The Secret to Michael Kors' Success

You don't have to be the next Warren Buffett to see that the retail landscape has changed dramatically over the past five years. Few, if any, brick-and-mortar retailers have been unaffected by the dramatic shift to online and mobile commerce, and apparel merchants are no exception. Approximately 66% of consumers now buy clothes online, according to a new study.

From digital marketing to consumer shopping habits, the online world has crashed brick-and-mortar's party, and if merchants don't adapt, there's a good chance they won't survive.

One stand-out in this area that may surprise many investors is none other than luxury fashion brand Michael Kors Holdings Ltd (NYSE: KORS). Over the past six months, Kors' stock price has soared 53% to around $63 per share, leaving the S&P 500 index in the dust. The company's turnaround has been remarkable: Just 12 months ago, Kors' shares were languishing in the mid-$30s, with investor sentiment dragging.

The company reported its third-quarter earnings last month, showing total revenue grew to $1.44 billion, a 6.5% increase year over year, and adjusted earnings per share rose to $1.77, a 7.9% increase year over year.

While several factors have contributed to Kors' rise, its digital efforts have especially excelled. In the company's 2018 third-quarter conference call, as transcribed by S&P Global Market Intelligence, CEO John Idol said, "The greatest level of traffic growth for the company is clearly online." Let's take a closer look at three crucial parts to Michael Kors' holistic digital strategy -- all of which have helped spur growth and revive hope in the company's long-term prospects.

A VIP pass to future returns

One of the more exciting things Kors' management revealed on the company's third-quarter conference call was the launch of a new customer loyalty program for U.S. customers dubbed KORSVIP. Idol called the program "an important next step in our personalized journey." While Idol said that more details would be forthcoming, he said program members would be able to accrue points by submitting product reviews, creating wish lists, and, of course, buying products.

In a data-driven retail world, gathering customer intel is crucial for success. While Idol didn't give specific numbers, he did say the number of customers who signed up for the program in its first days far exceeded expectations and he believed it would prove to be an excellent tool to more deeply engage customers.

A strong social media presence

Another area where Michael Kors has excelled is marketing its brand and engaging its customers through social media. In the conference call, management said Kors had grown its social media presence across all platforms to 40 million followers, an 18% increase. Idol specifically called out Facebook's Instagram, where Michael Kors now has more than 11 million followers, making him "one of the most followed fashion designers" on the platform.

The company has also done an excellent job generating excitement and buzz around company-sponsored events using social media. For example, in November, Michael Kors traveled to Shanghai for a showcase titled The Walk and generated 1.6 billion social media impressions, according to the company, and live-streamed the event to almost 10 million viewers. Another marketing campaign, featuring handbags and shoes, generated 159 million impressions on social media.

An omnichannel shopping experience

Perhaps the most important thing Kors has enhanced is the entire shopping experience -- from the time a customer first browses online for ideas to when that customer makes an in-store purchase. In retail parlance, the popular buzzword for this shopping experience evolution is called omnichannel. Michael Kors shareholders should be encouraged that Idol really seems to understand how crucial getting this right is:

Kors is taking initiatives in several different areas to make this a reality. For instance, this past holiday season Kors launched a digital gift guide to help customers find a perfect gift for their style. In addition, store employees are now able to search online for complementary pieces to help customers create an entire ensemble. That same platform will also allow sales associates to build customer profiles that can be used when the customer returns.

Still unfashionable?

The retail landscape is changing fast, perhaps faster than it has in decades, but Michael Kors management has done a capable job of navigating this tricky river, even as the best way to navigate it changes. The jury is still out on whether these new online and omnichannel features drive sales, but the company is collecting more data as it carries out these initiatives, making the moves long-term winners, even if they are rolled out or rebooted in the future.

I have been critical of Kors leadership, but it seems I may have underestimated them. With a P/E ratio of 18.9, the company is far from the undervalued investment it was in the recent past. While I would not initiate a position at these levels, I have been wrong before on this company and I really like the direction the company is taking with its digital investments. With the Jimmy Choo acquisition looking smarter by the day, this is not a bad retailer for investors to keep an eye on for better entry points.

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Matthew Cochrane owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool owns shares of Michael Kors Holdings and has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.