Five reasons why Michael Kors' stock is hurting?
Michael Kors' stock which once traded at $100+ is now trading very close to its 52 Week low at $70. Credit Suisse recently downgraded Michael Kors' stock from "outperform" to “neutral”.
Ever since Michael Kors went public in 2011, its market valuation has gone up by more than 200%. Within 2 years of going public, its stock was added to S&P 500 in October 2013. Since the launch of its IPO, Michael Kors’ performance in the stock market has been nothing short of exemplary. With Michael Kors reporting higher than industry average growth rate, improved Earnings per share and negligible debt, the pessimism in the stock market is nothing but ironic. There are five key reasons why investors do not expect Michael Kors' exceptional performance to last:
- Stiff Competition in Accessible luxury segment: There are many long running brands in the market, which are extremely invested in the business and have spent years cultivating their product lines and building their brand equity. These brands continue to pose a strong competition to Michael Kors.
- No guarantee of repeat sales: Consumers in accessible luxury segment keep up with latest trends and with changing fashion trends repeat sales is not guaranteed in this segment.
- Nominal growth focus in Emerging Markets is another reason for deceleration of Michael Kors’ growth rate. Only 1% of Michael Kors revenue comes from emerging markets while emerging markets are showing highest growth potential in luxury segment. Michael Kors does not have direct online presence in China, world's largest e-commerce market.
- Europe’s economic outlook: Approximately 15% of Michael Kors revenue comes from Europe where the European debt crisis could continue to negatively affect growth in the second largest market for Michael Kors.
- Brand Dilution in North America: North America accounts for 84% of Michael Kors' revenue. But due to brand's democratic presence from collection stores to outlet stores and off-pricers, its growth is slowing down. Michael Kors extensive presence in department stores leads to discounting of its full priced items further impacting the brand image
Some of the options that exist for Michael Kors to gain a long term sustainable growth are to focus on expansion to emerging markets and other product lines and to increase its focus on premium collection stores, while reducing its footprint from outlet and off-priced stores.
Michael Kors has started moving in the right direction. The brand has increased its focus on developing new product lines. Menswear, Fragrances, Jewelry and Eyewear were launched to capitalize its brand value in existing markets. Recently in November 2014, company also launched Tech accessories like phone charging cases, ear buds and lipstick chargers. While I am hopeful early signals will warn Michael Kors enough to take a note, but whether Michael Kors will re-write the history or follow the suit with some other luxury brands is yet to be seen.
Tanvi Gupta is working as a Buyer with a New York based e-commerce firm. She is also pursuing her Masters in Global Fashion Management from FIT New York. She likes to follow latest trends in retail and welcomes any discussion on the future of retail.