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Michael Kors is fed up with department stores damaging its brand

A shopper looking at Michael Kors handbags in Macy's flagship store in New York.
Scott Mlyn | CNBC
A shopper looking at Michael Kors handbags in Macy's flagship store in New York.

Michael Kors has had enough with department stores' excessive discounting.

After reporting a 7 percent decline in its wholesale business during the fiscal first quarter, CEO John Idol told analysts that come February, the accessories brand will no longer participate in department stores' broad-based friends and family sales, or accept coupons for its products there.

The label will also move forward with its strategy to cut back on the amount of merchandise it ships to these retailers, as it looks to rebuild the pricing power it's lost with shoppers. Because the brand is constantly on sale, consumers have forgotten the true value of the product, Idol said.

These discounts once again damaged its revenue and profit margins in both wholesale and stand-alone stores, Idol added. Michael Kors' same-store sales slid 7.4 percent during the fiscal first quarter, steeper than Retail Metrics' forecast for a 4.2 percent decline.

"It's creating confusion in the consumers' mind relative to the value of the Michael Kors brand when it's being seen so often on sale in so many different places," Idol said. "We have to correct something that we think is actually having a negative long-term effect for the brand."

Because of this pullback, Idol told investors they should expect to see further degradation at department stores for the remainder of the year and into 2017. The company has already started dialing back the number of goods it sends to department stores, a strategy it had previously announced.

Kors' comments come just one day after competitor Coach said that it will exit about 25 percent of the 1,000 department stores where it sells its product. Like Kors, Coach is trying to regain control over the prices charged for its handbags. Unlike Coach, Kors will not pull its brand from any locations.

Michael Kors' products are sold at retailers including Nordstrom and Bloomingdale's. Macy's generates the largest chunk of its wholesale revenue and accounted for 12.7 percent of its total sales last year.

The company reported fiscal first-quarter earnings of 88 cents a share on revenue of $987.9 million. That compares with 87 cents a share and $986 million in sales during the prior-year period. Analysts had been expecting the company to report earnings per share of 74 cents on revenue of $953 million, according to Thomson Reuters estimates.

Also hurting Kors during the quarter was a slowdown in travelers visiting the United States, with sales in tourist-dependent cities including New York getting hit particularly hard. Shoppers' preference for smaller handbags, which carry a lower price tag, once again weighed on the company's sales.

Still, management maintained its full-year guidance for revenue and earnings per share, saying it expects growth in its men's, digital and international businesses to offset the decline at department stores. The label will likewise launch smartwatches and smart jewelry in September, which management said should moderate some of the slide it's experienced in its watch business. That was the brand's weakest-performing category in the quarter, posting a double-digit sales decline.

For the full year, management expects revenue to come in flat, at roughly $4.7 billion, with earnings per share between $4.56 and $4.64. The company did, however, lower its outlook for comparable sales. It now expects this metric to decline in a mid-single-digit range, versus its prior guidance for a low-single-digit drop. Its fiscal second-quarter earnings per share guidance likewise fell short of Wall Street's expectations.

"I don't want you to think that we don't understand there will be a decline in certain categories because of this," Idol said. "We absolutely understand that and quite frankly want that because we want to ship less units at lower prices ... that is not the way ultimately to build a luxury business."

Instead, the company plans to sell fewer units at higher prices — something Idol said should, over time, balance out on its top line.

Investors weren't quite as convinced. Shares of Michael Kors were lower Wednesday, even after the wholesale category posted a much narrower decline than analysts had expected. Michael Kors' reliance on department stores, where it generated 40 percent of its sales during the quarter, has been one of the biggest concerns among bearish investors.

"We continue to believe the brand is overdistributed, and while the company is doing the right thing by reducing exposure to the wholesale channel, we believe much of the damage has been done," Citi analyst Paul Lejuez said.