Has the trend for luxury brands reached its peak?
Published 12/09/2016 | 02:30
There was a time when branding was confined to 'pesky' steers in cowboy movies, but now it seems, everyone wants to be branded - be it labelled footwear, logo-ed beachwear, or Abercrombie & Fitch emblazoned over one's manly chest; it seems necessary even to have a famous brand name on your sunglasses.
The international corporation we are examining this morning is another of those ubiquitous luxury global fashion brands, Michael Kors Holdings. Named after celebrity designer Michael Kors, the fashion line is known for its posh handbags with its signature 'MK' logo prominently displayed. The company also markets footwear, men and women's clothes, jewellery, watches, and the inevitable 'shades'.
The brand is marketed as "accessible luxury", which I'm sure could be applied to many hundreds of thousands of products. But Michael Kors sells through concession stands and in-store boutiques in upmarket outlets like Harrods, Bergdorf Goodman, Galleria La Fayette and Brown Thomas.
New Yorker Michael Kors set up his own operation in 1982 specialising in women's wear, but within a decade was forced to retire. He tried again in 2002, opening his first shop four years later, and by 2014 was listed on the stock exchange, becoming a billionaire in the process; not bad going for a dropout.
Today the company's main focus is on its own retail shops, leading department and speciality stores. Sales last year were $4.5bn split between retail and wholesale activities. Retail is the company's largest unit accounting for over half of total sales. Interestingly, accessories (handbags etc) accounts for some 70pc of total sales at $3.2bn.
The US is the company's most important market with sales of $3bn - more than three times that of Europe - helped by its 400 company-owned stores, 200 of which are in Europe. Surprisingly, sales in Asia - the Mecca for brands - were only $200m. However, the company has signalled its intention to expand in the Asian region after buying back its licence in China. According to some analysts this decision was driven by a softening in the US due to sluggish department store sales and a weak dollar.
In addition to its new Asian strategy, the company is picking up the pace in the US opening 45 new owned stores and intends competing in non-traditional locations, like stores in airports. This year it plans 500 more in-store boutiques adding to its 1,500 existing ones.
While its bricks and mortar strategy continues, a key focus is on e-commerce. Since its floatation five years ago the company has experienced a meteoric rise. Sales have quadrupled to $4.5bn and net income has risen from $147m to $840m in the same period.
Up to mid-2014 the share price reacted positively, peaking at almost $100 per share. Since then investors have cooled on concerns that margins have been sacrificed for sales growth. The stock is now trading at $47.73 with a modest price earnings multiple of 11, valuing the company at $8.4bn. To help its flagging share price, it has recently announced a $1bn share buyback programme.
The company is also trying to lessen its reliance on women's handbags. The fashion house is looking at new male customers. It has recently concluded a sponsorship deal with McLaren Formula 1 racing team. Under the deal Michael Kors will create a limited edition of leather jackets which it sees as kick-starting the re-launch of its menswear business. Observers are cautious because this is a crowded and competitive market.
Most analysts agree the company must seek other fashion areas to revamp its brand, which in the opinion of some may have peaked.
If you are interested in investing in a luxury brand it might be preferable to look at the European-quoted fashion companies like LVMH or Hermes, which have the added attraction of avoiding any exchange risk; unlike Michael Kors. However investors must first answer the question: is the tide going out for luxury brands?
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.