Digging Into kate spade

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I am so excited about a fashion retailer stock that I'm ready to write in that breathless prose style of the fashion magazines. Fifth & Pacific (NYSE: FNP), not a California bank but the former lackluster Liz Claiborne, owns one of the very hottest brands around, kate spade. They also own Lucky Brand jeans, Juicy Couture, and Jack Spade, the men's division for kate spade.

Fifth & Pacific is up 57.33% over the last year as it works off its image as the middle aged Liz Claiborne company. In fact, the share price has tripled since September 2011. The P/E is 17.80 but some of their key statistics aren't quite as exciting as their brands. Profit margin is 6.66% but operating margin is a negative -2.28%. It is still a small cap company with a market cap of 1.65 billion and it has a large short interest at 15.30%.

The Star Called kate spade

kate spade is the star in the crown as a higher end accessories and apparel manufacturer. The purses, shoes, and apparel (dresses) run between $300-500 similar to Coach (NYSE: COH) and a little cheaper than Michael Kors Holdings (NYSE: KORS). Items can go for half that at their outlets. Interestingly, they are launching a tier-two line like Michael Kors Michael line of "affordable" apparel to be called kate spade Saturdays first in Japan and then in the US in the spring. Fifth & Pacific completed the purchase of kate spade Japan in late 2012.

In an Q4 preannouncement on January 14 the company said direct-to-consumer comp sales for kate spade were up 27%. At the ICR XChange presentation on January 17, the company provided more color on kate spade's success with 100% sales growth globally with five new stores in the Middle East. Also, in 2013 40 new kate spade stores are opening in North America and 25 internationally. The company boasted average sales per square foot at existing kate spade stores of $1,100. Not Apple store numbers but very good nonetheless. Their kate spade e-commerce database grew 50% in 2012 and like Urban Outfitters their kate spade website is attractive and clean and their blog is entertaining and cheaper than a fashion mag.

Fifth & Pacific also owns higher end costume jewelry companies, Trifari, Monet, Dana Buchman, and Marvella. (Not really of interest except to vintage costume jewelry collectors like me). These and other heritage brands, they call them Partnered Brands, include Liz Claiborne and Lizwear are run separately under the Adelington Design Group division for a total of four main brands.

The company said Q4 direct-to-consumer comp sales for Lucky were up 3% while Juicy Couture was down 2%. The Juicy Couture division put in place a new CEO, Paul Blum, in December in hopes of improving the merchandising and inventory issues that led to soft sales at the division. There may be more problems than a new CEO can handle with Juicy Couture as the fashionable tracksuits and hoodies just don't seem to be as popular as a year ago.

The Big Dog Competitors

Competitors Coach and Michael Kors Holdings have their own interesting numbers, but with Michael Kors as one of the most successful IPOs (it actually debuted December 2011) of last year yet with a P/E of 43.31 and a forward P/E of 26.58 it's been hard for me to recommend. Now that any insider selling overhang is out of the picture Michael Kors is free to run higher to my embarrassment. Analysts have a mean target of $65.00 for some 20% upside and expect five year 29.60% earnings growth.

Coach has a similar P/E to FNP at 17.30 and a yield of 1.90%. Coach has ten times the market cap at 17.53 billion and a long time CEO who came up in the ranks and is highly invested in the company, Lew Frankfort. Analysts have a price target of $68.00 but the stock was at a 52 week high of $79.70 in March 2012. It has underperformed the S&P 500, down 3.80% over 52 weeks.

Coach reports on January 23 and analysts will want to hear those China numbers and how the heritage accessories are doing. For a company with a 54.86% return on equity and a 31.22% operating margin Coach seems oversold here.

Buy One, Get Three Free

For the cost of kate spade, you're getting Lucky Brand, Juicy Couture, and the heritage brands for free. Fifth & Pacific has run over the last year, though not as much as Michael Kors, and that was partly due to getting out from under the Liz Claiborne cloud as well as the spectacular performance of the kate spade brand throughout 2012. CEO William McComb said quite candidly in the preannouncement, "I am optimistic about delivering sizeable growth in 2013 at kate spade and Lucky Brand, while recognizing that the fixes at Juicy Couture will come late in 2013 and into 2014." As a small cap that has run big I would consider it speculative compared to Coach but I think the kate spade brand is brilliant (there I go in that fashion mag style) and I am definitely not the only one.


leglamp has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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