Sales up, revenue down for Michael Kors Holdings
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While retail net sales grew 9.2 per cent to US$836.7 million for luxury lifestyle brand Michael Kors in its third quarter, ended December 31, its revenue decreased 3.2 per cent to $1.35 billion.
It sales growth was mainly driven by 193 store openings since the end of the third quarter, including 143 stores associated with the company acquiring its the previously licensed outlets in Greater China and South Korea. This resulted in licensing revenue dropping 22.9 per cent to $43 million, but revenue in Asia growing 89.1 per cent to $112.3 million.
At the end of December, the company had 816 retail stores, including concessions, compared to 623 at the same time the previous year. There were also 128 retail outlets run by licensing partners.
Chairman/CEO John Idol says the company believes Asia represents a $1 billion opportunity over the long term.
For the first nine months ended December 31, the company saw retail net sales increase 9.6 per cent to $2 billion while comparable store sales fell 6.6 per cent. Wholesale net sales dropped 15 per cent to $1.32 billion. Gross profit eased 2.8 per cent to $2.04 billion.
“More work to do”
Neil Saunders, MD of research company GlobalData Retail, says the poor holiday quarter shows that Michael Kors has a lot more work to do before it is back on track.
“Chairman/CEO John Idol says the company believes Asia represents a $1 billion opportunity over the long term.”
“The numbers provide a marked contrast to those of Coach, a company going through a similar brand reinvention, which had a much more positive third quarter. To be fair, the overall decline is partly because of the decision to cut back on distribution through department stores and other channels, which Michael Kors believes have been undermining its brand through excessive discounting, ” says Saunders.
While the resulting 17.8 per cent slide in wholesale revenues and 22.9 per cent drop in licensing revenues was painful. “We believe the decision to dial back is a necessary step in making the brand less ubiquitous, and driving higher margins.
“However, the issue is that the reduction in the number of doors through which Michael Kors is available is not immediately translating into an uplift in sales through its own stores. With a 9.2 per cent rise in retail sales, the numbers look robust enough, but most of this is down to store openings and the shops acquired in Asia where Michael Kors bought out the brand licence.”
Saunders says the underlying comparable sales tell a more revealing story. “These remain weak and have actually deteriorated since the previous quarter. Only a small element of this decline is because of the stronger dollar; indeed, on a constant currency basis same-store sales are still down by 6.4 per cent.
“As much as we believe that Michael Kors is headed in the right direction, and that its new lines are generating interest, it has much more work to do in reconnecting with customers who have been alienated by the overexpansion of the brand. As yet, it is simply not exciting customers in the same way that Coach or Kate Spade are. ”
Saunders says that reconnecting customers with the brand is particularly important as Michael Kors expands its range.
“The new Access smartwatches and fitness trackers, and the new fragrance lines are sensible additions to the portfolio. However, they will only really drive sales as part of a strong lifestyle brand that consumers want to buy into. In our opinion, on this front Michael Kors has more convincing to do. ”
Questions & Answers
Q.Why did Michael Kors' overall revenue decrease despite an increase in retail net sales?
Why did Michael Kors' overall revenue decrease despite an increase in retail net sales?
Overall revenue decreased mainly due to a significant drop in licensing revenue and wholesale net sales. The company acquired its previously licensed outlets in Greater China and South Korea, which reduced licensing income.
Q.What is the primary reason for the reported growth in retail sales?
What is the primary reason for the reported growth in retail sales?
The growth in retail sales was primarily driven by 193 new store openings, including 143 stores acquired in Greater China and South Korea. This expansion of their retail footprint contributed significantly to the increase.
Q.How do Michael Kors' recent results compare to a competitor undertaking a similar brand reinvention?
How do Michael Kors' recent results compare to a competitor undertaking a similar brand reinvention?
Michael Kors' numbers show a marked contrast to Coach, which is undergoing a similar brand reinvention but had a much more positive third quarter. This suggests Coach's strategy is currently yielding better results.
Q.What is the underlying issue with Michael Kors' sales performance, according to Neil Saunders?
What is the underlying issue with Michael Kors' sales performance, according to Neil Saunders?
Underlying comparable store sales remain weak and have deteriorated, despite new store openings. This indicates the existing stores are struggling to excite customers in the same way as competitors like Coach or Kate Spade.
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