Ralph Lauren and Michael Kors Both Post Quarterly Profit Beats

In this Market Foolery segment, host Chris Hill and Million Dollar Portfolio's Jason Moser consider what these two high-end apparel and accessories sellers are doing right. The Michael Kors (CPRI -0.05%) story is one of expansion and improvement as it looks to become a true global fashion-luxury group, with acquisitions like footwear maker Jimmy Choo. Ralph Lauren (RL 1.08%), meanwhile, is doing less discounting, which is paying off for the brand and the margins.

A full transcript follows the podcast.

This podcast was recorded on Aug. 8, 2017.

Chris Hill: A couple of retailers are having really good days. Ralph Lauren first-quarter profit came in higher than expected. Michael Kors, same story, Q1 profit better than expected and they raised guidance. Michael Kors up 20% today.

Jason Moser: Yeah. Hey, listen. I have four words for you. Global fashion luxury group. Is that something you might be interested in?

Hill: Go on. [laughs] 

Moser: It sounds like Wall Street is interested in it, and that's really what's going to be key to Kors' success here in the coming years. We watched this Kors story play out sort of the way we watched the Coach story play out. It was a handbag maker that really saturated the market. The brand lost its cachet, they started discounting and had to start liquidating more and more inventory, margins got killed, the stock went down the toilet. What they're doing going forward, Coach is doing this, we're seeing Kors doing this, they're acquiring other businesses to bring in additional dynamics beyond handbags. The Jimmy Choo acquisition here is a good example of that recently. They acquired Jimmy Choo for about $1.2 billion, and that's a big shoemaker. So really, what they're trying to do is build out this fashion luxury group. The addition of Jimmy Choo is part of that. They also acquired the exclusive China licensee for the business for $500 million not too long ago. So, that really gives them tremendous exposure to an up-and-coming Asian market. We talk all the time about the growing middle class in China and how much they're going to be spending in the coming years, and how much they really like big brands like these. 

There are reasons for investors to be optimistic there. They raised their guidance a decent bit for the quarter and for the year. Their year was essentially still the same. But the thing is, that that doesn't reflect the Jimmy Choo acquisition. So, that actually means that things were getting a little bit better even before that. So, they continue to streamline the business. While comps were down, top-line revenue is up. Now, that was due to opening stores. So, we have to keep an eye on that, because they can't just keep opening stores forever. But all in all, it wasn't a bad quarter for Kors. It's certainly less bad than probably the market was expecting.

Hill: In the case of Ralph Lauren, we saw something that we have seen previously with Michael Kors, which is less discounting. I get that it is a tough needle to thread for all of these companies, in terms of, at what point and how do you get the inventory off your shelves? In a perfect world, people are buying it, and that's what's getting it off your shelf. But at some point, if stuff isn't moving, you need to make that decision, and you have to choose very wisely what you're going to do. In the case of Ralph Lauren this latest quarter, it paid off for them to just say, "Yeah, we could discount the hell out of this stuff just to get it moving, but we're not going to do that." And it showed up in the margins.

Moser: Yeah. I think you keyed in on exactly what was really was part of the success for this quarter for Ralph Lauren. Top line sales fell 13% from a year ago. It's not like they just blew out the numbers here. But they got their inventory levels down significantly -- 31% from a year ago. And they were able to do that with a minimum of discounting and liquidations and whatnot. Because, yeah, you're right, any given day, you can go into a TJ Maxx, and you're going to see a slew of Coach, Kors, Ralph Lauren stuff. That's not good for those businesses. It's great for TJ Maxx, but it's not good for Ralph Lauren, because those are basically just liquidations and discounting. 

So, when they were able to get that inventory level down 31% from a year ago, while keeping discounts and liquidations at a minimum, that tells us at least that there's some demand out there for the brand. Ralph Lauren is a unique brand. It's important that they have Ralph Lauren in there still as the chief creative officer. He's able to offer his input on the fashion side, while giving this business over, perhaps, to folks who are a little bit better schooled on how to take this business forward in such a challenging environment. With Ralph Lauren, they have a very strong balance sheet. Balance sheet has more than $1.1 billion in net cash. They kept guidance intact, and they're really identifying digital as this big opportunity, and they continue to invest in that while pulling back the reins a little bit on their department store presence. And really, for any retailer in this decade and beyond, that's going to be the key -- establishing that digital presence and really taking advantage of it. It seems like they're taking the steps to do that.