Kate Spade's (KATE) Shares Fall despite Robust Q2 Earnings - Analyst Blog

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Yesterday, Kate Spade & Company ( KATE ) reported yet another quarter of better-than-expected financial results wherein it's top and bottom lines for second-quarter 2014 came ahead of the Zacks Consensus Estimate as well as the year-ago comparable quarter figure.

The announcement, which was made before the opening bell spread positive sentiments among investors leading the stock to gain 10% during the pre-market opening session, which eventually touched a seven-year high of $42.87. However, the stock's glory wore off later in the day as management, on its conference call, sounded cautious about reaching its long-term targets within the established time frame of 2016. Consequently, the stock was beaten up with awfully high volumes during yesterday's trade finishing down over 25% at $29.00.

At the second-quarter earnings conference call, management revealed that the company's 2016 profit margin goals, outlined at Investor Day meet held in 2013, might get delayed by a year due to certain adjustments made in the 2014 outlook. Kate Spade & Co. had set a target of achieving 25% of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margin by 2016 excluding corporate expenses.

The company has lowered its long-term store opening guidance to 100 from 125. Comparable-store sales (comps) growth for the remaining half of 2014 is expected to be in the high-single digit range as compared with growth of over 30% registered for the first half. This is due to relocation of the stores which are expected to decelerate the company's comps and productivity growth until 2015, after which these will again be included in comps calculation.

Due to the above mentioned factors, the company anticipates the adjusted EBITDA margin to expand only 150 basis points (bps) in 2014 as compared with 200 bps projected earlier. However, on dollar-basis, the company raised its adjusted EBITDA guidance range to $120 - $130 million from $115 - $125 million predicted earlier.

Further, though the company anticipates slowdown in comps growth in the second half of 2014, it raised its full-year comps growth range to 15%-17% from the earlier projected 12%-15% band.

Additionally, from second quarter onward, Kate Spade & Co. has changed its reportable segment. The company will now report under three segments namely Kate Spade North America, Kate Spade International and Adelington Design Group.

Quarterly Discussion

Now coming back to quarterly discussion, Kate Spade & Co. posted adjusted earnings of 5 cents per share from continuing operations which fared better than the Zacks consensus Estimate of a loss of a penny as well as the year-ago quarter's adjusted loss of 8 cents from continuing operations.

On a GAAP basis, Kate Spade & Co. reported a loss of 11 cents per share from continuing operations for the quarter as against a loss of 20 cents per share in the prior-year period. While including the discontinued operations for both the periods, Kate Spade & Co. posted loss of 3 cents per share versus a loss of 36 cents per share in the second quarter of 2013.

Net sales for the quarter, excluding Lucky and Juicy Couture brands rose 48.7% year over year to $266 million, beating the Zacks Consensus Estimate of $229 million. Sales improved due to strong performance at Kate Spade's domestic and international segments.

Gross profit jumped 28.6% year over year to $181.5 million. However, as a percentage of sales gross profit contracted 320 basis points (bps) year over year to 58.6% primarily due to impact of off-price sales margin which primarily resulted from excess inventory and raw materials disposal at Kate Spade Saturday brand.

During the quarter, the company's adjusted EBITDA, net of foreign currency transaction adjustments and excluding Lucky and Juicy Couture Brand, came in at $32 million against $11 million in the year-ago comparable quarter.

Segment Details

Kate Spade North America segment's net sales surged 54.6% to $208 million. Its adjusted EBITDA came in at $32 million compared with $12 million in the year-ago quarter. Consequently, adjusted EBITDA margin improved 680 bps to 15.5%.

At the Kate Spade International segment, net sales increased 53.6% year over year to $49 million, benefiting from all its operations. However, its adjusted loss before interest, taxes, depreciation and amortization for the quarter was flat at $0.7 million.

Net sales for the Adelington Design Group segment declined 30.6% to $8 million. Adjusted EBITDA for the segment was $0.4 million compared with $1 million in the year-ago comparable quarter.

Financial Details

Kate Spade & Co. ended the quarter with cash and cash equivalents of $177.1 million. The company used up $46.2 million in cash for operating activities during the first half of 2014. The company ended the quarter with a total long-term debt outstanding of $402.4 million compared with $391.7 million at the end of second-quarter 2013.

Other Stocks to Consider

Currently, Kate Spade & Co. carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the apparel-shoe sector include Citi Trends Inc. ( CTRN ), The Men's Wearhouse Inc. ( MW ) and The Buckle Inc. ( BKE ). Citi Trends and Men's Wearhouse sport a Zacks Rank #1 (Strong Buy), while Buckle holds a Zacks Rank #2 (Buy).

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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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