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Ralph Lauren, Michael Kors Fall Victim To Wholesale Luxury Blues

UPDATE: Michael Kors will no longer participate in department store promotional sales as of February 2017, according to John Idol, Chairman, CEO and Director of Michael Kors in a conference call. Idol revealed that the promotions were causing difficulties that hampered the company’s retail sales business.

“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,” Idol said. “We have to correct something that we think is actually having a negative long-term effect for the brand.”

While rival Coach is exiting 25% of its department store partners, Michael Kors will not pull its products from any partner locations. However, the brand has already begun reducing the amount of inventory shipped to its department store partners.

Luxury brands Michael Kors and Ralph Lauren are feeling the heat that major department stores have also been struggling to deal with.  Both companies revealed that their revenues, income and comparable store sales are not going in their favor. Simply put, fewer shoppers are buying products within either brand’s store, and they’re not going to department stores to buy them either.

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The definition of luxury continues to remain in flux, especially as retailers such as Burberry, Nordstrom and Tom Ford take notes from fast fashion retailers in adopting a “see now, buy now” merchandising approach. At one end of the spectrum, this strategy caters to consumers who otherwise wouldn’t be shopping at these retailers until later on in the product lifecycle, as well as those who would instead just shop somewhere else. However, this pivot away from exclusivity may have been the actual problem for brands such as Michael Kors and Ralph Lauren in the first place, especially since their products are available at marked-down prices at the nearest department stores.

Although Ralph Lauren actually beat Wall Street estimates, its Q1 earnings report painted a dreary picture:

  • Revenues declined 4% to $1.6 billion;

  • Wholesale (department store sales) dipped 5%;

  • Comparable store sales dropped 6%;

  • Net losses of $22 million, compared to a profit of $64 million in Q1 2015.

The company has already been slimming down, cutting nearly 1,000 jobs and closing 50 stores as it’s become apparent that its sales channels just haven’t been effective. CEO Stefan Larsson, who assumed the position in November 2015, made it a point to follow the “see now, buy now” model by cutting production times by six months, so it won’t be until the end of 2016 before the brand can get a read on whether the decision has worked for them.

Michael Kors, which focuses less on apparel and more on handbags and accessories, didn’t fare well either:

  • Revenues declined 0.2% to $987 million;

  • Wholesale dipped 7%;

  • Net retail sales increased 7.6%;

  • Comparable sales fell 7.4%; and

  • Net income fell 15.7% to $146 million.

The company’s increase in net retail sales was attributed to the company’s North American e-Commerce presence and further expansion into Asian markets such as China and South Korea, indicating that there are specific strengths the brand can build on despite poor U.S. store results.

Coach Sets Precedent For Wholesale Exit

Coach, a primary rival of Michael Kors, has actually experienced a bit of a turnaround due to a brand transformation that tilted its focus more toward the retailer’s outlet stores and semi-annual promotions. As part of the ongoing repositioning, the brand announced it was exiting 250 of the approximately 1,000 department stores it sold products in due to poor Coach merchandise sales. Considering the wholesale numbers at both Michael Kors and Ralph Lauren, Coach’s plan might not seem so drastic after all, especially if the department stores themselves continue to see their own numbers decline.

As this quarter continues, the two luxury brands (and others struggling within the vertical) are going to have to take a hard look at the wholesale performance of their brands and decide whether hinging their plans on a third party is worth the time and effort.

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