Analysis Of Michael Kors' Financial, Microeconomic, And Competitive Strategy Essay.

Introduction to Michael Kors

Discuss about the Quantitative Empirical Analysis In Management.

The following study deals with the various financial and non-financial analysis of the chosen American luxury sportswear house company of Michael Kors which is a luxury lifestyle brand operating worldwide, it has a world-class management team that has been launched since 35 years. The company of Michael Kors has featured distinctive designs when it comes to products like global accessories, footwear and apparel operating in more than 100 countries. The company operates in three segments including retail, wholesale and licensing that led to the company strategically controlled global distribution of network that consist of more than 390 retail stores in the Americas 278 international retail stores and e-commerce sites in U.S. the discussion consists of the strategy analysis of the businsess that includes industry evaluation, microeconomic factors and competitive strategy (Rigamonti et al., 2015). In order to analyse the competitive strategy, the chosen company for the base of the comparison taken is VF Corporation dealing with similar products in the same industry. Further in the study there has been financial analysis of the company both year wise and company wise this would enable the financial position of Michael Kors. For the financial analysis various ratio has been calculated along with critical analysis of the company’s financial statements from the annual reports.

In order to understand the economy of the chosen American luxury sportswear house company of Michael Kors there has been an analysis of one of the predominant factors among the various micro economic factors that includes the political, economic, social and the technological factors related to the company. There are the external factors that affects the performance and operation of the company. According to the annual report of the Michael Kors the PEST analysis gives a vivid detail of the operating challenges (Kothari, Mizik & Roychowdhury, 2015). The Michael Kors Holdings Limited will face in prevalent macro environment other than competitive forces. The Industry may be highly profitable with a strong growth trajectory but it will not be any good for Michael Kors Holdings Limited if it is situated in a political environment that is not stable. Since the company operates in different nation with different economies the Macro environment factors of the company includes the rate of inflation, rate of savings, rate of interest, rate foreign exchange and the economic cycle  that helps in the determination of the aggregate demand and investment the economy(Grant, 2016). On the other hand the micro environment factors that impacts are competition norms impact the competitive advantage of the firm. Michael Kors Holdings Limited can use country’s economic factor such as growth rate, inflation & industry’s economic indicators such as Textile - Apparel Clothing industry growth rate and consumer spending.

Analysis of Microeconomic Factors

The process of industry refers to the assessment tool of the market of company of Michael Kors that reviews the market factors that influence the way the in which the industry develops. The factors that influence the market of a particular industry are competitors, buyers and the suppliers, market entrants (Giannakis & Papadopoulos, 2016). The industry in which the company of Michael Kors Holdings Limited operates is apparel or textile industry. The company of Michael Kors Holdings Limited lies in the textile or apparel industry lies in range of top performer with a rank of 38 out of 255 company. Moreover the company of Michael Kors Holdings Limited has a market share of 2.92%.

The competitor company that is to be analysed with the company of Michael Kors Holdings Limited is is VF Corporation dealing with similar products in the same industry. The competitor analysis would enable to identify the complexity of a particular industry (Titman, Keown and Martin 2017). The VF Corporation shares increased at present increased to 5.01%. Michael Kors Holdings Limited on the other hand has reached is up 4.97% year at present. In addition to this since the V.F. Corporation and Michael Kors Holdings Limited are the two most active stocks in the Textile – Apparel Clothing industry on the basis of recent trading volumes, of determining whether one is a better has a better investment than the other, There must be a comparison of the two companies in terms of growth (Fischer & Pascucci, 2017).  It can be observed that VF corporation has a grow earnings at a 11.34% annual rate. In comparison to KORS is expected to grow at a 5.60%. All else equal, VFC’s higher growth rate would imply a greater potential for capital appreciation.

It can be said that Michael Kors beats V.F. Corporation when it comes to market share and profitability. It has been seen that Kors is growing fast and generates high return on investment, has a lower financial risk (Valickova, Havranek & Horvath, 2015).

The Porter’s five forces framework that helps in the analysing the present competition of the company it includes the following heads:

• Threat of new entrants: In the industry of textile and Apparel a new entrant brings innovation and new procedures of business strategy and it may be a pressure on Michael Kors Holdings Limited with reducing costs, lower strategy pricing and new value offers to the clients.
• Bargaining power of the suppliers: The suppliers who are powerful in the sector of consumer goods may possess a negotiating power for extracting higher prices in the field. It may impact to the company if the supplier bargaining power is low in the overall profitability (Chandra 2017).
• Bargaining power of the Buyers: It can be of pressure on the Michael Kors regarding the profitability in long run. If there is small and more powerful customer base in the Michael Kors there is a higher the bargaining customers’ power and higher ability to seek discounts along with the offers.
• Threat of the substitutes: At the time of a new product launch that meets some similar needs of the customer the profitability of the industry suffers. In case threat of a substitute is high thee is a high value offer that is different from present prepositions of the industry.
• Competitor rivalry: The Michael Kors operates in an industry where the industry competition is high. This competition impacts the overall long-term profitability of the entity.

The fashion industry of United States is undergoing through seismic shift and the fashion system is driven by several factors such as redefinition of cost system by digitization across value chain, new innovative business model and accelerated industrial pace, data proliferation and brands experimenting with consumers directly. According to industry analysts, out of total worth of $ 1.2 trillion global industry, US spend more than $ 250 million annually on fashion. Since year 2013, apparel industry has struggled to exceed 3 percent of sales growth, however, the decline has been offset by considerable gains in retail segments and selected consumers. One of the most highlighted retail shifts in year 2016 was the growth of online shopping along with important piece of online growth is the pure play e commerce sites (Fibre2fashion.com, 2018). Fashion industry is being pushed and pulled in various directions by consumers who are looking to buying channels that is less traditional and who are demanding something different. A truly global supply chains are maintained by fashion companies of US on continuous basis. Millennial generation is the second most crucial segment of customers with the largest living generation in country. Total number of fashion events that are held in US is considerably higher compared to other countries. The regional fashion shows and emerging designers are promoted by support that is received from private financers.

Analysis of Competitive Strategies

The competitive strategies adopted by Michael Kors that helps in differentiating from competitors is growth of luxury lifestyle brand that has best in class and leveraging the position of brand to grow the product categories of global accessories, innovative offerings of product from licensing agreement. In addition to this, considerable focus is given on initiatives of customer relationship and continuous investment in technology. Furthermore, there some risk factors to the business footwear, accessories and apparel industry that affects the spending of customers. The market in which company operates is highly competitive both internationally and within North America. Some of the brands from which company faces huge competitions include Kate Spade, Calvin Klein, Burberry, Ralph Lauren, Hermes, coach and many other brands.

The competitive strategy adopted by VF Corporation is to reshape the portfolio and strengthening the ability to act vertically and responsibly sourcing the footwear and apparel from design and innovation along with placing the products in different retail channel and hands of consumers.  In addition to this, company also intends to drove the efficiency of go to market process for the Timberland and North face brands (Andersen & Andersson, 2017).

Business of VF Corporation is impacted by the level of consumer spending and constantly responding to changes in market conditions. Some other risks are associated with operations of business, their strategic capabilities and profitability of business due to increasing pressure on margins (Bettis et al., 2014).

The corporate strategy of VF Corporation is focused on some key mega choices for sustained growth that helps in unlocking of mega choices. Such strategies include reshaping portfolio of VF and enabling the powerful brands, elevating the business of direct to consumer while prioritizing digitization, transforming the existing business model to a more retain centric and consumer model and distorting investment towards Asian countries by heightening focus on China. All these strategic choice will be empowered by increased focus and investment of strategic capabilities such as brand experience, creation of demand, retail excellence, analytics and insights, innovation and design, talent and agility of demand and supply chain.

Michael Kors has six strategic initiatives that help in achieving the business strategies. These six strategies are innovative product offerings by setting trends, product planning diversification, and optimization of engagement of customers, distinctive positioning of brand, leading luxury digital presence and expanding global presence (Horkoff et al., 2014)

The key accounts as identified in the balance sheet of VF Corporation are the current assets, current liabilities and stockholders’ equity. Items recorded under current assets include inventories, cash and cash equivalents, current assets for discontinued operations and accounts receivables deductive of allowance for doubtful accounts. Total value of current assets reported in financial year 2017 increased to $ 4392124 compared to $ 4293098 in year 2016 respectively. On other hand, items under current liabilities comprised of short term borrowings, accounts payable, accrued liabilities, current portion of long term debt and current liabilities of discontinued operations. Stockholder’s equity comprises of common stock, preferred stock, additional paid in capital, retained earnings and other accumulated comprehensive income (Vfc.com, 2018).

Analysis of Porter's Five Forces

For Michael Kors Holding limited, the key accounts of balance sheet include assets, liabilities and shareholder’s equity. Current assets comprised of receivables, cash and cash equivalent, prepaid expenses, receivables and others. Items under current liabilities include accounts payable, accrued income tax, accrued expenses, accrued expenses related to payroll. Shareholders equity on other hand incorporates retained earnings, other comprehensive loss, additional paid in capital, ordinary shares and treasury shares.

The disclosure of financial statements is presented according to US GAAP (Generally Accepted Accounting principles). Additional disclosure is required to be made concerning the amount, nature, timing and uncertainty of cash flows and revenues that arises from contracts with customers. In addition o this, the process of performing the disclosure assessment of project relies on completion of impact analysis of VF Corporation by implementation of cross functional team. The assessment of new standard for revenue recognition includes the impact on disclosures, accounting policies and on processes. An update of guidance of accounting standard issued by FASB effects the requirements of disclosure for financial instruments (Fleisher & Bensoussan, 2015).

Michael Kors complies with the disclosure requirement of under the act of Securities Exchange, 1934. Management of organization is responsible for making the assumptions and estimates that affects the disclosure requirements contingent liabilities and assets. Furthermore, organization makes qualitative and quantitative disclosures about market risks along with disclosure about procedures and control process.  For the disclosure of fair value measurements, measurement of financial liabilities and assets are done using the hierarchy of three level valuation. The report prepared for evaluating the effectiveness of disclosure control and procedures and any change in the internal control of registrants is incorporated in the report during the recent fiscal quarter. Adoption of method for recognizing revenue and other related disclosures are evaluated.

The business of Michael Kors could be adversely affected by the failure of Information technology systems to carry out the operations in an effective and proper way, difficulty in integration of new system and issues with transition to replacement or up gradation system. Websites and IT system may be subjected to interruptions or damage from telecommunication failures, power outages, breaches of security, hackers, network, usage errors by employees computer, any bad acts by customers and computer viruses. In addition to this, credibility and reputation of organization could be harmed by any significant disruption in websites and IT systems (Inyang & Egor, 2017). Other red flags area that is identified from the analysis of annual report of company is any delay or interruptions in the operations at interim. In addition to this, in the interim, organization can suffer loss of critical data due to ceasing and damaging of the websites and this could materially have adverse affect on business, operating and financial results.

Competitor Analysis

The ability of business of VF Corporation to effectively operate and manage depends considerably on systems of information technology. Failure on part of information technology to operate effectively and making any transition to replacement system, breach of security and difficulties in new system integration could have adverse impact on the business operations such as replenishment and ordering, inventory management, authorization and processing of credit card transactions and interaction with public on social media (Fleisher & Bensoussan, 2015).

Acquisition process of VF Corporation faces some risks and it is difficult on part of organization to overcome the problems and risk that is encountered. There can be significant impairment charge due to large onetime expenses or creation of intangible assets or goodwill. The ability of organization to deliver the product to market could be adversely impacted due to the problem that is encountered with the distribution system. Furthermore, there can be adverse material impact on achieving operational efficiencies, inventory management, meeting customer expectations and complete sales if problem is encountered in meeting customer expectations and distribution system (Vfc.com, 2018).

The return on equity computed for Michael Corp increased from 1.87 in year 2015 to 2.27 and 2.73 in year 2016 and 2017 respectively. Increase in return on equity is attributable to decline in total value of equity and increase in net income of company. This increase in return on equity is indicative of the fact that ability of organization to generate profits from investment of shareholders has increased considerably in recent years and the funds of investors are being utilized effectively (Prajogo, 2016). Return to equity for VF Corporation on other hand, has witnessed a significant decline from 2.03 in year 2015 to 2.28 and further to 1.87 in year 2016 and 2017 respectively. This fall in values of return on equity is illustrative of the fact that investments are not utilized efficiently for generating profits.

The examination of return on equity is done in an extended way by using the du point analysis by highlighting the scope of improvement by the identification of strength and weak point of company. It is required by Michael Corp to increase the net income generated by company along with increasing the total value of equity (Hill et al., 2017). For VF Corporation, there is requirement of setting higher profit by lowering down the cost margin.

The operating performance ratios of both the companies have been evaluated by computation of fixed asset turnover ratio, revenue per employee ratio, operating cycle and operating ratio.

Fixed asset turnover ratio for Michael Kors has initially increased from $ 48.92 in year 2015 to $ 60.97 and subsequently to $ 49.66 in year 2017 respectively. This decline is attributable to fall in net sales generated and the amount of total fixed assets held by company. It is illustrative of the fact that fixed assets are not efficiently utilized for generating profits in recent years. Ratio for VF Corporation on other hand, has varied by fewer values from 31.60 in year 2015 to 31.30 2016 and further to 31.19 in year 2017 respectively.

Revenue per employee for Michael Kor stood at 0.38 in year 2015 and further to 0.36 and 0.32 in year 2016 and 2015 respectively. It is suggested by the figure that there is continuous decline in ratio. This fall in ratio is attributable to increasing number of employee’s year on year and decreasing net sales of company. Fall in such ratio depicts that company is not able to utilize their employees efficiently for generating sales. For VF Corporation, the value of ratio is computed at 0.16 for year 2015 and 2016 and it increased to 0.17 in year 2017 respectively. Increase in ratio is attributable to increase in net sales and constant number of employee.

The operating cycle of Michael Kor stood at 14 compared to 24 for VF Corporation indicating that former company is more efficient in converting inventories into cash.

Operational efficiency helps in measuring operational efficiency of organization and there is consistent increase in operating ratio of Michael Kor from 33% in year 2015 and further to 36% and 45% in year 2016 and 2017 respectively. This increase in percentage is indicative of the fact that operations of organization have become efficient in recent years. Operating ratio for VF Corporation on other hand has increased from 86% in year 2015 and further to 88% in year 2016 and 2017 respectively. A high net profit ratio is indicated by low operating ratio indicating that net profit of both the organizations have reduced in recent year.

Investment management ratios are evaluated by the computation of inventory turnover ratio, assets turnover ratio and days sales in inventory. Inventory turnover ratio for Michael Kor has reduced from 8.08 to 8.03 in year 2015 and 2016 and the value further decreased to 7.92 in year 2017 respectively. Fall in ratio indicates that inventory is slow moving inventories that might be due to the result of excessive inventories and leading to poor inventory management. For VF Corporation, there is considerable reduction in ratio from 62.38 in year 2015 to 29.45 and further to 69.01 in year 2016 and 2017 respectively. This increase is due to fall in inventory value and indicates that inventories are managed properly.

Average collection period has increased to 0.032% for Michael compared to 0.002% for VF Corporation in year 2017. The collection period of former is more than later.

Days sales in inventories has increased to 109.42 for Michael compared to 10.62 for VF Corporation in year 2017. The collection period of former is more than later indicating that inventory management is not efficient for Michael Kor.

Receivable turnover for Michael has increased from 11.56 in year 2015 to 16.36 in year 2017 indicating that company is efficient in collecting its receivables. On other hand, ratio for VF Corporation has reduced from 11.56 in year 2015 to 8.92 and further to 8.25 in year 2016 and 2017 respectively. This fall in ratio is indicative of the fact that company is not efficient in making credit sales as it takes long time to collect receivables.

Financial leverage ratios are evaluated by computation of debt to equity ratio, equity ratio, debt ratio and equity multiplier ratio. Debt ratio for Michael has initially increased to 0.44 in year 2016 compared to 0.35 in year 2015 and declined further to 0.4 in year 2017. Fall in debt ratio indicates improvement in financial leverage of company. VF Corporation ratio has increased to 0.45 in year 2017 compared to 0.19 in year 2015 indicating that there is increased depended on external funds.

Equity ratio for Michael stood at 0.60 in year 2015 compared to $ 0.54 in year 2017 there is reduced investment on part of shareholders in recent years. This is due to fall in value of total equity. For VF Corporation, has initially reduced to 4.77 and subsequently increased to 6.26 in year 2017indicating that investment made by shareholders has increased.

Debt to equity ratio has increased considerably to 0.78 in year 2016 compared to 0.75 in year 2017 and a low ratio is preferable which indicates that there is reduced dependence on debt. Ratio for VF Corporation on other hand initially increased to 0.09 in year 2016 compared to 0.04 in year 2015 and it increased to 0.07 in year 2017. This fall is a positive sign indicating that there is reduced dependence on external borrowings.

The net sales made by VF Corporation have increased in recent years as against net sales made by Michael Kors. This fall in value of sales is somewhat attributable to the macro economic conditions impacting the fashion industry of United States.

The above graph depicts that there is liner growth witnessed by Michael Kor in terms of return on equity. On other hand, for VF Corporation, return on growth has initially increased and there is a tendency that of reduction in subsequent year (Wheelen et al., 2017).

Conclusion

The above report is prepared for evaluating the financial performance of Michael Kor and VF Corporation. It can be seen that the financial performance of Michael Kors is likely to influence the shareholders and investors as against VF Corporation. Solvency position of Michael Kor is better compared to VF Corporation as the proportion total liabilities against then total assets is lower for former compared to later. Based on the assertions it can be seen that a truly global supply chains are maintained by fashion companies of US on continuous basis. Millennial generation is the second most crucial segment of customers with the largest living generation in country. Total number of fashion events that are held in US is considerably higher compared to other countries. The regional fashion shows and emerging designers are promoted by support that is received from private financers. It can be further discerned that the fashion industry of United States is undergoing through seismic shift and the fashion system is driven by several factors such as redefinition of cost system by digitization across value chain, new innovative business model and accelerated industrial pace, data proliferation and brands experimenting with consumers directly. According to industry analysts, out of total worth of $ 1.2 trillion global industry, US spend more than $ 250 million annually on fashion. Since year 2013, apparel industry has struggled to exceed 3 percent of sales growth, however, the decline has been offset by considerable gains in retail segments and selected consumers.  In addition to this, the examination of return on equity is done in an extended way by using the du point analysis by highlighting the scope of improvement by the identification of strength and weak point of company. It is required by Michael Corp to increase the net income generated by company along with increasing the total value of equity.

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