uploads/2016/09/2-12.jpg

Kate Spade Upgraded by Wells Fargo on Strong 2H16 Growth Potential

By

Updated

Kate Spade upgraded by Wells Fargo

New York-based Kate Spade (KATE) was upgraded by Wells Fargo on September 12, 2016, to an “outperform” from a “market perform” rating. The brokerage firm cited a strong momentum in its 2H16 top line, a stout long-term margin opportunity, and low valuations as the key catalysts for the upgrade. Wells Fargo is expecting Kate’s comps (comparable same-store sales) to grow in the 9%–10% range in 2H16.

Specifically, Wells Fargo’s analyst Ike Boruchow raised the company’s valuation from the $16–$18 range to the $23–$24 range. Boruchow thinks that Kate has been in the “penalty box” since the company reported weaker-than-expected 2Q16 earnings.

This news has created “a compelling entry point” for Kate, considering its 2Q16 earnings miss was also driven by execution issues such as its June novelty sales miss and its quicker-than-expected transition to Cameron Street handbags. (We’ll talk more about Kate’s 2Q16 performance in Part 3.)

Article continues below advertisement

Reasons for Wells Fargo’s bullish stance

According to the Wells Fargo analyst Ike Boruchow, Kate Spade has been witnessing strong trends in product reception and flash sales in its QTD (quarter-to-date) numbers. Boruchow provided four key reasons to support Kate’s upgrade:

  1. Kate Spade, as a brand, is quite healthy and is gaining market share.
  2. Its top-line growth continues to outperform peers.
  3. The company shows a strong potential for a margin increase.
  4. Kate has the low current EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, amortization) multiple of 7.0x based on its 2017 EBITDA.

ETF Investors

ETF investors seeking to add exposure to Kate can consider the First Trust Consumer Discretionary AlphaDEX (FXD), which invests 0.24% of its portfolio in the company. FXD also invests 1.6%, 1.4%, and 1.1% of its holdings in PVH Corporation (PVH), Gap (GPS), and Ralph Lauren (RL), respectively.

Advertisement

More From Market Realist