Kate Spade wants to be Ralph Lauren.
Looking to quadruple retail sales to $4 billion, the handbag maker is modeling itself on Lauren’s empire: a global lifestyle brand selling everything from apparel to home goods. Kate Spade & Co.’s (KATE:US) Chief Executive Officer Craig Leavitt is focusing on categories with ready appeal -- fragrances, jewelry, watches, sunglasses -- and offering a range of price points to attract millennials on one end and luxury shoppers at the other.
“Ralph Lauren is our business analog,” said Leavitt, 53, a former Lauren lieutenant who joined Kate Spade in 2008 and became CEO of the parent company last month. “We’re very confident in what we have set out to accomplish.”
It’s an audacious goal for a brand that’s one eighth the size of Ralph Lauren Corp. (RL:US) measured by fourth-quarter revenue, generates 75 percent of sales in the U.S. and is known mostly for quirky handbags beloved by gadabout urban women. Having parted ways with its namesake founder, Kate Spade also lacks a Ralph Lauren, whose curated image is as responsible for selling a modern Gatsby lifestyle as the products themselves.
Even with all the challenges, investors are still largely bullish on Kate Spade. In the past 12 months, the shares have gained 92 percent, outpacing rival and Wall Street darling Michael Kors Holdings Ltd. Eric Beder, an analyst at Brean Capital LLC in New York, has questioned the shares’ valuation and in January downgraded them to “neutral,” the equivalent of a hold. On Feb. 26, he wrote that investors may be “highly disappointed.”
Kate Spade has gone from a niche to mainstream brand in the past two decades. Founded in 1993 by Mademoiselle editor Kate Spade and her husband Andy, the handbag maker won a small following by melding vibrant color with classic lines. The brand lost luster after Neiman Marcus Group LLC bought majority control in 1999. Liz Claiborne Inc. acquired the company for $124 million in 2006, and the Spades left.
At the time, Liz Claiborne owned 30 apparel labels, including Juicy Couture and Lucky Brands. Over the years, most were jettisoned or closed. Three years ago, the company sold Liz Claiborne to J.C. Penney Co. (JCP:US) and subsequently renamed itself Fifth & Pacific Cos. Last year, as it sought to focus on Kate Spade, Fifth & Pacific sold Juicy’s intellectual property to Authentic Brands Group LLC and agreed to sell Lucky to Leonard Green & Partners LP. Only the Kate Spade and the Adelington Design Group jewelry brands remain. and last month the holding company became Kate Spade & Co.
Creative Director Deborah Lloyd, recruited in 2006 after rejuvenating Burberry Group PLC’s namesake brand, has updated the handbags and broadened out into other categories, including jewelry and apparel. Last year, the company unveiled Kate Spade Saturday, a sub-brand pitched at younger women with merchandise priced at about half that of the regular Kate Spade.
Two fragrances, “Twirl” and “Live Colorfully,” debuted in 2010 and 2013, respectively. Swimwear and table linens will come this year, under license. The brand also is licensed for shoes, sunglasses, legwear, electronics cases, bedding and stationery. In the past 13 quarters, same-store sales growth has reached at least 21 percent, according to Bloomberg data.
Jenny Morrissey, a 31-year-old interior decorator and event planner, has watched the brand evolve since receiving her first Kate Spade bag as a gift from her mother 15 years ago. She deems the look trendy yet classic and said the dresses, shoes, jewelry and china are quality and priced right.
“Kate Spade has kicked it up a notch, bringing a funkier vibe,” said Morrissey, who lives in Newport Beach, California. “They would spice up the market as a lifestyle brand. They do everything so well. They should just go for it.”
In an interview last month at his Africa-themed lower Park Avenue office in New York, Leavitt laid out his vision for the company (KATE:US). In the coming years, he plans to expand international sales to two-thirds of the total from less than 25 percent now, and sees much of the opportunity in Asia. To boost growth at home, he plans to open stores and drive more sales online, where the brand now generates 20 percent of revenue. Retail sales will reach $2 billion by the end of 2016, he said.
Sporting a flower in his lapel and patent leather sneakers, Leavitt dismissed doubters.
“The DNA resonates with customers around the world,” he said. “It’s about encouraging the customer to lead a more interesting life. Everyone strives to spend more time in museums and have adventures like seeing a new part of the world or going to a flea market and finding something unique for your home. The brand is optimistic, happy.”
Customers have greeted the expansion into multiple categories enthusiastically, he said. The company has “a lot more runway” and can launch new lines with “no barriers.”
Ned Davis, an analyst with William Smith & Co. in Denver, agrees, saying that the stock’s valuation is justified and that he expects to see it climb to $43 within 12 months. The shares rose 3.2 percent to $36.62 at the close in New York.
Still, even as consumers pull back, Kate Spade is fighting for a share in the premium sweet spot that’s cheaper than designer goods, costlier than mass merchandise, and more resistant to the markdowns that have bedeviled many chains. Already, the challenging retail environment is taking a toll. Kate Spade itself has said same-store sales growth will slow by more than half this year, to a maximum of 13 percent.
The stock “prices in the ongoing momentum at Kate Spade, but not the difficult retail environment or what we view as the relatively narrow scope of the Kate Spade brand,” Pam Quintiliano, an analyst at Suntrust Banks Inc. in New York, wrote in a Feb. 25 note to clients. She called the valuation “lofty” and rates the shares “neutral.”
Kate Spade shares closed yesterday at almost 148 times (KATE:US) estimated earnings, according to data compiled by Bloomberg, compared with about 19 times estimated earnings for Ralph Lauren’s shares.
Leavitt’s ambitions are “aggressive” and will be hard to achieve against Ralph Lauren, Michael Kors, Coach Inc. (COH:US) and Tory Burch, said Marie Driscoll, founder of Driscoll Advisors. Building a strong lifestyle brand is key to standing out and succeeding in the oversaturated retail landscape.
Kate Spade has a much more limited appeal than its role model and hasn’t coordinated categories well enough to look like a lifestyle brand, New York-based Driscoll said.
“They have far to go,” she said. “Ralph Lauren created lifestyle branding. When you’re wearing Ralph Lauren, it says ‘Upper middle-class American.’ With Kate Spade, there is a kitschy element, a youthful, playful element to it. When you wear that clothing, it says, ‘I am wearing Kate Spade.’”
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