The Washington PostDemocracy Dies in Darkness

Kate Spade has invaded your closet. Now it’s determined not to be a flash in the pan

A Kate Spade & Co. store in Corte Madera, Calif. (David Paul Morris/Bloomberg)
Placeholder while article actions load

Fast-moving trends have many retailers struggling to define their identity, but Kate Spade New York is finding a place in affluent women’s closets by churning out sleek, functional handbags and whimsical, ladylike clothes that are chic enough for an Upper East Side socialite.

That look has lately helped the brand achieve extraordinary growth. Last year, the company raked in $1.2 billion in sales, a staggering 42 percent increase over 2013. On Thursday, the company announced quarterly earnings results that show its solid growth continued into the first quarter of 2015: Total sales rose 14 percent to $255 million.

The company’s rise hasn’t been without stumbles: In fact, it posted a $55 million loss during the quarter as it shutters its short-lived casual chain, Kate Spade Saturday, and closes its fleet of Jack Spade men’s stores. The move to get rid of those concepts, analysts say, allows the brand to refocus on its namesake brand and, in doing so, potentially avoid a pitfall that has snared its rivals Coach and Michael Kors.

Fast growth in the luxury world comes with a potential downside. Michael Kors has seen slower growth recently and Coach sales have declined as they grappled with a tricky image problem: Their bags became so popular with everyday shoppers that they lost the high-end, trendy fashionistas that helped catapult them to success in the first place.

Kate Spade sees potential for this problem to hit its own business. After all, while its first-quarter sales growth stacked up impressively against the vast majority of the retail industry, its growth was slower than it has been in recent quarters. (This may be why its stock slipped about 8 percent in morning trading.)

And so Kate Spade is looking to fight that prospect with a simple strategy: Fiercely protecting the exclusivity of its brand.

On a conference call Thursday, executives said they have cut back on “40 percent off your purchase”-type sales on their Web site and have asked that their merchandise be excluded from department store sales.  It can be tough for a retailer to resist the siren call of promotions, as they offer the potential for a short-term bounce in sales. But Kate Spade is betting that these markdowns dilute the cachet of the brand, and so they are trying to retrain shoppers to buy their handbags and other goods at full prices.

“This is about continuing to foster aspiration,” chief executive Craig Leavitt told investors during a conference call.

Kate Spade has also put the brakes on expansion of its low-price outlet business, saying last quarter that it plans to “moderate significantly” openings of this type of store in 2015.

Kate Spade’s exclusivity strategy is not just about keeping a lid on deals. Rival Michael Kors, for example, has been trying to grow the audience for its $298 leather handbags and its $325 beach cover-ups. Kate Spade, though, is taking a different tack. It is sticking with the same narrow band of customers, but trying to appeal to her with wider offerings such as kids gear and home decor.

“They are very much cognizant of how to grow sideways without growing too deep,” said Simeon Siegel, a retail analyst for Nomura Securities International.

In February, it launched a children’s clothing line that features items such as a $74 drop-waist dress for toddlers.  The company said Thursday that the line has “performed well” and will be expanded to more department stores and Kate Spade stores this fall.  A baby clothing and gift line is planned for fall.

Kate Spade has also added a display of accessories and jewelry aimed at brides and bridesmaids to some of its stores.  And then there’s its fast-growing home decor category, which Leavitt said will continue to expand into new categories in 2015.

“Kate has done a very good job of ensuring that they are a lifestyle,” Siegel said.

Still, Kate Spade hasn’t always been faithful to its pledge to protect its brand. Its Kate Spade Saturday concept, for example, targeted millennial women who didn’t quite have a budget for the main brand’s $350 pumps or $598 cocktail dresses.  But in January, the company announced it was shuttering Saturday stores and shutting down its standalone Web site.  (It says the concept will continue to exist as a label within its in main stores.)

Saturday was “not only expensive to keep afloat, but it kind of diverted attention from this great growth opportunity they had in front of them,” said Ed Yruma, a retail analyst with KeyBanc Capital Markets.

The protectionist strategy might preserve Kate Spade’s cool, but it could also hem in the company’s long-term revenue possibilities.  And it doesn’t necessarily inoculate the company against affluent shoppers’ preference for brands that feel under-the-radar.

“Particularly in accessories, these businesses have lifecycles,” Yruma said.