Michael Kors and Ralph Lauren reports 2Q results, to cut sales to department stores

Michael Kors

Michael Kors’s second quarter revenue was $987.9 million, almost the same amount as the second quarter of 2015. By segment, its retail net sale was $562.9 million, 7.57% up from $523.3 million because of 221 new stores openings and the acquisition of its China business, while its wholesale net sale went down by 6.98% to $394.4 million from $424 million. Its retail net sales benefited from the increase of European and Asia market. Net income dropped by 16.11% to $147.1 million from $174.4 million, suffering from a 13.92% increase in operating expense.

Ralph Lauren

Ralph Lauren reported a revenue of $1,552 million, 4.08% down from $1,618 million in the second quarter of last year. Both wholesale and retail segment underwent a decline of sale. It delivered a $22 million net loss for the second quarter, a result of lower net revenue and higher operating expense due to restructuring charges.  Investors were not frightened by the loss since its share price surged by 8.49% on Wednesday and then went up by 5.39% on Thursday. They are looking at the company’s progress on its cost-cutting efforts.

European Model or American Model

Wholesale business to department stores once was the most profitable segment, contributing operating margins approximately 20%, twice as much as retail business. However, more people are now enjoying the convenience and low prices offered by e-commerce rather than going shopping at department stores. According to Wall Street Journal, Michael Kors is cutting back sales to department stores in the hope that less inventory will translate into more full-priced sales. Ralph Lauren CEO Stefan Larsson also noted the heavy promotions at department stores.

There are two typical ways for luxury companies to operate business -European Model and American model. For example, Dior or Gucci follows a European model which means their products are only available at retail stores and luxury stores like Saks Fifth Avenue. By this way, they charge a high price and maintain their luxury brand image while sell lower volume. While brands like Michael Kors go another way. You can buy their products in places like Nordstorm Rack and their own stores, which bring them high sales volume but lower prices, possibly damaging brand image. Which way is better? It seems to be European Model.


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