Kors delivers another stellar quarter but slowdown signs worry investors, one problem is trend for smaller, cheaper bags
By Yasameen Noorian

Overexposure of a brand maturing too quickly was the sound bite than tried to steal Michael Kors’ thunder on Thursday. The brand that seems …

Feb 06, 2015
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Overexposure of a brand maturing too quickly was the sound bite than tried to steal Michael Kors’ thunder on Thursday. The brand that seems to be everywhere at the moment may have seen its 35th straight quarter of same-store-sales increases and  figures that would make most handbag execs envious, but the question analysts were asking was: is the affordable luxury brand heading for a Coach-style slowdown?

Kors set of Q3 figures were undeniably impressive, topping analysts’ expectations, driven by strong e-commerce and international performances.

But its outlook for the current quarter failed to match what those same analysts’ had expected leading to the inevitable worries about whether it’s reached a turning point.

Those worries are hardly surprising as there are few brands that can maintain the pace Kors has set. Also, consumers can become easily fatigued by brands that are just too visible and, of course, we’ve seen the same pattern set before with the once-unstoppable Coach.

So just what is the full Kors picture? The brand has added 194 stores to its fast-expanding global boutique network that now numbers over 500 but there was no safety in numbers over the Holiday season as some said the heavy discounting to drive sales diluted its higher-end status. Its shares tumbled as much as 6% on Thursday.

A candid chief executive John D Idol acknowledged Thursday that the American market was maturing.

But he argued that its comps performance did not include impressive online sales, which jumped 73% year-on-year.

“We believe that comparable store sales including our e-commerce business is a more accurate reflection of our performance,” Idol said of a brand that is still “resonating with the consumer.”

He also put slowing sales in the US down to a shift in this season’s tastes away from large handbags toward smaller, lower-priced offerings.

“The large handbag trend has kind of slowed down and it’s all about medium handbags,” Idol said. “Cross bodies are also a very hot fashion category today, and they’re at a lower price point.”

Idol also admitted that some of the brand’s recent offerings had been too fashion-forward. On one hand, the Greenwich leather satchel, which comes in colourful pop colours, is a smash hit, he said.

“But there were certain products that didn’t perform as well for us, like the Bucket bag, which from a fashion standpoint you just have to be a part of,” Idol said. “Unfortunately, from a retail standpoint, we didn’t get the same kind of resonation.”

He also said: “The consumer feels really good about our products. She’s voting yes. We are in the fashion business. You have to be a little bit more aggressive when those things don’t work. We said from the day we went public that we don’t believe that 30%-plus operating margins were ever sustainable.”

So let’s look at the Q3 figures in detail. In doing that, it’s worth pointing out that Kors is hardly in decline as the brand turned in the kind of numbers many in the industry would love to replicate.

Total revenue jumped 30% to $1.31bn and net income rose 32% to $303.7m/$1.48 per diluted share, both topping analyst estimates.

Total sales in North America rose 22.6% on-year but same-store sales slowed to 6.8% from 24% a year ago.
European revenue grew 72.1% to $241.4m with comps up 21.2%. Currency neutral, sales there jumped 86.3%, with a 29.9% increase in comp sales. Revenue in Japan increased 72.1% to $16m with comps up 35.4%.

Wholesale revenue via department stores grew 26.4% to $573.8m, excluding the impact from the stronger dollar. Licensing revenue increased 8.6% to $51.5m.

Gross margins narrowed to 60.9% in the three months through December 27, from 61.2% a year ago. While that was smaller than some analysts had expected, there remain worries that Kors will have to use more promotions to inspire visits and boost demand. Kors said it had been “a bit more promotional” to clear products that missed company expectations.

For the current Q4 ending in March, Michael Kors Holdings said it expects earnings between 89-92 cents per share and revenue of$1.05bn-$1.08bn. Analysts expected earnings of 94 cents per share and revenue of $1.15bn.
For the full-year, Kors expects earnings of $4.27-$4.30 per share and revenue of $4.4bn, ahead of analysts’ $4.17 and $4.42bn respective view.


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