Kate Spade: Cute and quirky fails to win in handbag war

Kate SpadeThere are several popular excuses for companies not doing so well at the moment. Brexit (but that only really counts if you’re UK-based). Lack of tourists (popular with with companies in ‘destination’ markets worldwide). The weather (available for use by anyone). And fashion mis-steps (the one chosen by those who really want to admit their mistakes). Oh, and then there’s consumer bargain-hunting. That’s one hurting US companies in particular.

We’re not used to Kate Spade using any of them but the accessories and fashion giant was forced to pick numbers two, four and five off the list for Q2 (to July 2). It missed analysts’ earnings estimates and it shares were punished (dropping 18%) as a result.

The company, which had previously been seen as a big winner in the handbag wars, slashed its forecasts yesterday as its sales suffered from heavy department store discounting, as the strong dollar meant lower tourist spending in many markets and those fashion mis-steps.

Kate Spade’s woes led to speculation about how sector peers Michael Kors and Coach are doing. Are they also suffering or are they taking share from the Kate Spade? Some analysts think Coach might be the current winner in the segment as the handbags market turn into a roller-coaster ride with only one of the three premium giants ever in the car at the top at one time. We’ll know the answer to that next week when both rivals report their own results.

Now for the numbers

So, what’s the detail behind the headlines? Well, Kate Spade’s not exactly in the doldrums. Comp sales did rise – albeit by only 1%, or 4% once online sales were added. But analysts were expecting a 13% rise. They got that and more with total sales, which rose 13.7% to $320m. But comp sales, which strip out the impact of new stores opened in the last year, are the closely-watched measure of success or failure.

Net income surged to $26.8m from $8.5m as the prior year had been hurt by the closure of various business units.

“Key sale events fell short of our expectations as customers look for deeper discounts, a trend which negatively affected both total sales and comps this quarter,” said CEO Craig Leavitt.

Right product, wrong product

And the fashion mis-steps? Well, in one respect it wasn’t so much a case of the wrong product as not enough of the right product. Its new Cameron Street range is proving popular and it didn’t have enough product to meet demand.

Now Cameron Street is a fairly conservative, even slightly dull, product offer and not what we usually associate with Kate Spade. In another respect there was also some ‘wrong’ product in the line-up, and it was the novelty bags for which the brand is known that took it off the rails.

During June it seems handbags like the $400 Jazz Things Up Boom Box Bag and the Jazz Things Up Fluffy Cat Bag didn’t appeal as much as expected and so ended up on discount in outlet stores. Now that’s a big worry given that novelty bags and accessories are a foundation on which the brand is built.

Does that mean it’s all over for novelty bags? No. Craig Leavitt said they’re a “key differentiator” while admitting they’re also a “risk” . However. he didn’t seem to think they’re a problem long-term and believes the negative consumer reaction was confined to a specific set of items at a specific time.

“Looking forward to the balance of this year in terms of additional novelty deliveries, many of them are reinventions of tested themes that have worked well for us in the past,” he said. “So, we have a track record that, again, gives us even further confidence in the performance of this segment of product going forward.” Phew.

The plan

So assuming the novelty items are safe, how does Kate Spade plan to get the customer into stores and paying full price for its products? Well, we have to assume that it will be making more Cameron Street product.

But it also has a “microassorting” plan that turns its store into test labs and helps it match the right product to the right region, taste-wise. Leavitt said this helped its clothing offer rise in double-digits during the quarter.

One thought on “Kate Spade: Cute and quirky fails to win in handbag war

  1. Pingback: Coach gallops ahead on premium-to-luxury focus, acts on department store discounts | TRENDWALK.net

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