Kate Spade’s (KATE) stock closed down hard after rising 10% this morning on a strong earnings report. What changed in a few short hours?
The press release revealed healthy 49% Y/Y sales growth and a 5 cent EPS when the market was expecting slower growth and only breakeven results. But when Craig Leavitt (Co-Pres and COO) and George Carrara (EVP, CFO) updated their guidance on this morning’s conference call, the stock started to plummet and didn’t stop until it closed down 25.4% on the day.
KATE’s investors had dined on a diet of blue sky over the past year. The multiples being paid for KATE implied that the company could grow its topline 20-30%+ for the next few years while raising operating margins from <8% to near 20%. Both prospective growth and the margin improvement were called into question today. Previously, investors would hear of no risks, not slowing growth, competitive pressures or slowing inventory. And certainly not that KATE stock was expensive! Yet the risks were discoverable if you knew where to look.
We short sellers thrive on the unrealistic expectations of others, often as expressed in unsustainable valuation multiples. Even if the company is growing robustly, if you are going to pay such multiples, you had better be doubly sure about your assumptions. Because trees don’t grow to the sky.
