For a company concerned with maintaining the affordable luxury appeal of its brand, putting the brand name on everything from cameras to underwear seems counterproductive to creating an exclusivity narrative. For a company working to establish brand pricing power after department store discounts cannibalized brand perception and profit margins, making the company’s name more ubiquitous seems similarly antithetical to the story the company is trying to tell.
This is the problem with Michael Kors (NYSE: KORS). The company is trying to tell investors one story while acting protagonist in an entirely different narrative. For well over a year, I have followed the company’s every move and remained in a somewhat-bullish to completely-bullish range, citing the company’s ability to develop their men’s offerings, grow in international markets, and successfully expand licensing sales as reasons for optimism. Today, this optimism dissipated with good reason.It can be easy to get caught up in traditional financial metrics (admittedly, I did this with Michael Kors once myself). Sure, the P/E ratio is low, and other site contributors are correct in asserting that China sales numbers are encouraging, but investors must look beyond these numbers and focus on the company’s actual offerings. Looking at brand management and attempted new product launches it becomes quite clear that the company is simply treading water (fittingly, the stock chart over the past year appears as though it too is treading water).
To the licensing end, I applauded management for “licensing to only the best partners, including Fossil for jewelry, Estee Lauder (NYSE:EL) for fragrances, and Luxottica (NYSE:LUX) for sunglasses.” Though it was a natural extension of the firm’s brand at first, things are beginning to get carried away as the company recently expanded into Smart wear with their Access watches and continued to dive deeper into fragrances (they can even be found at Walmart). This is part of the dilemma facing Michael Kors: put the brand on everything in a Pixar-esque move to drive maximum impressions and dilute the luxury perception or focus on a core product line and dazzle consumers. It is worth noting that even with this deluge of product offerings the company’s licensing sales fell 10.2% last quarter — more products, yet still lower sales, suggests the company is losing steam.