’s currency exposure that contributed to our performance, positively in most years but negatively over the last 11 months. It has also provided higher income for comparable quality.”

The Loomis Sayles Bond Fund, with $23.7 billion under management, is down 0.20 percent so far this year, underperforming its peer category by 2.10 percentage points and trailing 98 percent of its multi-sector group, according to Morningstar data.

Not every well-established bond manager is having a bad year.

In the multi-sector bond category, the $2.6 billion Pimco Diversified Income Fund (PDIIX.O), overseen by Pimco Group CIO Dan Ivascyn, is outperforming 97 percent of its peer category. The fund is posting returns of 4.88 percent and outperforming its category by 2.98 percentage points.

The $68.3 billion Templeton Global Bond Fund, run by Michael Hasenstab, has returned 1.38 percent while its world bond peer category is down 1.43 percent so far this year. On a 12-month basis, the Templeton fund is returning 0.34 percent, surpassing 74 percent of its peer category, according to Morningstar data as of May 26.


The Pimco Total Return Fund, run by Scott Mather, Mark Kiesel and Mihir Worah, has rebounded in the last several days with the decline in the euro, posting returns of 1.19 percent year-to-date, beating 72 percent of its peers. But its one-month return is down 1.12 percent and three-month return is down 0.42, lagging 82 percent of the Pimco Total Return’s peer category, Morningstar said as of May 26.

Pimco, which used currency positions under Gross, its former chief investment officer, declined to comment for this story. On a 12-month basis ended May 26, the Pimco Total Return Fund, which has $110 billion in assets under management, has posted a return of 2.58 percent, lagging 53 percent of its peer category.

“For Pimco’s Total Return Fund it isn’t unusual, but I don’t think the average bond investor thinks they’re taking these kind of risks when allocating to an intermediate-term bond fund,” said David Schawel, vice president and portfolio manager of Square 1 Financial. “This type of exposure might even be prudent on a tactical basis, but the bigger question is whether investors understand what they’re investing in.”

Tad Rivelle’s Metropolitan West Total Return Bond fund (MWTIX.O), which has had net inflows as a result of Gross’s sudden exit, is posting returns of 0.78 percent so far this year, trailing 66 percent of its intermediate-term peer group. The MetWest Fund families are overseen by Los Angeles-based TCW.

“Given the dynamics in the current environment and our concerns around valuation in fixed-income, we’ve adopted essentially a risk-off portfolio construction,” a TCW spokesman said. The MetWest bond fund has returned 3.12 percent over the past 12 months, better than 74 percent of its intermediate-term bond peers.

For his part, Gross’s $1.5 billion Janus Global Unconstrained Fund is down 0.40 percent so far this year, underperforming its peer category by 1.88 percentage points and lagging 93 percent of its non-traditional bond category, according to Morningstar data.

“My famous (infamous?) ‘Short of a lifetime’ trade on the German Bund market was well timed but not necessarily well executed,” Gross said in his June Investment Outlook on Wednesday.

Gross, 71, had previously said in a tweet on April 21 that German 10-year Bunds were “the short of a lifetime” and better than the bet against the pound in 1992 by investors George Soros and Stanley Druckenmiller.

“When I put out the word that I thought German Bunds were the greatest short in the world, I basically hadn’t done much but I thought it was a great idea, and I came on TV and said that,” Gross said on CNBC on Wednesday. “It seems that the market believed me and moved ahead of me.”

German 10-year Bund yields have hit fresh record lows since the European Central Bank began purchases of public-sector bonds on March 9 as part of its trillion-euro stimulus program, with the latest low of 0.049 percent touched on April 17. The yield on the 10-year Bund has risen to 0.54 percent on Wednesday.

For the non-traditional bond category in which Gross is lagging, Jeffrey Gundlach of DoubleLine Capital has seen his $140 million DoubleLine Flexible Income Fund outperform rivals. The DoubleLine Flex fund is posting returns of 2.88 percent so far this year, outperforming 87 percent of its peers, and 4.38 percent on a 12-month basis, better than 94 percent.

(Reporting by Jennifer Ablan; Editing by David Gaffen and John Pickering)

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Tech, healthcare lead Wall St. higher; Nasdaq hits record

U.S. stocks ended sharply higher on Wednesday and the Nasdaq logged a record high close, led by a rebound in technology and healthcare stocks and optimism that Greece would avoid defaulting on its debt.

Reports that Athens and its creditors were near a deal pushed the euro higher against the dollar, partly reversing recent moves. EU officials, however, dismissed Greek claims an aid agreement was being drafted.

Investors said U.S. stocks were oversold in the previous session, when concerns about Greece and foreign exchange pushed Wall Street to its steepest fall in three weeks.

The SP has inched up to a handful of record high closes in May. But the stock market has failed to make what some traders see as meaningful gains, in part because they are concerned about when the Federal Reserve will start to raise interest rates for the first time since 2006.

“People felt yesterday was an overreaction and I would agree,” said Peter Jankovskis, co-chief investment officer at OakBrook Investments in Lisle, Illinois. “The fact that the market has been staying at its peaks for as long as it has, with only modest pullbacks, is fairly encouraging.”

The Dow Jones industrial average .DJI rose 121.45 points, or 0.67 percent, to end at 18,162.99 points. The SP 500 .SPX gained 19.28 points, or 0.92 percent, to 2,123.48 and the Nasdaq Composite .IXIC added 73.84 points, or 1.47 percent, to 5,106.59.

It was the SP’s strongest day since May 14 and the Nasdaq’s strongest since late January, lifting it to its first record close since April 24.

Nine of the 10 major SP 500 sectors ended higher, with technology .SPLRCT up 1.82 percent and the health .SPXHC index up 1.13 percent.

Broadcom (BRCM.O) surged 21.8 percent on news the chipmaker was in talks to be bought by Avago Technologies (AVGO.O). Avago jumped 7.76 percent.

Gilead Sciences Inc (GILD.O) rose 2.45 percent and led gains on the SP health index.

The energy sector .SPNY was off 0.11 percent as the rising dollar weighed on oil prices. The Dow Jones airlines index .DJUSAR broke a 5-day losing streak to rally 2.23 percent.

Michael Kors (KORS.N) dropped 24.19 percent after the handbag maker reported its slowest quarterly revenue growth since going public.

Peers Coach (COH.N) fell 3.28 percent, Kate Spade (KATE.N) was off 4.66 percent and Fossil (FOSL.O) dropped 6.47 percent on Michael Kors’ report of lower tourist traffic, weak watch demand and shipping delays due to West Coast port disruptions.

Advancing issues outnumbered declining ones on the NYSE by 2,242 to 808, for a 2.77-to-1 ratio on the upside; on the Nasdaq, 1,927 issues rose and 845 fell for a 2.28-to-1 ratio favoring advancers.

The SP 500 posted 23 new 52-week highs and 4 new lows; the Nasdaq Composite recorded 85 new highs and 50 new lows.

About 5.8 billion shares changed hands on U.S. exchanges, below the 6.2 billion daily average for the month to date, according to BATS Global Markets.

(Additional reporting by Tany Agraway, editing by Savio D’Souza and Nick Zieminski)

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U.S. judge puts GM ignition-switch suits on ice, for now

NEW YORK A U.S. bankruptcy judge on Wednesday put on hold dozens of lawsuits accusing General Motors Co (GM.N) of concealing an ignition-switch defect while the plaintiffs in those cases appeal an earlier ruling that found their cases were barred.

GM had argued that claims for vehicles predating its 2009 exit from Chapter 11 bankruptcy should be dismissed, following U.S. Bankruptcy Judge Robert Gerber’s April 15 ruling that the company was shielded from those claims by the terms of its bankruptcy. Plaintiffs said the cases should be stayed pending a resolution of their appeal.

On Wednesday, Gerber said it would be procedurally “cumbersome” to dismiss the cases, as GM requested, in case a higher court overturned his decision. Instead, the cases would be “simply stayed for the time being.” Gerber added that, if his decision was upheld, GM could renew its request.

Steve Berman, a lead lawyer for the plaintiffs, said he was pleased with the decision. Although Gerber said his April ruling could be immediately appealed to the 2nd U.S. Circuit Court of Appeals, Berman said the plaintiffs first planned to seek review from the district judge in Manhattan overseeing more than 200 cases consolidated against GM over the defect and subsequent recalls.

GM spokesman Jim Cain said Gerber had made a practical decision, given the plaintiffs’ plans to appeal.

“The bottom line is that many claims will not go forward at this time,” Cain said.

The plaintiffs’ claims center on a faulty ignition switch in some older vehicles that could slip out of position, cutting power to brakes, steering and air bags. Last year, GM recalled 2.6 million vehicles with the switch, and later issued additional recalls for other safety issues.

Some of the cases have been brought by customers who say their vehicles lost value as a result of the recalls, while others filed lawsuits for injuries or deaths linked to the vehicles. GM also set up an out-of-court fund to compensate victims of mishaps from the ignition switch defect.

Plaintiffs are proceeding with cases involving GM cars made after its bankruptcy, which were not affected by the April ruling. Gerber also said plaintiffs could bring claims based solely on the conduct of post-bankruptcy “New GM.”

(Reporting by Jessica Dye; Editing by Alexia Garamfalvi and Andre Grenon)

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With ‘attitude shift’, Takata moves from denial to compromise in air bag crisis

BEIJING Japan’s Takata Corp, which for months resisted U.S. regulators’ demands to widen a recall over its potentially lethal air bags, has had an “attitude shift” and is in a mood to compromise to try to resolve the ballooning auto safety crisis, said a person close to the company.

That doesn’t mean Takata is ready to take all the blame and shoulder all the cost of fixing tens of millions of air bags that have been linked to six deaths, all in Honda Motor cars, when they exploded violently and sprayed metal shards into the vehicles.

The knowledgeable person, who has been briefed by Takata management leaders, said the company is adamant that its automaker customers share the blame, and the financial burden.

“‘There’s no use or gain in fighting the regulators’ is how one Takata management leader explained to me as to why Takata has undergone this shift,” the person said, adding Takata, via its lawyers, began contacting the U.S. Department of Transportation and the National Highway Traffic Safety Administration (NHTSA) in mid-April.

Those talks eventually led to last week’s announcement by Takata and the U.S. regulators doubling the recall of air bags to nearly 34 million vehicles. Millions more have been recalled outside the United States since 2008.

“We have always worked closely with NHTSA and other American regulators, and have been in close contact right from the start with them over the current recall,” Takata spokesman Hideyuki Matsumoto told Reuters.


The person said one factor motivating Takata to agree to the wider recall was a daily fine NHTSA imposed on the Tokyo-based firm in February for not fully cooperating with investigations.

“The fine was mounting,” the person cited a Takata executive as telling him, noting this was costing Takata upwards of $400,000 a month. As part of last week’s recall announcement, NHTSA said those fines had been suspended.

As of end-March, Takata, valued at close to $900 million, had $636 million in cash and had set aside $520 million in the past 18 months for recall costs. It has three bonds outstanding and yields have risen steeply in recent weeks, reflecting some investor concern over the firm’s finances.

Bonds due in 2021 are yielding 4.99 percent, more than 400 basis points higher than when NHTSA expanded its warning about faulty airbags in October – a move that sent Takata shares tumbling by almost a quarter.

The knowledgeable person said Takata felt it was also coming under pressure from automakers including Honda, Toyota Motor and Nissan Motor, which late last year began recalling millions of air bags for their own investigations.

Takata had refused to take part in those recalls, saying the defect cited by car manufacturers was not “officially recognized.”


Announcing the expanded recalls last week, Takata indicated it still hasn’t got to the root cause of the defective air bag inflators, though it said the performance of some inflators could be affected “by exposure over several years to persistent conditions of high absolute humidity.”

However, it noted that this long-term susceptibility to humidity couldn’t be established conclusively “within the scope of testing specifications” set by automakers – a hint, say some analysts, that Takata holds its automaker clients partly to blame.

The knowledgeable person said a Takata executive told him the statement was not meant as a declaration of war against automakers, rather it was meant to highlight the difficulty of pinning blame to just one party.

He said Takata has not begun negotiating with automakers on how to divide the financial burden of fixing recalled air bags that Scott Upham, president of Valient Market Research, which tracks the air bag industry, reckons could be as high as $4-$5 billion.

“Meaningful negotiations will have to wait until Takata and others involved can conclusively identify the root cause for the defective inflators,” the person said, reflecting Takata’s position.

Company spokesman Matsumoto said Takata “plans to start talks with automakers,” but the first priority is to identify what’s causing the inflator problem. He declined to elaborate.

Takata faces dozens of civil lawsuits, which have been consolidated in a U.S. federal court in Miami, alleging the Japanese firm and automakers knew for years about potential problems with the air bags but failed to warn customers or alert regulators until recently.

A subcommittee of the U.S. House Energy and Commerce Committee has scheduled a hearing for Tuesday (June 2) on the problems that led to the recall – which industry experts said could take years to complete.

And air bags are still rupturing.

This week, Honda said a driver-side air bag erupted on May 13 in a 2005 Honda Fit that was being scrapped at a Japanese yard, sending shrapnel into the air. The car was one of the models covered by Honda’s expanded recalls announced earlier this month. No one was injured, Honda said.

($1 = 121.8400 yen)

(Additional reporting by Umesh Desai in HONG KONG, Ben Klayman in DETROIT and Maki Shiraki and Mari Saito in TOKYO; Editing by Ian Geoghegan)

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JPMorgan CEO faults company and shareholders for disagreements

NEW YORK JPMorgan Chase Co (JPM.N) officials have not done enough to show how well the company is run, Chairman and CEO Jamie Dimon said on Wednesday, after one-third of shareholders disapproved last week of his pay and the practice of one person holding his two jobs.

“We have to do a better job of describing to the investor class” how the board of directors oversees executives, Dimon said at an investor conference. Since he came to the bank a decade ago, Dimon said, he has stepped out of board meetings so that directors will discuss their views and his performance independently.

“The board talks all of the time about what they want the agenda to be,” Dimon said, adding that the entire panel approved his compensation.

At the company’s annual meeting last week in Detroit, JPMorgan’s compensation for top executives was endorsed by only 61 percent of votes cast. A call for separation of the posts of CEO and chairman after Dimon has left was backed by 36 percent.

Dimon also faulted investors for not thinking for themselves and instead following the recommendations of shareholder advisory services Institutional Shareholder Services and Glass Lewis Co. Both firms had argued against Dimon’s pay and for an independent chairman of the board.

“God knows how any of you can place your vote based on ISS or Glass Lewis,” Dimon said. “If you do that you are just irresponsible, I am sorry. And, you probably aren’t a very good investor, either. I know some of you here do it because you are lazy.”

Dimon also said that it was “terrible” last week to have to go through with company’s guilty plea to criminal conspiracy to manipulate foreign exchange rates. Dimon, who blamed the crime on a handful of people, said executives had to brief employees and clients on the decision. The company will lose “some” business as a result, he said.

Meanwhile, trading revenues in the second quarter are running about the same as a year ago, Dimon said. Bank of America CEO Brian Moynihan said earlier in the day he expects trading revenue in the quarter to be “flattish to down a little bit.”

(Reporting by David Henry in New York; Editing by Dan Grebler)

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EU officials dismiss Greek statement on aid agreement being drafted

ATHENS Greece’s government on Wednesday said it is starting to draft an agreement with creditors that would pave the way for aid, but European officials quickly dismissed that as wishful thinking.

Greece and its European and International Monetary Fund lenders have been locked in tortuous negotiations on a reforms agreement for four months without a breakthrough in sight. Without a deal, Athens risks default or bankruptcy in weeks.

A new round of talks begin on Wednesday in Brussels, and a Greek government official said the two sides would start drafting a technical-level agreement there, along the lines of Athens’ longtime demands for no wage or pension cuts and a lower target for a primary budget surplus.

But European Commission Vice President Valdis Dombrovskis said the two sides still had some way to go before any agreement could be drawn up.

“We are working very intensively to ensure a staff-level agreement,” he said. “We are still not there yet.”

Other officials in the euro zone, speaking to Reuters on condition of anonymity, were more blunt. One called the Greek remarks “nonsense”. Another said: “I wish it were true.”

Greek Deputy Foreign Minister Euclid Tsakalotos, who is also a top negotiator in talks with Athens’ lenders, told German newspaper Frankfurter Allgemeine Zeitung that both sides were not only discussing the terms for completing the current aid program, but that talks already included the conditions of additional aid.

“Almost by itself, the two negotiation processes have now been combined,” he said. Tsakalotos also said that the final decision on further aid for Greece and the country’s economic future would come in the next two weeks.

Another Greek official defended Wednesday’s government statement, saying any draft being drawn up now would not be the final agreement, but that there had been progress in talks even though there had been no agreement on some issues.

The statements come as pressure grows on Greek Prime Minister Alexis Tsipras to strike a deal before the country faces a 300 million-euro payment to the IMF on June 5, which several government officials say Athens does not have money for.

Speaking to reporters after a meeting with ministers involved in negotiations with lenders, Tsipras once again voiced optimism that a deal was near. He blamed some of the trouble on policy differences between the EU and IMF creditors.

“We are in the final stretch, it’s obvious that calmness and determination are needed,” Tsipras told reporters.

“We are not alone in this, we are dealing with three different institutions which often have opposing views.”

A deal has been held up by Tsipras’s refusal to back down on so-called red lines, or non-negotiable demands, on reversing labor and pension reforms as well as agreeing a lower target for the primary budget surplus.

(Additional reporting by Jan Strupczewski in Brussels and Renee Maltezou in Athens; Writing by Deepa Babington; Editing by Jeremy Gaunt, Larry King)

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Nasdaq sets record as Wall St. bounces back

NEW YORK U.S. stocks rose on Wednesday, with the Nasdaq Composite setting a record closing high, led by a rebound in technology and healthcare stocks and on optimism that Greece would avoid defaulting on its debt.

The Dow Jones industrial average .DJI rose 121.55 points, or 0.67 percent, to 18,163.09, the SP 500 .SPX gained 19.29 points, or 0.92 percent, to 2,123.49 and the Nasdaq Composite .IXIC added 73.84 points, or 1.47 percent, to 5,106.59.

(Editing by Nick Zieminski)

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Airbus wins board spat with Spain, to renew CEO

AMSTERDAM Airbus Group (AIR.PA) faced down a revolt by government shareholders over a board appointment and invited its chief executive to stay on until 2019 as Europe’s largest aerospace company consolidated a recent push for political independence.

Europe’s largest aerospace group, whose shareholders include the Spanish, French and German governments, won shareholder support for its choice of Spanish board candidate despite what sources described as behind-the-scenes opposition from Madrid.

But the relatively narrow margin of support for Maria Amparo Moraleda Martinez, with 40.4 percent of the shares represented at an annual meeting cast against the former IBM executive, indicated a common front by all three shareholder nations.

France and Germany own 11 percent each of Airbus Group and Spain controls 4.1 percent. About two thirds of the company’s shares were represented at Wednesday’s meeting, which also saw the company reaffirm upbeat business forecasts.

Shares in Airbus Group closed up 2.8 percent.

Airbus Group Chairman Denis Ranque hailed Moraleda’s credentials as the company seeks to import experience from high-tech industries, but the vote became snared in the remnants of previous power battles between Airbus and founder nations.

It was only the second test of a 2012 agreement to curb the influence of the three government stakeholders, but one that Boeing’s (BA.N) European rival appeared determined to win.

Headed by independent-minded former paratrooper Tom Enders, Airbus had blocked the French government’s choice of chairperson immediately after the governance reforms in 2012.

Defeat in what insiders dubbed their new war of Spanish succession could have sent a signal of weakness to Paris and Berlin ahead of future battles over defense spending and jobs.

Airbus also on Wednesday ended suspense over Enders’ future as chief executive, saying its board had asked him to serve for at least one more term after his mandate expires in 2016.

Enders, who had tried and failed to buy BAE Systems (BAES.L) but pulled off a surprise overhaul in company structure since becoming CEO in 2012, could remain in charge until 2019.

While Airbus maintains a board slot for Spain under the 2012 agreement, Madrid’s government no longer has the right to directly appoint its representative, who is deemed independent.

Three Spanish ministers had however written to Airbus to put forward Belen Romana, former head of Spain’s “bad bank” Sareb, as an alternative board candidate, company officials said.

While the three governments wield less direct influence over Airbus than in the past, they have committed to help safeguard each others’ interests on issues of importance to them.

There had been concerns that the row could scupper plans for Airbus to adopt a new legal status as a “European company” if Spain persuaded its two partners to block the change, which needed 75 percent approval. But shareholders adopted it by a

margin of 99 percent.

France and Germany appeared instead to have shown solidarity by backing Madrid on the board vote, but without triggering a full-scale confrontation with management since this vote needed only a simply majority.

The debate could however strain relations between Airbus and Madrid during a sensitive time for the troubled A400M military aircraft project, which is based in Seville.

Enders said he was optimistic that deliveries of the partially grounded aircraft would resume very soon, as long as it could quickly establish what caused a recent fatal crash.

People familiar with the investigation have said the crash may have been caused by a suspected installation error.

(Editing by Mark Potter, David Goodman and David Evans)

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Michael Kors posts slowest revenue growth since going public

Michael Kors Holdings Ltd (KORS.N) reported its slowest quarterly revenue growth since it went public in December 2011 as demand for its handbags and accessories weakened in North America, its biggest market.

Shares of the company, which also forecast full-year sales and profit below analysts’ expectations, fell as much as 19 percent to a two-and-a-half-year low of $49.03 on Wednesday.

Michael Kors’ revenue rose 17.8 percent in the fourth quarter, slowing sharply from the growth of 29.9-74.4 percent it posted for the past 13 quarters.

Same-store sales in North America fell 6.7 percent. Analysts on average had expected a 4.4 percent rise, according to research firm Consensus Metrix.

Lower tourist traffic in U.S. Northeast and Southeast, weak sales in its watches business and shipping delays due to disruptions at West Coast ports hurt sales in North America, Chief Financial Officer Joe Parsons said.

Chief Executive John Idol said watch sales were expected to fall further this year.

Michael Kors said it did not expect its handbag sales to “wildly accelerate” in North America and the category was growing slower than it had in the past five-six years.

The company’s shares will remain under pressure as the North American market for handbags and accessories slows and competition intensifies, Baird Equity Research analyst Mark Altschwager wrote in a note.

Michael Kors’ margins fell to 58.4 percent from 59.9 percent as the company aggressively offered discounts to attract shoppers at a time rivals Coach Inc (COH.N) and Kate Spade Co (KATE.N) are cutting back on promotions.

Michael Kors has been expanding heavily, opening stores and distributing to retailers such as Macy’s Inc (M.N), which has led to brand fatigue among shoppers, analysts say.

The handbag maker forecast revenue of $4.7 billion-$4.8 billion and earnings of $4.40-$4.50 per share for the year ending March 2016. The company said it expected a strong dollar to hurt profit by about 20 cents per share.

Analysts were expecting revenue of $5.05 billion and earnings of $4.70 per share, according to Thomson Reuters I/B/E/S.

Michael Kors said it expected same-store sales to be flat in fiscal 2016.

The company’s net income rose to $182.6 million, or 90 cents per share, in the quarter ended March 28 from $161 million, or 78 cents per share, a year earlier.

Revenue rose to $1.08 billion from $917.5 million.

Michael Kors’ shares were down 18.7 percent at $49.26 on the New York Stock Exchange.

(Additional reporting by Yashaswini Swamynathan in Bengaluru; Editing by Kirti Pandey)

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