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Is kate spade the Next Michael Kors?

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

Most investors probably haven’t noticed the strong growth of the kate spade brand since it’s been wrapped up as a small component in Fifth & Pacific (NYSE: FNP). As the brand continues to grow at dizzying comps, it has quickly become a bigger catalyst for the company as a whole.

The former Liz Claiborne is probably even less known having changed names to Fifth & Pacific back in 2012. After selling off numerous brands over the last few years, the company is left with kate spade, Juicy Couture, Lucky Brand, and the Adelington Design Group.

The stock surged on Monday after reporting lower than expected EBITDA numbers for Q4 2013. While the results probably disappointed most investors, the key number was the 27% comp growth at kate spade. With the whole company only worth $1.6 billion, most investors are going to start valuing the company based on kate spade plus the others.

Q4 2013 Highlights

The company reported the following highlights for Q4:

  • Expects full year 2012 adjusted EBITDA of $100 million to $105 million, up approximately 25% compared to full year 2011 on a comparable basis 
  • Provides initial full year 2013 adjusted EBITDA guidance in the range of $120 million to $150 million 
  • Expects 2012 year end net debt to be in the range of $345 million to $350 million
  • Q4 comps: kate spade 27%, Lucky Brand 3%, Juicy Couture (2%).

A couple of key takeaways are that the adjusted EBITDA for 2013 encompasses strong growth if met. Also, Juicy Couture is the major weakness. If that brand quits becoming a negative, the company as a whole could take off. Another key is the below table highlighting how kate spade is now an equal brand based on size:

<img src="/media/images/user_15227/screen-shot-2013-01-14-at-93253-am_large.png" />

If the trend continues in 2013, kate spade should finish the year as the largest sales component of the company. Not only does the company have strong comps, but also starting towards the end of 2013 the company finally was able to invest in new store growth for the brand after years of neglect.

The Next Michael Kors

The debate that investors in Fifth & Pacific will engage in over the next year is whether kate spade has the potential to be the next Michael Kors Holdings (NYSE: KORS) or even Coach (NYSE: COH). The valuation becomes very compelling as the stock as a whole only trades at 3.5x kate spade sales. Assuming a limited valuation of $500 million or 0.5x sales for the other brands, the remaining valuation of around $1.1 billion assigned to kate spade is only 2.4x sales.

For comparative purposes, Michael Kors trades at over 6x sales while Coach trades at nearly 3.5x sales. Coach is now a behemoth with a market valuation of over $17 billion and expected to report yearly revenue of $5.3 billion. If it can trade at 3.5x sales with only 11% growth, than kate spade deserves a higher multiple.

That brings the experiment back to Michael Kors. This concept and stock were one of the hottest items in 2012. The stock doubled after a huge IPO at the end of 2011 and revenue is growing around 50%.

In fact, as Michael Kors has surged to a revenue base of $2 billion and kate spade is only now beginning the new store growth cycle, an investor could easily place a higher premium on the smaller brand with more upside.

Stock Performance

The stock performance over the last year has been very flat after nearly doubling in Q1 last year. The stock has bounced from the $10 to $14 range several times in 2012.

1-Year Chart – Fifth & Pacific Companies

<img src="/media/images/user_15227/sc_1_large.png" />


With the strong bounce in the stock yesterday, investors are clearly focusing more and more on the kate spade results only. As noted above, stripping out a limited valuation for other brands would leave the hot brand trading at an attractive discount to comparable brands. Factor in an eventual turnaround at Juicy Couture and a better valuation for Lucky Brand and the stock is extremely cheap.

Whether now is the time that the stock finally breaks above $14 remains a question, but long-term the valuation metrics suggest that the stock is going much higher. As investors become more enamored with the kate spate brand, the stock as a whole will obtain a valuation commensurate with the massive growth it provides.

Mark Holder and Stone Fox Capital, LLC own shares in Fifth & Pacific. 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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