Is Kate Spade Headed the Right Way?

Do the company's recent partnerships make it a worthwhile investment?

Apr 29, 2014 at 2:44PM

Renowned designer company Kate Spade (NYSE:KATE) wasn't able to turn around its fortunes last year, as it continued to report losses. However, its latest quarterly result portrays a different picture altogether. Let's see what the company is up to and how its peers Coach (NYSE:COH) and Ralph Lauren (NYSE:RL) are performing.

Fourth-quarter results
Kate Spade's strong momentum continued in its latest quarter; the company reported earnings of $1.48 per share versus $0.47 a share in the same period last year. Net sales surged nearly 22% to $426.9 million, driven by a strong performance in the Kate Spade division, which accounted for 60% of the company's total revenue.
 
The company's core Kate Spade division generated a total of $256 million in sales, an increase of 48% from the year-ago quarter. Furthermore, despite deep discounting during the holiday season, comparable sales increased by a sizable 30%. The gross margin improved by 60 basis points to 56.8%, benefiting from a higher margin for the Kate Spade brand relative to the company's average. However, since the company is making investments for future growth, selling, general, and administrative expenses increased to 59.6% in the quarter.
 
On a full-year basis, Kate Spade earned $0.60 per share in contrast to a loss of $0.64 a share in 2012. Similarly, the company saw approximately $1.3 billion in total revenue, a 21.2% increase over last year.
 
What is Kate Spade up to?
The company previously announced that it had sold Lucky Brand Jeans to a Leonard Green Partners affiliate for $125 million. In November, the company sold Juicy Couture's intellectual property to Authentic Brands Group; the business will be winded up this year. All in all, the divestment of Lucky Brand Jeans and Juicy Couture will generate net proceeds of $370 million to $380 million.

Two months ago, Kate Spade acquired businesses in Hong Kong, Taiwan, Macau, Malaysia, Singapore, Thailand, and Indonesia from its long-term partner Globalluxe for $34 million. In Singapore, Malaysia, and Indonesia, the company's new partner Valiram will operate its business; in Thailand, the company has made a distribution agreement with AT Luxury. As far as Hong Kong, Macau, and Taiwan are concerned, Kate Spade has opted for direct-to-consumer sales. To manage these operations, Kate Spade has also established a regional headquarters in Hong Kong.

In fiscal 2013, Kate Spade's retail sales at Globalluxe climbed 25% to $44 million. Though Globalluxe was doing a good job in the region, the new partners, especially Valiram Group, are expected to deliver more revenue for the company in the coming quarters. Valiram, which was established in 1935, is Southeast Asia's leading luxury items and specialist retailer.

For the current quarter, Zacks analysts forecast a loss of $0.04 per share compared to a loss of $0.16 a share in the year-ago quarter. Sales are anticipated to be around $201.2 million, which is far below last year's sales of $371.8 million. But revenue in the prior year included sales from three additional brands which have now been discontinued as they were producing losses for the company.

Industry peers
In its most recent quarter, Ralph Lauren posted an impressive $2.57 per share in earnings, up 11% compared to $2.31 a share in the year-ago quarter. Revenue increased 9% year over year to slightly more than $2 billion. All the segments performed fairly well; retail sales grew 6% while the wholesale business jumped 15% on account of strong momentum in North America. These days, the company is focusing on expanding its Polo brand across the U.S, Europe, and Asia.

 In addition, it is repositioning itself in Greater China to better enjoy its presence in the world's second largest economy. The company also raised its sales growth forecast to 10% to 12% for the current quarter, slightly higher than analysts' estimates of 10%.
 
Coach released disappointing results in its latest quarter, as a slowdown in sales from the company's North American business turned out to be a significant drag on net profits. Earnings dipped about 14% and stood at $1.06 per share, falling short of the Street's estimate of $1.11 a share. Sales for the quarter were $1.4 billion, down 6% from the comparable period a year earlier.
 
Since Europe and the emerging markets of Asia constitute a sizable portion of the company's international business, it is pinning its hopes on these regions for future growth. However, the company is facing tough competition in almost all the regions it operates in, with Michael Kors gaining market share in North America and Kate Spade gaining in China.
 
Final thoughts
Kate Spade's fourth-quarter earnings have more than tripled from the comparable quarter, which indicates that the company is back on track. Changing the company's name to its core brand name, Kate Spade, has already started to turn things around.
 
Kate Spade's decision to sell Lucky Brand Jeans and Juicy Couture is also proving to be wise, as its profits are on the rise. Opening a new headquarters in Hong Kong clearly shows Kate Spade's intentions of focusing more on the huge Asian market, which is yet another healthy sign. Considering all of this, I believe Kate Spade presents a good investment opportunity at this juncture.
 

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Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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