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Is the Kate Spade Stock Bubble About to Explode?

Stocks in this article: KATE KORS COH M JWN RL

NEW YORK (TheStreet) -- Wall Street has fallen in love with preppy handbag and accessory maker Kate Spade (KATE).

However, based on the financial performance of the company, the great Kate Spade stock bubble may be about to explode.

The company is estimated to announce its second-quarter earnings on Aug. 8. In just one telling sign of excessive optimism, Kate Spade has missed Wall Street's earnings expectations for four consecutive quarters. For the first quarter, the company actually delivered its first sales beat vs. consensus forecasts in three quarters, yet still fell shy of Wall Street's profit estimates.

Yet hopeful investors have pushed shares of Kate Spade up 17.27% year to date, outpacing the 3.7% rise in the Bloomberg Branded Apparel Index. Fueled by bullish commentary from chief executive officer Craig Leavitt, those investors are expecting the company to become the next Polo Ralph Lauren (RL) -- a global lifestyle brand powerhouse.

Read More: Aeropostale Struggling to Show it Could be Cool Like Forever 21, H&M

Wall Street has specifically warmed to Kate Spade because it sees a future for the company in these areas:

  1. An ability to maintain a mostly non-promotional, full-price market for its products that range from bright-colored housewares to quirky ballet flats.
  2. The continued rollout of product extensions. In November, for example, Kate Spade will unveil its first swimwear collection consisting of 70 pieces.
  3. A dramatic increase in global square footage via the opening of new specialty stores, concessions and likely flagship stores in international tourist destinations. Kate Spade currently operates 118 specialty stores, 51 outlet stores, and 43 concessions.
  4. Further penetration of lucrative online sales. Digital sales already comprise approximately 20% of Kate Spade's business.

All told, Leavitt has gone on the record stating Kate Spade is destined to reach the $2 billion sales mark by year end 2016, which would represent a 169% surge from 2013.

While Wall Street chooses to remain infatuated with Kate Spade's future growth potential, there is one not-so-slight problem being overlooked. Kate Spade has done close to nothing in terms of profitability in over six quarters to justify its exorbitant market valuation.

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