Kate Spade Markdowns Hurt Margins

Updated Aug. 12, 2014 4:55 p.m. ET

Concerns about thinner margins at


Kate Spade



KATE -25.39%



Kate Spade & Co.


U.S.: NYSE


$29.00


-9.87
-25.39%



Aug. 12, 2014 4:00 pm


Volume (Delayed 15m)
:
52.60M



AFTER HOURS



$29.27


+0.27
+0.93%


Aug. 12, 2014 6:00 pm


Volume (Delayed 15m)
:
156,775




P/E Ratio
42.26

Market Cap
$4.92 Billion


Dividend Yield
N/A

Rev. per Employee
$179,592









08/12/14 Markdowns at Kate Spade Hurt M…
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& Co. overshadowed news of a narrower loss and a surge in demand.

The handbag and fashion company said its gross margin narrowed to 58.6% in the quarter ended July 5 from 61.8% a year earlier, driven by discounts needed to clear excess inventory at its lower-priced Kate Spade Saturday brand. The company said margins will be under pressure for the year as well.

Kate Spade shares—which had climbed about 9% in premarket trading—made a U-turn and ended the day down 25%.

Speaking on a conference call, Kate Spade executives said broader discounting in the industry was fiercer than they had expected. The company, which is trying to move away from using promotions to drive sales, said it was forced to move sales earlier to compete.

“We’re not going to sit on the sidelines while there’s meaningful promotional activity amongst retailers and competitors,” said

George Carrara,

Kate Spade’s chief operating officer.

The comments echoed those from rival


Michael Kors Holdings Ltd.



KORS -3.19%



Michael Kors Holdings Ltd.


U.S.: NYSE


$77.44


-2.55
-3.19%



Aug. 12, 2014 4:01 pm


Volume (Delayed 15m)
:
5.01M



AFTER HOURS



$77.44


0.00
%


Aug. 12, 2014 5:54 pm


Volume (Delayed 15m)
:
66,362




P/E Ratio
21.75

Market Cap
$16.42 Billion


Dividend Yield
N/A

Rev. per Employee
$390,803









08/12/14 Markdowns at Kate Spade Hurt M…
08/05/14 Coach Profit Declines on Weak …
08/05/14 Michael Kors Shares Fall 7% as…
More quote details and news »



, which last week said it had to resort to discounts in the latest quarter to clear out fall merchandise.

The former Fifth & Pacific Cos. and Liz Claiborne Inc. became Kate Spade in February. Former chief

William McComb

had narrowed the apparel company’s focus, shedding dozens of labels—most recently Lucky Brand and Juicy Couture—over the past eight years, to focus on the Kate Spade brand.

Overall, Kate Spade posted a second-quarter loss of $4.4 million, or three cents a share, compared with a loss of $43.1 million, or 36 cents a share, a year earlier. Excluding acquisition-related costs and other items, earnings from continuing operations were five cents a share, versus a loss of eight cents a share a year earlier. Net sales rose 49% to $266 million.

Kate Spade and Michael Kors have cut into


Coach Inc.



COH -0.55%



Coach Inc.


U.S.: NYSE


$35.98


-0.20
-0.55%



Aug. 12, 2014 4:01 pm


Volume (Delayed 15m)
:
4.24M



AFTER HOURS



$35.98


0.00
%


Aug. 12, 2014 4:34 pm


Volume (Delayed 15m)
:
62,681




P/E Ratio
12.85

Market Cap
$9.92 Billion


Dividend Yield
3.75%

Rev. per Employee
$279,432









08/12/14 Markdowns at Kate Spade Hurt M…
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‘s share of the handbag market. Michael Kors reported earlier this month that profit and sales climbed, though increased markdowns were a drag on margins. Coach, meanwhile, reported its earnings declined sharply as North American sales fell and costs rose.

During the quarter, the company split its former Kate Spade reportable segment in two— Kate Spade North America, where sales grew by 55%, and Kate Spade International, where they grew by 54%.

Write to Joshua Jamerson at Joshua.Jamerson@wsj.com and Suzanne Kapner at Suzanne.Kapner@wsj.com

  Click to listen highlighted text! Updated Aug. 12, 2014 4:55 p.m. ET Concerns about thinner margins at Kate Spade KATE -25.39% Kate Spade & Co. U.S.: NYSE $29.00 -9.87 -25.39% Aug. 12, 2014 4:00 pm Volume (Delayed 15m) : 52.60M AFTER HOURS $29.27 +0.27 +0.93% Aug. 12, 2014 6:00 pm Volume (Delayed 15m) : 156,775 P/E Ratio 42.26 Market Cap $4.92 Billion Dividend Yield N/A Rev. per Employee $179,592 08/12/14 Markdowns at Kate Spade Hurt M… 08/12/14 Stocks to Watch: Intercept Pha… 08/05/14 Coach Profit Declines on Weak … More quote details and news » & Co. overshadowed news of a narrower loss and a surge in demand. The handbag and fashion company said its gross margin narrowed to 58.6% in the quarter ended July 5 from 61.8% a year earlier, driven by discounts needed to clear excess inventory at its lower-priced Kate Spade Saturday brand. The company said margins will be under pressure for the year as well. Kate Spade shares—which had climbed about 9% in premarket trading—made a U-turn and ended the day down 25%. Speaking on a conference call, Kate Spade executives said broader discounting in the industry was fiercer than they had expected. The company, which is trying to move away from using promotions to drive sales, said it was forced to move sales earlier to compete. “We’re not going to sit on the sidelines while there’s meaningful promotional activity amongst retailers and competitors,” said George Carrara, Kate Spade’s chief operating officer. The comments echoed those from rival Michael Kors Holdings Ltd. KORS -3.19% Michael Kors Holdings Ltd. U.S.: NYSE $77.44 -2.55 -3.19% Aug. 12, 2014 4:01 pm Volume (Delayed 15m) : 5.01M AFTER HOURS $77.44 0.00 % Aug. 12, 2014 5:54 pm Volume (Delayed 15m) : 66,362 P/E Ratio 21.75 Market Cap $16.42 Billion Dividend Yield N/A Rev. per Employee $390,803 08/12/14 Markdowns at Kate Spade Hurt M… 08/05/14 Coach Profit Declines on Weak … 08/05/14 Michael Kors Shares Fall 7% as… More quote details and news » , which last week said it had to resort to discounts in the latest quarter to clear out fall merchandise. The former Fifth & Pacific Cos. and Liz Claiborne Inc. became Kate Spade in February. Former chief William McComb had narrowed the apparel company’s focus, shedding dozens of labels—most recently Lucky Brand and Juicy Couture—over the past eight years, to focus on the Kate Spade brand. Overall, Kate Spade posted a second-quarter loss of $4.4 million, or three cents a share, compared with a loss of $43.1 million, or 36 cents a share, a year earlier. Excluding acquisition-related costs and other items, earnings from continuing operations were five cents a share, versus a loss of eight cents a share a year earlier. Net sales rose 49% to $266 million. Kate Spade and Michael Kors have cut into Coach Inc. COH -0.55% Coach Inc. U.S.: NYSE $35.98 -0.20 -0.55% Aug. 12, 2014 4:01 pm Volume (Delayed 15m) : 4.24M AFTER HOURS $35.98 0.00 % Aug. 12, 2014 4:34 pm Volume (Delayed 15m) : 62,681 P/E Ratio 12.85 Market Cap $9.92 Billion Dividend Yield 3.75% Rev. per Employee $279,432 08/12/14 Markdowns at Kate Spade Hurt M… 08/12/14 Vascular Biogenics Says It Did… 08/10/14 Alibaba Cleans Up ‘Gray Market… More quote details and news » ‘s share of the handbag market. Michael Kors reported earlier this month that profit and sales climbed, though increased markdowns were a drag on margins. Coach, meanwhile, reported its earnings declined sharply as North American sales fell and costs rose. During the quarter, the company split its former Kate Spade reportable segment in two— Kate Spade North America, where sales grew by 55%, and Kate Spade International, where they grew by 54%. Write to Joshua Jamerson at Joshua.Jamerson@wsj.com and Suzanne Kapner at Suzanne.Kapner@wsj.com Powered By GSpeech