Michael Kors' Greatest Strength Is Also the Company's Biggest Weakness

Michael Kors has thrived as a result of incredibly strong brand awareness among consumers, but is the company now too dependent on this one aspect?

Jul 8, 2014 at 5:00PM

In the competitive world of retail fashion, successful companies often have one thing in common: powerful brand name recognition among consumers. While this can be a tough metric for investors to measure with any degree of consistency, it is also a great way to screen for lucrative investments.

One of the most successful companies operating in fashion retail right now is Michael Kors (NYSE:KORS). Through years of robust advertising and clever pricing schemes, Kors has gained increasing acceptance among consumers, most of it at the expense of older retail competitors like Coach (NYSE:COH).

However, the company's best attribute is also the single greatest risk factor investors have to consider going forward.

Mmk

Source: Michael Kors.

Strong brand recognition
The Michael Kors brands has thrived in recent years. In the most recent fiscal year alone, the company has increased total net revenue 52%. Retail net sales grew 50%, while comparable-store sales grew 26%. Finally, wholesale sales grew 53% and licensing revenue grew 61%.

Company Chairman and Chief Executive Officer John D. Idol explained, "We believe that our expanding global brand awareness is driving continued strong demand for our luxury product and fueling our growth as a global luxury lifestyle brand. In addition, Michael Kors and our talented design team continue to deliver exceptional products while the distinctive jet-set in-store experience that we offer in both our retail stores and our shop-in-shops continues to resonate well with our consumers." 

The success of the Kors brand has had a direct negative impact on Coach. Take the lucrative handbag and accessories market, for example; while Kors has grown its presence significantly, Coach's share of the market has declined.

A retail analyst at ITG Investment Research stated bluntly, "Coach customers are becoming Kors customers." 

While Kors continues to grow at rapid rates, Coach continues to struggle mightily. The company's most recent third-quarter report saw net sales decline 7%. In particular, North American sales for Coach decreased 18%, which is in stark contrast to Kors, which saw North American sales increase a staggering 43% in its most recent quarter. 

A cause for concern?
While there is no indication yet that consumers have started to migrate away from the Michael Kors brand, investors have to consider how dependent a company like Kors is on staying popular among consumers.

This dependence is explained best in the company's 10-K. It reads, "In varying degrees, depending on the product category involved, we compete on the basis of style, price, customer service, quality, brand prestige, and recognition, among other bases. Some of our competitors have achieved significant recognition for their brand names or have substantially greater financial, distribution, marketing and other resources than us." 

Besides Coach, which is attempting a brand restructure of sorts, other increasingly popular names like Kate Spade and Tory Burch are competing in the handbag and accessories space as well. 

Images

Source: Michael Kors Facebook. 

Bottom line
Savvy investors always need to monitor what is happening in the competitive landscape in which their companies operate. In the retail segment, Kors is dominating all competitors as a result of its immense popularity and subsequent pricing power.

However, there will no doubt come a time when a newer and more aggressively growing peer enters the retail arena to challenge Kors for market share.

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Philip Saglimbeni has no position in any stocks mentioned. The Motley Fool recommends Coach and Michael Kors Holdings. The Motley Fool owns shares of Coach and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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