Handbag companies have turned earnings season into the spinning cycle.
Michael Kors Holdings Ltd., Kate Spade & Co. and Coach Inc. all reported this week and while all three did better than Wall Street expected, the one key metric that’s been on the decline at least for two of the firms has been comparable-store sales for stores open at least a year. Executives at the three firms say they have answers to the category malaise, whether it’s more newness in handbags, fewer promotions while adding lifestyle categories or more acquisitions. How these initiatives will pan out – no matter what the executives are saying about market share gains – won’t be known for several more quarters, when results will give weight to perceived solutions to dealing with the slowing handbag market.
Nonetheless, shares of Michael Kors on Thursday jumped 10.8 percent to close at $43.77, while Coach slipped 0.5 percent to $31.56 and Kate lost 5.4 percent to $20.33.
Kors was the last of the big three to post results Thursday. The company said for the first quarter ended June 27, net income fell 7.1 percent to $174.4 million, or 87 cents a diluted share, on a 7.3 percent gain in revenues to $986 million. Net sales rose 6.8 percent to $947.3 million, which included a 4.2 percent increase in wholesale sales to $424 million and a retail net sales growth of 9 percent to $523.3 million. Retail sales growth was helped by 107 net new store openings – but comparable-store sales dropped 9.5 percent.
John D. Idol, chairman and chief executive officer of Kors, said a continued decline in watch sales in North America impacted the quarter, but that there was growth at its own retail stores domestically and internationally in the handbag category. That led Idol to conclude in a call to analysts, “We believe that the category in North America is growing in a low-single-digit rate today, and we think that we are outpacing that growth by a fairly significant amount.”
Idol said the way to get more market share is to have more bags. “Newness is without a question what is driving her interest.…There are some really good things starting to happen in the handbag business.” He noted backpacks as part of a new trend, as well as smaller handbags. For spring 2016, Idol said, “We are introducing our largest assortment of new handbag groups as well as new watch styles….”
According to Idol, the female shopper — particularly the Millennial — wants the smaller bags, cross-bodies and small leather goods.
Despite Idol’s bullishness, chief financial officer Joseph B. Parsons told analysts the company expects the retail environment for the second quarter and full year will remain challenged. Second-quarter total revenues are projected at between $1.06 billion and $1.08 billion, or diluted earnings per share at between 86 cents and 90 cents. The company expects a “high-single-digit comp decrease,” Parsons said. For the full year, total revenue is expected at between $4.7 billion and $4.8 billion, and the forecast for comps is a low-single-digit decline.
Parsons also said a priority is for the company to have “dry powder, should we be able to opportunistically do something in the future.” While Idol said taking back certain licenses would be a possibility, he also said “there might be other things that we would look at as an organization as well, but we’ll take a look at that as we get further down the road.”
Jefferies analyst Randal J. Konik has a “Buy” rating on the stock, noting, “While Kors did see slightly higher markdowns in its North America retail business and higher allowances at wholesale, this was largely offset by strength in Europe, geographic mix and growth in licensing.”
Coach Inc. was the first out of the gate to report earnings on Tuesday and its ceo Victor Luis said what’s missing in the handbag market is newness. “Today, there’s a lot of competition driving a lot of similar product. Consumers are looking for something new to inspire them,” he said.
As for how to grow, Luis told Wall Street analysts strategic acquisitions are a second priority for the company, with the first investing in its own business for organic growth. “While we have nothing planned imminently, we want to have the flexibility to act if and when it’s in the best interest of Coach and our shareholders,” he said.
Coach has been investing in transforming the name into a lifestyle brand, but it’s hard to tell whether the new line by Stuart Vevers has really taken hold with consumers given that only about 15 percent of stores are showcasing the line in the context of its new store concept. Luis expects to see positive comps in the fourth quarter of fiscal-year 2016, when 40 percent of the store fleet will showcase the concept.
Kate Spade followed on Wednesday, and Craig Leavitt, its ceo, is working on a micro-assorting strategy to protect the quality of sales, as well as a pullback on flash sales on its site. It’s also elected to no longer participate in friends-and-family sales. The company said it was gaining market share in handbags, although Leavitt did note that there’s been a reshuffling of brand penetration in the handbag space. The company’s also using speed-to-market to leverage with the specialty channel to test reactions to new styles. Regardless of what happens in the handbag market, the company is looking to expand organically through new product categories, such as sleepwear and the entrance into the ath-leisure market.
While it makes sense for firms to try to grow organically, clearly the move to a lifestyle monobrand gives companies the opportunity to grow through licensing. And having other categories allows them to rely less on any one product line.