Can Kate Spade Export Its Magic?

With more classic retailers falling behind, Kate Spade is expanding beyond its borders.

Jun 23, 2014 at 6:00PM

Years ago on a trip to Hawaii, I heard tales of a genre of Asian tourist -- the shopping tourist. Allegedly, these folks would fly to Hawaii with a carry-on bag and an empty suitcase that they filled up with the finest American loot. The sights? The sounds? None were had -- unless they were found in the mall. It's a tale that rings true with many retailers as they expand into the Asian market and find an insatiable appetite for polished American goods.

One of the newest entrants into Asia is Kate Spade (NYSE:KATE), handbag maven and all-around rock star. Kate has put up incredible sales growth in the U.S. Sales have been so strong that the company ditched its other major brands -- Juicy Couture and Lucky Brand -- to focus on the Kate Spade moniker. Now, Kate is looking to push beyond our fair soil, and she couldn't have picked a better time.

The ace of Spade
Let's start by looking at the handbag market. The three dominant, mass-market brands are Kate Spade, Michael Kors (NYSE:KORS), and Coach (NYSE:COH). Coach represents the old guard, and its failure to shift quickly has led to a weak third place. Last week, the company announced a revised forecast due to expenses it will incur as it closes down 70 of its retail locations -- about 13% of its entire North American footprint.

That leaves Kors and Kate vying for the top spot, with ambitions to be much more than they currently are. Kors is growing sales in North America at a steady rate, putting up a comparable-store sales increase of 20.6% last quarter. The company's relatively small European division did even better, growing comparable sales by 62.7%, demonstrating the demand for Kors outside of the U.S.

Kate Spade did slightly better than Kors, with comparable sales of 22% in North America. Right now, the former makes a scant 20% or so of its revenue outside of the U.S., but has its sights set on expansion in Europe and Asia, though no doubt hoping to recreate the magic of Kors.

Getting the word out
Michael Kors' European sales have surged ahead as the market catches on to the trend. Kors has reacted to the positive demand by opening new locations, and it now operates around 120 locations outside the U.S. The company has a mix of European and Japanese outlets, and it seems clear that Asia is the next big push.

Kate Spade's management team has said that expansion into Europe is its No. 1 priority, but it's not just going to wait around for Asia to come to it. The company appointed Roy Chan as the new senior vice president of international. Chan has an international background from the Jones Group and was COO at Evisu, a Japanese denim company.

Kate's long-term plan is to have two-thirds of its revenue generated outside the U.S. That's going to require some significant expansion, and Asia is the place where the magic happens. To that end, the company recently completed the buyout of Asia-based Globalluxe, which owned the Kate Spade brand in many Southeast Asian countries. It put a substantial employee base in place before the completion of the deal, so expect that area to be running smoothly and quickly very soon.

To sum it all up, Kate Spade is a brand on a mission and it has the pieces in place to make Asia its next big conquest. If it can beat Kors to the saturation point, then Kate Spade might have a chance to push its advantage into the stratosphere. Don't count Kors out just yet, but Kate is definitely one to watch over the next year.

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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coach and Michael Kors Holdings. 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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