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Kors shares tumble as weak sales show department stores aren't its only problem

Michael Kors
Eduardo Munoz | Reuters
Michael Kors

Shares of Michael Kors tumbled 13 percent on Tuesday, after the luxury handbag maker said a planned pullback in distribution at department stores led to a 17.8 percent slide in wholesale revenue during its fiscal third quarter.

But the company's weak results weren't limited to softness in these third-party stores, which have borne the brunt of management's blame over the past several quarters.

Instead, comparable sales at Kors' branded retail stores also deteriorated, as fewer shoppers visited these locations. Meanwhile, deep promotions and a preference for lower-priced small handbags weighed on the company's margins, even as management pulled back on discounts in department stores.

The company lowered its fourth quarter and fiscal year expectations in wake of the weak results. Shares were trading at $35.87 at late morning Tuesday.

"We expect the Kors brand to continue to have significant challenges as it strives to get its distribution on track," Citi analyst Paul Lejuez told investors.

Until now, Kors' management had focused much of its rhetoric on the changes it needed in wholesale locations to boost its profitability. In those stores, management said, too much inventory and widespread promotions were cutting into its margins and damaging the brand's equity long term.

As a result, the company decided to dial back on the amount of merchandise it pushed into these stores. Earlier this month, Kors doubled down on this approach, when it began to sit out department stores' broad-based friends and family sales.

Yet even as the brand's operating margin improved at wholesale locations, it dropped more than 6 points in its retail stores.

"We're really looking at the company in total," CEO John Idol said. "We're going to be much more retail focused."

Kors' management on Tuesday cut its outlook for the full year, saying sales will come in at about $4.48 billion. That's down from its previous expectation of $4.55 billion, and last year's $4.71 billion. Lower-than-anticipated retail sales are expected to account for most of its shortfall in the fiscal fourth quarter.

Meanwhile, management trimmed its full-year earnings forecast to a range of $4.15 to $4.19 a share on an adjusted basis, compared with its prior expectation of $4.37 to $4.43 a share.

"Our objective is to reduce promotions, increase [prices] and position the brand in a more elevated place with our consumer," Idol said. "It's going to take the entire fiscal year to work our way through that."

Still, Idol maintained that shoppers are still responding to the brand and that it has significant opportunity for long-term growth. As a result, he said, the company will continue to "be aggressive" with its share repurchase program.

He added that the company is "actively looking" at a number of acquisition opportunities, but would prefer not to make small transactions that would distract from its main business. Michael Kors' name has been floated as a potential buyer of Kate Spade's business, which has been rumored to be for sale.

"As much as we believe Michael Kors is headed in the right direction … we maintain our view that it has much more work to do in reconnecting with customers who have been alienated by overexpansion of the brand," Neil Saunders, managing director of GlobalData Retail, told investors.

Last week, rival handbag maker Coach took another step in its turnaround plan, when it said net sales rose 4 percent to $1.32 billion.