Handbag giants Michael Kors Holdings Ltd. (KORS) and Tapestry Inc. (TPR - Get Report) this week shot out strong from the earnings gate, with both revealing progress in their turnarounds and capitalizing on buoyant consumer confidence over the holidays. Do their positive results signal a turnaround in retail overall?
Yes, some analysts say. "Consumers have had the ability to spend due to rising wages, and they have the will to spend because they're optimistic about their own personal finances and the future of the economy," said Neil Saunders, managing director of retail consultant GlobalData. "That benefits all, but it benefits more discretionary spending like luxury retail."
Michael Kors beat Wall Street forecasts on fiscal third-quarter earnings released Wednesday, reporting $219.4 million of net income vs. $271.3 million in the same period last year. That's $1.77 per share excluding one-time items -- up nearly 8% from the same period last year and trouncing the $1.29 in EPS that analysts had expected. KORS also posted $1.44 billion of revenues, exceeded the $1.38 billion analysts had anticipated.
And on Tuesday, Tapestry, which owns brands like Coach and Kate Spade, reported $1.07 in earnings per share for its fiscal second quarter (excluding one-time items). That beat Wall Street forecasts of 89 cents in EPS Net sales totaled $1.79 billion, a 35% uptick from the same period last year and topping analysts' expectations of $1.77 billion.
David Weiss, a partner at retailer consultancy firm McMillanDoolittle LLP, said Kors and Tapestry "are both riding tailwinds right now. The U.S. economy is strong, the Chinese economy is strong and Western Europe is better than it has been in a long time. This is buoying the premium and luxury markets."
He added that both firms are combining the better economy with "an emergence from a strategy of cleaning up the assortment, the distribution channels and the promotional activity. We should continue to see a positive impact from these efforts, and the same benefits should spread to [fellow Tapestry brand] Kate Spade next year."
But while that bodes well for some parts of the retail industry, other areas might suffer.
Here's why: Tapestry, Michael Kors and Ralph Lauren Corp. (RL - Get Report) are all trying to reclaim their luxury cachet by appearing more exclusive. That means they're withdrawing merchandise from midrange chains like Macy's (M - Get Report) and focusing instead on either selling their wares in their own in-house stores or via luxury chains like Nordstrom Inc. (JWN - Get Report) , privately held Neiman-Marcus or Macy's subsidiary Bloomingdale's.
"What that has done has made the brands more desirable and encouraged consumers to pay full price," Saunders said.
Jason Goldberg of SapientRazorfish agreed, noting that both the high and low ends of retail are doing well. By contrast, analysts say that stores in the middle -- like Macy's, J.C. Penney Co. (JCP - Get Report) , Sears Holdings Corp. (SHLD) and Kohl's Corp. (KSS - Get Report) -- have been struggling. "It's smart of Michael Kors and Tapestry to be running away from the middle toward luxury," Goldberg said.
Saunders said midrange retailers might counter the loss of Kors and Tapestry's offering by developing their own private-label brands that are exclusive to a given department store. Such a concerted strategy would draw more customers and allow the midrange stores to earn higher margins than they do with branded merchandise, he said.
But Saunders added that midrange department stores need to spiff up their look. "From a physical point of view ... Macy's, J.C. Penney and Sears [look] like they haven't changed since the 1970s," while Tapestry's and Michael Kors' stores look elegant and enticing, Saunders said.