Kate Spade Q3: Good but not great

Kate Spade

Luxury handbags may not be doing as well as they used to at the moment but expensive not-quite-luxury bags with cute stuff one them seem to be holding their own. At least Kate Spade’s are – just.

The company said yesterday that its net sales rose 14.1% in Q3, which is a lot better than many higher-end and handbag peers have been managing lately.

The company told us about the usual issues (“challenging retail environment and continuing tourist headwinds”) but if it does this well in a tough market, it must be looking forward to a time when when it can really soar in a more buoyant one. Well, Kate Spade hasn’t got it all its own way at the moment as a 10% share price fall yesterday showed.

So what happened in the three months to October 1? Well it was definitely a mixed quarter with good news and some hiccups.

Net sales were $317m, that’s a healthy $39m rise. And direct-to-consumer comps rose 6.7% but were flat excluding e-commerce. Interpreter please? The company’s own stores and its e-tail ops combined managed a 7% rise but it looks like online growth was largely responsible for that because without it, comps didn’t rise at all. Actually, they fell ever so slightly. The company said that comparable sales per square foot at Kate Spade New York stores were $1,615 in the last 12 months down from $1,619 in the 12 months to July this year. So in the last three months productivity per square foot dipped by $4.

Still, given the retail environment, the company did well not to do worse.

Back with the figures. Gross profit as a percentage of net sales was 59.4% this time but that was down from 61.2% a year ago. Although total company costs came down during the quarter, that margin was hurt by the firm having to invest more in promotions to boost sales at off-price stores and as it tested some lower price points.

Now for some better news. Net income jumped to $29.6/23 cents per share from $2.3m/2 cents a year earlier so shareholders should have been happy. But no. As I said, the firm’s shares actually fell 10% yesterday.

Why is that? Well it’s not because North American sales are tanking. They rose 13.7% in Q3 to $260m. And it’s not because international ops are tough. Sales there rose 18.9% to $51m.

No, it was the fact that the sales overall were expected to be higher, sales last quarter were helped by a timing shift on some wholesale shipments, and shareholders and analysts are concerned about those falling margins. Yet it seems the company is managing it all fairly well. For a start it’s not losing full-price customers to off-price stores. It said the crossover here is minimal. And by experimenting with more attractive pricing but at full price, it seems to be staying in control – just.

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