The bigger brands are exercising some muscle and, in turn, are gaining the upper hand in their relationship with their retail partners.
Quarterly results from Kate Spade & Co. and Coach Inc. show that as they exit certain department store promotional events, the companies are also able to migrate consumers over to full-price purchases. Included in the group of brands that have pulled back on their participation in these same events are Ralph Lauren Corp. and Michael Kors Holdings.
For each of the four firms, the strategic pull-back represents an effort to increase brand equity. Even though Ralph Lauren and Michael Kors don’t report earnings until next week, company executives on past quarterly conference calls have expressed the viewpoint that the pull back also improves the quality of each sale. That translates to better margins.
Ralph Lauren is working on initiatives to drive quality of sales up, which include pulling back on inventory receipts and store closures through its Way Forward Plan being spearheaded by chief executive officer Stefan Larsson. Michael Kors chairman and ceo John Idol said in September at the 23rd Goldman Sachs Global Retailing Conference that in order to bring back the credibility of the pricing structure for the brand, the company on Feb. 1 will no longer be included in friends and family events and in couponing promotions at department stores and other retailers.
Kate Spade ceo Craig Leavitt in a telephone interview Wednesday after the company reported third-quarter results said that as the company expands distribution at new wholesale doors, the partnership begins with the exclusion from many of the planned store promotions already in place. “We are building that customer relationship at full price right from the start. Based on the growing penetration of our full-price business, even in the full price channel, that methodology certainly is working. It points to the strong brand health at Kate,” he said.
For the three months ended Oct. 1, Kate Spade’s net income grew to $29.6 million, or 23 cents a diluted share, on a net sales gain of 14.1 percent to $316.5 million. Adjusted earnings per share was 13 cents. Direct-to-consumer comparable sales growth was up 6.7 percent. Wall Street was expecting EPS of 9 cents on sales of $310.9 million.
Even though Kate Spade bested analysts’ EPS estimate by 4 cents, shares of the company on Wednesday fell 10.2 percent to close at $14.67 in part because the 6.7 percent comps growth was below the 7.4 percent that analysts were predicting for the quarter.
Leavitt said new customers of the brand may purchase a handbag first and then return and buy in a different category, or they may buy a home product first and then check out the core handbag offerings. The company has also been able to migrate existing customers loyal to the brand to full price purchases. Microassorting certain categories based on specific store locations — such as greater selection of working wardrobe offerings in downtown city stores — has helped to grow the full-price channel, as has “finding new ways for the consumer to interact with the brand,” Leavitt said. Those ways include personal shopping appointments at a freestanding store that can be made online, buy online and ship from store, and new merchandise offerings that tout some form of personalization, he explained.
As for “working with its retail partners,” Leavitt said there hasn’t been any resistance from them at all. He noted that conversations with the firm’s wholesale partners on how to differentiate product offerings by door have been well received. The company’s extensive database on sales trends from its e-commerce sales and company-owned stores help to fine-tune the wholesale merchandise mix — whether silhouette, size or occasion — and differentiate their assortment from the competition.
In a telephone interview on Tuesday, Coach ceo Victor Luis said the firm’s runway collection Coach 1941 — available in company-operated stores and at finer department stores and specialty retail doors — “has been doing very well and taking a bigger and bigger proportion of our own store network.”
Luis said the company has been pulling back on promotions and in distribution channels that no longer make sense. Having fewer promotional products available helps to “maintain trust with the consumer and not create confusion across channels,” he said.
Coach on Tuesday posted first quarter results for the period ended Oct. 1 in which profits rose 21.8 percent to $117.4 million, or 42 cents a diluted share, on a net sales gain of 0.7 percent to $1.04 billion.
Gabriella Santaniello, founder of fashion and retail research firm A-Line Partners, said brands such as Kate Spade, Coach, Michael Kors and Ralph Lauren are taking the steps that they need to in order to reposition their respective brand.
“The department stores right now are in a situation where they have to be receptive. It’s not like it was 10 years ago when it was expand, expand, expand. Now they’ve all run into a difficult time and the retailers want to be profitable too. They have to receptive because they don’t want to damage their relationship with their vendors, and they know there will be some growing pains,” Santaniello said.
She compared the current mindset with that of ten years ago, a time when department stores saw a good business and the attitude was to keep growing it, either by expanding the square footage allocated to the brand or by adding more retail doors in general. “Initially everyone thought it was a good idea, and even if someone was losing money, it was still generating sales. The large brands would pay markdown money to keep the business afloat. It takes a lot of courage and business savvy for the brands to say they are pulling out of [certain doors]. At a certain point, you have to do what’s right [because] you can’t over-saturate the market,” Santaniello said.