Kate Spade defies handbag slowdown, shares jump

Kate Spade CEO: Focus is on quality of sale

Shares of Kate Spade surged nearly 11 percent Tuesday, after the handbag maker reported fourth-quarter sales growth that easily outpaced competitors Michael Kors and Coach, as well as the broader handbag market.

More importantly, the company logged a 14 percent sales gain despite pulling back on the number of promotions it ran during the holiday period, showing consumers were willing to pay full price for its products.

Despite lapping last year's higher level of discounting, Kate Spade CEO Craig Leavitt said wholesale shipments and sales in its anchor handbag category increased by double digits.

The company also logged better-than-expected sales in its online segment, even as it reduced the number of flash sales it ran. Combined, these two initiatives helped boost the brand's gross margin by 2.5 percent.

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"In our view Kate Spade has a brand clarity and uniqueness that is now lacking in brands such as Coach and Michael Kors," said Hakon Helgesen, an analyst at Conlumino retail research firm. "This gives it the ability to pull in customer traffic and sell through at a higher price point, without having to resort to discounting to shift stock."

During the fourth quarter, Kate Spade saw strength in its anchor handbags and small leather goods categories. The company's novelty handbags, which the brand uses as a means of differentiating its assortment beyond traditional silhouettes, also performed well, Leavitt said.

These offerings contributed to the brand reporting direct-to-consumer comparable sales growth of 14 percent during the quarter.

But it wasn't just sales of its hallmark categories that helped drive Kate Spade's strength. During 2015, the brand added 14 new product categories to its portfolio, including athletic wear, sleepwear and bedding. It also grew its physical footprint to eight new countries.

It's through these tactics, as opposed to broad-based discounting, that Kate Spade plans to grow its revenues long term, and avoid oversaturation. Leavitt said many of the new categories attracted 30 to 50 percent new customers, and he called that "a big opportunity for us to create a really sticky relationship."

"We're seeing that they are coming back … and buying from us a second time in our core categories," Leavitt told CNBC.

More broadly speaking, Coach management in January estimated that handbag revenues were roughly flat during the holiday quarter, representing a slowdown for the category. By brand, Coach reported domestic same-store sales that declined 4 percent, while Michael Kors' comparable sales fell 0.9 percent.

While Kate Spade's 14 percent comparable sales gain easily topped the performance at its competitors, it's working off a substantially smaller base. Whereas Kate Spade's fourth-quarter sales came in at $428 million, the Coach brand reported $1.18 billion in revenues during the comparable period and Michael Kors logged sales of $1.31 billion.

Shares of Kate Spade were trading near $22 on Tuesday afternoon, partly due to what Wall Street analysts called a conservative 2016 guidance. Over the past year, Kate Spade shares had been down nearly 40 percent.