Michael Kors’s turnaround is on the right track, but the brand may be boring consumers
February 8, 2017
Some analysts think Michael Kors is following the same path as rival Coach
Analysts think Michael Kors Holdings Ltd.’s efforts to reduce merchandise promotions are good moves for the company, but some wonder whether consumers are a little bored with what the brand has to offer.
“As much as we believe that Michael Kors is headed in the right direction, and that its new lines are generating interest, we maintain our view that it has much more work to do in reconnecting with customers who have been alienated by the overexpansion of the brand,” wrote Neil Saunders, managing director of GlobalData Retail, in a Tuesday note. “As of yet, it is simply not exciting customers in the same way that Coach or Kate Spade are.”
Michael Kors KORS, +1.17% shares closed Tuesday down nearly 11% after the company announced sales of $1.35 billion, just below the $1.36 billion FactSet consensus. Same-store sales were down 6.9%, missing the 5.1% decline FactSet forecast. Looking ahead, the company sees a same-store sales decline in the low-teens range in the fourth quarter.
Michael Kors is one of the few brands, including Coach Inc. COH, +0.50% and Ralph Lauren Corp.RL, +0.77% , that are pulling back on department store availability to reduce the number of discounts on their merchandise. The constant stream of promotions not only cuts into sales, but also dilutes the brand.
GlobalData believes the issue with reducing the number of stores in which Michael Kors merchandise is available “is not immediately translating into an uplift in sales through its own stores.” Coach’s third quarter was “much more positive,” Saunders said, and the company is “going through a similar brand reinvention.”
The problem may also be the stores themselves.
“Overall, Jane Hali & Associates believes the downfall of Michael Kors… is due to the lack of newness and updating not only [in] their handbags, but also their store experience,” said Jessica Ramirez, retail research analyst at the retail investment research firm, in a Tuesday note.
Jane Hali is negative on Michael Kors.
On the Tuesday earnings call, Chief Executive John Idol outlined five initiatives to improve same-store sales outcomes, including new design elements for its handbags in the $498 and $398 category, more footwear in high-volume stores, and an increased digital marketing spend. The company also sees the $300 handbag category as “a very big opportunity” to create value without promotions.
“Efforts to be less promotional are the right long-term and global steps, but we think the company is still early in the journey,” said Cowen & Co. in a Tuesday note. “[W]holesale accounts may or may not response well to more formal pullbacks on promotional plans with new policy in effect now as of Feb. 1 – this is a risk factor for wholesale revenue which should be lower as a percent of mix as Michael Kors seeks to re-elevate the brand.”
Cowen & Co. rates Michael Kors shares market perform and cut the price target to $40 from $47.
Wells Fargo believes the focus is on the same-store sales guidance, “which would be easily their worst performance as a public company.” Analysts say the company’s issues go beyond its own initiatives.
“We believe Michael Kors continues to be challenged by moderating industry trends and competition,” analysts wrote in a Tuesday note. “As a result, sales and margins may be under pressure in the near term.”
Wells Fargo rates Michael Kors shares market perform and cut its valuation range to $38 to $40 from $48 to $50.
Analysts at Wells Fargo, as well as those at Wedbush, think Michael Kors may be following the same route as rival, Coach.
“We suspect further retrenchment… will be necessary before growth can resume (similar to Coach prior to its recent turnaround),” Wedbush wrote in a Tuesday note.
Analysts there rate Michael Kors shares neutral, and cut the price target to $36 from $45.
Michael Kors shares are down 26.7% for the past year, nearly the same as the 26.8% decline for the past three months. The S&P 500 SPX, -0.22% is up 23.7% for the last 12 months.
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