Kate Spade shares plunge 20 percent as growth abruptly slows

Kate Spade handbags
Scott Mlyn | CNBC

Kate Spade shares tumbled 18 percent Wednesday, as comparable-sales growth at the high-flying handbag maker came to an abrupt slowdown during the latest quarter and fell short of analysts' estimates.

After reporting several quarters of industry-leading, double-digit same-store sales gains, Kate Spade reported a 4 percent lift in this metric for the recently ended three-month period. That was well shy of Wall Street's consensus estimate of 12 percent growth, according to Retail Metrics.

Management called out a slew of factors as contributors to its slowdown, with softness at its discount outlet stores bearing the brunt of the blame. There, value-focused shoppers were not swayed by the brand's discounts, which weren't as steep as those seen at other retailers, CEO Craig Leavitt told analysts. As a result, it was forced to offer more substantial promotions. These stores were likewise hit by a slowdown in international tourists, who spent noticeably less than they did the first quarter, the company said.

While expectations had moved down, Kate's second-quarter report was "much worse than investors had anticipated," Wells Fargo analyst Ike Boruchow said. "Today's results are concerning regarding the top-line trajectory of the business, as the brand seems to be slowing much more quickly than we would have anticipated at this stage."

As a result of its second-quarter challenges, Kate Spade lowered its full-year guidance. The company now expects to generate net sales of $1.37 billion to $1.4 billion, compared with its prior range of $1.39 billion to $1.41 billion. It also reduced its earnings projection and is now calling for earnings per share of 63 cents to 70 cents. That compares with its previous forecast of 70 cents to 80 cents a share.

Several of the headwinds the company listed as contributors to its second-quarter shortfall will continue; however, management sees opportunity for improvement in the second half. That includes restocking a popular line of handbags, which it sold out of during the quarter, and offering more flash-sale events related to its made-for-outlet online products.

Despite plans to become more promotional at it outlet stores and online, the company reiterated its commitment to generating full-price sales in its traditional specialty shops. Although its overall gross margin contracted, that metric logged an increase in its traditional stores during the quarter, as a higher percentage of the sales there were rung up without a discount.

"We want to focus on the full-price customer," Leavitt said. "This strategy is working."

Kate Spade reported a 14 percent increase in revenues during the second quarter, to $320 million. Its earnings per share rose to 11 cents, compared with 8 cents during the prior-year period. Analysts had been expecting the company to earn 14 cents a share on a topline of $318 million, according to a Thomson Reuters forecast.