KATE Stock: Kate Spade Climbs Higher After Earnings

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Shares of Kate Spade & Company (KATE) rose as much as 13% on Wednesday even after the company reported earnings which missed Wall Street expectations.

Kate Spade Sign

By the end of the day, shares of KATE had come off their highs, but were still up just about 4%. While handbag makers Coach (COH) and Michael Kors (KORS) are struggling, should investors drop the others in favor of KATE stock?

Before we jump to conclusions, let’s take a closer look at the Kate Spade earnings numbers.

KATE Stock Jumps on Rising Sales

Kate Spade reported quarterly revenue of $281 million and adjusted earnings of 8 cents per share. These figures came in higher than the year-ago-quarter, when KATE reported revenue of $265 million and 5 cents per share. Despite posting better year-over-year results, Kate Spade skill came up short of Wall Street expectations for $293 million in sales and earnings of 11 cents per share.

KATE stock posted a 20% increase in second-quarter net sales and a 10% increase in direct-to-consumer sales when compared to last year. The company has also reduced its debt from $232 million down to $171 million over the last 12 months.

Unlike the competition, Kate Spade seems to be crushing it in North America; excluding sales from wind-down operations, KATE saw net sales rise 22.4% up to $232 million when compared to the same quarter last year. The company increased its store count by 15 specialty stores and 11 outlet locations during the past 12 months, upping its square footage by 30.1% year-over-year.

Moving forward management believes full-year adjusted EBITDA will come in around $190 million to $200 million. The low end of that guidance had previously been $185 million.

The Problem With KATE Stock

Kate Spade’s management team has made some good moves over the last few year, but shares of KATE stock are still down 35% year-to-date and 44% over the past 12 months. Similar to Coach, Kate Spade is trying to turn the ship around. And while I am more inclined to say Kate Spade, rather than Coach, is actually turning around, I believe both companies are dealing with the same issue: discounting.

In short, discounting has damaged the consumers mind.

The average Kate Spade, Michael Kors, or Coach consumer now believes these products aren’t worth the same premium they used to command, due to the constant discounting and price reductions these companies offer.

Once a customer walks into an outlet store and buys a handbag, belt or hat for a dramatically reduced price compared to the regular store locations, that customer is highly unlikely to spend top dollar on the same brand in the future. That dynamic hurts margins as well as the brand image, making it less exclusive.

Furthermore, while Kate Spade based increased square footage by more than 30% during the quarter, it only boosted revenue by 6% on a reported revenue basis. Sales per square footage, a key metric in retail, have fallen — not the kind of thing we see from companies who are truly performing at their highest level. Investors also need to consider that, when square footage increases, so do costs; more stores mean more rent, more employees, and higher inventories.

Sales growth through new stores is good, but not if earnings growth doesn’t keep up.

After reviewing the earnings statement and the conference call, my conclusion is the same with Kate Spade as it was with Coach: Investors should wait for a few more quarters of increased sales and earnings before jumping on the bandwagon.

As of this writing, Matt Thalman was long Michael Kors. Follow him on Twitter at @mthalman5513.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/kate-spade-kate-stock-climbs-higher-earnings-report-buy/.

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