Kate Spade (KATE) Dips on Q4 Earnings Miss, Guides 2015 - Analyst Blog
Kate Spade & CompanyKATE ended 2014 with mixed results. While the company delivered better-than-expected top-line results for the fourth quarter and full year 2014, the bottom line lagged expectations for both the periods. Bringing some respite, results improved considerably year over year on both fronts.
The company's adjusted earnings from continuing operations for the quarter soared 84.6% year over year to 24 cents a share. However, earnings fell short of the Zacks Consensus Estimate of 27 cents. Shares of this Zacks Rank #4 (Sell) company slipped over 2% on the index following the announcement.
On a GAAP basis, Kate Spade reported earnings of 99 cents per share from continuing operations for the quarter, up significantly from 23 cents per share earned in the prior-year period.
Delving Deeper into the Quarter
Net sales increased 44.7% year over year to $398.6 million, beating the Zacks Consensus Estimate of $390 million. Sales improved due to strong performance at the company's North American and International segments, partially offset by weakness witnessed at the Adelington Design Group segment. Further, direct-to-consumer comparable sales grew 28% including eCommerce, and 21% excluding the same.
Gross profit jumped 35.6% year over year to $230.2 million while as a percentage of sales, it contracted 380 basis points (bps) to 57.8%, primarily due to unfavorable mix in North America and currency headwinds in Japan.
Selling, general and administrative (SG&A) expenses escalated about 33% to $181.8 million. However, as a percentage of sales, SG&A expenses fell 400 bps to 45.6%.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), net of foreign currency transaction, came in at $77 million, up 40% from $55 million in the year-ago comparable quarter.
Kate Spade North America segment's net sales surged 50.5% to $327 million, backed by strength witnessed at kate spade new york. Adjusted EBITDA at the segment came in at $73 million compared with $50 million in the year-ago quarter. Adjusted EBTDA margin contracted 40 bps year over year.
At the Kate Spade International segment, net sales grew 56% year over year to about $60 million, benefiting from its operations in Japan and Southeast Asia. Further, its adjusted EBITDA for the quarter improved to roughly $1 million from breakeven results reported in the fourth quarter of 2013.
Net sales for the Adelington Design Group segment plunged 40.5% to $12 million, accountable to falling sales at its Lizwear and Monet brands. Adjusted EBITDA for the segment was $3 million compared with $5 million in the year-ago quarter. Adjusted EBITDA margin rose 250 bps to 26.1% in the quarter.
Quick Look at 2014
Kate Spade's full year adjusted earnings from continuing operations came in at 25 cents a share, comparing favorably with an adjusted loss of 10 cents incurred per share last year. However, earnings fell short of the Zacks Consensus Estimate of 28 cents.
Sales for full year 2014 escalated 41.7% year over year to $1,138.6 million, cruising ahead of the Zacks Consensus Estimate of $1,128 million. Excluding the impact of an extra week benefit, direct-to-consumer comps improved 24%, and 22% on excluding eCommerce operations.
Kate Spade ended 2014 with cash and cash equivalents of nearly $184 million. The company generated $14.4 million as cash from operating activities during the year. As of Jan 3, 2015, the company's total debt stood at $411 million, up from $394 million as of Dec 28, 2013. Also, at the end of 2014, total stockholders' equity came in at $199.6 million.
In a separate press release, the company announced plans to expand its home category, with four licensing deals falling under the kate spade new york brand. The collections, which are expected to launch in May 2015 and spring 2016, will be available at select stores and on the company's website. This highlights the company's focus on enhancing product categories, which in turn is likely to drive long term growth.
Management at Kate Spade is pleased with its 2014 performance whereon it witnessed solid sales across all regions. Going forward, the company remains focused on enhancing scale and expects to start enjoying the benefits of all its strategies adopted, this year. Kate Spade intends to remain committed toward expansion across both products and regions while also improving margins to drive profitability in the long run.
Following a strong year and an optimistic outlook, Kate Spade issued its 2015 guidance taking into account several adjustments. The company envisions direct-to-consumer comps to display high single-digit growth. Adjusted EBITDA is anticipated to come in between $185-$200 million. Further, Kate Spade intends to spend nearly $75 million as capital expenditure in the year, with plans to introduce 50-55 stores.
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