As if Michael Kors’ (KORS) explosive growth weren’t enough of a problem for Coach (COH).
Now the company that basically invented the affordable luxury handbag category is feeling even more heat from yet another upstart: Kate Spade. (KATE)
Kate Spade reported comparable sales gains of 30% for its second quarter, which ended in early July. That prompted Kate Spade to raise its profit estimate for 2014 by $5 million to a new range of $120 million to $130 million with sales growing 15-17%.
Despite the sales jump, Kate Spade, previously known as Fifth & Pacific before that company sold off its Juicy Couture and Lucky Brand labels, remains much smaller than Kors and Coach. (Kate Spade’s most recent quarterly sales were $266 million, vs. $919 million at Kors and $1.14 billion at Coach.) But by one key retail metric—sales per square foot—Kate Spade is narrowing the gap with its bigger rivals.
Kate Spade’s sales per square foot, a rough gauge for how much money each store generates while factoring in size to make it comparable to peers, now stand at $1,477 after 16 straight quarters of growth, compared to about $1,280 earlier this year. That suggests the company is not expanding its store fleet too quickly, even as that concern is weighing on the minds of Kors shareholders. Kate Spade added 27 full-service stores and 18 outlets in the past year, bringing its total fleet to 96 stores and 51 outlets. (Last week, Kors shares fell after it warned Wall Street that opening new stores would take a big toll on its profit margins.)
According to eMarketer Retail, which in May ranked top retailers by sales per square foot, that puts Kate Spade within spitting distance of catching up to Coach, which has sales per square foot of $1,532. (Kors is still way ahead of both at $1,886 per square foot) . (By the way, Apple (AAPL) is still king, at $4,551 per square foot.(Department store chains like Macy’s (M) and J.C. Penney (JCP) are typically in the $150-$200 range.)
At the rate things are going for Coach and Kate Spade, it is only a matter a time before the upstart brand overtakes it in this key ranking.
Turns out even high flying upstarts like Kate Spade face problems. Shares fell 25.4% after company executives told Wall Street analysts that business was likely to cool off, and that it will have to offer more deals to clear merchandise.
“The retail environment continues to be more promotional,” Chief Operating Officer George Carrara said. He warned analysts that comparable sales would be up by a “high single digit” percentage in the second half of the fiscal year, compared to 30% in the first half, and that gross margins would fall between 1.25 and 1.75 percentage points because of the discounting, echoing Michael Kors’ warning last week. Turns out even Kate Spade is human after all.