(Bloomberg Opinion) -- Luxury-goods seller Capri Holdings Ltd.’s CEO, John Idol, described the fiscal year the company just completed as a “transformational” one. And, in some ways, it was: Capri bought flashy fashion label Versace and integrated Jimmy Choo into its business after snapping it up in late 2017. But there’s one much-needed transformation that has yet to clearly take hold: The revitalization of its most important brand, Michael Kors.
Capri reported Wednesday that comparable sales for the Michael Kors brand decreased 1 percent in the fourth quarter from a year earlier. Executives said the decline reflected a number of factors, including a drag from its watch business and from efforts to transition its jewelry to a higher price point. A turning point is, apparently, not imminent: The company’s first-quarter outlook is for comparable sales declines in the “low single digits” for the Kors brand. For the full year, comparable sales and operating margins are expected to be just flat – so not backsliding, but not exactly a forecast that suggests a turnaround has taken hold.
Capri executives have taken steps to shore up the Kors brand, which, while sensible, have admittedly caused the company short-term pain. These include reducing wholesale distribution to restore the brand’s cachet and closing stores after realizing they had overexpanded. Factors it couldn’t quite control, such as weakness at department stores, certainly played a role in its struggles, too.
But, also, it can’t be overlooked that Kors keeps scoring own-goals. In the fourth quarter, for example, it said it suffered because it didn’t have enough inventory in its Signature collection of classic bags, and ended up having to resort to markdowns on pieces that were too fashion-forward. It had a similar issue in the previous quarter.
The weakness at Kors stands in contrast with what we saw at key rival Tapestry Inc. this quarter. Its largest brand, Coach – which has been through some of the very same turnaround initiatives as Kors – continued a streak of positive comparable sales. Tapestry still had challenges of its own, with the Kate Spade brand still finding its footing under new designer Nicola Glass.
Both Kors and Tapestry are trying to turn themselves into conglomerates in accessible luxury, buying up new brands so as to diversify in a way that gives them exposure to more varied geographic markets and product categories that allows them to thrive no matter which fashion trends are running hot. And yet at this point, based on their valuations, both seem to be struggling to convince investors this is going to work.
The dilemma for Capri is that even if Jimmy Choo and Versace hit their long-term revenue targets, Kors is still expected to be its biggest brand. So it is urgent for executives to show the cornerstone of its luxury empire isn’t going to keep stumbling.
The conglomerate structure Capri has embraced is, in theory, a good idea. But only if it can prove it is capable of nurturing its new brands without being distracted from fixing its legacy one.
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Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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