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Understanding Kate Spade: The Affordable Luxury Brand

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Jul. 28 2016, Updated 1:57 p.m. ET

Snapshot

Based in New York, Kate Spade & Company (KATE) is a designer and manufacturer of apparel, women’s handbags, and fashion accessories. The company primarily operates under two lifestyle brands: Kate Spade New York and Jack Spade.

Jack Spade offers fashion products for men, while Kate Spade New York sells apparel and accessories for women and children as well as home products. The company also owns Adelington Design Group, a private brand jewelry design and development group.

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Kate Spade has displayed industry leading sales comps, despite a cut down in promotional days by the company in recent quarters. The company’s e-commerce channel is particularly strong and accounted for about 20% of its total sales in fiscal 2016. After doubling its earnings in fiscal 2015, the company is predicted to grow its EPS (earnings per share) by a whopping 56% in fiscal 2016.

ETF investors seeking to add exposure to Kate can consider the First Trust Consumer Discretionary AlphaDEX (FXD), which invests 0.27% of its portfolio in the company.

Valuations update and stock recommendation

Kate is currently the most expensive stock in its peer group. It is trading at a one-year forward PE (price-to-earnings) ratio of 25.4x, as compared to 11.2x, 18.3x, and 19.7x, respectively, for Michael Kors (KORS), Ralph Lauren (RL), and Coach (COH), as of July 15, 2016.

The mean 12-month price target by 21 analysts covering Kate Spade is $28.63, which suggests the stock could gain about 36% over the next one-year period. Of the 20 analysts covering the stock, 14 have recommended a “buy” and seven have recommended a “hold.” None has given a “sell” recommendation.

This series

In this series, we’ll analyze Kate Spade’s key revenue drivers, discuss its margins and profitability, understand its key strategies, and evaluate its future growth potential. We’ll wrap up by evaluating the company’s valuations and compare them to those of its peers.

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