Michael Kors, Ralph Lauren profits signal fashion rebirth
NEW YORK— Ralph Lauren and Michael Kors merchandise is less likely to be marked down these days, and that’s showing up on the bottom line for both companies.
The two fashion houses posted profit that handily beat analysts’ estimates on Tuesday — a sign of progress in their efforts to get customers to pay full price — and helped send the stocks soaring. Deep discounts had squeezed earnings in recent years, eroding the brands’ prestige.
Now many shoppers seem to be less obsessed with getting a low price — and more focused on the product itself, said John Idol, chief executive officer of Michael Kors Holdings Ltd. The Londonbased company has cut down on its promotions, and the typical customer is “not fighting us on that,” he said. “As long as we are giving her the right product, she’s responding extremely well,” he said.
Michael Kors climbed as much as 21 per cent to $45.25 (U.S.) in New York trading, while shares of Ralph Lauren Corp. advanced13 per cent to $88.53. The gains represented the stocks’ biggest rallies in at least 18 months.
At Ralph Lauren, first-quarter earnings amounted to $1.11 a share, excluding some items. That topped the average analyst estimate by 17 cents. In one sign the company is charging higher prices, gross margin increased more than 2 percentage points to 63.2 per cent. Margins are expected to expand at least another percentage point in the second half, CFO Jane Nielsen said on a conference call.
“Clearly, the significant improvement in gross margin is a great sign the strategy of tightening inventory and pulling back on promotions is helping profitability,” said Bloomberg Intelligence analyst Chen Grazutis. “The jury is still out as to how successful the company could be in bringing consumers back to the brand and drive top-line growth.”
The results represent an early gift for new CEO Patrice Louvet, a Proc- ter & Gamble Co. veteran who took the helm last month. He comes into the job after a rocky stretch. The five-decade-old business has been closing retail locations, including its flagship Polo store on Fifth Avenue. And the previous CEO, Stefan Larsson, left the company after creative differences with its founder.
Louvet said he plans to improve customers’ online and in-store experiences, and will modernize the brands attract younger consumers.
While Ralph Lauren’s same-store sales declined 6 per cent, that was roughly in line with the 5.8-per-cent drop predicted by analysts, according to Consensus Metrix. Revenue was $1.35 billion in the period, compared with a $1.34-billion average estimate.
Michael Kors, meanwhile, posted profit of 80 cents a share last quarter. That topped analysts’ 62-cent projection. Sales fell 3.6 per cent to $952.4 million, but the decline was far milder than projected. Wall Street was bracing for a drop to $919 million.
Idol said the company’s two bestselling products in the past quarter were Mercer handbags and smartwatches — all of which sold at full price. Its Bancroft bags, which cost about $1,000 on average, are also selling well. The CEO said he is seeing some improvement in the department-store business. Starting with the Spring season, the company plans to begin raising prices at its own shops and at department stores, starting with its Michael Kors Collection handbag, he said.
Michael Kors has been diversifying beyond handbags by expanding its smartwatch, menswear businesses and its women’s ready-to-wear lines, which Idol said is seeing strong results.
The company expects smartwatches to account for 25 per cent of total watch sales by the end of the year.
The company also agreed to buy shoemaker Jimmy Choo Plc for $1.2 billion last month, aiming to add lustre to the brand. And Idol said he’s planning to make more acquisitions as part of his growth strategy.
But for now, Ralph Lauren and Michael Kors are using similar tactics: making their products more exclusive by closing storefronts and relying less on the troubled departmentstore industry.
The progress shows that a brand such as Michael Kors can once again “regain the permission to charge full price,” said Simeon Siegel, an analyst at Instinet LLC.