Michael Kors’ weak sales suggest it’s falling out of fashion

May 27, 2015, 2:32 PM UTC
Michael Kors Celebrates The Opening Of New Robertson Boutique
Photograph by Charley Gallay —Getty Images

When you’re a red-hot aspirational luxury brand, it’s tempting to capitalize on the moment with aggressive expansion plans and a broader assortment of products to become a so-called “lifestyle” brand.

But that strategy eventually and inevitably leads to brand fatigue, as Michael Kors (KORS) — the brand whose founder rose to cultural ubiquity a few years ago on TV’s Project Runway — is learning the hard way.

Its stock was taking a beating on Wednesday morning after the fashion company posted weak financial results. Its shares are down almost 50% from an all-time high of $97.60 a few months ago.

Michael Kors reported an unexpected 5.8% decline in stores open a year or more, including a 6.7% drop in North America, its biggest market by far. Analysts had been expecting a North American increase in such comparable sales — a widely accepted measure of a retailer’s health — of 3%, according to Consensus Metrix.

The company, long a Wall Street darling, had gotten investors used to seeing 20%+ growth rates in comparable sales since it went public in late 2011. It has been one of the fastest growing brands in recent years, stealing market share away from its handbag rival Coach (COH).

To ride its wave of popularity, Kors has been on a store-opening rampage, adding 121 new stores in the fiscal year that ended March 28 alone, bringing the total to 526. That represents a 30% increase in just one year, and a doubling in just two years. And that doesn’t even include the spaces it has in department stores like Macy’s (M) and Nordstrom (JWN)

The comparable sales declines suggest that Kors’ stores are eating into each others’ sales.

The Kors strategy contrasts with that of Coach. Seeking to regain the aura of luxury it squandered by having too many new stores and relying too much on outlets, Coach is closing 20% of its North American stores to better focus on locations in key markets and its flagship stores, rather than those in malls. It is also laying off its logo-centric merchandise and focusing on the higher end.

Kors, which also sells shoes, eyewear, watches, jewelry and fragrances, has several brands to cater to the high end, the middle market, and discount outlet shoppers, the latter of which could end up cannibalizing its pricier items and damaging its luxury aura. (Again, just look at Coach.)

That very omnipresence is starting to damage the Kors brand, experts say.

As Rahul Sharma, founder of London-based Neev Capital and a retail expert, put it in a tweet this morning: “If your marketing strategy is largely based around [the] ‘jetset’ loving younger female shopper, remember she can be rather fickle.”

And Kors’ problems look set to continue: The company forecast “double-digit” percentage decreases in comparable sales this quarter, suggesting things are getting worse for the company, whose operating profit as a percentage of sales is declining.

What’s more, the company’s inventory is up 21.8%, with overall sales rising only 17.8% (Kors’ international push explains much of that growth), suggesting another renewed sales shortfall will mean more sold at clearance, further hurting its profit margins.

Analysts for years have been saying Kors should slow its growth. But shares rose five-fold from $20 in its IPO in 2011 to $100 in the past year, making it tempting to push ahead.

“The seductive thing about the Kors-type of ‘hot’ trajectory is in the initial delight of consumers,” veteran retail expert Robin Lewis said in an April blog post, referring to how accessible the brand is and how much people want it.

Then, “all of a sudden, in a nano-split second, the largely young and trend-fickle consumer base wakes up and realizes the brand is slapped on everything and is being worn by everybody, everywhere. And, crash! Wonderful becomes awful. The brand stands for nothing for anybody – everywhere.”

That is something that Kors, like Juicy Couture, Tommy Hilfiger, Coach and countless others before it, is now learning.