Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

William L. McComb - Chief Executive Officer and Executive Director

George M. Carrara - Chief Financial Officer, Chief Operating Officer and Executive Vice President

Jennifer Black - President

Analysts

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Corinna L. Freedman - Wedbush Securities Inc., Research Division

Janet Kloppenburg

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Scott D. Krasik - BB&T Capital Markets, Research Division

Jennifer Black

Kate McShane - Citigroup Inc, Research Division

Fifth & Pacific Companies (FNP) Q4 2012 Earnings Call February 21, 2013 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Fifth & Pacific Companies, Inc. Year End 2012 Conference Call, hosted by Chief Executive Officer, Bill McComb. [Operator Instructions] This call is being recorded and is copyrighted material. Therefore, please note that it cannot be recorded, transcribed or rebroadcasted without Fifth & Pacific's permission. Your participation implies compliance with these requirements. [Operator Instructions] Please note that there will be a slide presentation accompanying the prepared remarks. The slides and earnings release can be accessed at www.fifthandpacific.com in the Investor Relations section. There are separate links to the slides for webcast and phone participants.

Please note that statements made during this call that relate to the company's future performance and future events are forward-looking statements within the Private Securities Litigation Reform Act. These forward-looking statements are based on current expectations and are subject to the qualifications and cautionary statements read out in this morning's press release, including those under the caption Fifth & Pacific Companies, Inc. Forward-looking Statements, as well as in the company's annual report on Form 10-K for the fiscal year ending December 29, 2012, under the captions Item 1A Risk Factors and Statement Regarding Forward-looking Statements, which is being filed with the SEC.

The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Also, please note that during this call and in the accompanying slides and press release, sales, gross profit, gross margin, SG&A, SG&A as a percentage of sales, operating income, operating margin, interest expense, net income or loss from continuing operations and EPS are presented on both a GAAP and a non-GAAP adjusted basis. In addition, adjusted EBITDA net of foreign currency adjustments and comparable adjusted EBITDA excluding foreign currency gains and losses are non-GAAP measures that are also presented in the accompanying slides and press release. The company presents EBITDA measures because the company believes that these measures represent a more meaningful presentation of the company's historical operations and projected financial performance as these measures provide period-to-period comparisons that are consistent and more easily understood, and the company considers these measures as important supplemental measures of its performance and believes they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in this industry.

Reconciliation of adjusted results to the GAAP results are available in the tables attached to the earnings release and slides captioned Reconciliation of Non-GAAP Financial Information, which will be posted to the company's website at www.fifthandpacific.com in the Investor Relations section after this call. The company believes that the adjusted results for the fourth quarter and full year of 2012 and 2011 represent a more meaningful presentation of its historical operations and financial performance since they provide period-to-period comparisons that are consistent and more easily understood.

Now I would like to turn the call over to your host, Mr. McComb. Please go ahead, sir.

William L. McComb

Good morning. Thank you for your time and attention as we recap our fourth quarter and year end 2012 adjusted earnings results this morning. Today's call will be brief given that we pre-released results back on January 14 and today's final results are slightly better overall compared to that pre-announcement. I'm again joined by George Carrara for the call. I'll start by reviewing the year in total and the fourth quarter brand results, and George will discuss the P&L and balance sheet metrics. He will also update you on key corporate operating strategies, and then we'll open it up for some brief questions and answers.

So looking here at Slide Page 2. As I said at the ICR conference in January, 2012 saw big wins at our company, some of which were tempered by new challenges. Company-wide total sales in 2012, totaling $1.5 billion, were up 12% on a comparable basis to 2011. Adjusted EBITDA was up nearly 30% from $82 million to $106 million, just above the high end of the range that we had guided back in January when we pre-announced. Overall, gross margin for the year was up 60 basis points to 56% on a comparable basis to 2011. Both kate spade and Lucky Brand saw significant growth in adjusted EBITDA. kate spade further positioned itself for broad long-term growth in all markets globally via a new sub-brand, kate spade Saturday, and via an outstanding omni-channel CRM platform. And corporately, we strengthened our capital structure while further reducing our corporate costs and refocusing our IT strategy on customer experience and omni-channel capabilities. These wins were offset by the erosion of profitability of Juicy Couture in the North American market, as we hunkered down and reimaged the brand via product, store and marketing changes. Thankfully, we believe that we're on track now organizationally and moving in the direction to stabilize the business this year.

As previously announced, due to the unique nature and complexity of our business and what was becoming too long and too costly a ramp into a new distribution facility, we disrupted our own planned migration out of our Ohio DC, and as you'll hear from George shortly, we've finalized now a new plan that we believe meets all of our goals, a plan that we're very pleased with. In all, I'm proud of our teams and what they accomplished last year, and I think we're set up now, across the board, for good things in each part of the business this year.

Turning here to Slide Page 3. We've prepared for your reference a full-page summary of our quarterly direct-to-consumer comps for 2012, including total year comp, a stunning year for kate spade, sustained growth at Lucky Brand, which also posted incredible margin traction, and yes, a tough story at Juicy.

On Page 4, you can see that with the acquisition of kate spade Japan, the kate spade business posted total sales growth of 57%. We now have 153 direct-to-consumer points of sale, largely reflecting the inclusion of Japan in the count. Comp sales productivity is approximately $1,100 a square foot. Note that this excludes kate spade Japan, where average sales per square foot amount to nearly $1,400.

We're all excited about this brand's unique long-term potential, spanning so many different lifestyle product categories and has the ability to spawn sub-brands, the ability to leverage the platform we've been building to achieve very high operating margins and the ability to travel to nearly every market around the globe. As I announced in January, we're planning to host 3 single-brand investor days in 2013. The kate spade Investor Day will be held on March 15 and is an invitation-only event for the financial community. It will be webcast. We view this day as a great opportunity to see the management team and hear our blueprint for growth. With these single-brand events, we think that we can better highlight the full potential of each of these businesses.

On Slide Page 5, you can see the summary for Lucky Brand. Comp sales were up 3% during the quarter. We estimate that Superstorm Sandy cost us around 2 additional points of comp growth on this business. Productivity at Lucky Brand grew 7% to $461 per square foot. Overall reported sales were flat, as increases in retail and full price wholesale were offset by decreases in shipments to what we call the value channel, resulting from cleaner inventory levels and timing. But gross margin was up for the quarter nearly 200 basis points compared to last year.

For the year, Lucky Brand delivered gross margin growth of 230 basis points. We believe Lucky is now poised for sales growth, having addressed the operations and merchandising and design functions. Innovation is now the story fueling growth. This year, we'll have a full year impact of the plus-size launch. The reconceived Outlet product will deliver all year. We launched our kids license for spring, and we'll launch our new handbag license in the fall. We expect to sign 6 international territories for launch during third quarter. We're stepping up the social media and digital initiatives dramatically, and we're taking lots of learning on women's fashion, especially tops, and broadening assortments there while introducing 2 new major denim initiatives for 2013.

On Slide Page 6, you'll see that Juicy Couture posted a 4% decrease in total net sales, with comps down 2%. We focused on keeping the inventory turning, which worked, and we ended the quarter clean, but we took a lot of pain in gross margin. Last week, we announced that LeAnn Nealz resigned her post as President and Chief Creative Officer. And while she leaves us with a much improved brand imagery, we still have real work to do this year on product assortment. Thankfully, we're full steam ahead there under Paul Blum's leadership, with a very clear sense of what we're doing to fix the trend, from Outlet product and visual merchandising to simpler assortments in full price stores.

Say what you want, but in the whole landscape of brands globally in the women's apparel and accessories field, Juicy has the rarest of great qualities, a top-selling fragrance line, a very global base of brand awareness, a clearly differentiated brand equity with ties to iconic Los Angeles, Hollywood and Malibu. So stay tuned, folks.

The Adelington Design Group posted a sales increase of 12% apples-to-apples versus fourth quarter 2011. This year, the Group is pitching new business to additional clients in all price tiers on the private label side, while serving the mid-tier partners with their unique blend of value engineering, design strength, trend right merchandising, and even greater penetration at opening price points, which is where the segment is now growing the fastest.

And finally, here on Slide Page 8, let me wrap up the quarterly brand summary with this brand financial slide. During fourth quarter, kate spade posted a 26% adjusted EBITDA margin on adjusted net sales of $173 million, up from a 22% adjusted EBITDA margin in 2011. Lucky Brand's adjusted EBITDA margin was down and its adjusted net sales were flat to year ago. The slight decline in margin was expected, as discussed previously on the third quarter call, due to differences in the timing of recognizing reserve adjustments and certain corporately controlled expense items year-over-year, Juicy Couture's adjusted EBITDA margin fell from 19% a year ago to 8%. Corporate costs came down from $28 million in 2011 during fourth quarter to $15 million in 2012, primarily reflecting the last big cost reduction in our back-office functions last summer, as well as decreased discretionary spending and facilities costs. The overall adjusted net sales for the company during the quarter were $487 million, with an adjusted EBITDA margin of 14%.

Let me now hand the call over to George Carrara to walk you through the total Fifth & Pacific Companies picture. George?

George M. Carrara

Thanks, Bill, and good morning, all. Page 9, our fourth quarter adjusted P&L summary. Adjusted net sales for the fourth quarter were $487 million, up $59 million or 14% versus the comparable brands in 2011. This increase was driven by a $62 million or 57% increase in kate spade, which includes $16 million of sales attributable to the October 31 acquisition of kate spade Japan.

Additionally, we experienced notable increases in the Lucky DTC and full price wholesale segments, the Juicy e-commerce segment and Adelington Design Group's private label business. These were offset by decreases in Juicy's other channels and the Lucky wholesale value channels explained by Bill. The adjusted gross margin rate decreased 120 basis points to 55.5% versus the comparable adjusted gross margin last year. This was driven by a drop in gross margin in Juicy of approximately 800 basis points, as we aggressively managed the markdown cadence to end the year at an appropriate level of inventory. All other segments of Fifth & Pacific experienced gross margin expansion during the fourth quarter, especially Lucky with an increase of approximately 200 basis points, driven by both the full price wholesale channel and all DTC segments.

Adjusted SG&A was up $11 million for the quarter versus the comparable spend in the third quarter of 2011, a year-over-year increase of 5%. As a percentage of sales, adjusted SG&A decreased to 47% versus 50.9% in LY, an improvement of 400 basis points. This resulted from the corporate realignment actions initiated in June, the 20%-plus reduction of Juicy staff which occurred in September and our continual efforts to improve operating leverage at each of our brands.

Adjusted EPS net of foreign exchange transaction adjustments was $0.12, $0.02 better than our comparable result last year. Although the $13 million or 23% increase in adjusted EBITDA would correlate to an increase in EPS of approximately $0.07, we incurred incremental noncash impairment charges related principally to certain Juicy specialty stores. I will note that we currently have no plans to significantly reduce our specialty store count. We currently operate 78 Juicy specialty stores across North America and Europe, and we believe that this is an appropriate level commensurate with the positioning of the brand in the marketplace. Our view is that once the contemplated merchandising corrections are fully implemented, the substantial majority of our Juicy specialty fleet will return to a meaningful level of profitability. We experienced the same dynamic at a similar point in the evolutions of both kate spade and Lucky Brand Jeans.

Now to Slide 10, some selected balance sheet and cash flow data. Accounts receivable are up 2% to $122 million. This increase is principally driven by a 40%-plus increase in sales in the wholesale channel at kate spade, coupled with a 20%-plus increase in Lucky's full price wholesale channel. These increases were offset by the impact of brands exited in the Adelington Design Group and the value channel decreases at both Juicy Couture and Lucky.

Inventory's up 14% to $221 million. In the next slide, we will give you more detail on inventory, but it's worth noting now that approximately $14 million of the Q4 inventory balance is related to our acquisition of kate spade Japan. Next, total net debt was $347 million as compared to $265 million at the end of Q4 2011, an increase of $82 million. This results from the $41 million acquisition of kate spade Japan, the buildout of new doors, principally in kate and Lucky, and funding of working capital to support the accelerated growth of kate.

We also made IT investments to enhance our DTC POS and omni-channel capability. The change in the total debt balance over the last 12 months also includes the impact of converting $49 million of our convertible notes into equity, repurchasing the remaining balance of our euro notes and issuing high-yield notes, as discussed in our prior call. Finally, CapEx increased to $86 million, related to the reasons just discussed.

Slide 11. Slide 11 provides some additional insight into our inventory levels. Total inventory was up 14% to $221 million. Excluding the kate spade Japan inventory of $14 million, inventory was up 7% or $14 million. This increase reflects an investment in kate spade to support its top line growth, offset by the ADG brands that were exited and/or discontinued. With respect to Juicy and Lucky, it's important to note that their inventory levels ended the year on plan and relatively flat to LY.

Turning to Slide 12, an update on our critical operating strategies. First, let's discuss our recent distribution and logistics development. During our October earnings call, you'll recall that we discussed some issues that were encountered during our migration to the new Li & Fung distribution center in California. At that point, we and our partner, Li & Fung Logistics, temporarily suspended the migration out of Ohio, pending a resolution of the related issues, and embarked on an extensive evaluation of the new platform. Given the unique nature and complexity of our business, we mutually concluded that completing the migration to the new LFL facility would have resulted in a long and costly ramp, as Bill noted earlier. Accordingly, we mutually agreed to let the contract expire on January 31, and we entered into a new agreement with Ridge Global Services, a third-party facilities operation management company that I worked with during my tenure at Tommy Hilfiger. Ridge Global will operate out of our Ohio facility. Additionally, Ridge has entered into a collective bargaining agreement with Unite and will engage certain of our employees.

I'd like to reiterate that this does not affect our relationship with Li & Fung on the sourcing side of the business. We are very pleased with this decision, as it allows us to maintain continuity at economics that work for us. Ridge will utilize our existing Ohio systems and equipment to provide distribution services similar to our previous arrangement with LFL. This proven platform in Ohio has successfully supported the complex needs of our multichannel businesses. Further, the economics of this arrangement are both compelling and flexible. We will compensate Ridge at a variable rate per unit with no volume minimums, and any efficiency-enhancing platform modifications that we initiate will be credited to us in the form of a rate reduction.

Once we are beyond both the transition and then through the Ridge startup phase, we expect this model to result in a 10% to 15% reduction in unit costs. After some enhancements to the Ohio platform planned in 2014, we project a longer-term benefit in the range of $8 million to $12 million annually. In January, we executed a step in realizing these savings by consolidating the leadership of our operations and information technology teams. We have already begun to transition back to our Ohio distribution facility and expect to complete this transition during Q2. Our 2013 guidance includes approximately $4 million of redundant costs associated with operating out of both the Ohio and California facilities during the first half of 2013.

Now let me give you an update on some other items. Our e-commerce replatforming. In October, we told you that we had initiated the planning and development of a new platform to support this high-growth segment. We are now in the final stages of testing this new platform, which includes a redesigned web store and a new order management and fulfillment system. Our plan is to sequentially migrate our brands to this platform, beginning sometime in March, once we complete the testing process. The migration process is expected to last approximately 90 days, so we should complete this initiative during Q2.

Next, our new POS system. We continue to pilot a new POS system while our implementation partner proceeds with development of the related Phase II mobile functionality. We expect to begin the all-store rollout during Q2 and complete such during Q3. And then, once all stores contain the new POS system, we will deploy the mobile functionality in time for fourth quarter. Our corporate infrastructure. During Q4, we concluded the last phase of our $15 million corporate realignment which we initiated in June. You can see the positive effect of this within the corporate line item back on Slide 8. With this initiative behind us, our corporate infrastructure is now appropriately sized to support our business needs, so you should not expect further significant reductions to this line item, which we expect to be approximately 3.5% of consolidated sales on a prospective basis. Instead, we will focus on the $8 million to $12 million opportunity within our new logistics model. I should note that logistics costs are captured within brand SG&A. Finally, on the real estate front, we are working on sale leaseback opportunities related to our Ohio and New Jersey facilities.

With that, let's move onto our 2013 outlook on Slide 13. Let's update and reconfirm a few key metrics that are embedded in our financial outlook for 2013. We gave a preview of our 2013 outlook in January. As Bill indicated, we are reiterating our adjusted EBITDA guidance for the year, in the range of $120 million to $150 million net of foreign currency transaction adjustments. Incorporated within this range are annualized direct-to-consumer comps for kate spade in the low teens, Lucky Brand in the mid-to-high single digits and slightly negative to flat comps at Juicy.

Additionally, I'd like to emphasize that the quarterly flow of the adjusted EBITDA performance will be substantially similar to 2012, with a heavy back-end weighting. For corporate overhead, as discussed, we are still targeting $66 million to $68 million. Depreciation and amortization, $75 million to $80 million. Annual CapEx is targeted at approximately $115 million. We expect interest to be approximately $45 million to $50 million for the year. Our normalized tax rate for 2013, applied to adjusted earnings, will be between 38% and 40%. I should note that we ended 2012 with more than $550 million of NOLs. And lastly, our forecasted full year 2013 basic share count is approximately 120 million shares.

Now back to Bill for some closing comments before we open it up to Q&A. Bill?

William L. McComb

All right. Thank you, George. So as I said in the beginning, 2012 was a year of progress marked by industry-leading growth at kate spade, a significant improvement in performance at Lucky Brand, tempered, however, by issues at Juicy Couture that we believe are now being corrected under Paul Blum's leadership. I feel good about 2013 so far. In the meantime, I want to reiterate what we said back in January regarding the whole portfolio. We remain fully committed to delivering value to our shareholders. This includes making resource allocation decisions today that support strong, long-term growth within our current strategy, as well as being thoughtful regarding alternatives to our current multi-brand portfolio approach that unlock value. I realize that statement inspires a lot of questions, but aside from reasserting that commitment now, I won't provide any answers during Q&A to any specific questions on that issue. So with that ground rule firmly in place, let's go ahead and open the call for a few questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Edward Yruma of KeyBanc Capital Markets.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Can you talk a little bit about the performance of some of the new kate doors you've opened? I know this was obviously a critical time for you to open some of these new doors. And kind of some of the economics that you're targeting for the new doors you're looking at in '13?

William L. McComb

Yes. Ed, this is Bill. Let's just -- let's say this, and we'll give probably a little more color on this on March 15, but the range that some of these new stores are opening up at on a run rate in terms of productivity and dollars per square foot is in the $650 to $750 range, between $650 and $750 a square foot. And our planning values, then, for the new fleet of doors follows that path. So that's -- I'm even more bullish there than I was, say, 6 months ago. Well, 6 months ago, we were still trying to figure that out and we were learning, and some of the doors that have opened have been able to help us with our models that way. So pretty good.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Great. And I know you reiterated your EBITDA guidance, but you guys didn't give some of the segment detail that I believe you gave in January. So first, I want to be clear that the EBITDA by segment hadn't changed. And then, I guess second, as we look at Juicy, I think you had forecasted a negative $5 million to $5 million EBITDA target for 2013? Did that contemplate kind of some of the struggles that you're seeing in the business today that precipitated the change in some of the leadership there?

William L. McComb

There's virtually no change in the character or quality or components of the EBITDA guidance. I mean, I think the more -- and so yes, I mean, frankly, nothing has really changed as far as those callouts at Juicy. What I will say, and George may even elaborate more, I think George added a little more color around the guidance by saying that it will basically follow the flows of last year. More than 86% of the EBITDA in 2012 came in the third and fourth quarter. This year, it will probably be even more concentrated to the back half given that our -- that 50% of our new kate stores opened in the third and fourth quarter and 6 -- and 2/3 of the Lucky doors opened in the third quarter. And so the way that you ought to think about that, I think, is once again, first quarter will have a negative EBITDA. And if last year, if it was 14%, 15% in the first half and 85%, 86% in the second half, it will probably be a little more skewed toward the back half this year. And I think that on -- with that, there's really not much more to say, George, is there about the guidance?

George M. Carrara

Right. And on Juicy, we'll just reiterate what we said in January, that there's sequential improvement planned by quarter.

William L. McComb

That's right. So really, I mean, no changes at all on Juicy. We're not any more bearish or bullish. We're really comfortable with our plan. I feel really good about it, but -- and where that team is going, but no changes.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Great, and my final question. You're guiding to mid-to-high single-digit comps for Lucky. That's obviously an acceleration off of your recent experience and your quarter-to-date experience. I guess, how do you think about the Lucky comp as it progresses through the year, and kind of what gives you confidence that you can hit a mid-to-high single-digit comp?

William L. McComb

It's all about the incremental, the new initiatives that are adding upsell and cross-sell opportunities to the stores. So it's -- we're very comfortable with the 2 Denim programs that we're launching, one that is out now, it's the t-shirt jean, and then we have a big one in fall, which I'll hold back from describing. But it's really -- it's the initiatives that the team has in place on tops. It's the launch of handbags in the back half. It's the addition of kids to the business, which is largely e-com, but in more than a dozen stores right now and expanding to 2 dozen by the back half. And those things are productivity boosters. So there's the answer.

George M. Carrara

And fourth quarter results were also impacted adversely by Hurricane Sandy by about 200 basis points. So we should note that.

William L. McComb

That's right.

Operator

Your next question comes from the line of Corinna Freedman of Wedbush.

Corinna L. Freedman - Wedbush Securities Inc., Research Division

I just had a quick question on your wholesale philosophy. If you could discuss your plans for '13 by brand, just what you see for growth and categories and customers, even? Is there an opportunity, if Juicy isn't working in some of the higher-end stores, to roll it out to maybe a mid-tier department store? And if you could just elaborate on the Lucky wholesale initiative, that would be great.

William L. McComb

Well, I'll take it from the top on kate. There's really no change in our philosophy in any of these 3. So that's the headline callout. We have a very comfortable, secure, brand-appropriate and strategically smart strategy with kate spade. We have outstanding partnerships with Nordstrom and Bloomingdale's and Neiman Marcus, and with Holt in Canada. And these are really important. They are -- our philosophy is that they provide the appropriate environment, the right strategically sound adjacencies and incremental brand awareness. In certain categories where department stores separate brands, it's an opportunity -- by product category, it's an opportunity to launch a category and get even more traction, say, in market share in a category like watches than we might even through our own single fixture rollout in our own stores. So it's about partnership, it's about delivering a customer. And therefore, you may hear us talk about growth in wholesale, the good news is we're seeing the same kind of growth rates with that fixed strategy in wholesale that we're enjoying in our own stores, and that's one of our goals. We want to be able to deliver capital-efficient profitable growth for our department store customer and partner, and we want our brand to be a magnet for more traffic for them. But we're not rolling deeper, or -- we like the doors that we're in. There will be new categories. We're in the midst of launching the new fragrance. That really has a special focus on Nordstrom right now. And that's a good example of how we're exercising that strategy that I described. Lucky Brand is a business that is enjoying a very healthy department store -- limited department store partnership. Macy's, in particular, where we have about 200 doors at Macy's, we're seeing brand traction in jewelry. We're seeing fantastic business on our -- on men's and women's apparel. We think that the handbag business will be excellent for Macy's. Macy's enjoys -- the whole department store channel enjoys in that upper-price tier of the better zone. A fantastic, very large shoe business. I think it would surprise you how big it is. But since it is a licensee, I don't want to quote the number for you. But -- and that, to us and to our partners as well, this brand can get a lot bigger there. But again, we're not looking to change the penetration within Macy's in terms of the overall number of doors, just maybe a nominal adjustment. And the same goes for Belk's and Dillard's, where we have a good business. But again, the same basic strategic principles that I described. At the store level, they have to be able to deliver our full-price customer. And there's a lot of things that we could do with all 3 of these brands to let a lot of the string out on the kite and rack up some bigger EBITDA. We have competitors in each segment that are really freewheeling with it. We believe -- I mean, this -- our corporation is now anchored and run by direct-to-consumer retailers. And we know that what you got to be careful about is not getting the wholesale business that puts pressure on markdown cadence in our own stores. So we're being very careful with that. So really, no change there. And Juicy, the flat-out answer to your question is no. We're not desperate. We're not going to do that. We're going to build the business back through our own stores and productivity. We have a ravenously growing business in e-commerce, which tells us a lot, and it tells us a lot about our merchandising and store assortments and how we manage inventory for stores. We have a business, by the way, in Asia and the Middle East, that -- whose comps were up 25% in the -- of total sales. Total sales were up 25% in the fourth quarter of last year, a very healthy and growing business. So no, we -- I'm not risking those things. We're not -- and we have nothing against the mid-tier or the better-zoned department stores. You can tell from what we're doing at Lucky that there could be a good and right way to do it, but that's not -- we're not making a strategic turn with that right now. In fact, one of the things that I'm very proud of is, although we have a disappointing EBITDA and EBITDA margin right now at Juicy, it's -- we're following the same -- we're using the same tools and following the same steps that we did to turn kate and Lucky. And as tough as that fourth quarter may have been, we had no markdown liability to speak of in wholesale. We have a very clean channel and we want to build it the right way up. So there are really no substantial changes. It's a continuation, and hopefully, that verbose answer to your question gives you the strategic principles of how we think about wholesale.

George M. Carrara

And one short to add, in Juicy, our wholesale business is now reduced to an insignificant amount in our guidance. So our risk profile has improved in there -- in that context.

Corinna L. Freedman - Wedbush Securities Inc., Research Division

Okay, that's helpful. And one follow-up, if I could, on Juicy. Could you talk about the inventory or the magnitude of the inventory decline there you might be modeling in for 2013? And how we should think about sales, if that relates to it?

William L. McComb

We're not -- we ended that -- we ended the year clean and it's the right level. And so that's how we would look to end the year next year, too, in terms of ending year balances.

George M. Carrara

And recall last year, at this time, we were light on our inventory buys. So we rectified that. So although our inventory ended relatively consistent with LY, the complexion of that inventory this year versus last year is much better, and the buys are right size versus 2012. So we'll be in a much better position, and you can see that now at the stores.

William L. McComb

And what we're looking for, Corinna, the more important metric is quarter-on-quarter improvements to full price sell-through.

Operator

Your next question comes from the line of Janet Kloppenburg.

Janet Kloppenburg

Just a couple of questions. Well, actually, more than a couple. Bill, any updates on a partner for Paul Blum at Juicy on the merchant front? And staying on Juicy just for a sec, should we expect that perhaps the Outlet business would turn out to be stronger sooner than the full price business?

William L. McComb

Yes. Yes to both. Paul will have an announcement soon. So I'm not going to say whether that's in 2 weeks or 4 weeks or 6 weeks, but it's kind of in that basic zone, 2 to 6 weeks. And I won't comment any more on that. On -- I am very bullish about what Juicy Outlet can and will do. I mean, I know from my other 2 businesses that when you put the attention back on it, I think the biggest day symmetry and the biggest gap is -- that the 3 brands have ever had is Juicy right now. It's Outlet -- the treatment of Outlet is so far lagging, not only in terms of the store aesthetic and visual merchandising, but the fixturing and the product load that it can hold and the thinking around a smart product for that value channel customer. And so we -- you can tell from the guidance that we haven't been forecasting hockey sticks in the back half on anything, particularly at Juicy. But we do believe that Outlet can see a fast and dramatic pickup in response to the things that we're going to do in the back half of the year. And Paul's all over it. And so that's a potential upside, Janet.

George M. Carrara

And we have plans to refixture a portion of our outlets, and you will already see a broader product assortment in the Outlet channel.

Janet Kloppenburg

Okay, and George, I think you've commented on the balance between the fashion and the more basic product at Juicy. When should we expect that balance to come into play? Is that a back half situation?

George M. Carrara

Yes. As we said in January, it's a back half phenomenon. We'll see it, to a large extent, in fall, and then to an even greater extent in holiday.

Janet Kloppenburg

Okay, great. And then on the Lucky EBITDA for the fourth quarter, gross margins were up sharply. So there was just some expense shifts that caused that EBITDA to come in lower, George, is that what happened there?

George M. Carrara

Yes, on the brand direct-operating profit business -- basis, we would see an improvement in the overall profit of about 200 basis points. So it was a function of corporate allocations.

William L. McComb

We talked about it on the third quarter call.

Janet Kloppenburg

And is that opportunity for gross margin improvement ongoing at Lucky?

George M. Carrara

Yes. We're looking forward at 100 to 150 basis points of potential improvement.

Janet Kloppenburg

Any comment on the performance of the t-shirt jean, Bill?

William L. McComb

I'm not going to make any comments on anything during this call on first quarter.

Janet Kloppenburg

It looks really good.

William L. McComb

It's a great product.

Janet Kloppenburg

And then lastly, on the Saturday launch, I was wondering if we should expect that to have any detrimental effect on kate spade's margins? In other words, you're launching a new business, it's...

William L. McComb

Yes, Janet, here's what we've said, and we said this publicly here. We've said that on an apples-to-apples core business basis, the kate spade New York business is going to see a couple of hundred basis points of margin growth in 2013. But we've said that kate spade Japan, being integrated in, is -- on an accounting basis, dilutes it. On a total systems basis, it's accretive in terms of the accounting convention. It actually, on a margin basis, dilutes it. And that's because -- I think you know that kate spade New York enjoyed wholesale shipments to what was the Japanese affiliates. So that's a nick, and kate spade Saturday is the second component that nips at the margin. And the other 2, smaller, are Jack and our investment in the joint venture in China. So net-net-net in the kate spade franchise, overall, the margin is down a couple of hundred basis points as we plan it. But the core businesses, actually, the margin is going just the right way. So the impact from Saturday, it probably ranks second out of the 4, and it's -- we're not lavishly spending. The fact that it's a capital-light model in terms of how we're rolling it out with e-com and pop-up stores, but it definitely is a margin diluter.

Janet Kloppenburg

And just lastly, Bill, back to the Lucky, the sales per square foot are pretty healthy right now. Is your goal for that to come in around $500 longer-term? Or should we be thinking...

William L. McComb

Over $600. Over -- we're managing the business to see that north of $600. And I can tell you these guys have done a beautiful job in the top 50, 60 stores getting that number significantly even north of that. And now they're taking in those initiatives and rolling them out.

Operator

Your next question comes from the line of Mary Gilbert of Imperial Capital.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Could you talk about Paul Blum's initial observations at Juicy and how we should see the direction of the design changing, if we would see it change? Could you give us some idea of what we're going to see with Juicy going forward in terms of its design direction and what Paul Blum has observed in his initial...

William L. McComb

I think if Paul were here, he'd say these things. First of all, let me say, his excitement level is -- it's contagious. I mean, he called me on Saturday just because he wanted to share a big idea that he had that was exciting. And I mean, it's -- so that's the first thing that I want to give you in macro. He loves the business and he sees so much opportunity. Paul would tell you that he's not going to go fix what's not broken. The design direction is fantastic. It is -- we have made so much progress on that. I've said it a thousand times. We've -- Leann reimaged the business, from a marketing perspective, from a store layout perspective and, clearly, the product. It -- she nailed it. She absolutely nailed it. Where the callout is, is around the assortment. We've said that we've skewed what ought to be maybe the top 20% of the line. We've made the whole thing out of that. I've said it's like making a meal out of hollandaise sauce. And so, I mean, some of the metrics that show that are like the average retail price of -- per unit in the back half of the year was up 28% versus year ago. We skewed it too much to the fashion component of the assortment. But it's a fashion brand, and Leann brought that back to the business. And so if I can -- if I give you my perspective, in '08 and '09 and 2010, we were -- there was no new fashion component. Runway trends, key components of the design like color, print, pattern, fabric, we were missing virtually every key trend. We've almost gone to the other guard rail, which is we've nailed it and every single relevant trend of the season is active and present. And I've said, we've lit up the 4 corners of influence in the business, the bloggers, the editors, the alpha-dog customers that are the fashion it-girls. But in order to make our numbers and make it the -- to deliver on the full component, the merchandising in the store, and I don't mean visual merchandising, although that ends up taking on a component, the amount of goods that are on folded tables, those kinds of things, that's what needs to change. And he sees it loud and clear. He's excited about the opportunity in a much bigger way with intimates, with footwear, getting the handbag. I mean, I've been talking about this a long time. There's no question that what hasn't tracked as well is the design in handbags. But I will tell you, I told you that holiday 2012 was going to be better and it was. And spring, right now, is a giant step forward. Take a look in-store and you'll see silhouettes and you'll see design elements that are right where we need to go. And by the way, it gets even better for Fall/Holiday of 2013.

George M. Carrara

So in Fall/Holiday, we'll see more compelling opening price points. Another example will be a greater penetration of denim. We've been experiencing an outperformance in the sales-to-stock ratio of denim, and we're also leaving a little bit of open-to-buy on the table for our handbag assortments. So we plan to chase that in season.

William L. McComb

But more with our graphic-tee business, which is always a mainstay for Juicy, dialing up the separates in the tracksuit line. And there's scads of these discussions. So your question was what are the callouts that Paul's got? And design, it's not the -- I've heard none of that from him. I mean, it all is -- honestly, it's in line with all of the things that we've laid out, and I think that he is organizing the team in such a way as to be a lot more focused, now that we've nailed sort of the top end of the pyramid, on the middle and the bottom of the pyramid and waking up the opportunity in Outlet. And I think those things are going to -- I said, this isn't a do-over. I said that we're just over halfway there, I think, 50% to 60% of the way there in terms of all the things that happen underneath the tip of the iceberg to make a business turn. I think that this isn't like -- we're not going to drop to 20 and then move forward. He's sort of picking up and moving forward on those initiatives.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay, and so the new design director that you're going to hire to replace Leann is going to sort of further this and then just improve the assortment so that you'll have an edited line, I guess?

William L. McComb

Yes. The continuity -- continuity is the order of the day. Leann has, thankfully, brought a very tasty team of designers and concept people to the table. And they're outstanding. And they're good at what they do and we're going to stick with it. And that's the direction. We have a clear brand book. We've spent money in capital. We're not going backwards. Even the marketing is right on track. Leann is brilliant and Leann did a great job. And you know what? It's -- we're just moving forward from here. But -- that's it.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay, great. That's helpful. And then could you talk about the initial sales on kate spade Saturday so far? I know it's just a preview, but can you just kind of give us an idea?

William L. McComb

Yes, it was terrific. It was at fab.com and it was a single-day event, or just over that, and it more than met our expectations. We're very happy with it.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay, it's perfect. And then one thing on the -- how we should look at revolver borrowings going forward, just on the average borrowings? Can you -- George, can you give me an idea of how we should look at that?

George M. Carrara

You can expect it to be in the high-double digits in terms of millions.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Yes, so do you mean like $30 million to $50 million, in that range?

George M. Carrara

No, I think it will be higher than that, probably more like $75 million to $100 million.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

That would be the average?

George M. Carrara

Yes.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

The average. Okay. And then can you just give us the peak and the trough?

George M. Carrara

I -- we don't have that data with us. So...

Operator

Your next question comes from the line of Scott Krasik of BB&T Capital Markets.

Scott D. Krasik - BB&T Capital Markets, Research Division

A few questions on kate, Bill. So any -- because of the assortment or introductions, any big differences either first half, second half, on that low teens comp expectations?

William L. McComb

I don't want to break it out any further than that right now. I mean, for planning values, just to spread that out across the year. And as I actualize the quarters, we'll give you more color on that.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay, and then can you say what the comps were in your Japan business in the fourth quarter?

William L. McComb

It -- Japan was not comped.

Scott D. Krasik - BB&T Capital Markets, Research Division

Right, but I mean, they had a business, so just if you went off or out? Are there comping in line with kate in general? Is it better or worse?

William L. McComb

Yes, I mean, it's what you would call high comps for the industry, maybe a little bit lower in numbers, but high comps. And you know what, I'll answer that at the -- I'll make sure we answer that for you at Investor Day.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay. No, that's helpful. What percent of your assortment are you tailoring to geography? And will that increase or decrease as you increase your international penetration?

William L. McComb

You're speaking about kate spade?

Scott D. Krasik - BB&T Capital Markets, Research Division

Yes, kate only.

William L. McComb

I -- you know what? I don't know. I don't know. It's not a lot. And what I -- the one thing I can tell you is that both the size and style actually works very well for Japan. So there isn't a lot of that. I'm going to say it's low-single digit percentage, and it may be really low, but that's another thing I can ask Craig to opine on, on March 15.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay, and then just generally for kate spade, do you expect price points to stay pretty consistent over the next year or 2?

William L. McComb

Yes, absolutely -- I mean, yes. Here's the part that's consistent. We know what we're -- we know where opening needs to be and we know where the bread and butter is. We are always -- one important thing on these businesses that we learned in 2009 is never assume that you can -- never assume that you know how high is up. There's some fantastic stories in kate where we've flirted, not in huge quantities, we're talking about the top of the pyramid, but where we've pushed the price points and have seen some of the highest and immediate -- most immediate full sell-throughs of any parts part of the line. That's true across these businesses, by the way. We have some unbelievable stories, in this last year at Juicy, at the highest price points. So when I talk about Juicy, when I talk about the mistake being too high-priced, that's only talking in terms of where the average is, as opposed to where the opening and where the high end is.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay, that's great. And then just last, what do you envision the role for outlets in kate spade to be? Is that a multiyear process? There's a lot of room in full price now, and what do you expect there?

William L. McComb

It's always important to look at the ratios between, and it's always important to make sure that you're not doing something stupid on one end that hurts -- doesn't hurt the other. There is a huge growth opportunity in full price and in Outlet, separately. And I can tell you, we know at kate spade that, interestingly, the value channel, the Outlet and our design for flash sales online, which are limited to a couple of days a year, are events and entry points for the brand. Actually, it's working for us. Strategically, it's -- we're converting people into the total franchise. And that there's very little cannibalization or cross-shopping between the average Outlet shopper and the average full price shopper at kate. Obviously, you can just look at the numbers. We're way under-stored in both channels. So clearly, there's going to be a long growth run in both of those. And we're going to do it in a strategically right and careful way. Everyone says that. I think we really do that.

Operator

Your next question comes from the line of Jennifer Black of Jennifer Black & Associates.

Jennifer Black

I have a couple of questions. I guess, first, we've talked about Lucky and the productivity and I was curious to know what percent of the men's and women's denim is stretch? I know you've converted most of the styles and also at the outlets. And then I wondered also what percent are accessories at both full price and Outlet? I love the scarves that are in the newest floor set at full price, so I'm just wondering a little bit more about productivity, and then I have follow-up questions.

William L. McComb

Okay, so at Lucky. So for the first question, the stretch is -- boy, it's hard to answer that question because it depends on what you mean by it, but so I'm going to say this. Skinny is about 40% of our women's business, and skinny is stretch. And we have different amounts of stretch in the different fabrics and the different cuts. But I think that gets to your question. Just over 40% of our women's denim business is in fits and cuts that have been launched in the last 18 months. And those are the ones that are leaning to stretch and skinny. So kudos to that team. I said 1.5 years ago that their big -- or 2 years ago that their big insight was that Lucky had gotten, on the women's business, too butch, and it was we steered away from stretch and we steered away from skinny. We were just -- we were really boxy and boyfriendy. And that's totally changed what women are buying in the Lucky franchise. And it's great. Your next question was about accessories penetration and percent, and the answer is that it's in the teens. So we have a long way to go there. And that's not counting footwear, which is a big business. But we still have a long way to go.

Jennifer Black

But going back to the stretch for a minute, is it the same percent in the Outlet business as well?

William L. McComb

No. We -- outlet, I don't know the percentage, but we're only just now introducing -- I mean, we did it in fourth quarter. We don't have the level of penetration on the floor that we do in the main store. So it's in the full price. So it's probably more like 20% to 25%.

Jennifer Black

So that's a nice opportunity as well?

William L. McComb

It absolutely is.

Jennifer Black

Okay. I have a few more questions. At kate, you're launching live colorfully, which you're doing in-house. And I'm curious to know, is -- I mean, the scent is amazing. Is this a hot -- I mean, we know it's a high-margin business. Will it be followed by an entire line? And also, I was just curious to know, I mean, could this be incredibly meaningful, as far as -- is this a really big deal?

William L. McComb

We think so. We do. I mean, we're doing it in a sort of bespoke way. We're doing it with our partner at Nordstrom and in our own stores right now, and we think it's really well done, the bottle, the imagery, the juice itself. We know from Juicy how big -- Juicy remains a top-selling fragrance. We're launching Couture La La right now through our partner at Elizabeth Arden. It's a great success. And so we know how important -- we all know how important a fragrance can be. I think that we're doing a better job with this one than we had done with Twirl, and we're starting out slow with it. Like everything in the brand, I mean, when we envisioned the brand at $3 billion to $4 billion in sales, when you stop and pull back and look down and think about what the whole footprint is. There -- fragrance and related items is at full peak volume. It's a big business for us. But we're taking it slow and doing it kind of niche and doing it really well, and we'll let it seed the next thing.

Jennifer Black

Okay, great. And anything as far as cosmetics? I know you do lipstick with kate.

William L. McComb

No. There -- yes, we do some niche-y color things, and there is an opportunity, but not one that we're gating right now.

Jennifer Black

Okay, and just one last question. At Juicy, it appears you've narrowed the assortment of tracksuits as far as your delivery. Am I reading that incorrectly?

William L. McComb

Yes, I don't think so. I don't think that, that is right. I wouldn't say that, that is true. And I think you're going to see more branded tracksuit innovation. Leann did 2 or 3 different -- introduced 2 or 3 different style and silhouette changes to it, which, if anything, I think we could market even better. And so no, we haven't really trimmed that and we don't plan to.

Operator

Your final question comes from the line of Kate McShane of Citigroup Research.

Kate McShane - Citigroup Inc, Research Division

Most of my questions have been answered, and mainly, it was focused on Juicy. And with the departure of Leann, I just wondered, with regards to the timing of replacing her, if you have any special qualifications that you're looking for with the next head of the brand -- or creative director of the brand.

William L. McComb

Yes. Thankfully, and this gets back to some of the things that I said in response to Mary and to Janet's questions, we have a very clear creative vision and a very clear creative direction. And the area that we want to dial-up even stronger is merchandising as a function. And so Paul has a very clear spec. I don't want to say too much about the process because these aren't things to talk about, other than to say that, that timeframe is more in the weeks than months. 2- to 6-week kind of timeframe, I think, is where he is on that.

Okay, that's it. Thank you all so much for dialing in. We look forward to talking to the investment community on February 15 with our kate spade -- or I'm sorry, March 15. Sorry about that, with our kate spade team. So we'll see you then. Thank you.

George M. Carrara

Bye-bye.

Operator

Thank you. This concludes your conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Fifth & Pacific Companies Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts