Optimism Grows at Two Brands -- WSJ

By Suzanne Kapner Features Dow Jones Newswires

Lauren, Michael Kors surpass predictions for quarterly profits; shares climb sharply

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This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 9, 2017).

Two big U.S. apparel and accessories brands, Michael Kors Holdings Ltd. and Ralph Lauren Corp., showed some progress Tuesday on efforts to wean themselves -- and shoppers -- off heavy promotions.

Both companies reported sharp sales declines in their latest quarters, as they reduced discounts at their own retail stores and pulled back the amount of goods sold through department stores. However, profits were better than expected and executives at Michael Kors pointed to signs of improved consumer spending in the U.S.

Shares of Ralph Lauren were up 11% to $86.52 in afternoon trading. Michael Kors shares were 22% higher, at $45.49. The gains recouped losses from earlier in the year, when both stocks had fallen sharply.

Michael Kors Chief Executive John Idol said consumers were willing to buy full-price merchandise if the style was right. He pointed to strong demand for the company's Bancroft handbag, which is made in Italy and sells for roughly $1,000. "If it's the right product you don't have to have these aggressive markdowns at retail," Mr. Idol said.

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But while the demand for full-price goods helped raise the company's average prices, it was more than offset by a decline in sales volume because of the reduced discounts, he continued.

Michael Kors revenue declined 3.6% compared with a year earlier to $952.4 million for the three months ended July 1. Sales at existing retail stores fell 5.9%, while sales through department stores dropped 23%.

At Ralph Lauren, quarterly revenue fell 13% to $1.35 billion, including a 17% drop in North America, which the company attributed to declines in its retail and wholesale channels.

Ralph Lauren's new CEO, Patrice Louvet, who took the helm last month, said that while he was largely sticking with a strategy laid out by his predecessor that focused on streamlining operations, he wanted to place more emphasis on boosting revenue.

One way he hopes to do that is by strengthening e-commerce, where sales in North America fell 22% in the most recent quarter. Mr. Louvet said he hasn't ruled out deepening Ralph Lauren's relationship with Amazon.com Inc., where the luxury brand currently sells a limited number of items.

He added that other partnerships with online retailers are in the works. Ralph Lauren recently struck a deal to sell through Zulily, which is owned by the home-shopping retailer QVC Inc.

While net income at Michael Kors fell to $125.5 million in the quarter, from $147.1 million a year earlier, the results exceeded analysts' expectations. Likewise, for Ralph Lauren, where net income totaled $59.5 million, compared with a loss of $22.3 million a year earlier.

"Results and outlook were better than expected," wrote Jefferies analyst Randal Konik in a note to clients about the Michael Kors results. He said that management's strategy of innovating and elevating the brand is driving sales and margins.

Mr. Idol, the Michael Kors CEO, said plans call for small increases in wholesale sales next year, providing the holiday season is strong. He also said that with the dollar weakening against the euro there is hope that foreign tourists will return to the U.S.

"We are definitely seeing business improve in North America," Mr. Idol said. Although foot traffic to stores is still weak, he said, "there's definitely a slightly better feeling that we're seeing with the consumers coming into the store being a bit more optimistic."

Ralph Lauren said it expects wholesale revenue to be down about 5% going forward. The company also said declines in spending by foreign tourists had moderated.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

August 09, 2017 02:47 ET (06:47 GMT)