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Takeaway: A rare ‘bulletproof’ quarter for KATE – numbers and communication. Our thesis is playing out, and we’re sticking with it as a Best Idea.

Editor's Note: Below is a brief excerpt from an institutional research note on Kate Spade (KATE) along with some related tweets by our Retail analysts Brian McGough and Alec Richards. To access our analyst research ping sales@hedgeye.com.

The Bull Case For Kate Spade | $KATE - kate spade

KATE | Best Comp in Retail (Again)

INVESTMENT SUMMARY AND CONCLUSION:

In January of last year, we issued a note stating that ‘KATE Put Up the Best Comp in Retail’. Roughly a year later, we’re saying the same exact thing.

Sure, a 14% number this year might not seem eye-popping, but...

  1. It went up against an incredibly difficult 28% in 4Q14, and;
  2. Virtually every company in the space has sharply decelerated since last year.

KATE is leading, again. This is a rarity for us to say, but the quarter, and the conference call were both bulletproof, at least based on the standards KATE has set in the past.

We’re not making any meaningful changes to our model, as our thesis is unchanged, and the story is progressing as expected. We like the fact that the company is starting to talk about (gasp!) E-P-S as a financial metric. That’s been our contention for the past six months, that an actual earnings base after seven years of losses would give investors a more tangible valuation metric, as opposed to the ‘adjusted EBITDA’ numbers that no one really trusts anyway.

The current 25x p/e on this year's numbers might seem like a stretch. But the earnings growth rate for the next three years is 40-50%. Using a multiple with a 50% discount to growth in 2017, we get to a $40 stock.

We don’t want to get greedy with a high-beta, high-multiple stock in this tape where its style factors are so clearly out of favor. But when all is said and done, we think the company will continue to execute, and valuation will prove supportive for this stock to work.