MICHAEL KORS CEO: This is why brick-and-mortar retailers are doomed

michael kors storeJonathan Alcorn/ReutersPeople waiting to enter a Michael Kors store during day-after-Christmas sales.

Retailers are facing a puzzle.

Theoretically consumers should have more money in their pockets from low gas prices, low unemployment, and (slowly) increasing wages.

Despite all of these tailwinds, retailers have been reporting generally disappointing earnings.

So why are many traditional retailers flailing given favorable economic trends?

According to Michael Kors CEO John Idol, it comes down to one thing: online sales.

“Unfortunately today, e-commerce generates a lower operating profit for us than four-wall brick-and-mortar,” he said Tuesday during his company’s quarterly earnings call.

Idol added: “We think over time that will reverse itself, but, as you know, when the consumer requires free delivery, free return, wonderful packaging, plus there’s a new trend that people are buying multiple sizes of things to try them out at home and then return them, that all is a negative headwind for us.”

It’s pretty simple: There is a systemic shift from in-store buying to online shopping. For retailers, online shopping is a money-losing hassle, but customers love it. And customer expectations — consider the “order four sizes, try them on, and send three back” plan Idol lays out — are only getting higher.

Amazon, the giant of online retail, has always had razor-thin margins. Additionally, the margins at many retailers are facing pressure for multiple reasons, not least of which is the difficulty of online order fulfillment.

Michael Kors’ operating margins, for example, decreased 2.5% from the company’s third quarter last year. Idol, and other CEOs, have said this shift is necessary to preserve their business, but there are obviously growing pains — and, for investors, lower profits.

Overall, however, investors cheered Michael Kors’ quarter as the company beat expectations. The stock jumped 24% on Tuesday.

Disclosure: Jeff Bezos is an investor in Business Insider through hispersonal investment company Bezos Expeditions.

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