One fashion trend is still hurting Michael Kors’ sales growth and profits: smaller handbags.
Given their smaller sizes, these bags cost less — which can ultimately hurt the brand’s profits, even if the number of physical bags sold are impressive,Wells Fargo analysts highlight in a note..
CEO John D. Idol spoke to this irony on a recent earnings call.
“And the whole cross-body piece of the business, I want to tell you, we’re excited about,” Idol said. “We’re less excited about the lower transaction value, but we are on trend, and all the consumer research that we’re doing, our customer says we love Michael Kors, we want to buy Michael Kors, and they are actually buying more Michael Kors. They’re just buying small units, a smaller average price point unit for us. So we’re seeing that happen.”
Michael Kors handbags and watches are everywhere.
But the brand’s popularity might mean it is not perceived as luxurious anymore. Sales growth has been slowing and same-store sales are down 8.5%.
“One of the current issues for the company is that its brand simply does not have the cachet that it once did and is, to some extent, suffering from over-exposure,” Neil Saunders, CEO of consulting firm Conlumino, said.
Investors on Wednesday were focused on the good news, the shares rose after profit and revenue were better than expected. Shares are still down 30% in the past year.
To combat the smaller bag trend, Michael Kors plans to increase the prices of some of its smaller leather bags.
“We are going to take some price increases on some of our small leather goods because we’ve been actually slightly underpriced compared to some of our other luxury competitors and also on some of our cross bodies, so we think that will get us some margin improvement there,” Idol said on the call.
Additionally, Idol outlined plans to release 22 new groups of handbags this spring.
“Obviously, all of those won’t be at retail,” he said. “But you’re going to see a major change in the way that the product works in the stores. And that’s not just because of comp store trend. I want to be clear. That’s because that’s what’s happening in the handbag and the fashion business.”
But the trend isn’t hurting the company too much: Michael Kors shares are rising as much as 10% on profit and revenue that was better than Wall Street expected.
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