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Kate Spade Won't Be Held Back by Michael Kors

After falling flat on its face for years, Kate Spade (NYSE: KATE  ) dropped another groan-inducing result this week. No, just kidding -- Kate killed it, as usual. Comparable-store sales shot up like a rocket and the business grew its footprint, reaching out to new locations. In the face of seemingly stiff competition from the likes of Michael Kors (NYSE: KORS  ) , Kate Spade is making its own place and continues to be in charge of its own destiny. How can it keep it up?

Kate Spade's first-quarter results
Comparable-store sales grew 22% in the first quarter, pushing total Kate Spade segment sales up 54%. The company still does a small portion of business through its Adelington Design Group brand and is still winding down its Juicy Couture business. Juicy accounted for 32% of total sales while Adelington brought in 2% of the total.

The story for investors is how Kate grew. The comparable-sales increase came with a slight fall in gross margin, but the company is working through its Juicy product, lost licensing sales from Juicy that it had last year, and had a shift in sales mix at Kate Spade. Even with the fall, gross margin was still 55.3%, down 2 percentage points from the previous year.

In short, it was a good quarter, and investors pushed the stock up 9% by midday. The company's investor presentation reads like a manifesto on retail growth, and that's giving investors something else to cheer about.

Growth in the face of Michael Kors
The other big grower in apparel is Michael Kors, which put up a 27.8% increase in comparable sales in its last quarter. Both Kors and Kate are working a similar but slightly different segment of the population. The distinction isn't well defined in price, but is clearer in type. Kors sells what it calls "jet set" luxury -- aimed at the high-end would-be world traveler. Kate Spade says that it is "Always optimistic, often irreverent and wonderfully original." The distinguishing term there is "irreverent," something that Kors has no desire to be.

With differing targets, Kors and Kate have been able to be successful in parallel. Michael Kors is currently sitting on a huge opportunity for international expansion, with just around 15% of its sales coming outside of the U.S.. That's an opportunity that's not going to stop Kate Spade from expanding in its own way, growing the Kate Spade Saturday line.

Saturday targets a more aspirational, younger crowd that can't quite afford classic Kate Spade yet. The brand currently makes over half of its revenue through accessory sales. Those will continue to be the backbone of this emerging brand, as it gives customers a chance to show off the Kate Spade brand for the least cost.

The bottom line
Kate Spade is on the warpath, and Kors isn't going to interfere with its future. The two companies seem able to coexist and thrive, giving investors a chance to get into the higher-end apparel market without having to bet on Kors. Kate Spade's expansion into the lower-end Saturday brand is going to help propel this company forward, and yesterday's earnings call is going to start seeming commonplace. Kate Spade has a long way to run.

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Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

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Related Tickers

8/28/2015 4:01 PM
KATE $18.88 Up +0.46 +2.50%
Kate Spade & Compa… CAPS Rating: **
KORS $43.17 Down -0.11 -0.25%
Michael Kors Holdi… CAPS Rating: ****