Department Stores Not the Only Problem, Weak Sales Also Reason for Kors’ Tumbling Shares

Department Stores Not the Only Problem, Weak Sales Also Reason for Kors’ Tumbling Shares

A 13% tumble was observed on the luxury handbag maker Michael Kors’ shares this Tuesday after they planned to end distribution to department stores, which had led to 17.8% downfall in revenue in the third quarter.

Their weak results are not just the third party stores, which the management has blamed for several past quarters. Even their retail stories have shown deteriorated sales as lesser potential shoppers came to these stores. Also, their promotion costs and low price small handbags being the current fashion affected the margins of the company.

They have decided to lower their fiscal year and fourth quarter expectations due to the previous weak results. Management at Kors focused on changes in their wholesale locations as they had thought that a lot of inventory and promotions were harming their margins and damaging their long term equity. Therefore, they had decided to reduce the merchandise they pushed to these stores. They did have improvement in their wholesale operating margins, but their retail stores’ margin dropped six points.

The management decided to cut their outlook this fiscal year to $4.48 billion, which is down from $4.55 billion. This was expected earlier and last year’s expectation was $4.71 Billion.

Their complete year earnings are forecasted to be in the range of about 4.15 dollars – 4.19 dollars per share, which was to be between 4.37 dollars and 4.43 dollars per share as previously expected.

They are going to reduce their promos, increase their prices and bring the brand back to its former glory. They believe the entire year of work is needed to achieve that. The management feels that the brand is still in the race as the customers are responding to their products with the same level of enthusiasm. Therefore, a long term growth is opportune. The company has decided that they will still be aggressive with their share repurchase program as a result of their hypothesis.

It has also been said that the company is looking for opportunities of acquisition actively, but they don’t want to make transactions that are small as they might distract them from their main business. It is also rumored that they are eyeing Kate Spade’s business. Another problem Kors’ management has is Coach, their rival handbag maker whose sales rose by 4% last week to about $1.32 Billion.

GlobalData Retail’s managing director, Neil Saunders told investors that he believes that Michael Kors is going in the right direction, but they still have a lot of work to do as they need to reconnect with their customers who now have been almost alienated due to the rapid over-expansion of their brand.  Hope our favorite handbag maker retains their former glory.

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