Michael Kors and Ralph Lauren Q1: Department stores are a problem for US luxury brands

There are, broadly speaking, two types of luxury company. The European model operates at one elevated price level and has been squeezing ‘cheaper’ products out of its system for decades. You can buy cheaper from Dior, Gucci or Burberry, but those products are still conventionally expensive and only come in at a lower price because they’re smaller or come in simpler materials. These brands are usually only available in their own stores or select, distinctly luxe, multi-brand stores.

Then there’s the American model where a luxury brand begins as just that and then expands into a global powerhouse via multiple lines at various price levels and many licensed products. These brands, like Calvin Klein, Ralph Lauren and Michael Kors, are available in a wide range of stores and are mainstay brands for department stores.

I’m not trying to be all European and suggest that the former is a better model because the latter has worked well for years. But at the moment, the American model is causing a major headache.

Kors and Lauren both reported their Q1 results yesterday and just how much of a headache was very clear. For Kors, which used to be a luxury fashion brand but is now so dependent on its populist premium watches and handbags, a bigger than expected fall in comp sales was caused by fewer mall shoppers (as consumers went online) and fewer tourists due to the strong dollar.

Many US department stores are in crisis as they try to reinvent themselves for a new retail age and wean customers off endless discounts. But it looks like Kors is fed up with waiting. From next year, it will stop taking part in store-coupon promotions and “will be removing ourselves from all of the department store 'friends and family sales' as well,” its CEO said.

That’s no surprise given that its wholesale business with chains such as Macy’s and Neiman Marcus fell 7% in the latest quarter. Not that department stores would be thinking they’re entirely to blame. Earlier stories about the rate of Michael Kors products being returned because of quality issues, plus a general market saturation that has made some fashion customers run a mile from anything with a Kors logo on it, can’t be ignored.

And challenging sales for handbags and watches during the quarter highlight just how it’s not winning the handbag war against rivals Coach and Kate Spade.

Michael Kors: increased reliance on handbags and watches

Now for the numbers

But we’re still talking about a hugely valuable and, for many customers worldwide, desirable brand. So let’s look at the detail of how Michael Kors did in Q1.

Its total revenue rose only 0.2% to $987.9m and while retail sales rose an apparently healthy 7.6% to $562.9m, that was mainly due to new stores, including 145 linked to acquisition/consolidation of its business in Greater China, South Korea and Latin America. But comp sales fell a painful 7.4%.

While European and Asian revenue both grew, revenue in the Americas fell 5% to $690.8m and that all meant net income fell a hefty 15.7% to $146.3m.

Its American woes aren’t the end of the story. Demand rose in Europe, with customers buying "cross-bodies, small leathergoods and athletic footwear,” while those all-important handbag and watch sales weakened.

There were also store traffic issues in key European markets with customer visits slowing to UK stores following the 23 June Brexit vote and French tourism hurt by a succession of terrorist attacks.

Asia therefore remains the fastest-growing market and the company will open stores in Seoul and Singapore this autumn to capitalise on that.

Polo Ralph Lauren woman

Ralph Lauren reinvention continues

And Ralph Lauren? Just look at its list of brands and you’ll see how far removed it is from the European model of luxury brands. They include Ralph Lauren, Ralph Lauren Collection, Ralph Lauren Purple Label, Polo Ralph Lauren, Double RL, Lauren Ralph Lauren, Polo Ralph Lauren Children, Denim & Supply Ralph Lauren, Chaps, and Club Monaco.

Pause for breath!

Despite that basket of brands, the company has been struggling to rediscover growth in recent periods and again reported weaker sales for virtually the same reasons as Kors: fewer department store customers and the strong dollar.

Q1 net revenues fell 4% to $1.6bn and it made a loss of $22m. But CEO Stefan Larsson said the company was making good progress with its restructuring plan and chairman Ralph Lauren said he’s “encouraged by the steps we are taking to refocus on and evolve our core and bring back the entrepreneurial spirit that made this company great.”

Again, the company’s biggest challenge is in its domestic market with a North American revenues drop of 11% while international revenue rose 10%.

Like Kors, wholesale revenue declined, by 5% to $607m, driven by a decline in North America as the US department store channel “continued to experience challenging traffic trends, partially offset by an increase in Europe.”

Retail segment revenue fell 3% to $907m as new stores only partially offset a comp sales fall of 6%.

It’s clear that Ralph Lauren, like Michael Kors, has a lot of work to do to get back to full health and that both of them face the extra challenge of macroeconomic conditions beyond their control. However things pan out, it looks pretty certain that in, say, five years time, both firms and indeed the entire US department stores sector, will be quite different from how they’ve been in the past five years. Because survival, for all of them, really does mean embracing change