Kate Spade & Company stock jumped 11 percent on Thursday to close at $22.25 on heavier than usual volume following positive comments from analyst Matthew Delly at Cleveland Research Company. The stock continued its rise Friday, up another percent to $22.50.
The gain was surprising considering that shares have dropped 41 percent during the past year as the company has been forced to make many changes. It announced that it was discontinuing Kate Spade Saturdays and closing Jack Spade stores, plus there has been a lot of concern about the company’s exposure to the Chinese market.
“It think it’s washed-out, and when it got under $20, buyers came in,” said Corinna Freedman, a Kate Spade analyst at BB&T Capital Markets. Freedman also pointed out that the quick jump probably forced many of the traders with short positions to have to cover, which meant they would have to buy the stock.
Kate Spade short positions increased from 8.16 million shares in May to 9.65 million as of June 15. Traders sell the stock short when they think it will go lower. If it moves higher they have to buy the stock to limit their losses. In addition to that, Options and Volatility reported unusually high options activity for Kate Spade on Tuesday ahead of the Cleveland Research report. On Thursday’s CNBC show “Fast Money,” Jon Najarian stated he was long KATE calls, meaning he expects the stock to move even higher.
Delly isn’t the only analyst who is seeing value in the stock. On June 24, Sterne Agee reiterated its buy rating and gave the company a $37 target price, and Cowen and Company reiterated its buy rating for the shares on June 30. Freedman led the pack when she initiated coverage with a buy rating in May and gave the stock a $35 price target.
But even with all that analyst love, the stock plunged until Thursday. Josh Arnold, an independent trader, isn’t convinced of the Kate Spade story. Arnold is troubled by the high selling, general and administrative costs and the company’s inability to turn a profit. Kate Spade recorded a loss of $53.6 million in the first quarter of 2015, worse than last year’s first-quarter loss of $38.4 million. Net sales have been up, but expenses rose 17.2 percent in the first quarter. He suggests that increasing sales is one thing, but after a while investors want to see real profits.
The question for Kate Spade for the summer will be how well customers respond to promotions. During the May earnings call, concerned analysts asked the company about margins and the firm said it was going to participate in fewer department store promotions. Freedman, who is positive about the company, said Kate Spade traffic at Macy’s during a recent promotional event was better than Coach and was only marked down 25 percent.
However, when it comes to the outlet stores, Kate Spade was very promotional during the Fourth of July holiday. The outlet stores were running 60 percent off sales with an additional 20 percent off handbags. This resulted in long lines at the stores and photos of the lines being circulated on stock sites such as StockTwits. The big issue for Kate Spade customers is whether they will be willing to pay full price and accept fewer discounts after having been taught to wait for big sales. Kate Spade reports its second-quarter earnings on Aug. 10.