Michael Kors Holdings Ltd., Kate Spade & Co. and Coach Inc. all topped analysts’ earnings estimates for the past quarter after the retailers cut costs and reduced discounts.
NEW YORK, United States — Michael Kors Holdings Ltd., Kate Spade & Co. and Coach Inc. all topped analysts’ earnings estimates for the past quarter after the handbag retailers cut costs and reduced discounts to cope with sluggish sales.
Growth of the once-hot segment in North America has slowed to low single digits, Kors Chief Executive Officer John Idol said Wednesday on an earnings conference call. Young customers are still buying handbags and leather goods, but styles have shifted to lower-priced large wallets and small cross-body bags. To protect their brands and margins, companies are reducing discounts, adding new products and slashing costs.
“There’s been this myth that no one is buying handbags anymore, but really it’s a change in trend away from the big totes everyone was buying a few years ago to smaller bags that don’t cost as much,” said Dorothy Lakner, a New York-based analyst at Topeka Capital Markets.
Traffic and sales at North American department stores are sluggish, leading to higher levels of leftover Kate Spade, Coach and Michael Kors products that will need to be discounted to make way for newer goods. And while international expansion has boosted sales, a strong U.S. dollar has hurt tourism sales domestically and taken a bite out of profits earned abroad.
Even after a restructuring, Kate Spade’s handbag sales still make up about 70 percent of its revenue, according to data compiled by Bloomberg. Since 2013, the New York-based company has sold the Lucky and Juicy Couture brands and streamlined its corporate operations. In 2014, it began a complete overhaul of management with renewed focus on e-commerce, which now accounts for 20 percent of sales. The retailer is also expanding into home goods, rolling out a 325-piece home-furnishings category last month.
The move to streamline expenses may be paying off. While Kate Spade’s $275 million in net sales in the third quarter fell short of the $281.2 million analysts expected, the company recorded profit excluding some items of 6 cents a share, topping the 4 cents analysts forecast.
Michael Kors posted profit in the second quarter through Sept. 26 of $1.01 a share. That topped the 89 cents a share analysts predicted. Still, the London-based company forecast third-quarter revenue of $1.33 billion to $1.35 billion, falling short of the $1.4 billion analysts projected.
Results were similar at Coach, which said last week that profit excluding some items last quarter was 41 cents a share, exceeding analysts’ estimates by a penny. The New York-based retailer posted sales of $1.03 billion, missing analysts’ projections of $1.04 billion.
“You have to make products more scarce and have less inventory left over at the end of the year so you can get full price,” Lakner said. “Michael Kors is really pulling back on inventory in the department store channel. Similarly, Coach is reducing the number of discount events.”
While all three companies say they’re pulling back on discounts, they’re also looking to other categories to drive growth. Coach agreed to buy designer shoe brand Stuart Weitzman in January for $574 million to diversify its selection. It also hosted its first women’s runway fashion show this fall. Kate Spade introduced a home goods line last month, while Michael Kors is expanding its licensing agreements into watches, accessories and eyewear.
The handbag makers may look to a fellow retailer for how restructuring and cost-cutting can boost performance. One of the original lifestyle companies, Ralph Lauren Corp., announced a restructuring effort in May that will save $110 million annually when it’s completed in 2017.
Increased efficiency helped Ralph Lauren post earnings last quarter of $2.13 a share, excluding some items. That surpassed the $1.73 a share analysts had estimated. Still, comparable sales declined 6 percent, Ralph Lauren said in a statement Thursday. That’s more than the 3.8 percent decrease analysts had forecast.