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Business |ANALYSIS

Michael Kors tops expectations yet faces tough strategic decisions

By Angela Gonzalez-Rodriguez

9 Nov 2015

Michael Kors Holdings Ltd. posted second-quarter profit that topped analysts’ estimates as new retail locations boosted sales. However, the accessible luxury brand needs to re-thinks its expansion strategy to fight the perils of turning too ubiquitous.

Conscious of how the brand is wearing off due to the aggressive expansion it has implemented since it went public in 2011, the US handbags retailer has announced its plans to stop rolling out more stores.

"We'll open a few more stores, and then that roll out will be complete," Chief Executive John Idol said on a conference call with analysts earlier this month, after the company posted its second- quarter earnings.

Michael Kors is “acknowledging that there’s a limit “

“It's good, then, that the retailer seems to know its boundaries, said Simeon Siegel, an analyst at Nomura Securities. "They do have a very concentrated position in North America," said Siegel. "But they're acknowledging that there’s a limit."

It is worth recalling that Michael Kors has been opening new international locations faster than within its core North American market. This strategy has helped revenue climb despite dollar’s weight on sales.

"Well, we're profitable when we open more stores. And people — while online shopping is absolutely a trend and it's going to move the needle for the company — people will still go out and shop in a store," Idol said. "That won't, at least while I'm alive, won't have evaporated."

“Accessible luxury is a new category internationally, and there’s a preference for American brands,” said in this regard Corinna Freedman, an analyst at BB&T Capital Markets.

To regain its now shrinking market share, Michael Kors plans to add new products in the second half of the year and is working to improve its digital operations to incentive sales.

Revenue in the quarter rose 6.9 percent to 1.13 billion dollars, topping analysts’ 1.08 billion dollars average projection, reported Bloomberg.

Earnings in the quarter through September, 26 came in at 1.01 dollars a share, ahead of analysts’ consensus estimate of 89 cents apiece. On the back of the results, the stock advanced 8.3 percent to 42.57 dollars per share at the close in New York. Nevertheless, the stock has fallen 43 percent this year.

The company lowered its forecast for profit in its current fiscal year, saying spending on items such as its online business, new stores and distribution will increase costs, reports ‘Forbes’. Now the company expects earnings in the year through March to be between 4.38 dollars and 4.42 dollars a share. This forecast comes behind the previous one issued by the company: 4.40 dollars to 4.50 dollars apiece.