Some Luxury Handbag Retailers Have Cut Costs and Reduced Discounts

The Business of Fashion has reported that some luxury handbag retailers have cut costs and reduced discounts in order to cope with slow-moving sales. But the outcome has been good with some companies such as Michael Kors, Kate Spade, and Coach    all topping analysts’ earnings estimates for the past quarter. To protect their brands and margins, these companies have reduced discounts, added new products as well as slashing costs.

Michael Kors Chief Executive Officer John Idol reports that growth of the once hot luxury handbag segment in North America has slowed to low single digits but that young customers are still buying handbags and leather goods, but styles have shifted to lower-priced large wallets and small cross-body bags.

“There’s been this myth that no one is buying a luxury handbag anymore, but really it’s a change in trend away from the big totes everyone was buying a few years ago to smaller bags that don’t cost as much,” said Dorothy Lakner, a New York-based analyst at Topeka Capital Markets.

Because the number of people looking for a luxury handbag at North American department stores is reduced and subsequent sales are low, there were higher levels of leftover Kate Spade, Coach and Michael Kors handbags that needed to be sold off at discounted prices to make way for newer goods.

“You have to make products scarcer and have less inventory left over at the end of the year so you can get full price,” Lakner said. “Michael Kors is really pulling back on inventory in the department store channel. Similarly, Coach is reducing the number of discount events.

Luxury handbag sales have been boosted by international expansion but a strong U.S. dollar has hurt tourism sales domestically and taken a bite out of profits earned abroad. “You have to focus on newness in products and keep inventories tight,” Lakner said.

Even after a restructuring, Kate Spade’s luxury handbag sales still make up about 70 percent of its revenue, according to data compiled by Bloomberg. Since 2013, the New York-based company has sold the Lucky and Juicy Couture brands and streamlined its corporate operations. In 2014, it began a complete overhaul of management with renewed focus on e-commerce, which now accounts for 20 percent of luxury handbag sales. The retailer is also expanding into home goods, rolling out a 325-piece home-furnishings category last month.

The move to streamline expenses may be paying off. While Kate Spade’s $275 million in net sales in the third quarter fell short of the $281.2 million analysts expected, the company recorded profit excluding some items of 6 cents a share, topping the 4 cents analysts forecast.

Michael Kors posted profit in the second quarter through Sept. 26 of $1.01 a share. That topped the 89 cents a share analysts predicted. Still, the London-based company forecast third-quarter revenue of $1.33 billion to $1.35 billion, falling short of the $1.4 billion analysts projected.

Results were similar at Coach, which said last week that profit excluding some items last quarter was 41 cents a share, exceeding analysts’ estimates by a penny. The New York-based retailer posted sales of $1.03 billion, missing analysts’ projections of $1.04 billion.

While all three companies say they’re pulling back on discounts, they’re also looking to categories other than luxury handbag sales to drive growth. Coach agreed to buy designer shoe brand Stuart Weitzman in January for $574 million to diversify its selection. It also hosted its first women’s runway fashion show this fall. Kate Spade introduced a home goods line last month, while Michael Kors is expanding its licensing agreements into watches, accessories and eye wear.

The luxury handbag makers could follow the example of how fellow luxury handbag retailer used restructuring and cost-cutting to boost performance. One of the original lifestyle companies, Ralph Lauren, announced a restructuring effort in May that will save $110 million annually when it’s completed in 2017.

Increased efficiency helped Ralph Lauren post earnings last quarter of $2.13 a share, excluding some items. That surpassed the $1.73 a share analysts had estimated. Still, comparable sales declined 6 percent, Ralph Lauren said in a statement Thursday. That’s more than the 3.8 percent decrease analysts had forecast.

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