Kate Spade Plunges as Dwindling Tourism Prompts Forecast Cut

  • Company deepens discounts, stumbling in bid to cut promotions
  • Handbag maker’s quarterly profit trails analysts’ estimates

Kate Spade & Co. fell the most in almost two years after weakening sales to tourists prompted the handbag maker to cut its full-year revenue and profit forecasts.

Profit will be 63 cents to 70 cents a share in the year ending in January, the New York-based company said in a statement Wednesday. Kate Spade had previously forecast 70 cents to 80 cents, and analysts projected 78 cents, on average.

Kate Spade has been trying to reduce promotions at department stores and sell more items at full price to maintain the brand’s cachet. But a dearth of foreign tourists to the U.S. -- who have put off visits and are spending less because of the strong dollar -- has slowed foot traffic, forcing the company to mark down merchandise at outlets. Kate Spade also is facing increasing competition from rivals such as Coach Inc. and Michael Kors Holdings Ltd.

Shares of Kate Spade fell as much as 22 percent to $15.66, the biggest intraday drop since August 2014. Before the decline, the stock had been up 13 percent this year.

More Promotional

Outlets have become more promotional than expected, pressuring margins, while some key sale events fell short of expectations, Chief Executive Officer Craig Leavitt said on a conference call. Kate Spade also didn’t have enough inventory for some of the products that became popular, but it will fix the issue in the second half, he said.

Leavitt sought to reassure investors that the challenges are short-term and the company is confident it can continue to attract customers who will pay for full-price items. Those sales already are growing, he said.

“Our overall strategy and our confidence in achieving our long-term $4 billion target remains unchanged,” Leavitt said.

Full-year sales will probably be $1.37 billion to $1.4 billion, the company said. That’s down from its previous forecast of $1.39 billion $1.41 billion. Analyst estimated $1.41 billion. Profit for the second quarter was 11 cents, excluding some items, lower than analysts’ average estimate of 14 cents.

North America

Sales in Kate Spade’s North America business, which accounted for about 85 percent of its total revenue, rose 15 percent in the second quarter. International sales climbed 6.6 percent.

The company has increasingly integrated its stores and online shops, and is working to sell more full-price products by shipping items purchased online from its stores. Direct-to-consumer comparable sales grew 4 percent. Analysts had predicted an increase of 13 percent, according to Consensus Metrix. The company expects that to grow in high single digits to low double digits for the full year.

Kate Spade is coping with a long-term decline in the handbag industry by expanding in home products and children’s wear. It introduced 14 new product categories last year, including furniture, lighting and rugs. It also entered eight new countries, such as India, and extended its reach in Latin America, Macau and Taiwan.

“This is a business that’s enjoyed extraordinary growth in past four years,” said Ed Yruma, an analyst at KeyBanc Capital Markets Inc. “It isn’t unusual for brands to reach a point of stability and a period of slower growth. Is this a transient problem or a new normal? I think time will tell.”

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