NEW YORK — Protecting quality of sales helped Kate Spade & Co. post second-quarter results that swung to a profit versus losses a year ago.
Chief executive officer Craig Leavitt said in an interview that protecting quality of sales was “absolutely critical” in the quarter. “It is clearly one of the reasons why we are seeing the results that we are seeing,” he added.
As for some of the initiatives for the new selling model, Leavitt said the company has “pulled back on the number of flash sales at its e-commerce site in each of the quarters so far this year.” The company also decided to opt out of participating in most promotional events at its wholesale accounts, such as the ubiquitous “friends and family” sales, and adjusted the promotions that were at its brick-and-mortar stores. The results had sales at the e-commerce site, what Kate Spade considers its global flagship, “outperforming” at full price.
“Each quarter we see increases in traffic and conversion in full-price selling,” the ceo said.
The company raised the low-end of its full-year adjusted earnings before interest, taxes, depreciation and amortization range, with revised guidance of $190 million to $200 million, excluding wind-down operations. It also upped its comps expectations to between 9 percent and 11 percent for the full year.
Leavitt added that the changes in the sales strategy as the company transitions its brand model to a lifestyle monobrand is about a controlled approach to the distribution of product to ensure “sustainable long-term growth in both sales and profitability.”
The company said net income was $8.5 million, or 7 cents a diluted share, versus the year ago net loss of $4.4 million, or 3 cents. Net sales rose 5.7 percent to $281.1 million from $266 million. Direct-to-consumer comps gained 10 percent, or 12 percent excluding e-commerce. On an adjusted basis reflecting continuing operations, diluted EPS was 8 cents on net sales of $273 million.
Adjustments for wind-down operations include net sales for Kate Spade Saturday, Jack Spade brick-and-mortar sites, Kate Spade Brazil and brand exits in the Adelington Design Group.
The company missed Wall Street’s estimates, which pegged consensus expectations at 11 cents on revenues of $293 million. Still, investors liked the progress the company is making, sending shares of Kate Spade up 3.8 percent on Wednesday to close at $21.48.
As a further measure of protecting quality of sales, the company is in the early stages of a micro-assorting strategy. So far it has focused on merchandise to meet the climate of where stores are located. Leavitt said a further drill down on the strategy will include featuring items more suited to the locations by category. That means some locales will have more casual product, while other markets would feature more wear-to-work options.
“This is another layer of detail that our buying and planning organization [will track] to grow sales,” Leavitt said. He explained that the new structure will improve profitability on the gross margin side because the “right product in the right stores will improve full-price sell-through.” Further, the change would also improve some of the efficiencies on the transportation expense side of the equation because it won’t incur costs having to reship product from one store to another where it’s needed more.
As for what’s been occurring in the handbag category and the perceived malaise, Leavitt said, “We are not seeing changes in consumer behavior. What we’re seeing [and hearing from our wholesale partners] is a reshuffling of brand penetration in the space.” He added that Kate Spade is “clearly gaining market share.”
Handbag growth was strengthened by its increase in speed-to-market, which will be used to leverage its specialty channel as a laboratory to test reactions to new styles. The company also is building its fashion accessories business via a new license with Global Brands Group for soft accessories such as scarves and belts. That’s in addition to the new lines in swimwear and children’s wear, and the entry into the ath-leisure and sleepwear markets in early 2016.
The company remains focused on its four pillars – women’s, men’s, children’s and home – as it looks to build annual volume to $4 billion at retail. The new All in Good Taste collection for food prep, cookware and bakeware will be available in the U.S. in 430 Macy’s stores at the end of this month and be an exclusive shop at macys.com. Plans are in place to have the collection available in Canada exclusively with Hudson’s Bay.
Leavitt said even as the company pushes into other product categories and makes further inroads on the international front, the Kate Spade brand will still be “anchored by handbags and small leather goods.”