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Michael Kors Is Shrinking Its Department Store Business, On Purpose

They're damaging its "brand equity."
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Photo: Spencer Platt/Getty Images

Photo: Spencer Platt/Getty Images

Michael Kors made headlines last week after an analyst from Wedbush reported that nearly half of Nordstrom stores had decided to stop selling the brand's handbags due to "waning interest from customers" and competition with Macy's because of its "constant discounting" of the product. Nordstrom Co-President Pete Nordstrom refuted the reports, sort of, telling WWD: "We value our relationship with Michael Kors and hold them in the highest esteem," and that "we plan on carrying their product in select stores and online."

Whether Nordstrom has actually begun scrapping Kors's handbags or not, the brand's fourth-quarter and fiscal 2016 earnings call Wednesday morning confirmed that it does, in fact, have a problem with department stores. CEO John D. Idol told investors and analysts that because its North American wholesale partners had become so "highly promotional" (i.e. putting too much of its product on sale), Michael Kors would be "actively decreasing exposure" and "decreasing inventory levels" in department stores. The reasoning is that when shoppers constantly see the brand's product on sale, they perceive the brand as being more downmarket (and less desirable) than it is. It also forces other retailers, including Michael Kors itself, to discount product in order to compete, and that hurts profit margins. Idol said that while the move will result in a "meaningful decrease" in wholesale revenue in the coming year, it will improve profit margins and brand equity in the long term.

During the call, Idol also said that reports of the brand being "dead" or "losing its vibrancy" were "flat out not true," and that wholesale partners are totally still ordering its product. "We're shipping double-digit unit increases; we just think that's too many units going into the marketplace," he said. "There will be less product, more demand and that demand will be [at] full price." The brand has also begun offering exclusive products in its stores to differentiate its own buy from that of department stores.

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While several luxury brands have shifted their focus away from wholesale and towards directly operated retail, Idol says department stores' promotional activity has gotten a lot worse over the past 12 months — the result of declining traffic in shopping malls. Despite a decline in its North American wholesale business, overall wholesale revenue was up 4 percent for the fourth quarter and 6.8 percent for the year ended April 2 on a constant currency basis, largely thanks to growth in Asia.

Sales in the brand's own stores were up 22 percent for the quarter, driven by e-commerce and new store openings. Sales in stores that had already been open for at least a year were flat, however. Total revenue was up about 11 percent to $4.7 billion.

In other news, the brand also just bought back its license in Greater China in order to take control of its business there. While that will result in a short term decline in licensing revenue, Idol says the region has the potential to become a $500 million business.