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Michael Kors

Michael Kors Holdings Ltd. (NYSE:KORSB) has decided to close up to 125 stores this year. The company is in the process of partially unwinding a recent expansion that isn’t serving the company as well in a cooling retail climate.

According to the company, comparable sales at stores open at least a year fell 14.1% in its most recent quarter and have continued to fall so far this year. Moreover, the company’s wholesale business, mostly to the department store sector, fell 22.8% in the quarter.


Difficult Environment

Kors chief executive, John Idol, blamed the company’s problems on, "a difficult retail environment with elevated promotional levels." He conceded both the product and store experience had become somewhat stale.

The rapid expansion has not helped. The plan behind opening so many stores so quickly was to compete in the lucrative handbag space with rivals like Coach Inc. Stock not found COH. For a while the plan worked and Kors passed its rival. Coach, however, started closing stores 3 years ago and saw the downturn before Kors.

Improving Profitability

The store closings are expected to help Kors improve profitability. The company had 827 retail locations in April. Kors expects ongoing savings of $60 million from the plan but will record a $125 million charge.

While not everyone is optimistic that these closings will turn the tide for the company, one analyst, Randal Konik of Jefferies said, "The first move was reducing wholesale exposure and now it's the announcement of > 100 stores over the next 1-2 years." Konik added, "These moves are an important step in rightsizing points of distribution, which will improve [long term] brand equity, [capital return], and margin structure."

Some Fashion Expansion

Not everything is about cutting back. Kors has expanded into dresses and menswear. The company has also followed the lead of others in bricks-and-mortar retail by investing in its online channel. Kors has also heavily discounted merchandise in stores in an attempt to win back lost customers.

The expansion has yet to lure back those customers, some of whom decry the “sameness” of the store and its offerings. Gabriella Santaniello, founder of A-Line Partners said, "If you walk into a Michael Kors store, they basically have the same handbags over and over again. It is basically an entire wall of the Mercer handbags -small and large - and another wall of Hamilton bags.”


Competition Getting Intense

That “difficult retail environment” mentioned by Idol comes from traditional competitors as well as online retailers and others. Amazon.com Inc. (NASDAQ:AMZNC) hurts accessories as much as it hurts other spaces. Kors does have a partnership with Amazon to sell its watches but otherwise expects to compete with Amazon for business with its own e-commerce engine.

On that front, Kors may face a challenge from Wal-Mart Inc. (NYSE:WMTB). Wal-Mart has been buying up e-commerce sites, including women’s clothing and accessories retailer, ModCloth.

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