By Neil Saunders
Michael Kors has kicked off its new fiscal year with a weak set of numbers. Total revenue was virtually flat, coming in at 0.2% over the same period last year. This performance was driven by the opening of new stores which helped push overall retail sales up by 7.6%, offsetting a dismal comparable sales decline of 7.4%.
As we noted last time we updated on Michael Kors, one of the key issues is that interest in the brand – at least in North America – appears to have peaked. This is evident from our brand tracking, which shows that while MK is not viewed unfavorably by consumers it is not enjoying the resurgence that Coach has managed to engineer. This domestic woe is evident in the North American numbers which tumbled by 5%, a sequentially worse performance than the previous quarter.
The company’s new stores in Europe, such as the one recently opened on London’s Regent Street, are generating good trade in a way that the stores in North America are failing to do. Given that the company has several further European digital flagship stores in the pipeline for this fall, it looks likely that Europe will continue to deliver respectable sales growth across this fiscal year.
The worsening of North American results is partly attributable to the stronger dollar which has likely weakened tourist sales at key flagships in the United States. We believe Michael Kors is affected more than Coach in this respect, as it relies more on tourist spend at its larger stores. Nevertheless, given the investment being put into the new digital flagships – such as the one at 520 Broadway in New York – such an outcome is disappointing.
While North America was disappointing, the numbers from Europe were somewhat better with a 3.3% increase in revenue over last year. Here, the MK brand is less ubiquitous and we believe the company’s new stores, such as the one recently opened on London’s Regent Street, are generating good trade in a way that the stores in North America are failing to do. Given that the company has several further European digital flagship stores in the pipeline for this fall, it looks likely that Europe will continue to deliver respectable sales growth across this fiscal year.
Asia has been another growth spot, with revenues rising by 74.5% – although this is flattered by the acquisition of the company’s Greater China licensee. However, even on an underlying basis we believe that the region is in positive territory, again thanks to the more favorable brand perception from consumers.
In the continuation of a theme we have seen across many luxury brands, wholesale revenue has decreased – falling by 7%. Some of this is down to the company’s own actions to reduce exposure to channels that do not reflect its brand image, and some is down to the generally weaker traffic to malls across North America which has affected a number of outlets and stores that sell Michael Kors product.
Looking ahead, while we expect international to grow this year, the increase will be offset by continued pressures in North America. As such, revenues will likely be flat which will create pressure on the bottom line given all of the investments the brand is making.
Neil Saunders is CEO of research firm Conlumino.