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Kate’s Stock Price Crashes on Weaker Gross Margin Warning

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Stock price crashed on margin contraction warning

Continued weakness in Kate Spade’s (KATE) margins and sales comps (comparable store sales) has impacted the company’s stock market performance. The company is currently looking at YTD (year-to-date) losses of 18%. Notably, Kate’s stock price plunged 10.2% after the company warned about further margin contraction during its 3Q16 earnings call.

During the earnings call, George Carrara, President and Chief Operating Officer of Kate Spade, stated: “Given the continued headwinds in the environment, we expect gross margin pressures to continue to intensify particularly in our off-price business as we maintain our competitive stance heading into the important holiday season.”

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Peer performance

Kate Spade’s close competitors have done reasonably well in the stock market this year. Coach (COH) has gained 8.4% YTD while Michael Kors (KORS) is up 25% YTD.

However, apparel players Ralph Lauren (RL), Hanesbrands (HBI), and VF Corporation (VFC) have fallen 12.3%, 18%, and 13%, respectively.

Kate’s stock has a substantial upside

Kate has been assigned a target price of $20.64 by Wall Street, which indicates an upside potential of about 41% over the next 12 months. By comparison, analysts see an upside of 23% to Coach’s stock price and 10% to Kors’s stock price.

Ratings and recommendations

Kate is covered by 19 Wall Street analysts. Of these, 74% analysts have recommended a “buy,” and 26% of the analysts have recommended a “hold” on the stock. There is no “sell” rating on the stock. By comparison, 4% and 5% of analysts have recommended a “sell” for Kors and Coach.

ETF investors seeking exposure to Kate can consider the iShares Morningstar Small-Cap Growth ETF (JKK), which invests 0.42% of its portfolio in the company.

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