Michael Kors is currently on a rocky road to top-tier luxury brand status, and last week—during its second quarter fiscal 2017 earnings results announcement —it made clear that it has no plans to change course.
On Thursday, Joseph B. Parsons, Michael Kors’ CFO and executive vice president, and John Idol, its chairman and CEO, claimed to be optimistic as they revealed the company’s first quarterly revenue decline since it went public in 2011. They largely attributed the 3.7 percent drop in quarterly sales ($1.09 billion, compared to $1.13 billion in the same quarter a year ago) to its recent reduction of inventory in U.S. department stores.
Since August, the brand has been strategically pulling back on the amount of product it ships to retailers including Macy’s and Neiman Marcus. In addition, starting in February 2017, it will exclude itself from their broad-based coupons and sales.
It’s all part of Michael Kors’ plan to elevate its perceived status among fashion shoppers. Here, we break down its strategy for effectively changing its reputation for the better.
Nix promotions
Michael Kors clearly understands that, in order to be regarded as a luxury brand, you’ve got to behave like one. Historically, premier fashion houses including Chanel and Louis Vuitton have not offered public discounts—and since disclosing its first-quarter fiscal 2017 earnings, Michael Kors has been making moves to follow suit.
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“We’re really focused on reducing the amount of promotional activity that we are going to be involved with as a brand,” Idol said on Thursday. “We think that’s the right thing to do for the health of the business.”
The same strategy has been employed by like-level brands Coach and Kate Spade, the latter of which highlighted its progress in its third-quarter 2016 earnings statement on November 2:, “We have remained completely extracted from … large storewide promotional events and are building a healthy full-price business in our wholesale environment [and] our full-price channels,” said George M. Carrara, Kate Spade’s president & COO.
Richard Church, a retail analyst at the data analytics firm Discern, approves of the tactic. “Discounting a product and expecting to maintain a premium image are contradictions,” he said. “When your product is increasingly in the off-price channel and is being discounted in department stores, your brand image suffers.”
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And scrapping promotions is as much about making money as it is about saving face. According to Idol, Michael Kors’ sales have slumped due to promotional activity—not because shoppers are not purchasing the brand. “This past quarter, we saw mid-single-digit increases in our overall accessories business in units,” he said. But in order to profit from sales, the discounts have to go.
It’s the math of optimizing sales volume relative to the unit price of a brand that ultimately drives profitability, Church said: “When a brand [attempts to] drive more sales volume with more promotion, the customer begins to wait for the discounts. Ultimately, the brand will likely never regain a full price margin and the equity in the brand suffers.”
Reduce supply to create more demand
Michael Kors believes that there can be too much of a good thing. On Thursday, Idol revealed that, despite the fact that the move was blamed for second-quarter wholesale revenues falling 22 perfect in the Americas, the company will continue to cut the number of units it sells in the North American marketplace, particularly in department stores.
According to Paula Rosenblum, co-founder and managing partner of RSR Research, it’s about time. “The Michael Kors brand is almost crazily over-exposed. When you get too much availability of any ‘luxury,’ it becomes a commodity.”
“We are in the process of rebalancing our business to increase the average transaction value in our retail stores, as well as in our wholesale channel,” said Idol.
And the brand is not alone. In August, Coach made the decision to completely move out of department stores in the name of boosting perceived value, and Ralph Lauren pointed to “pulling back inventory” in its earnings statement released this week.
“It’s great for Kors, and it justifies the company’s investment in its [own] stores,” said Rosenblum. “For department stores, it’s another nail in the coffin.”
Be patient
Michael Kors does not expect to change its image overnight. Despite the fact that it’s experiencing obstacles, it made no mention of reverting to its old retail ways.
“We expect this trend will continue through the remainder of this year,” Idol said, in regard to the downslide of wholesale revenue. As a result, the company lowered its full-year revenue outlook from approximately $4.7 billion, which it previously expected, to $4.55 billion.
Following Thursday’s earnings announcement, Michael Kors shares fell more than 4 percent in after-hours trading. However, many insiders continue to support the brand, holding that it’s forging the right path.
“There are so many aspects to managing a brand,” said Church. “But heavy promotional activity and over-distribution across channels like wholesale and off-price are the kiss of death if you want to be perceived as ‘premier’ or ‘luxury.’”
