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Kate Spade Back In Style With Analysts

Kate Spade Back In Style With Analysts|Buy/Outperform|Cowen, Citi, Wells Fargo

Shares of Kate Spade & Co KATE 1.22% bottomed at $15.10 after the company reported its second-quarter results on August 3, which included a reduction in its full-year fiscal 2016 outlook.

Specifically, Kate Spade lowered its earnings per share outlook for the full year to a range of $0.63 to $0.70 from a prior $0.70 to $0.80. The company also lowered its sales forecast to a range of $1.37 billion to $1.4 billion from a prior range of $1.385 billion to $1.41 billion.

Related Link: Kate Spade Sits In The "Penalty Box," But That Could Be A Good Entry Point

Since then, Kate Spade's stock has rebounded and briefly traded above the $19 level as of Tuesday. Several Wall Street analysts found the $15 level to be attractive enough for investors to jump in.

For instance, a day after Kate Spade's earnings print, Citi Research's Kate McShane maintained a Buy rating on the stock, but she also slashed the stock's price target to $23 from a previous $33.

The analyst cited multiple initiatives ahead that represent "strong opportunities" for earnings per share growth, including an improving brand recognition and new customer acquisitions, productive improvements, store growth, international sales growth and margin expansion.

Cowen's Oliver Chen named Kate Spade his top pick in the handbag space on August 22 given the brand's "over-indexed" representation in A and A+ shopping centers along with promotional activity in the outlet space to maintain its market share.

Wells Fargo Turns Bullish

Wells Fargo's Ike Boruchow upgraded Kate Spade's stock to Outperform from Market Perform with a valuation range boosted to $23–24 from a previous $16–18 range.

The analyst highlighted investor skepticism around the name and the stock has been "put into the penalty box" following its earnings report. However, this created a "compelling entry point" considering a large portion of the second quarter weakness and outlook was due to execution issues.

Boruchow added that channel checks so far this quarter imply a pick-up in trends which reinforces the analyst's long-term margin opportunity of 20+ percent EBITDA.

The analyst also added four reasons to support a bullish stance:

  • The Kate Spade brand remains "healthy" and gaining market share.
  • Top-line growth continues to outperform peers.
  • Margins should continue to move higher.
  • Valuation of just 7.0x EV/EBITDA on 2017 estimates creates a "compelling" valuation for investors.

At time of writing, Kate Spade was down 0.33 percent on the day at $18.32.

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