In the fight for full-price customers, Kate Spade & Co. says it’s winning, but promotions in the outlet channel and poor tourism trends had a negative impact on results.
For investors, the negative outweighed the positive, sending shares down 11.5% to a four-year low, reversing a premarket rally that saw the stock jump as much as 9%.
“We continue to feel the impact of the price sensitive customer in our full-priced and off-price channels, but particularly in our outlets where the environment remains heavily promotional, contributing to increased margin pressure,” said Kate Spade
Chief Executive Craig Leavitt on the earnings call, according to a FactSet transcript. “In order to remain competitive in this channel and help maintain market share, we increased our promotion level relative to last year.”
Both outlets and full-price stores faced tourist headwinds, prompting a focus on loyal customers.
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“In order to help offset reduced tourist traffic in our full-price stores, we are targeting local customers with enhanced store locator functionality and online appointment scheduling as well as hosting selling events in our stores that help appeal to existing customers and attract new ones,” said Leavitt.
The company has “extremely low crossover” between full-price and outlet shoppers, Leavitt said, citing consumer data. And it is continuing its efforts to maintain a “reduced promotional posture” in the wholesale channel to protect the brand.
The company also added new handbag groups to keep discounts in check.
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“In the third quarter, several macroeconomic factors, including a challenging retail environment and continuing tourist headwinds, impacted our results,” Leavitt in a statement. “That said, we are making solid progress on several strategies that are continuing to drive growth in our business, which is reflected in the consumer’s strong response to our collections at full-price.”
Analysts are bullish about the brand.
“Despite numerous market headwinds that have impacted virtually all handbag competitors, Kate Spade successfully utilized strong branding and product development efforts to register what should be the best quarterly sales growth performance of the industry, while also maintaining astute cost controls to offset tourist and promotional headwinds,” said Wunderlich Securities in a Wednesday note.
Wunderlich rates Kate Spade shares at buy despite “limited” visibility in the handbag area. The research firm has a price target of $20.
Clothing and accessories companies have taken steps in recent months to reduce the amount of discounting on their goods, particularly through the wholesale channel. The effort seeks to protect the health of brands that strive for luxury status.
said Tuesday that sales were pressured by about 150 basis points because of reduced exposure at the department store channel. Sales for the fiscal first-quarter totaled $1.04 billion, below the FactSet consensus of $1.07 billion.
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After results were negatively impacted by price reductions, Michael Kors Holdings Ltd.
and Ralph Lauren Corp.
said this summer that they would take steps, like making less product available in department stores, to spark improvement.
“That channel has become very promotional, and, in fact, is causing us difficulties in our own retail channel, which is why you see our gross margin declining, because we are having to meet certain pricing,” Chief Executive John Idol said.
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Kate Spade reaffirmed its 2016 guidance for sales between $1.37 billion and $1.40 billion and earnings per share between 63 cents and 70 cents. The FactSet estimate is for sales of $1.38 billion and earnings per share of 65 cents.
Kate Spade shares are up 1.7% in Wednesday premarket trading after the company reported third-quarter earnings of 23 cents per share and sales of $316.5 million, beating estimates.
The company’s stock is down 8.1% for the year so far while the S&P 500 index
is up 3.3% for the same period.
View more information: https://www.marketwatch.com/story/kate-spade-says-its-winning-the-battle-against-discounts-2016-11-02