Why Kate Spade & Co.'s Shares Dropped 11% in November

By Travis Hoium Markets Fool.com

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Image source: Getty Images.

What happened

Shares of fashion company Kate Spade & Co. (NYSE: KATE) fell 11.3% in November, according to data provided by S&P Global Market Intelligence, after Black Friday shopping appeared to be weaker-than-expected.

So what

The stumbles for Kate Spade started when Black Friday sales came out showing discounts as high as 70% on items in the company's outlet stores. That's more than last year's discounts and may be a sign that the holiday season won't be very good for the retailer.

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Another driver of the stock's decline was a downgrade of the stock by Oliver Chen at Cowen & Co. from "outperform" to "market perform." He also gave the stock a $16 price target, which at the time was slightly below where it was trading, although it's fallen below that mark now.

Now what

Retail is a fickle business and the handbag market that drives Kate Spade has been flooded with companies all fighting for consumers and sales are a way to bring people in the door. Sometimes sales are a way to drive sales, but when they go too far, sale prices can both reduce profitability and eat away at a high-end brand's value. Customers get used to seeing discounts, reducing the premium the brand can charge, which makes it less attractive to high-end consumers and then leads to more sales to move inventory. It's a vicious downward cycle and the concern is that Kate Spade is beginning to see that cycle take hold.

Investors will want to watch the sales and margin trends for Kate Spade this quarter to see how discounts are affecting the business. If margins are falling, it could be a sign of bad things to come.

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