Dive Brief:

• Kate Spade shares fell quickly on Wednesday, losing 18% after the fashion design house reported that second quarter same-store sales grew just 4%, missing analyst expectations of a 12% increase.

• Kate Spade executives blamed a slowdown in outlet store sales, which forced deeper discounts, and a drop in sales to international tourists due to the strong dollar’s inflation of prices. 

• The results forced a downward revision in its forecasts: Kate Spade now expects full-year net sales to fall between a range of $1.37 billion to $1.4 billion, compared with its prior expectations of $1.39 billion to $1.41 billion. The company now expects full-year earnings between 63 cents and 70 cents, down from its prior forecast between 70 cents and 80 cents per share.

Dive Insight:

Investors were alarmed by Kate Spade’s swift downturn in Q2, an indication that the company (and perhaps luxury goods in general) will continue to suffer the rest of the year. The company had been reporting double-digit same-store sales increases, but that momentum has apparently halted, which Wells Fargo analyst Ike Boruchow said was a surprise, according to CNBC.

"Today's results are concerning regarding the top-line trajectory of the business, as the brand seems to be slowing much more quickly than we would have anticipated at this stage,” Boruchow wrote.

Executives said Kate Spade would endeavor to improve outlet sales by leveraging flash sales to move inventory online, in a sign that the embattled model has its place in a larger retail context. CEO Craig Leavitt told analysts on a conference call that the company will focus on the full-price customer, a strategy he says is working.

“That’s where we saw gross margin dollars, solid expansion, a higher penetration of full-price sales in our full-price channels and we've seen in previous quarters this was really in the full-price channel," Leavitt said. "The challenge, as I mentioned in my prepared remarks, was really on that sale-oriented customer. And capturing the sales from that particular consumer who is inundated with a promotional landscape, in general, was an additional learning that we had during this quarter.”

Kate Spade has an opportunity with those full price-paying customers, considering that it sold out of many of its flagship handbags in the quarter. The retailer will move to cater to the "splurge customer" later this year by growing a handbag assortment at higher price points.