Kate Spade shares plunge 24 per cent after margin warning

NEW YORK (REUTERS) - Kate Spade & Co's shares lost nearly a quarter of their value after the handbag and accessory retailer said gross margins were being hit by intense competition, particularly in the Kate Spade Saturday brand.

Kate Spade Saturday sells apparel, handbags and jewellery at almost half the price of the company's upmarket kate spade new york brand.

Profit margins are also thinner for the Kate Spade Saturday brand, which caters to younger shoppers.

The stock, which reversed course after touching a seven-year-high on strong quarterly results, was the biggest loser and one of the most traded on the New York Stock Exchange on Tuesday. The selloff also marked the stock's biggest intraday percentage loss in four years.

Kate Spade said on a post-earnings conference call on Tuesday it expects 2014 gross margins to decline by 1.25-1.75 percentage points from a year earlier.

The company also said it may take longer to meet its goal of 25 per cent adjusted EBITDA margin for the Kate Spade brands and that it may consider pushing the timeframe for achieving the target to 2017 from 2016.

The company's gross margins in the second quarter ended July 5 fell to 58.6 per cent from 61.8 per cent due to increased discounting to clear inventories of Kate Spade Saturday products launched during the first quarter of last year.

"Our most recent view on Kate Spade Saturday performance ... is a somewhat larger investment and less improvement in the adjusted EBITDA margin compared to our plan coming into the year," chief executive Craig Leavitt said on the call.

Rival Michael Kors Holdings also said earlier this month its quarterly margins were squeezed by increased discounting to clear inventory.

"(Kate Spade) moved up the timing of their semi-annual sale by two weeks and they expect to be more promotional than originally planned into the back half of this year," said Jim Chartier, an analyst at research firm Monness, Crespi, Hardt & Co.

Kate Spade's shares were down 22.8 per cent at US$30 in afternoon trading.