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Kate Spade Shares Drop on Concern That Growth Is Cooling

Kate Spade Store in London
Kate Spade & Co. said its North American and international divisions both saw sales increases of more than 50 percent last quarter, even as retailers had to rely more heavily on promotions to entice customers. Photographer: Dave M. Benett/Getty Images

Aug. 12 (Bloomberg) -- Kate Spade & Co., the handbag maker with aspirations to be a global lifestyle brand, fell the most in more than five years on concern that growth is cooling, reversing the stock’s earlier gains.

Sales will increase at a high single-digit percentage rate in the second half, slowing from a 30 percent gain in the first half, Chief Operating Officer George Carrara said today on a conference call. The company also may put off its profit-margin goals for 2016 until 2017, in part because its Saturday brand has taken longer than expected to ramp up.

The shares dropped 25 percent to $29 at the close in New York, the biggest decline since June 2009. Today’s plunge erased the stock’s gains for the year.

“This is a growth stock, so any time you see they’re coming out and saying high single-digit comparable-sales growth, and we just saw a 30 percent, increase, that’s not the growth trajectory we were thinking we were seeing,” Mary Ross-Gilbert, a Los Angeles-based analyst at Imperial Capital, said in an interview.

The shares had climbed earlier in the day, fueled by better-than-estimated earnings. Second-quarter profit was 5 cents a share, excluding some items, the New York-based company said in a statement. Analysts had predicted break-even results, according to data compiled by Bloomberg. Kate Spade posted $266 million in revenue, topping the $237 million estimate.

Sales Gains

The company said its North American and international divisions both increased sales more than 50 percent last quarter even as retailers relied more heavily on promotions to entice customers. Kate Spade also boosted its annual earnings forecast to as much as $130 million, up from a high end of $125 million.

The results come as Coach Inc. struggles to regain its pricing power and cachet. The 73-year-old bag maker said earlier this month that sales fell 7.1 percent last quarter, the fourth decline in a row.

Coach, which has lost customers to newer rivals like Michael Kors Holdings Ltd. and Kate Spade, said its missteps included opening too many outlets, failing to invest in marketing and not creating enough stylish new products.

Kate Spade is looking to quadruple retail sales to $4 billion as a global lifestyle brand selling everything from apparel to home goods. Chief Executive Officer Craig Leavitt is focusing on categories with ready appeal, including fragrances, jewelry, watches and sunglasses. The retailer also is offering a range of prices to attract millennials on one end and luxury shoppers on the other.

“It still has tremendous growth opportunities,” said Gilbert, who has the equivalent of a buy rating on the shares. “The overall story is still intact.”

To contact the reporters on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net; Selina Wang in New York at swang533@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Kevin Orland, John Lear

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