There's just something about a sale that makes shoppers salivate. It's the thrill of the deal; it's assurance that they paid less than they could have and got more for their money—or some combination of these psychologies.
Retailers put goods on sale when they want to stimulate demand, or clear out merchandise that isn't resonating. But there's a careful balance that companies have to strike.
In recent years, it's become more of a growing concern that retailers are training consumers to buy only when merchandise is on sale—deep sale—and that's a dangerous place, especially for brands that want to be considered premium.
Selling goods for less than full price usually means a less than full profit margin, but it can also ding consumers' perceptions about brand equity.
Fairly classified as higher-end, handbag and accessory players Coach, Michael Kors, Kate Spade, and Ralph Lauren have gotten themselves into a quandary in recent quarters. In order to excite shoppers and entice purchasing, discounting kicked up a notch. But there's some pain as these brands work their way away from promotions.
Coach CEO Victor Luis explained on the earnings call that "for both the quarter and year, our total sales in North America were down 20 percent, impacted by our deliberate actions to curtail promotions and elevate brand perception."
The short-term pain could very well be worth it for these brands in the long run. The hope is that the stronger the brand perception among consumers, the higher the value associated with the brand, which leads to an increased willingness to pay full price.
UBS analyst Michael Binetti upgraded shares of Coach to buy from neutral after the latest results, saying he thinks the company's core North American business had bottomed, and he is looking for acceleration through fiscal year 2016.
Ralph Lauren also began to move away from promotions in the most recent quarter. On its earnings call, Ralph Lauren Chief Operating Officer Jackwyn Nemerov explained "we made the decision to be less promotional than the landscape, because we believe it's critical to protect our brand." But it wasn't without a short-term sales pinch.
"While we knew this decision could slow our revenue growth, we believed it was the right thing to do for our brand. We have seen a pickup in sales at the beginning of the second quarter. However, we remain cautious as most of the quarter remains ahead of us," Nemerov said.
While smaller than competitors, Kate Spade has already seen the payoff in pulling back on promotions.
"We are relentlessly focused on protecting quality of sale to foster aspiration, drive demand and help maintain gross margins, despite the promotional retail landscape," said CEO Craig Leavitt on the earnings conference call. "We continue to deliver results through our deliberate pull-back on sales and promotional events, modifying our in-store sales posture and reducing the number of flash sales this year versus last year."
Leavitt said he saw "strong momentum" during the first quarter with its full-price sales, in part due to its quality of sale efforts. We are pleased with the impact of these efforts, and our business now has less reliance on surprise sales in our North American e-commerce channel," Leavitt said.
In addition to guarding the discounting in retail and department stores, Kate Spade executives have also decided to curtail the total number of outlet stores in North America, "to both drive the quality of a sale and avoid outward saturation," according to Leavitt.
But unlike competitors, Michael Kors executives aren't pointing to promotions as a big issue.
"We have said consistently that we really haven't changed our promotional cadence, almost since we started the company," explained Michael Kors CEO John Idol. "We did say that last quarter we did get a little more promotional, and really that's just clearing some merchandise through our stores, as we had normalization and our comps slowed down a little quicker than we had anticipated."
Cowen & Co. analyst Oliver Chen agrees with the brand, saying margins were better than expected for the quarter, even with the increased level of promotions.
While margins may be holding up at Michael Kors, many still worry about the brand perception. Canaccord Genuity analyst Camilo Lyon told investors that "concerns about the brand's waning allure due to ubiquitous distribution were not alleviated" with the latest earnings report.
But Morgan Stanley analyst Kimberly Greenberger is comforted by the market share gains Michael Kors asserts it made in the quarter. In a note to investors, Greenberger said "management's decision to prudently trim shipments" should lower markdown and promotional levels "as well as reduce market fears of overdistribution."
A big potential wrench in the handbag makers' plans to pull back on promotions? The holiday season. It's just around the corner, and with every passing year the trend that only gets hotter is discounting.