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Kate Spade Up on Strong Q3 Earnings & Upbeat FY14 View - Analyst Blog

Shares of Kate Spade & Company ( KATE ) gained 17.9% in the yesterday's trading session after the company posted strong third-quarter 2014 results and provided an upbeat guidance for the full-year.

Kate Spade & Co. posted break-even adjusted earnings from continuing operations for the quarter which fared better than the year-ago quarter's adjusted loss of 8 cents per share. However, it fell short of the Zacks consensus Estimate by a penny.

On a GAAP basis, Kate Spade & Co. reported earnings of 2 cents per share from continuing operations for the quarter as against a loss of 12 cents per share in the prior-year period. When including the discontinued operations for both the periods, the company posted loss of 7 cents per share versus a loss of 14 cents per share in the third quarter of 2013.

Net sales for the quarter rose 30% year over year to $250.4 million, beating the Zacks Consensus Estimate of $244 million. Sales improved due to strong performance at Kate Spade& Co.'s domestic and international segments, partially offset by weak performance at the Adelington Design Group segment.

Gross profit jumped 33.1% year over year to $157.3 million while as a percentage of sales it expanded 140 basis points (bps) to 62.8%, primarily due to efficient promotional activity and shift in timing of the Fourth of July holiday along with semi-annual sales in the second quarter.

During the quarter, the company's adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), net of foreign currency transaction, came in at $21 million against $12 million in the year-ago comparable quarter.

Segment Details

Kate Spade North America segment's net sales surged 36.4% to $192.9 million. Its adjusted EBITDA came in at $21.1 million compared with $10.3 million in the year-ago quarter. Consequently, adjusted EBITDA margin improved 370 bps to 11%.

At the Kate Spade International segment, net sales increased 32.8% year over year to $50.9 million, benefiting from its operations in Japan and Southeast Asia. Further, its adjusted loss before interest, taxes, depreciation and amortization for the quarter narrowed to $1.3 million from $0.7 million reported in the third quarter of 2013.

Net sales for the Adelington Design Group segment plunged 48.6% to $6.6 million. Adjusted EBITDA for the segment was $1 million compared with $3.3 million in the year-ago quarter.

Financial Details

Kate Spade & Co. ended the quarter with cash and cash equivalents of $123.3 million. The company used up $75.6 million in cash for operating activities during the first three quarters of 2014. The company ended the quarter with a total long-term debt outstanding of $401.4 million compared with $391.3 million at the end of third-quarter 2013.

Outlook

Buoyed by strong third-quarter performance, Kate Spade & Co. raised its 2014 comparable sales guidance range to 19%-21% from 15%-17%. Further, adjusted EBITDA is now anticipated to come in between $130 million and $140 million compared with the earlier guidance range of $120 to $130 million. Similarly, adjusted EBITDA margin is projected to expand over 150 bps versus previous forecast of not more than 150 bps.

The company has opened 57 stores in the first three quarters of 2014 and intends to open 23 more till year-end. Kate Spade & Co. also targets to increase its square footage by 30% year over year.

Considering the aforementioned changes in its 2014 outlook, the company has revised its 2016 profit margin goals. At the third-quarter earnings conference call, management revealed that it now expects to achieve 18% to 20% of adjusted EBITDA by the end of 2016.

Earlier in the second-quarter conference call, the company had outlined that its 2016 profit margin goals might get delayed by a year. During its 2013 Investor Day meet, Kate Spade & Co. had set a target of achieving 25% of adjusted EBITDA margin by 2016 excluding corporate expenses.

Other Stocks to Consider

Currently, Kate Spade & Co. carries a Zacks Rank #2 (Buy). Some other stocks in the apparel-shoe sector worth considering include Citi Trends Inc. ( CTRN ), L Brands Inc. ( LB ) and Zumiez Inc. ( ZUMZ ), all carrying Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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