Michael Kors calls halt to department store discounts, citing brand damage

Dive Brief:

Luxury apparel and accessories label Michael Kors said Wednesday it will no longer participate in department stores' friends and family sales, or accept coupons for its merchandise there. "It's creating confusion in the consumers' mind relative to the value of the Michael Kors brand when it's being seen so often on sale in so many different places," CEO John Idol said, according to CNBC. "We have to correct something that we think is actually having a negative long-term effect for the brand."
Idol's comments came soon after Michael Kors reported fiscal Q1 2017 adjusted earnings of 88 cents per share, a penny increase year over year and ahead of estimates for 74 cents per share. Revenue rose 0.2% to $987.90 million, beating estimates for $952.4 million. Same-store sales fell 7.4% and wholesale sales fell 7%, while gross profit margin fell to 59.9% from 61.2% a year earlier.
Kors lowered its outlook to a range of 84 cents to 88 cents per share for the second quarter and of $4.56 and $4.64 per share for fiscal 2017. The Zacks Consensus Estimate for the second quarter is $1.06 per share and for the fiscal year is $4.59 per share.

Dive Insight:

The same-store sales slide at Michael Kors is not good news for the company, but it may be even worse news for Macy’s and other department stores, which Kors, like Coach earlier this week and Ralph Lauren in its turnaround plan, blamed for its declines.

The luxury brands maintain that their wholesale sales are suffering from the aggressive promotional environment in department stores, which are turning to discounts to combat falling foot traffic.

In addition to boycotting friends and family sales and other promotions, Michael Kors CEO Idol said the company will pull back inventory and policies from department stores starting in the first quarter of next year and reject store coupling in U.S. and Canadian department stores, among other moves.

“We think that this is critical for us to really do three things," Idol said. "Number one, to protect our brand image. As you know, that channel has become very promotional and, in fact, is causing us difficulties in our own retail channel, which is why you see our gross margins declining because we're really trying to meet certain pricing that's happening to be competitive. And we don't think that's the right thing to do for our brand going forward.”

But department store sales aren’t Kors' only problem. American women aren’t snapping up handbags the way they once did, and that’s hurting brands like Kate Spade and even Coach, which has otherwise turned its fortunes around of late. But Michael Kors is suffering the most, according to Wedbush Securities.

“[Michael Kors] has the highest direct exposure to the wholesale channel (nearly 50% of its North American sales), but beyond channel exposure, higher promotions at department stores and a slowing of the category in general also led to sluggish sales and increased discounting at retail locations, analysts there wrote in a note to clients earlier this week.