3 Things Michael Kors Does Right (And 1 Big Thing It Does Wrong)

For investors in global luxury fashion company Michael Kors Holdings Ltd (NYSE: KORS), the past few years have proven to be a trying time. Over the past year, the company has struggled to turn its business fortunes around. The company's stock price, which seems perpetually cheap in a bull market, has decreased 13% over the past year while the S&P 500 has shown gains north of 12%.

The company's 2018 first quarter results and conference call were a microcosm of everything the company's shareholders have been through over the past year: declining revenues and same store sales, encouraging tactics designed to stimulate sales being taken by management, and what appears to be a misguided strategy showing the flawed direction from the C-suite.

For value investors, the things the company is doing right, when combined with its attractive valuation, can sometimes make the stock hard to ignore. Yet a close examination should be enough to show that this company still has a long way to go before it can be relied upon to produce market-beating returns for shareholders. Let's quickly review three of the initiatives that management is getting right before showing that its faulty strategy could unravel everything management is trying so hard to accomplish.

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Three things Michael Kors' management does right...

1. Men can be fashionable too. While CEO John Idol didn't break out any specific numbers for Michael Kors' new men's business, he did express that several lines in the men's clothing, were seeing success. In the first quarter conference call, Idol said the company "saw very strong comp store increases" in its men's lines at both retail and wholesale stores. While the new line is still too small to materially affect the company's top and bottom lines, Idol believes the men's side will grow into a "powerful business" for the company.

2. Growing digital engagement and sales. In its most recently reported quarter, e-commerce continued to do well with a double-digit comparable sales increase in North America. This fall, to further fuel the company's digital growth, Kors is launching an online dress shop and Kors Style, a platform that allows online customers to view head-to-toe seasonal fashions and buy an entire ensemble in one transaction. Kors' online offerings also include more customizable products than its brick-and-mortar retail locations.

The global fashion company is also busy launching digital flagships in other countries around the world. This quarter, Kors launched twelve European digital flagship stores, bringing its total to 23.

3. Smart watches replacing lost revenue from traditional watches. Traditional fashion watch sales took a huge hit when smartwatches were introduced a couple of years ago. Seeing the industry change, Michael Kors introduced its ACCESS smartwatch line last year. In the second quarter conference call, Idol said, "ACCESS smartwatches remain an important and growing category. Consumers continue to respond well to the increased array of styles, plaidings, and interchangeable strap options." This fall, the company is introducing two more ACCESS smartwatch styles, Sofie and Grayson. Management now anticipates ACCESS smartwatches will account for 25% of all watch sales by the end of the year.

... And one thing it does wrong.

While there are plenty of things that could determine the level of success the company enjoys over the next several years, the most important thing remains the company's brand. To this end, management has long maintained a determination to stop running so many promotions on the company's products. Even if sales meandered downward for a few quarters with this strategy, the company maintained that it was in the best long-term interest of the brand to maintain an exclusive, high-end image.

In the 2016 fourth quarter conference call, Idol said that "our primary focus as a company is to sell full-price merchandise and present Michael Kors in the best and most appropriate exciting environment for our consumer." For several quarters, management's top priority was to raise the average selling price of its products.

Therefore, when the company announced it would be closing store locations in the previous conference call, it was a shock to discover management would not be closing outlet stores, where products are discounted but, rather, full-price retail locations instead. Exacerbating matters was the reasoning management offered for the bizarre decision. At the company's Analyst/Investor Day this past summer, Idol said:

No data given, just a hunch that seemingly goes against the company's primary goal of raising the average sales price of its product. Despite management's best efforts, it's hard to shake the feeling that they are messing up the single most vital element to the company's long-term success: the company's brand. While I like several of the moves Michael Kors is making to stimulate growth, I can't invest in a company I believe gets this crucial piece to the puzzle so wrong.

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Matthew Cochrane has no position in any of the stocks mentioned. The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool has a disclosure policy.