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How Does Kate Spade’s Valuation Compare to Peers?

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Valuations summary

In this article, we’ll evaluate Kate Spade’s (KATE) current valuations and compare them to other apparel and accessory peers. We’ll also look at Kate Spade’s earnings forecasts to see whether its valuations are justified by its underlying growth potential. Kate Spade is currently trading at a one-year forward price-to-earnings (or PE) ratio of 23x, which puts it closer to the lower end of its 52-week PE range of 18x–29.6x.

Despite trading near the lower end of its valuations, the company continues to be one of the most expensive in its peer group. Its closest competitors, Michael Kors (KORS) and Coach (COH), are trading at 10.9x and 19.6x, respectively, as of August 5, 2016.

PVH (PVH) and Ralph Lauren (RL) are also more reasonably priced as compared to Kate Spade. While PVH is trading at about 14.6x, RL’s one-year forward PE stands at 17.7x.

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Earnings potential

Though Kate Spade fumbled on its 2Q16 earnings performance, it still has strong earnings potential. After doubling its earnings per share (or EPS) in fiscal 2015, Kate Spade is predicted to grow its EPS by 36% in fiscal 2016 and 37% in fiscal 2017.

In comparison, Coach’s earnings are predicted to remain flat in fiscal 2016 and grow by 15% in fiscal 2017. Michael Kors’ earnings are also expected to improve by 4% in fiscal 2017 and another 7% in fiscal 2018. Kate Spade, Michael Kors, and Coach compete fiercely with each other to win handbag industry market share. Presently, Michael Kors is the market leader, followed closely by Coach.

Wall Street recommendations

Strong earnings potential has kept Wall Street positive on Kate Spade. Of the 18 analysts that have rated the company, 12 have recommended a “buy” and six have recommended a “hold.” None of the analysts have a “sell” rating on the stock.

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

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