Michael Kors to close over 100 stores

Michael-KorsClothing and accessories retailer Michael Kors has announced it intends to close between 100 to 125 of its full-price retail stores over the next two years as it intends to improve profitability of its store fleet.

The company, which has 827 retail locations as of April 1, stated it anticipates ongoing annual savings of $60 million as a result of store closures and the lower depreciation and amortisation associated with these impairment charges as a result of the plan but added it will incur approximately $100 – $125 million of one-time costs associated with store closures.

The retailer did not disclose which stores will be closing and also did not say how many jobs might be lost as a result of the closures.

The luxury retailer has posted a net loss of $26.8 million, or 17 cents per share, in the latest quarter ending April 1, compared with net income of $177 million, or 98 cents per share, from the previous corresponding period.

According to the company, its fourth quarter earnings were hurt by the $193.8 million in noncash impairment charges that were related to some underperforming lifestyle stores. Sales at stores established for more than a year fell 14.1 per cent

Total revenue decreased 11.2 per cent to $1.06 billion from $1.20 billion in the previous corresponding period. On a constant currency basis, total revenue decreased 10.6 per cent. Retail net sales went up 0.5 per cent to $575.3 million, driven primarily by 159 net new store openings since the end of the fourth quarter of fiscal 2016, including 111 stores associated with the company’s acquisition of the previously licensed operation in Greater China.

Total revenue in the Americas decreased 18.0 per cent to $721.0 million on a reported basis, and decreased 18.3 per cent on a constant currency basis. European revenue decreased 15.3 per cent to $215.2 million on a reported basis, and declined 11.5 per cent on a constant currency basis. Revenue in Asia increased 96.3 per cent to $128.6 million on a reported basis, and increased 95.1 per cent on a constant currency basis. Gross profit decreased 11.1 per cent to $619.7 million.

“Fiscal 2017 was a challenging year, as we continued to operate in a difficult retail environment with elevated promotional levels. In addition, our product and store experience did not sufficiently engage and excite consumers,” said John D. Idol, company chair and CEO.

“We acknowledge that we need to take further steps to elevate the level of fashion innovation in our accessories assortments and enhance our store experience in order to deepen consumer desire and demand for our products.”

The retailer said it expected revenue of $4.25 billion for fiscal year 2018 and also forecast a high single-digit drop in same-store sales. For the first quarter of fiscal 2018, the company expects total revenue to be between $910 million and $930 million, and a comparable sales decrease in the high-single digit range. Operating margin is expected to be approximately 13.0 per cent.

Neil Saunders, managing director of GlobalData Retail, said Michael Kors’ precipitous drop in sales does very little to reassure that the company’s nascent recovery program is on track. If anything, he said, it raises a question mark over whether management can win back custom as it tries to reinvigorate the brand.

“We do not question the general direction of travel,” Saunders said. “Indeed, we believe that Michael Kors is right to cut back on promotions and discounts, just as it is right to restrict distribution through third parties that are not able to communicate the essence of the brand. In this sense, the 17.2 per cent decline in wholesale revenues is excusable; it is a necessary evil to reduce the exposure of the brand in a bid to restore premium status.”

According to Saunders, this dose of bitterness, however, should be accompanied by at least a little sweetness from the retail sales figures, which they would expect to rise as shoppers transfer their custom to own-brand stores.

“Unfortunately for Michael Kors, this rebalancing does not seem to be taking place. Indeed, the retail figures were catastrophic,” he said. “A 0.5  per cent rise in total sales may appear to be a green shoot; however, when put in the context of the 159 stores added over the past year, it is a highly unsatisfactory outcome.”

The comparable sales figures for the direct to consumer retail operation are a further cause for concern, he said.

“These plunged by 14.1 per cent, or by an equally bad 13.6 per cent when the impact of exchange rates is stripped out. If the market had been soft or especially challenging over the period, such a result would be excusable. However, as results from other players show, the market for premium accessories grew at a reasonable rate.”

Saunders said in their view, as much as Michael Kors is undertaking the right corrective action regarding distribution, it has fallen well short in its efforts to rebuild and reinvigorate the brand.

“In truth, ranges and collections lack oomph and definition, and across many established stores levels of service and merchandising are lackluster. In short, the brand is nowhere near where it needs to be if it wants to excite and inspire consumers,” he said.

“Looking ahead, it is clear that Michael Kors has further to fall,” Saunders said. “In the near term, sales will decline further as the group struggles to find its place in the market. Longer term a chance remains that Michael Kors can succeed. It has taken much of the painful action on restructuring but must now focus squarely on rebuilding the brand.”

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