Michael Kors and E-Commerce Reality

The handbag maker says online sales are less profitable than those made at stores.

Michael Kors just admitted what other retailers have been reluctant to concede: E-commerce isn't as profitable as brick-and-mortar stores. 

Not So Bad

The drop in Michael Kors' same-store sales wasn't as bad as expected.

Source: Bloomberg

The handbag retailer's shares rose as much as 26 percent  on Tuesday after it said holiday sales at established locations fell by only 1 percent, a better showing than investors had feared. (As we recently pointed out after Coach's earnings, less bad seems to be just good enough to do the trick these days.)

More telling, however, was the admission by CEO John Idol that e-commerce isn't as profitable as business at actual stores  -- and that a company long ridiculed for opening too many locations and flooding the marketplace with Michael Kors-branded purses and watches (at its own shops as well as venues from T.J. Maxx to Amazon) plans to keep on expanding even more. It wants to reach 1,000 stores, not including its men's business. 

Idol said the company thinks online sales will one day represent 20 percent to 30 percent of its business; it's never going to be 100 percent because "stores aren't going away." 

Building Blocks

Michael Kors has more than doubled its store count in two years

Source: Bloomberg

The reality at Michael Kors undercuts the conventional wisdom among retailers  that e-commerce would prove to be more profitable than in-store sales because it doesn't come with the overhead expenses of operating locations, hiring clerks and cashiers,  etc. Instead,  the reality is that online shopping isn't yet the saving grace retailers were counting on when they started plunging billions of dollars into new websites and shipping facilities. 

Profit Squeeze

Year-over-year change in operating margin at Michael Kors

Source: Bloomberg

While more shoppers are certainly flocking online to buy things and in total, online sales are outpacing those in brick-and-mortar locations, retailers haven't yet found a way to make as much money off of them. And online sales have been slowing at big retailers such as Gap, Nordstrom and Walmart. 

Idol warned investors that as Michael Kors sales shift from stores to online,  it would have to invest in hiring staff and building out its e-commerce operations "well in advance of having any revenues" and that many of those expenses wouldn't level off until well into 2018.  

According to Idol: 

Unfortunately today, e-commerce generates a lower operating profit for us than four-wall, brick-and-mortar. We think over time that will reverse itself but as you know, when the consumer requires free delivery, free return, wonderful packaging, plus there's a new trend that people are buying multiple sizes of things to try them at home and then return them, that all is a negative headwinds for us.

The company explained that if it doesn't make these investments now, it won't be able to build a lasting company. That's true. But it might start weighing on investors once the glow from the company's better-than-expected earnings wears off. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at sbanjo@bloomberg.net

    To contact the editor responsible for this story:
    Beth Williams at bewilliams@bloomberg.net

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