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Kate Spade Sits In The 'Penalty Box,' But That Could Be A Good Entry Point

Kate Spade Sits In The 'Penalty Box,' But That Could Be A Good Entry Point|Buy Rating|Wells Fargo

Wells Fargo believes Kate Spade & Co KATE 1.22% shares provide compelling risk/reward on second-half acceleration potential. The current levels provide a good entry point for investors, since the stock underperformed its group by 10 percent due to heightened investor skepticism.

The brokerage believes the stock is currently in the "penalty box," as the stock witnessed a drop of 30 percent since late April compared to the 4 percent drop in the group. As a result, Wells Fargo upgraded the stock from Market Perform to Outperform and boosted the valuation ranges from $16–$18 to $23–$24.

Analysts Ike Boruchow and Tom Nikic are not worried that the stock has witnessed choppiness in fundamentals in the last few months. They are confident about the health of the brand, and see it continuing to gain share over rivals. Furthermore, the analysts see 9–10 percent comps growth in the second half, which is reasonable. While predicting margins to move up, the lead analyst believes valuation is compelling.

In a research note to clients, the brokerage said, "KATE has the potential for strong top-line growth, margin expansion potential, and continues to be a healthy brand, particularly in a challenging environment, and we believe this is not fully appreciated in the valuation."

Headwinds

On the flip side, the analysts see recent sales volatility and category weakness could offset the upside potentials. The brokerage thinks that its valuation could face threat if the company fails to keep pace comps or margin expansion outlook.

At time of writing, Kate was down 0.38 percent at $18.31 after witnessing a 3.07 percent jump earlier in the day to $18.94.

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DateFirmActionFromTo
Sep 2016Wells FargoUpgradesMarket PerformOutperform
Aug 2016SunTrust Robinson HumphreyMaintainsNeutral
Aug 2016CitigroupMaintainsBuy

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