What Lies ahead for Kate Spade?

Sonya Bells - Author

Jul. 22 2016, Updated 2:06 a.m. ET

Growth spree

After a good 9% growth in revenues in fiscal 2015, Kate Spade (KATE) has forecasted its top line to register double-digit growth in the next fiscal quarter. The company has predicted that its top-line growth will be in the 11.0%–13.5% range in fiscal 2016, which is in line with the consensus average of 13.5%.

Strong brand recognition initiatives, an expansion of product category offerings, international footprint growth, and a robust e-commerce business will continue to drive the company’s revenue.

Kate’s management is looking for low- to mid-teens in comparable sales growth and expects to open 40–45 new stores during fiscal 2016. These new stores will include licensed stores in Japan, Hong Kong, and the UK, which would further help in the company’s international growth.

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What about margins?

Kate’s margins are likely to expand further in fiscal 2016 as the company lessens the frequency of its promotional events and increases the penetration of licensed products among its offerings. The company has guided its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to lie in the $257 million–$282 million range, resulting in an adjusted EBITDA margin of between 18.6% and 20%.

Management expects the company’s EPS (earnings per share) to lie in the $0.70–$0.80 range, which would be in line with the average consensus estimate of 78 cents per share, which would reflect a good 56% year-over-year increase.

2Q16 expectations

The company expects its second quarter results to be even better than in 1Q16, and the second half of 2016 is expected to be even healthier because certain planned initiatives are likely to show results late in the year.

Notably, ETF investors looking to gain exposure to KATE can consider the iShares Morningstar Small-Cap Growth ETF (JKK), which invests 0.53% of its portfolio in the company.

In the next and final part, we’ll look at valuations.


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