Kate Spade (KATE), a designer and marketer of premium fashion brands, has undergone a major transformation. By boldly discarding old labels and emphasizing new trendier ones, the new Fifth & Pacific looks like a very interesting company with a compelling valuation and great potential.
Out with the Old, in with the New
The firm, formerly known as Liz Claiborne, aggressively sold off its legacy brands to focus on three more contemporary lines: kate spade, Juicy Couture and Lucky Brand. But the company's restructuring may not be complete. It has been reported that even the Lucky Brand and Juicy Couture labels could be for sale to private-equity or strategic buyers. Apparel maker VF Corp., men’s clothier Jos. A. Bank and buyout firms like Leonard Green and Advent International have all been bandied about as possible suitors. It’s believed that some have already signed confidentiality agreements for detailed information with the goal for a transaction later this summer.
A sale of one or both of these lines would not be surprising, since future really depends on the kate spade name. Since its 2006 purchase, kate spade has grown to an expected $750 million in sales for 2013 and a possible $1.2 billion by the end of 2016. A key component of this growth is the Kate Spade Saturday label. Launched earlier this year, it's a younger and more affordable version of the main brand, and on its own could grow to as much as $275 million in sales by 2016.
What’s Kate Spade Worth?
Maybe the best way to value Kate Spade is a sum-of-the-parts method because of the probable divestment of its brands. This technique entails valuing each line separately and then combing them for a total company worth.
Juicy Couture looks most likely to be sold. Its latest quarterly performance, though consistent with expectations, has been disappointing. Gross margins were down significantly and sales dropped 11%. The recent hiring of a new brand CEO implies a turnaround plan. There is something to work with, with 75 specialty retail and 53 outlet stores with a respectable $646 of annual sales per square foot.
Assuming annual revenue of around $450 million, which is discounted from the $487 million booked in the last 12 months, with a valuation at 1.0x sales, Juicy Couture might be worth around $450 million, or roughly $2 a share net of debt.
Lucky Brand’s latest quarter was much better. Total sales increased 16%, driven primarily by the timing impact of wholesale shipments. Lucky continued to generate strong full-price selling, which resulted in a sizable direct–to-consumer gross margin improvement.
The label ran 171 specialty retail stores and 50 outlet stores with annual sales per square foot of $462. This line might be worth around $550 million, about $4 a share net of debt, based on 1.1x its trailing 12-month sales of $478 million.
A comparable can help verify if these valuations are reasonable. True Religion, the maker of designer jeans worn by celebrities, recently agreed to be bought for about $822 million. Based on expected 2013 sales of $517 million and an estimated 9% to 10% top-line growth rate, that purchase amount was roughly 1.6x revenue. This deal and a recent buyout of teen retailer rue21 at slightly less than 1.0x sales seems to indicate that our value estimates are probably in the ballpark.
The Real Value
Kate Spade crown jewel is kate spade. Its sales in the last quarter were $141 million, a 63.1% increase compared to 2012. The brand’s 86 specialty retail stores, 41 outlet stores and 35 concessions indicate it has plenty of room to grow and the $1,144 annual sales per square foot figure shows its luxury standing.
Given an estimated $750 million in revenues for the year, the line might be worth around $2.4 billion, or about $19 a share net of debt based on 3.2x sales. Again, comparables can be used to judge this value’s plausibility.
Michael Kors Holdings, which designs and produces a range of award-winning luxury accessories and clothing, is a chief competitor. The company is well liked on Wall Street, with a significant majority of analysts rating it a buy.
In its latest quarter, revenue increased 57.1% to $597.2 million from $380.0 million in the previous year. As of March 30, the company operated 304 retail stores, including concessions, compared to 237 retail stores, including concessions, at the end of the same prior-year period. Kors also had 96 additional stores operating through licensing partners. For fiscal 2014, management expects sales to be in the range of $2.6 billion to $2.7 billion. Based on top of the range, sales of $2.7 billion with an 18% cash earnings profit margin, the company is currently valued at around 4.0x revenue.
Coach also competes with Kate Spade. A leading marketer of modern American accessories and fine gifts, the company has lost some of its allure on the Street. Disappointment over slowing growth has dropped its shares from near $80 to around $55 recently.
Coach announced sales of approximately $1.2 billion in the last quarter, an increase of 7% compared with $1.1 billion in the same period a year ago. On a constant currency basis, sales rose a good but not outstanding 10%. Net income for the quarter totaled $239 million, 6% more than the prior year. Based on analysts' expected sales of $5.1 billion, at a 19% profit margin, Coach is currently valued at around 3.0x sales.
Kate Spade has remade itself into a contemporary fashion house. Given the recent performance of its three remaining brands, the company could be worth around $25 a share on a sum-of-the-parts basis with its kate spade line potentially offering further value. An interesting situation and intriguing valuation, Kate Spade might be a firm to watch.