Michael Kors FY 1Q17 Earnings Call Notes

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Michael Kors Holdings (KORS) John D. Idol on Q1 2017 Results

7.4% comp decrease in retail

“In our Retail segment, comparable store sales decreased 7.4%, due to a high single-digit comp decrease in North America and a low double-digit decline in Europe. This was partially offset by a high single-digit comp increase in Asia.”

Decrease in traffic

“In the Americas, retail stores’ conversions increased at a double-digit rate once again. However, this was more than offset by the decrease in traffic.”

Mentioned smartwatch but interestingly didn’t mention Fossil

“we are excited to be entering the growing smartwatch category with the September launch of our Michael Kors ACCESS collection. We are pleased to be teaming up with Google and utilizing their Android Wear operating system to run this truly unique accessory. The smartwatch will be available in two styles, each with thousands of different display options. The touchscreen device allows you to see your social media updates, texts, emails and call alerts, use voice controls to access services via Ok Google, track your fitness and much more. Our smartwatches will be priced between $350 and $395. ”

Department store promotionality isn’t right for our brand

” we will be removing ourselves from all of the department store friends and family sales as well. We think that this is critical for us to really do three things; number one, to protect our brand image. As you know, that channel has become very promotional and, in fact, is causing us difficulties in our own retail channel, which is why you see our gross margins declining because we’re really trying to meet certain pricing that’s happening to be competitive. And we don’t think that’s the right thing to do for our brand going forward.”

Watches are the main driver of the comp decline

“Now, those aren’t yet enough to offset what we’ve lost in – really remember, the number one decline of our comp store sales is watches. It’s the number one area that’s really hurting us the most when we look at our comp store declines. So we need to get some of these other categories to deliver at a higher rate than they’ve been in the past. We see digital marketing as being one of the critical ways to do that, and then really arming our jet set selling associates with the right tools to engage with the customer, both in-store and out of store.”

You’re seeing impact from currency

” as I think some of our other competitors have reported, factory traffic is down versus its historic level, although not really that significantly. So it’s not an area that we see as volatile as the full price side. And really the full price side, for us, the volatility, as we’ve talked about many times, is happening in major markets, whether it’s New York, South Florida, certain parts of Southern California and you see this all with currency. ”

It’s the tourist markets that are hurting most

“So those are big markets for us and they’re meaningful markets for us. And as we look across our fleet of stores, where we’re suffering the greatest is really in the tourist markets. Where we’re not heavily penetrated by tourists, actually those markets are relatively healthy, with the local customers inside there. So that’s kind of the state of what we see in that area”

Consumer wants a fashion wearable

” the watch part of our ACCESS launch we’re extremely excited about and, as you know, we think we’ve got one of the best products in the marketplace. So we’re competing in a different arena. We’re competing against some very significant competitors, being Apple and Samsung and et cetera. But we think with our partnership with Google and the fact that we believe that we’ve got a product that’s better looking from a fashion standpoint, and the consumer research that we’ve done, in particular with the female customer, is bearing out that absolutely she wants something that’s exciting looking and not quite as just tech looking, so more fashion in its nature.”

Department stores are getting inventories in check

“Lastly, in terms of the inventories, we’ve already started to wind down the inventories in the wholesale channel. Additionally, as you saw, the promotional activities, the retailers are getting their inventories in line. We do not expect there to be any inventory issues in our own channels, with the retailers for the fall seasons. That doesn’t mean they’re not going to be promotional. I can’t tell you what they’re going to do and not do, given the traffic situations. But in terms of inventory, there will be a significant amount of less inventory in the retail channel of Michael Kors’ product. And we think that’s a good thing, and will hopefully improve the health and image of our brand with the consumer as it relates to price.”

Joseph B. Parsons – Executive Vice President, Chief Financial Officer, Chief Operating Officer & Treasurer

Wholesale business down 7%

“In our Wholesale segment, net sales declined 7.0%, due to lower sales in our accessories and womenswear line, partially offset by increases in our men’s and footwear businesses”