On Wednesday, fashion brand Michael Kors Holdings Ltd. reported decent first quarter fiscal 2017 results, maintaining its earnings streak for the fifth consecutive quarter. Adjusted earnings per share of 88 cents beat the Zacks Consensus Estimate of 74 cents. Total revenue came in at $987.9 million, also topping our consensus estimate of $952.4 million thanks to an increase in retail sales in Asia and Europe.
Despite these positive beats, KORS stock fell over 5% in pre-market trading—it’s recovered a bit, and is down just under 2% in afternoon trading—due to a weak outlook for its fiscal second quarter and a 7% decline in its wholesale business.
CEO John D. Idol said that “this progress was muted by the continued decline in mall traffic trends as well as a decrease in tourism in certain major cities which negatively impacted our comparable sales performance during the quarter. Looking ahead, we remain focused on executing against our long-term growth strategies across both product categories and regions.”
The solution? The brand will no longer be a part of department stores’ sales, discounts, and coupons on its products. It will also limit the amount of product available in these stores.
Talking to analysts, Mr. Idol said that consumers “have forgotten the true value of the product” since the brand is always on sale. This is certainly true, but I think the real problem is not that simple.
The Most Basic of the Basics
Michael Kors is basic. Specifically, its Michael Michael Kors sub-brand is basic, like the way Starbucks’ (SBUX - Free Report) Pumpkin Spice Latte is. The brand is literally everywhere, oversaturating the retail market to the point where it has become a joke, both inside and outside of the fashion industry.
If you walk down, say, Michigan Avenue in Chicago, you’d be hard-pressed not to spot at least 10 Michael Kors handbags, noticeable from their shiny metal hardware and tacky, MK logo. Not even the designs can help the brand, as most are a direct rip-off from other luxury handbag makers, and more often than not, a year or two behind in terms of on-point trends.
For example: its Signature collection. Like Louis Vuitton did with its LV-emblazoned handbags, Michael Kors too created a product collection that prominently featured its initials. But unlike Louis Vuitton, the world’s most valuable luxury brand, Michael Kors’ products did not see the same success.
What makes a handbag top-quality, and the opposite of basic, differs from person to person, but some details stay constant: high-quality leather, minimalist design, small logo, classic shapes. Michael Michael Kors handbags—and even its shoes, apparel and other accessories—have strayed from these characteristics, disappearing beneath the distracting MK logo.
Michael Kors burst onto the scene in 1981, established by its namesake designer Michael Kors (he now serves as honorary chairman and chief creative officer), but its popularity skyrocketed after Mr. Kors landed as a judge on the hit reality show Project Runway in 2004. Just a year later, Kors formed a partnership with Mr. Idol, and the rest is history.
Right from the start, expansion was a key priority. Lawrence Stroll and Silas Chou, two investors who helped make Tommy Hilfiger a household name, were added to the team, and from there, mid-price point items were added to the brand’s portfolio. $400 handbags, $300 watches, and $200 shoes were sold as a complement to Michael Kors Collection, the company’s high-priced haute couture collection, under the Michael Michael Kors brand.
As of last year, Michael Kors has over 550 stores, as well as more than 1,500 in-store boutiques all over the world. Mr. Idol had once described Michael Kors as the “Hermes of Staten Island,” something probably meant to mean that luxury products don’t need to be unaffordable, but is really just insulting towards Hermes.
The company swiftly took over market share from Coach Inc. , a top competitor and a forerunner in affordable luxury. Like Michael Kors is experiencing now, Coach suffered the image and profit sales problems just a few years ago, having rapidly expanded both nationally and internationally, particularly into outlet stores.
And also like Michael Kors, Coach’s product line experienced misfire after misfire until last year or so, when the brand began emulating its original designs, hired a new creative director, and produced marketing campaigns that its audience connected with.
There May Be Hope Yet
Michael Michael Kors has done some serious damage to the brand’s reputation. It has reached the point of overexposure, something no fashion brand wishes to do and actively tries to avoid. The product line has the stigma of being basic, and it will take years for it to distance itself from that descriptor.
Mr. Idol is making a good start, limiting Michael Kors’ presence in shops like Macy’s (M - Free Report) and Nordstrom (JWN - Free Report) . Going forward, the company plans to sell fewer items at a higher price point, a strategy that should balance out on its top line, according to Mr. Idol.
Coach should be a clear lesson for Michael Kors. Because if that brand can make a comeback, Michael Kors surely can. Its Collection items are stunning, and are a true testament to the fashion design abilities of the brand and of the company.
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