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Michael Kors Blames Small Handbags for Its Big Problems

Michael Kors Celebrates The Opening Of New Robertson BoutiqueMichael Kors Celebrates The Opening Of New Robertson Boutique
A Michael Kors boutique in Los Angeles, Calif.Photograph by Charley Gallay —Getty Images

Michael Kors (KORS), a once-hot fashion brand, apparently did not see the small handbag trend coming.

The company, which was a Wall Street favorite during its meteoric expansion, reported that comparable sales at its North American stores fell 8.5% last quarter, a slightly less awful drop than in the previous quarter but nonetheless the third straight decrease. This is unimpressive for a company that not long ago was stealing market share from Coach (COH).

One of the big culprits: smaller handbags and greater demand for cross-bodied bags. Such bags fetch a lot less money in stores and caught fire as a trend earlier this year, catching Kors and others unawares.

Kors’ shares, which had fallen by half this year, rose 10% on Wednesday after its earnings proved to be less of a bloodbath than expected. Still, Kors expects similar North American sales declines in the current quarter, which includes the key holiday season.

Michael Kors CEO John Idol told analysts that he sees a silver lining. “The idea that people are not buying handbags, I do not believe is a correct concept.” He continued: “We were selling less of those [pricier bags] because we are selling a lot more in particular of cross bodies and large wallets,”

Though Idol claims Kors is selling a lot more handbags, the fact remains the handbag craze is waning: Barclays has estimated that sales of premium handbags and accessories in North America will rise 3% to $11.7 billion this year. But growth had been 8%, 11%, and 16% in each of the three preceding years.

Inventory buildup was 13% higher at the end of the quarter compared to a year earlier, far outpacing total sales growth. So it is likely Kors will have to continue the kind of heavy discounting it blamed for its decrease in gross profit margin.