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Kors outlines plan to cut back on promotions

It's about to get harder to score a deal on a Michael Kors handbag.

The purveyor of affordable luxury handbags on Wednesday said it will dial back on the number of products in its North American department stores in an attempt to preserve its brand equity amid higher discounts at mall-based locations.

A pedestrian passes by a Michael Kors retail store in New York.
Scott Mlyn | CNBC
A pedestrian passes by a Michael Kors retail store in New York.

These chronic discounts — partly the result of fewer shoppers visiting traditional malls — have weighed heavily on the handbag sector, causing many analysts to remain cautious on Kors and others. Shares were trading 11 percent higher on Wednesday after the company's second-quarter earnings call.

"The department store business in North America is suffering some of the same challenges that we've seen in terms of the traffic in shopping malls," CEO John Idol told investors. "That's got us taking a more prudent approach to how much inventory we actually have sitting in the stores."

On a call following Kors' earnings report, Idol also stressed that there is a bit of a "misnomer" about what's happening in the handbag industry. He said part of the reason why overall handbag sales are up a less-robust low-single digits is because shoppers — millennials, in particular — are opting to purchase smaller handbags, including cross-body styles.

The company's average product price fell 15 percent during the quarter, with Idol attributing 60 percent of that to a shift to smaller handbags.

"When we're selling high double digits in terms of additional units, that means that people are buying a lot more Michael Kors product," he said.

Idol's comments came after the company beat Wall Street's forecasts for the second quarter, helped by better-than-expected revenues. But the company also lowered its guidance for the full year, as it looks to take a more "prudent stance" on the second half of 2015, by growing sales in a way that doesn't dilute its brand.

Management added that slower tourist flows and currency headwinds continue to weigh on the results, though it said those trends should moderate toward the end of the year.

In the second quarter, Kors' gross margins missed expectations, as promotional activity continued to erode its profits. Still, its same-store sales decrease improved 1 percentage point from the first quarter, to a decline of 8.5 percent.

"While Michael Kors is now feeling some pressure on the bottom line, with net income falling by 6.8 percent over last year, it remains in a much better financial position than a number of its luxury rivals," said Neil Saunders, CEO of Conlumino retail research firm.

Coach last week also reported comparable-store sales results that improved sequentially, but were still down 9.5 percent in North America. Kate Spade will announce its third-quarter results on Thursday.