Buy Kate Spade (KATE) on Weakness, Sterne Agee Says

Sterne Agee analyst Ike Boruchow is sticking with a Buy rating and raised estimates on Kate Spade (NYSE: KATE) despite yesterday's dramatic 25% sell-off.

Boruchow commented, "KATE's impressive Q2 performance was overshadowed by GM concerns, issues with the Saturday brand, and commentary suggesting the 2016 margin target may be pushed out 12 months. While we see some cause for concern, yesterday's 25% sell-off is overdone. Below we address the key issues that came out of the release, and we'd be buyers on the pullback today given the fundamental story remains very much intact. The multiple isn't cheap, but retail growth is scarce; KATE deserves its premium valuation."

While the analyst acknowledged the negative surprises that came out of the company's conference call, they feel that yesterday's sell-off was overdone for the following reasons. 1) Gross margin weakness is never good, but the KATE margin thesis has always been predicated on top line (comped 30%+) and leverage (leveraged SG&A 850bps). 2) Saturday is a 15-month-old brand that needs to find its way. Many sub-brands take some time to develop and this won't be any different. The fact is, Saturday is likely less than 5% of sales and just gravy to the KATE story. 3) Comps were always planned +HSD for 2H and management has a track record for under-promising on top line. We believe the factors impacting comps in 2H aggregate to ~10 points of headwind, so even with that, KATE should comp mid-teens in 2H (1H's ~26% minus ~10 points). 4) The commentary on the 2016 margin target potentially being pushed out a year was disappointing. However, just given the time value of money, the 12-month push out shouldn't be worth more than ~12% to the stock, especially considering management simply stated they are "assessing" the target

The firm's 2014/2015 EPS estimates are raised to $0.26/$0.63 (from $0.22/$0.62) following a stronger than expected top- and bottom-line performance in Q2. The firm price target was lowered to $38 (from $42).

price target of $38.00 (from $42.00)

For an analyst ratings summary and ratings history on Kate Spade click here. For more ratings news on Kate Spade click here.

Shares of Kate Spade closed at $29.00 yesterday.

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