Michael Kors Tourism Traffic Down Significantly, New Channel Checks Show

• Michael Kors Holdings Ltd KORS shares are down 42 percent year-to-date, having declined most sharply in May.
• Piper Jaffray’s Erinn E. Murphy maintained an Underweight rating on the company, with a price target of $38.
• While trends decelerated through September, there continue to be long-term concerns in wholesale, Murphy noted.

Channel checks indicate that trends decelerated through September, following a modest improvement in July and August. Moreover, there seems to have been a sharp decline in traffic in outlets as well as in major tourist hubs, including New York and Florida.

Analyst Erinn Murphy said, “From the wholesale perspective, we are starting to hear of examples where elevated promotions Y/Y are not being met with increased consumer demand.” Although categories like watches are “in the process of being right-sized,” in handbags Michael Kors lost market share to smaller brands.

“Retail trends typically lead wholesale by 6-9 months. At retail, we are concerned with higher-ticket items decelerating (watches, handbags), negative traffic and more normalized brand demand given the likely unsustainable size of the brand today with the North America handbag market,” Murphy added.

Michael Kors opening 15 additional stores last quarter masked a part of the overall underperformance. Murphy said, however, that these trends are likely to have a significant adverse impact on the company's overall margin structure.

“At wholesale, we believe margins will continue to decelerate and sales growth will flatten out into next year,” the analyst stated.

Piper Jaffray’s web analytics suggest that trends were down through the quarter. “On a global basis, we saw decelerating and negative Y/Y search activity for the Michael Kors brand as the quarter progressed,” Murphy wrote.