Image source: Kate Spade. 

What happened

Shares of handbag-maker Kate Spade & Co. (NYSE:KATE) were getting tossed in the bargain bin Wednesday after its third-quarter earnings report came up short on a key metric. The stock closed down 10.2%.

So what

The fashion brand actually turned in a respectable quarter as revenue increased 14.1% to $316.5 million, easily beating estimates of $310.9 million, and adjusted earnings per share grew from $0.06 a year ago to $0.13, ahead of the consensus at $0.09.

CEO Craig Leavitt noted several macroeconomic factors, including "a challenging retail environment and continuing tourist headwinds," but said the company's new strategies were able to drive growth nonetheless.

The stock gradually sank over the course of the trading session as investors seemed to be turned off by weak comparable sales growth. Comps at stores were flat, while comparable sales including e-commerce were up 6.7% against estimates of a 7.4% gain. Management blamed slow store sales on weak tourist traffic and falling demand for its off-price goods. Gross margin also declined 180 basis points to 59.4%.

Now what

In its full-year guidance, management forecast revenue of $1.37 billion to $1.4 billion and earnings per share of $0.63 to $0.70, which compares to the analyst consensus of $1.38 billion in revenue and EPS of $0.65.

Consumer fashion brands like Kate Spade, Coach, and Michael Kors have struggled in recent years as new-store expansion, the proliferation of their bags and accessories, and deep discounting seems to have harmed their brands. With solid top-line growth and substantial cuts to SG&A costs, Kate Spade appears to be moving in the right direction to drive profits, but it's unclear if the brand will regain its former pricing power. The stock has lost more than 50% of its value over the last two years, but appears to be near a bottom. With earnings still growing at a solid pace, the stock's valuation looks much more reasonable on Wednesday.

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