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Kate Spade Sees Solid Earnings, Shares Crash on Profit Worries

Zacks Research Staff

Kate Spade (KATE) shares soared in pre-market trading today, adding about 10% and touching a seven-year high following a solid earnings report. However, the conference call with company management regarding future margins raised concerns for investors.

KATE Earnings

Kate Spade announced its second-quarter earnings for the 2QFY14; ending July 5. They reported a near 50% surge in second quarter revenue Tuesday Morning, sending the stock to new heights. Kate Spade reported $266 million in second quarter revenue, easily clearing the analysts’ hurdle of their $243 million revenue consensus.  

After reporting the positive news, Kate Spade surged 5% pre-market, but is now trading well below the previous closing day’s price at a mere $29 a share, representing a 25% loss on the session.  The company also announced splitting its reportable segments into two: Kate Spade North America and Kate Spade International.  The split into two segments will allow investors to obtain a clearer snapshot of the financial situations between the two divisions. 

Why the Crash?

Kate Spade experienced heavy selling pressure in a near downward spiral. Despite the 30% growth in sales, the company experienced contraction in gross margins, which came in at 58.6% for the quarter, down 3.1% compared to the same period last year.  The retailer reported a profit (:BNRI) of five cent per share in the quarter, compared to the Zacks Consensus Estimate of a one cent per share loss.

Kate Spade on their Conference Call lowered the store expansion target to 100 stores from 134. Additionally on the company conference call, management said they may postpone profit margin goals for 2016 until 2017.

The stock finished the session down over 25% on extremely heavy volume.  However, this slump in price could be a good opportunity for investors to buy the stock while it is relatively cheap.  We will have to wait and see what the company will do next to reassure investors that they are a high end retail company that still has growth prospects since many are starting to question that line of thinking after the lowered profit and expansion outlook from KATE.  

Currently, KATE has a Zacks Rank #3 (Hold) and is in the retail apparel shoe industry, which has an Industry Rank in the bottom third of all industries, so definitely be on the lookout for a continued weak trend in this corner of the market in the near term.

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