Market Overview

Kate Spade Is Still An Attractive Growth Story

Kate Spade Is Still An Attractive Growth Story

Although Kate Spade & Co (NYSE: KATE) delivered extremely disappointing 2Q results, the company continues to face attractive opportunities for EPS growth, Citi’s Kate McShane said in a report. She maintained a Buy rating on the company, while reducing the price target from $33 to $23.

Analyst Kate McShane mentioned that Kate Spade’s 2Q comps were adversely impacted by:

  • Lower spend by foreign tourists
  • Slower product transition, leading to insufficient stock in a new collection
  • An increasingly promotional environment, coupled with a lower sale event performance
  • Weaker consumer spending in Japan.

Related Link: Attention Luxury Investors: Kate Spade Just Reported Q2 Results

Performance Ahead

Management indicated that action had been taken to improve performance in the back half, and projected a 300-700 bps improvement in 2H. McShane pointed out that 2Q had been a tough quarter for most retail companies, the back half of the year had gained significant importance and the retail environment would likely continue to be challenging.

The EPS estimates for FY16, FY17 and FY18 have been reduced from $0.80 to $0.67, from $1.08 to $0.99 and from $1.39 to $1.33, respectively.

Opportunities Ahead

The analyst commented that Kate Spade continued to have “strong opportunities for EPS growth in several areas,” enumerating them as:

  • Improving brand recognition and new customer acquisition opportunities
  • Productivity improvement
  • Store growth
  • International sales growth
  • Margin expansion

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