Snapshot of Kate Spade’s performance in fiscal 2Q16
Kate Spade’s (KATE) 2Q16 performance was characterized by a disconcerting slowdown in sales comps and a contraction in margins. Sales comps stood at 4% in 2Q16 as compared to an average of ~15% in the four previous quarters. This slowdown was driven by a slew of factors, which included lower traffic, a promotional retail environment, a quicker-than-expected transition to Cameron Street handbags, and a novelty sales slump in June. In comparison, Wall Street was expecting a 12% jump in comps.
Kate Spade, however, recorded a 13.7% YoY (year-over-year) increase in sales to $320 million, beating the Wall Street estimates by $1.5 million. This increase primarily came from a temporary jump in wholesale penetration arising from a wholesale timing shift in 2Q15.
Promotional environment depressed 2Q16 margins
Gross margin was down to 59.7% in 2Q16 as compared to 61.6% in 2Q15. Heavier promotions at the outlet stores and a higher penetration of lower margin wholesale sales were the key factors behind this decline.
Kate Spade expects a similar promotional environment in the second half of the year. Read the next section to know more about the company’s expected performance for the remainder of the year.
With trailing-12-month (or TTM) sales of $1.3 billion, Kate Spade is about a fourth the size of Michael Kors (KORS) and Coach (COH). The company’s sales growth of 9.1% in fiscal 2015 was better than the 7.8% growth for KORS and 7.2% for COH. However, these two companies had better margins than Kate Spade did. Kate Spade’s TTM operating margin stands at 10.6% as compared to 23.6% for KORS and 14.5% for COH.
ETF investors seeking to add exposure to Kate can consider the iShares S&P Mid-Cap 400 Value ETF (IJJ), which invests 0.18% of its portfolio in the company.