What Drove Kate Spade’s Performance in Fiscal 2Q16?


Oct. 28 2016, Updated 3:04 p.m. ET

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.

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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.

Peer comparison

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.


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