Steep Holiday Discounts Could Spell Trouble for Upscale Handbag Makers

Luxury brands are kicking off the holiday season with significant discounts that will likely elicit opposite reactions from consumers and shareholders.

Early Tuesday morning, Kate Spade (KATE) announced a surprise sale of up to 75% off accessories, while Michael Kors (KORS) is offering 25% off an online order of $250 or 30% off an order of $300. Coach (COH) is discounting entire online purchases by 30%.

This week's sales reflect the type of broader discounts that consumers have come to expect from the retail sector.

"We continue to feel the impact of the price-sensitive customer in our full-price and off-price channels but particularly in our outlets where the environment remains heavily promotional, contributing to increased margin pressure," Kate Spade CEO Craig Leavitt said on the company's most recent earnings conference call.

Shoppers are not making purchasing decisions based on particular brands but rather products that offer style and function at entry price points, Cowen & Co. analysts wrote in a note last week.

Additionally, macro pressures such as lower tourism spending and promotional activity at department stores and outlets will likely continue to pressure store traffic, the analysts claimed. 

"We believe department stores continue to see both unit and pricing pressure - as customers both gravitate to lower price points and less well known brands, and private label," the analysts noted.

Department stores have been discounting handbags so heavily that luxury brands have begun to pull their products from department store shelves.

Barneys New York introduced 41% fewer styles into stores in the 2016 third-quarter compared to the year-ago period, while Michael Kors's Michael line introduced 43.5% fewer new styles in the last three months compared to a year prior, and Coach has introduced 45% fewer new styles during the period, according to research by retail technology company EDITED.

Due to its planned pullback, Coach's North American department store sales were down about 30% year-over-year in the most recent quarter.

J.C. Penney (JCP) said in its most recent earnings call that all divisions but women's apparel and accessories were positive in October, while Macy's (M) similarly noted weakness in handbags, cosmetics and fashion watches during the quarter. Nordstrom (JWN) alone said its designer business "continues to outperform."

But product demand could be reinvigorated somewhat by new styles this year, Cowen & Co. analysts said in last week's note.

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