Dive Brief:
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Sales declines at Michael Kors made a dent in Capri Holdings’ Q1, as the company's total revenue in the period fell 3.5% year over year to nearly $770 million.
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Michael Kors revenue tumbled over 7% to $590 million, while Jimmy Choo revenue surged more than 10% to $179 million, Capri said Wednesday.
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The bottom line was healthy, though, as gross margin expanded by 200 basis points to 65% and net income soared 32% to $70 million. Gross margin at Michael Kors expanded by 280 basis points to 63.9%, and at Jimmy Choo shrank by 170 basis points to 68.7%.
Dive Insight:
In an effort to pull away from discounts, Michael Kors is sacrificing short-term pain for long-term gain.
The brand will likely see negative store comps in Q2 as it winds up its final phase of markdowns, Capri CEO John Idol told analysts Wednesday. Higher-priced products will arrive in outlets this month and next, and how customers receive them will be a test of the strategy, he said. So far, shoppers have had “little or no reaction,” he said.
“I do expect customers to come in and be looking for lower-priced things that they had historically seen from us, and we may lose some of that historic customer,” he said. “We don't know that yet until we go through it. But we're excited. That's why we're increasing our marketing spend, to go out and attract new customers into both full price and outlet — in particular younger customers who most likely were never shopping with us previously.”
The approach, which was successful at Coach a decade ago, is one reason why gross margin expanded at Michael Kors, and GlobalData Managing Director Neil Saunders views it as “prudent if it can be pursued over the longer term.”
“All that said, it is far too early to use the word ‘turnaround’ alongside Michael Kors,” he said in emailed comments. “While Capri is taking corrective action, some of the decline is still down to the brand being seen unfavorably by consumers. Overall, the luxury and premium segments performed well this quarter, especially in the US. However, Michael Kors remains weak on our brand radar of aspirational brands people want to invest in or spend their money on.”
Capri lowered its outlook for the fiscal year. The company expects inventory delays at Michael Kors to siphon $50 million and weaker sales due to conflict in the Middle East to siphon another $50 million. As a result Capril now sees total revenue for the year reaching about $3.4 billion, down from its previous expectation for over $3.5 billion.
