By Neil Saunders
Michael Kors has kicked off its new fiscal year on an encouraging note with most sales metrics in positive territory. The 26% uplift in total revenue continues to be flattered by the addition of Jimmy Choo, but even when this is excluded, revenue still rose by a solid 8.1%. Also aiding the results was an uplift in the wholesale business; thanks to a shift in timing of shipments, revenue was up 19.5%.
Early results from a significant investment in renovating older stores are encouraging. The renovations create a more luxurious experience capable of showcasing products in a compelling way.
Most pleasing is the performance in the Americas, where the long-standing anemic run of retail sales has been reversed with a 2.6% rise in revenue. In context, though, weak prior-year figures saw revenues drop by a disastrous 8.2%. Comparable sales in the US also nudged into the black, although, on an overall basis, comparables increased by a weak 0.2%. This is disappointing given that the company was up against a 5.9% decline last year and that comparables rose by 2.3% last quarter.
Renovating older outlets
Some elevated performance in the Americas is due to a robust consumer economy over the period. Our data show an elevated level of spending on luxury products thanks to tax cuts and bonuses, which have boosted consumer finances. Michael Kors has been a beneficiary of this, especially in categories like accessories, footwear, and women’s outerwear. The same trend did not play out in Europe, where, hindered by a more frugal and cautious approach to spending, Michael Kors’ retail sales fell on both a total and comparable basis.
This mixed performance, along with the soft comparable numbers, signals that the recovery at Michael Kors is still building. The company has more work to do in refining its brand and creating a truly distinctive label among a sea of other luxury and high-end offerings. Progress has been made, but the offer is not as rounded and polished as at brands like Coach or the old-world luxury houses. Many consumers are still making their minds up about how they see Michael Kors.
One vehicle helping create a better impression on consumers are stores. Michael Kors has invested a significant amount in renovating older outlets to create a more luxurious experience capable of showcasing products in a compelling way. Early results are encouraging, with a much better revenue performance coming from the refurbished shops than the rest of the chain. We expect continued investment to help drive up comparable sales over the remainder of this fiscal year.
Rebuilding the bottom line
Another area where the company deserves credit is on the rebuilding of the bottom line. This quarter, gross profit rose by a solid 19.6%. The pullback on discounting and promotional activity has not only produced better margins, but has also reduced the flood of product onto the market, which previously made the Michael Kors label too ubiquitous.
Away from Michael Kors, Jimmy Choo put in a good performance with a healthy uplift in same-store sales and better-than-expected operating income. The benign economic environment was helpful to the brand.
Overall, Michael Kors is moving steadily in the right direction. There are signs of green shoots in these numbers, but we still wonder whether the brand would fare so well if the external environment was not quite so favorable.
Neil Saunders is managing director of research firm GlobalData Retail.