NEW YORK (TheStreet) -- "Ralph Lauren is our business analog", proclaimed Kate Spade (KATE) CEO and former Ralph Lauren (RL) executive Craig Leavitt in a recent interview. In non-corporate jargon, the comment was Leavitt's way of saying Kate Spade could become the next Polo Ralph Lauren, a global powerhouse brand that sells merchandise that is seemingly in demand year round. I chuckled at this bravado, not because Kate and Jack Spade are no longer working at the company, whereas Ralph Lauren is still actively involved in the company he founded and could be spotted on quarterly earnings press releases, but this is a brand that isn't exactly new to the retail scene.
How could an already well-known brand from outlet centers be transformed into one that steals the show from the on-fire Michael Kors (KORS) at Macy's (M), while at the same time stomping on the face of Coach (COH) as it attempts to pick itself up off the ground after years of stale assortments? Well, it's actually happening, as I detected in a fact finding mission at various upper tier department stores.
For the record, Kate Spade is now its own publicly traded entity, has a stock price that is up 98% in the last year, and a forward price-to-earnings multiple (58x) that would make Ben Bernanke and Janet Yellen cringe. Here are a few of the things I like and don't like about the new Kate Spade.
- It's taking floor space in department stores with more eye-catching shops (aka concessions in SEC filings) than Michael Kors and Coach.
- It's taking prime counter space in the watch section at department stores.
- The brand has begun to show consumers a full lifestyle collection in its new retail stores (housewares, stuff other than handbags and wallets).
- Although at $1,265 in sales per share foot there is opportunity to reach Michael Kors ($1,431) and Coach ($1,831), this metric has not grown much in the past six months.
- On a 30% same-store sales gain for the holiday quarter, adjusted operating margins were flat as Kate Spade invested in its future growth. Michael Kors has been able to expand its operating margins even as it invests globally.
All-Time Must Ask Questions for Investors
With any retail brand (could broaden out to consumer brand) that is being valued by the stock market as the next big thing, an investor has to cut through the fluff consisting of new store growth projections and buzzy exec speak and peer into the soul of the company. Remember, there are, by and large, no Warren Buffett-like wide moats around a retail brand, and what appears to be a wide moat one day could be nothing more than a fad that leads to earnings disappointments.
Here are the four questions to always ask yourself on sexy retail brands such as Kate Spade:
Is the brand really new?
- Michael Kors burst onto the scene as a clear counter to Coach's riskless merchandise assortments. Hence, it was something new to the consumer, a trendier brand at more affordable price points.
Will the target consumer return to the physical or online stores every season to buy the latest?
- The stock market is likely valuing it as if the consumer views the brand as their top destination throughout the year.
Does the brand's merchandise become a staple to a consumer's life?
- Michael Kors, for example, has designed its handbags to be very versatile. One could rock its handbags to a business meeting or to an interview.
Is the brand strong enough to have a person buy it at an outlet store but also be willing to pay full price at a store in the mall?
- Coach has been tripped up by more consumers visiting its factory stores.
Read on for glimpses into this retail battleground:
The outlet used to be Kate Spade's only home...
But now it's doing intense battle with Michael Kors and Coach. As you can see, Kate Spade's traditional flare (colors, stripes, floral prints) sticks out compared to Michael Kors (here, blue handbags).
Yes, Coach has started to redesign its department store shops. Pictured is a refresh, though the actual handbags appear as boring as the Coach of 2012 and 2013.
This is a new Kate Spade department store shop in shop. Take note of the mirror on the side of the display case, which is designed to keep the consumer in a dedicated place instead of having them wander to see how a bag looks on their shoulder. Wandering could lead to a sale for someone else's brand.
Watch wars: Michael Kors versus Kate Spade, both offering visually stronger (and more styles) assortments than Coach (watch license held by Movado). See the colorful watch trays on Kate Spade that draw in the eyes? Michael Kors has neutral color trays that blend in. Retail is detail, baby.
-- By Brian Sozzi CEO of Belus Capital Advisors, analyst to TheStreet