Michael Kors Is Rewarded for Not Caving on Price
(Bloomberg Opinion) -- The pandemic has battered the apparel and accessories business more than just about any other retail category. New clothes and bold fashion statements just aren’t as much of a priority now. But whatever desperation some of the giants in this area might be feeling in this moment, they are making a surprising choice: not chasing shoppers with heavy discounting.
Capri Holdings Ltd., corporate parent of Michael Kors, Jimmy Choo and Versace, said Thursday that its revenue sank 23% from a year earlier in the second quarter. While vastly better than the 66.5% sales decline in the previous quarter, the drop still shows the company is a long way from its pre-Covid normal. At the same time, though, its adjusted gross margin improved significantly on a higher average price per unit sold, helping the company beat analysts’ earnings expectations. Investors approved, sending the stock up more than 8 percent on Thursday morning.
There were several reasons for the beat. One has to do with a quirky shift in consumer needs born of the pandemic: After years of tiny crossbody bags ruling the handbag world, sales of big purses and totes are making a comeback, something CEO John Idol says reflects life in the Covid-19 era. With so much gear to carry around – gloves, sanitizer and so on – a pint-sized purse made to carry little more than a smartphone just doesn’t cut it. Bigger bags, logically, tend to carry bigger price tags. Importantly, though, the company also achieved a higher average price per item because it decided to sell more goods at full price and even raised initial price tags in some cases.
Capri is not alone. Tapestry Inc., the company behind Coach and Kate Spade, reported last week that its average price per item increased in the latest quarter as it stuck to full-price selling, contributing to sharp improvement in gross margin from a year earlier. Ralph Lauren Corp. reported a similar story, with an average price per unit up 26% in the most recent quarter, also helping drive gross margin expansion.
These upscale brands are likely making the right call by sticking to their guns on pricing. Each has been on a years-long journey to solve the problem of overexposure, using various tactics to try to regain their cachet by becoming less ubiquitous but more luxurious. All have retreated from lackluster department stores. Ralph Lauren has been holding fewer promotional events on its websites, while Michael Kors is shrinking its lineup of brick-and-mortar stores.
To blast the promotional confetti cannon now would undermine all that work. Idol, the Capri CEO, said at a recent conference, “We don't run brands. We run luxury houses.” If he wants that to be true, he – and his accessible luxury peers – have to remain steadfast on their attitude toward discounting.
What I also suspect may be in play is that with so many shoppers stuck at home these days and having fewer occasions to use a new handbag, the mix and motives of women buying these accessories is likely slightly different than usual. If you’re springing for a bag now, it’s probably one that is something of a collector’s item, something you perceive as timeless that you can use years from now. That’s exactly the kind of purchase for which someone is willing to pay full price.
Avoiding discounting does have risks, especially in this unique period of pandemic living. Ralph Lauren’s North American e-commerce sales rose only 10% from a year earlier in the quarter ended September, rather modest growth considering the widespread surge in online shopping. Part of the reason was that it slashed sitewide promotions by 52 days compared with the year-ago period.
Also, amid generally weak demand for apparel and accessories and a holiday shopping season in which retailers are basically offering a multi-month spree of Black Friday-esque deals, it could leave these companies stuck with bloated inventory. And at a moment when many stores are boasting of getting loads of new customers to try shopping with them because the pandemic has broken previous shopping habits, higher prices simply make for a higher hurdle to lure new shoppers to try the brand. But they also give consumers a sense they are getting something special, which is what upscale retail is all about.
In the end, these brands won’t regret forging on with their pricing strategies. If shoppers are to perceive them as aspirational arbiters of luxury, they have to act as such.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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