Michael Kors brand ‘losing momentum’
The latest numbers from Michael Kors are far from being a good result, indicating a distinct lack of momentum at the brand.
In some divisions, the Michael Kors brand has experienced a reversal of fortunes since the last reporting period and the results highlight the company was not one of the winners this holiday season as it was not able to capitalise on heightened consumer spending and confidence.
An overall sales growth of 6.5 per cent might look reasonable enough, however, this is inflated by the addition of revenue from Jimmy Choo, which contributed $114.7 million during the quarter. Remove this, and revenue fell by 2 per cent. Even this number is flattered by some favorable currency movements; take these into account and revenue dipped by a rather more depressing 3.9 per cent.
Admittedly, part of the decline at the core brand is down to a pullback from unfavorable sales channels. However, as this process has been ongoing for a long period, it cannot be used to explain away the weak performance entirely.
Michael Kors has full control of its retail business, where it reported modest growth of 1.1 per cent. However, that number hides some worrying weaknesses: all of the growth in retail came from the opening of 32 new stores over the past year. And at a regional level, only Europe and Asia increased revenue. Within the Americas, retail sales decreased by 4.5 per cent and the poor store performance contributed to a global comparable sales dip of 3.2 per cent. Worryingly, all of the growth numbers are materially worse since the prior quarter. In other words, while the overall retail and luxury market strengthened, Michael Kors’ performance deteriorated.
The sales softness might be acceptable if the company could point to a stronger bottom line. However, this is not the case. Operating margins were static in the retail group and fell for the Michael Kors division as a whole. As a consequence, operating income fell by 8.3 per cent over the prior year. With its relatively weak margins, Jimmy Choo did little to offset this.
Despite attempts to revive the brand, it is clear that Michael Kors has lost momentum and is now heading in the wrong direction. This does not mean the strategy is entirely wrong; indeed, we would argue that the company is stronger now than it was a couple of years ago. However, Michael Kors needs to review its positioning and think about how it can connect more effectively with consumers.
One of the issues is that Michael Kors is a fairly brash brand that lacks the softness of classic luxury labels. This plays well in some segments, but it alienates others – and that alienation is growing as consumers increasingly look for authentic and unassuming products. Admittedly, this is a difficult balancing act for Michael Kors, as it needs to be edgy and distinct, but at the same time generate broader appeal. However, we believe the balance is currently wrong.
Jimmy Choo has been more successful at squaring this circle and has a playbook that Michael Kors should look to emulate.
Overall, we do not see Michael Kors unfavourably, and we believe management has addressed many of the weaknesses that previously plagued the company. That said, it is clear there is a lot more work to be done before better results come through.
Neil Saunders is MD of GlobalData Retail.