Michael Kors Holdings (tkr: KORS) is a designer, marketer, distributor and retailer of women’s apparel and accessories and men’s apparel. The company’s primary focus has been on handbags, which still account for 80% of sales. In the last several years, Kors has expanded its offerings into clothing, watches, jewelry, and shoes for women. Men’s clothing was added earlier this year. The company aims to create products with a luxury look and feel “for the masses.” We bought Kors for two reasons: (1) the theme of a growing “wealth gap” in the US, Western Europe and Japan benefiting higher end goods and (2) low valuation despite solid growth.

Thus far, however, Kors has not performed as we had hoped. Recent earnings have not met analysts’ expectations, nor have retail sales. Sales at existing stores have fallen, particularly in the US. The two big drivers for the decline have been lower spending by tourists due to the strength of the dollar and the company’s weakening watch business (which management believes reflects a category shift to jewelry at 50% less per transaction). This was the first decline in same-store sales since Kors went public. Our longer-term concern is whether Kors can continue to attract and hold its consumer base, since it has aggressively attempted to grow its exposure through new stores (121 in the last year) and department store sales.

Kors now operates over 500 retail stores including concessions. When stores operated by licensing partners are included, the number is 728 worldwide. Operating margin has slipped despite management’s comments that the company was being less “promotional” (i.e., fewer products on sale) than its competitors, due in part to bigger discounts at its retail stores.

Management has stated that this will be a year of “strategic investments.” Plans to stimulate sales include: giving sales staff digital devices to help customers order items that are not in stock at the store, helping sales staff upsell customers, expanding the footwear business, expanding in both North America (30 stores) and internationally (45 stores), fully developing the men’s business and investing in the company’s digital strategy (the long-term goal is for 20% of sales to be online).

We are monitoring Kors’s performance carefully and expect to see an impact from their strategies by spring, 2016. If this is not the case, then it will be time to move on.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.