Michael Kors' shares drop on lower rating amid ramped up discounting

Markets Associated Press

Michael Kors' shares slumped Tuesday after a key analyst at Credit Suisse Group reduced its rating amid concerns about stepped up discounting this holiday season for its handbags.

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Credit Suisse analyst Christian Buss cut his rating to "Neutral" from "Outperform," citing a "dramatic ramp" in discounting in its handbag business, which accounts for 80 percent of its total sales. He now expects shares to reach $79 in the next 12 months, down from $103.

Shares fell nearly 8 percent, or $5.75, to $67.25 in afternoon trading.

The slump in its stock price is the latest hiccup for Hong Kong-based Michael Kors Holdings Ltd., which also offers clothing and other accessories like shoes. The designer has been riding high with investors since it made its debut on the New York Stock Exchange in December 2011. But in recent months, investors have been concerned about slowing growth. Shares are down about 26 percent in the past six months, versus a slight increase in the broader market.

In a client note, Buss noted discounting intensified over the holiday period for the overall handbag business, particularly in the premium arena. He noted that the number of handbag styles on sale at high-end premium department stores spiked from 5 percent in October to 31 percent in December. But he found that Michael Kors handbags had the highest percentage of styles on sale. He estimated 18 percent were on sale compared to the other top brands in the area, which had an average of 12 percent. He also found that 65 percent of handbags on the company-owned website were discounted in December, making it the most promotional e-commerce site of the six handbag brands he studied.

"A combination of rising inventories and softening traffic has led to a dramatic step up in promotional activity across Michael Kors stores, e-commerce sites and premium wholesale distribution partners," Buss wrote.

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Michael Kors had highlighted challenging traffic in company-owned stores during its earnings call with investors on Nov. 4.