[UPDATED] Kate Spade Tumbles to Net Loss in Q1, Targets Latin America

Kate Spade & Co.’s share price is down more than 10 percent today following the company’s earnings release, on May 7, showing a net loss of $55.2 million for Q1, ended April 4, 2015.

On the same day, the company also announced a new distribution agreement with Exclusive Brands International S.A. (EBI), a retailer and distributor in Latin America and the Caribbean, to expand the Kate Spade New York brand presence in Latin America.

“The newly formed strategic partnership will leverage EBI’s understanding of the region, international brand experience, and proven success at helping brands grow to expand the Kate Spade New York footprint in Latin America and distribute Kate Spade New York products to territories where the company does not currently have store, wholesale, or ecommerce presence,” the company said in a statement yesterday.

Meanwhile Kate Spade’s slipping share price is likely due to the decline in profits in Q1 even though net sales showed a 14 percent (28 percent adjusted) increase in the quarter.

Read on for the earnings breakdown.

Net income: The company posted a net loss of $55.2 million compared to a profit of $46.2 million in the same year-ago quarter.

EPS: Net loss per diluted share totaled 43 cents compared to the same year-ago quarter’s earnings per diluted share of 37 cents.

Net revenue: Reported net sales for the first quarter of 2015 were $255 million, an increase of $32 million, or 14.2 percent, from the comparable 2014 period.

Adjustments: Net sales for the first quarter of 2015, excluding sales for wind-down operations, were $240 million, up 28.4 percent compared to the first quarter of 2014, adjusting 2014 net sales for wind-down operations and excluding the impacts of the 53rd week, changes in foreign currency exchange rates and the 2015 strategic initiatives.

Hit, miss or beat: Net revenues were a beat on Wall Street’s estimates for the quarter. Analysts polled by Yahoo Finance has predicted revenues of $244.9 million. While, actual EPS missed analyst estimates of 2 cents per share.

Executive Insights: “This quarter, our overall performance reflects positive momentum across our four category pillars – women’s, men’s, children’s and home – with a pro-forma net sales increase of 28 percent and direct-to-consumer comparable sales growth of 9 percent. Our channel-agnostic approach and emphasis on improving quality of sale continue to drive brand awareness, customer engagement and product demand.”

“Looking ahead, we’ll continue to focus on driving profitability, accelerating growth across geographies and product categories and broadening our customer base. We are confident in the strength of our business model and are making significant progress toward becoming a $4 billion business at retail.” – Craig Leavitt, CEO of Kate Spade & Company, in a May 7 release.

“As it relates to core product, we are always looking to increase the penetration of our core, particularly as it relates to handbags, and we’ve had some success in that regard and that is a key focus for us as we move forward … So that will continue to be a focus and we’re always going to look to make sure that we are infusing newness and fashion into our overall brand presentation, but we have a focus on building core and we expect to see an increase in that penetration as we move through the year.” –Leavitt on May 7 earnings call.

Analyst Insights: “We remain encouraged that Kate continues to see solid results despite a focus on reducing promotions, yet outperformed the mid-single-digit industry growth in sales and comps, on a tougher comparison quarter…”

“Clients continue to be curious as to the weakness in Kate’s stock [on May 7] given the solid fundamental quarter. We attribute weakness to the lack of a guidance raise for the year despite a strong performance; softer than expected top line; gross margin expansion driven by timing and mix with flat overall guidance and anticipation of a greater pullback in promos expected later this year; [last 12 months] comp productivity of $1538 in Q1 versus $1579 as of Q4…” –Kate McShane, Citi Research analyst, May 7 note.

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