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Executives

William L. McComb - Chief Executive Officer and Executive Director

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

Analysts

Janet Kloppenburg

Irwin Bernard Boruchow - Sterne Agee & Leach Inc., Research Division

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

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

Jennifer Black

Jessica Schoen - Barclays Capital, Research Division

Eric M. Beder - Brean Capital LLC, Research Division

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

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

Fifth & Pacific Companies (FNP) Q2 2013 Earnings Call August 8, 2013 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Fifth & Pacific Companies, Inc. Second Quarter 2013 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. If you do not agree, simply drop off the line. 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 set out in this morning's press release, including those under the caption Fifth & Pacific Companies, Inc. Forward-Looking Statement, as well as in the company's annual report on Form 10-K for the fiscal year ending December 29, 2012, filed with the SEC and in the company's quarterly report on Form 10-Q for the quarterly period ending June 29, 2013, to be filed with the SEC, each under the captions Item 1A - Risk Factors and Statement Regarding Forward-looking Statements. The company undertakes no obligation to publicly update or revise any forward-looking statement, 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, net sales, gross profit, gross margin, SG&A, SG&A margin, operating loss, other expense income, net interest expense, net loss before provision for income taxes, provision for income taxes, 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 transaction adjustments, is a non-GAAP measure that is also presented in the accompanying slides and press release. The company presents this EBITDA measure because the company believes that this measure represents a more meaningful presentation of the company's historical operations and the projected financial performance as this measure provides period-to-period comparisons that are consistent and more easily understood, and the company considers this measure as an important supplemental measure of its performance and believes it's frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry. Reconciliations 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 second quarter and first half of 2013 and 2012 represent a more meaningful presentation of the company's 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

Okay. Thank you, Paula. Good morning. Thank you, all, for joining us on our conference call today as we report second quarter earnings for fiscal year 2013. As usual, I have George Carrara, our COO, joining me on the call. And to reiterate what Paula said, as we usually do, we'll be presenting with speaker support slides, which can be found in the Investor Relations section of our Fifth & Pacific Companies' website.

During the call, I'm going to provide an overview of the quarter for the whole company, and then I'll remark on performance for the brands, starting with Kate Spade, then Lucky Brand Jeans, and then Juicy Couture. Today's call is focused on our performance in the second quarter. We have no news to report relating to our portfolio strategy today. George will then walk you through our standard P&L and balance sheet dashboards. He'll also bring you up-to-date on our important corporate operating initiatives, which are progressing quite nicely, and then I'm going to open up the call for some Q&A.

The quarter came in a bit softer in adjusted EBITDA than we'd anticipated, stemming largely from Lucky Brand posting a plus 2 comp versus our high- to mid-single-digit target, as the brand was impacted by challenging traffic patterns in April and May that were apparently evident industry-wide. Overall, we're pleased with the first half results, and we have no change to our annual company-wide guidance for 2013.

In general, second quarter repeats many of the performance themes that we saw in the first quarter. Kate Spade continued to experience strong growth rates, with the core Kate Spade New York brand posting very strong double-digit growth. The brand also reported its first full quarter of selling under the Kate Spade Saturday name.

Lucky Brand Jeans delivered a positive comp again. And as I said, the comp of plus 2 was softer than we expected. We faced a very promotional mall environment competitively, but we maintained a full price presentation, and we promoted much less than the marketplace as a whole, which allowed us to deliver very strong gross margins yet again, but likely resulted in walking some traffic. Overall, traffic was soft there in April and May, but June saw a nice rebound in the business.

Juicy Couture was on plan for the quarter, showing improvement in some areas of the business and mixed results still in others, all consistent with our expectations. The year-over-year decline in the margin rate is moderating as we anticipated.

And finally, we began rolling out the new POS system to all 3 of our brands, while completing the launch of the new web platforms with our partners at Demandware and e-based GSI, 2 important steps in our march towards enabling true omni-channel capabilities throughout the enterprise. Unleashing the power of the web to recruit new customers, grow the breadth of each brand and deliver cut [ph] superior customer service, that's our most important overarching initiative at Fifth & Pacific.

So turning now to Slide Page 3. The Kate Spade business continues to expand in all channels and geographies, with total sales up during the quarter, 65% to $167 million. Excluding the impact of the Kate Spade Japan acquisition, total sales increased 43%. The brand posted a total direct-to-consumer comp of plus 27% during the quarter, exceeding our guidance of comp increases in the teens, even with industry-wide soft traffic in April and May.

During the quarter, we opened 14 new stores globally under the core Kate Spade New York concept and 2 stores for Kate Spade Saturday. We remain on track to open 21 new stores in the third quarter and 18 new stores in the fourth quarter. I'm happy to report the first tranche of stores in our 2013 retail expansion at Kate Spade has exceeded our expectations. Our New York City flagship opened on Madison Avenue and is exposing the brand to a very important high-end customer segment there that includes local and tourist fashionistas. The store is Kate Spade at it's best as you can see here in these photos. The assortment includes a capsule that of what we call Madison Avenue exclusive, which have been particularly well received, with sell-throughs of well over 60% in the first month alone.

Other keys to the success of the quarter in our domestic specialty channel included, in ready-to-wear, strong reactions to occasion dresses, cardigans and knit dresses, a classification that has recently expanded. Accessory wins were led by particularly strong results in small leather goods, in small fashion bags, together with jewelry and a successful launch of the new fragrance, Live Colorfully.

Here on Slide Page 5, the business in Japan is very strong, where comps for the quarter were up 16%. We're also seeing a strengthening of the business in the U.K., where comps were, during the quarter, were up 14%. The stunning success of our omni-channel initiatives are most evident in this brand's overall e-commerce development. Approximately 23% of sales in second quarter came from e-commerce, and comp sales of the online business were up 51%. The company-operated brick-and-mortar fleet posted comps up 13%, exceeding our expectations. We're breaking this out to show the power of the store-to-Internet and Internet-to-store initiatives across the brand. The e-commerce platform not only is driving trial. It's driving deeper loyalty, especially as our store associates point their customers online for an even wider product assortment.

As you know, we launched Kate Spade Saturday nearly -- or near the end of the first quarter. And today, we have 5 stores and a website in Japan and an e-commerce site and a pop-up store here in the U.S. We expect at least 2 permanent stores will open later this year here in the U.S., in New York's SoHo and in Houston right near Rice University. The brand is supported by a growing social media following and database. Kate Spade Saturday is only going to contribute in a very small way to the revenue line in 2013, but we're excited about its future as a complementary line that neither competes head-on with the base business, nor disparages or de-positions the overall house name.

We like what we're seeing and hearing on the business. Its young, flirty and accessible product line is attracting a younger female shopper. She likes our full range of products to suit her casual lifestyle, including apparel, which so far accounts for just over 40% of sales; bags and accessories, which account for around 45% of sales; and home products, which are coming in right now around 12% of sales. She's particularly attracted to the clothing, especially the dresses, and she loves our unique colors and patterns, not a surprise.

Marketing is focused on acquiring customers in our target age group of 18 to 34 years olds. Not surprisingly, consumers most aware of the brand today are those that have heard about the launch via the Kate Spade New York e-mail and marketing campaign. And while that was always our goal to help fuel the launch, we now need to get new customers into the brand in order to grow the business. To-date, we have spent about 40% of the Kate Spade Saturday brand's 2013 media budget. Fall and holiday will be important times to build awareness and recruit shoppers.

While the Kate Spade Saturday launch was forecasted to put some dilutive pressure on the overall brand's P&L, as you've heard me say since our ICR presentation, we believe it's an outstanding growth platform for the company and is particularly important as we look to address the vast markets around the world, where an even more accessible price point is required.

So turning now to Slide Page 6. At Lucky Brand, total direct-to-consumer comps were up 2% overall, with denim and accessories selling very well. Total sales for the brand were down 2% or $2.6 million versus second quarter of 2012, driven by timing of the wholesale shipments. This mirrors the comment that I made on the last call, where I noted that the first quarter benefited from this timing shift, so a good way to look at the overall performance of the total first half metrics.

For the first half of 2013, Lucky Brand sales increased $13.9 million or plus 7%, with a 2% total direct-to-consumer comp. Wholesale sales for the first half increased 11%, now growing in a very healthy way. Moreover, I would make the comment that our partners continue to be very pleased with the brand's natural margins and strategic fit in their assortment.

Adjusted EBITDA for the second quarter of $4 million is down $3.6 million to last year, following the sales pattern and wholesale shift. The second quarter was also impacted by some expenses related to the e-commerce platform transitions. Adjusted EBITDA for the first half was $9 million, up $3 million versus year ago. Lucky Brand's management team kept inventories tight throughout the first half.

As I mentioned in my opening remarks, Lucky Brand's e-commerce engine underwent a major transformation this quarter. In June, the brand launched an entirely new site, with 6 times the merchandising, real estate and expanded functionality for the user. Combined with the new POS system, which we've just begun to roll out, the Lucky Brand team is putting more emphasis than ever on its digital marketing, social media and e-commerce opportunities. That said, direct-to-consumer comps for the e-com channel alone were up 12%, with comps from the retail stores being up 1% for the quarter. So the opportunity to drive this franchise through online customer and traffic development I think is profound, and the tools to do so are now coming into place as is the management goal. Very exciting.

During the second quarter, we opened 2 new outlet stores, and we're on track to open 16 more new outlet stores in the back half of this year, most during the third quarter. With this, we expect to end the year with a total of 68 outlets, well on our way to our near-term goal of 100.

In terms of new specialty locations, we expect to open 3 new stores in the third quarter, including an incredible new flagship store on Beverly Drive in the heart of Beverly Hills.

Finally, the international expansion that we've been talking about for a year is now well underway, with the brand launching this fall in Indonesia, South Africa, the Middle East, Venezuela, Chile, Panama, and Colombia. Our first shop-in-shop is already opened in Gallery Lafayette (sic) [Galeries Lafayette] in Indonesia during the second quarter. We're currently working on the next wave of new markets for Lucky Brand, targeting additional launches in 2014.

As I mentioned, April and May saw soft mall traffic, and that impacted Lucky Brand's comp performance for the quarter, but came back strong in June.

So turning now to Slide Page 7. Juicy Couture was on plan for the quarter, showing improvement in some areas of the business and still mixed results in others, all frankly consistent with our expectations. Our apparel business was up slightly to year ago, which builds on what we saw in the first quarter as well. We had a strong performance in denim, woven tops and fashion dresses. Track was also up versus year ago. It seems we've figured out the apparel mix, and we anticipate that this team's strategy going forward will be rewarded by the consumer.

Total sales were down 11%, and total direct-to-consumer comps sales were down 4%. E-commerce at Juicy Couture accounts for 9% of total brand net sales. E-commerce comp sales for the second quarter were up 5%, while comp sales at brick-and-mortar stores were down 5%. Where we still haven't gotten it right, though, at Juicy is accessories, as evidenced by a second quarter sales decline, which hit us even harder in gross margin dollars.

We continue to see strong sales growth in the newly renovated outlet concept, which I presented during the last earnings conference call, and we're rolling along with our plan to have an additional 16 remodeled, what we call, re-coutured outlets, and 2 new outlets opened by the end of third quarter. We are very bullish about this concept, as well as the product initiatives that are going to feed it.

Here on Slide Page 8, you'll see the total direct-to-consumer comp sales summary by brand. As I described, overall direct-to-consumer comps at Kate Spade New York of plus 27% were above plan; direct-to-consumer comps of plus 2% for Lucky Brand were below plan, due to a soft April and May, backed by strong gross margins; and finally, the direct-to-consumer total comp of minus 4% for Juicy Couture was right in line with what we had expected for the quarter and primarily driven by accessories.

Turning to Slide Page 9. Sales at Adelington Design Group were down $7 million on a reported basis. In general, retail sales for jewelry across the mid-tier and moderate channels have been soft this year. At J.C. Penney, we see the management team returning to price points and assortment strategies that had been successful in the past, but were abandoned during their 2012 attempted remake. We believe that their retrenching is going to resonate with their core customer, and beginning in the fourth quarter of this year, we should see improvement. Additionally, the Adelington Design Group is currently developing some new private label lines for 2014.

So let me now turn it over to George Carrara, who is recovering a bit either from a cold or from some allergies. So George's voice may sound a little horse.

George M. Carrara

Thanks, Bill, and good morning, all.

Slide 10. Our second quarter adjusted P&L summary. As Bill mentioned, we are pleased with our overall performance for the first half, so here is a quick overview of our consolidated results for Q2.

Net sales for the quarter were $382 million, up $45 million or 13% versus 2012. This increase was driven by a $66 million increase or a 65% increase in Kate Spade, which includes $22 million of sales attributable to the October 12 acquisition of Kate Spade Japan. This increase was offset by decreases of $11 million at Juicy, $3 million at Lucky and $7 million at Adelington.

Our adjusted gross margin rate decreased approximately 10 basis points to 56.5% versus the 56.6% achieved last year, primarily reflecting an expected gross margin decline of approximately 350 basis points in our Juicy Couture segment, offset by the increased penetration of our most profitable Kate Spade business, which runs at a higher gross profit rate than the company average.

Adjusted SG&A was up $25 million for the quarter versus the comparable spend in the second quarter of 2012, a year-over-year increase of 13%, driven by increases related to DTC expansion in our Kate Spade and Lucky Brand segments, partially offset by reduced SG&A at corporate, and in our Juicy and Adelington segments.

As a percentage of sales, adjusted SG&A decreased to 59% versus 59.2% in LY, an improvement of approximately 20 basis points. And in summary, all of this yielded an adjusted EBITDA of $8 million versus $16 million last year, and an adjusted loss per share, net of foreign exchange transaction adjustments, of negative $0.12, down from $0.11 last year. The decrease of $0.01 resulted from the adjusted EBITDA decline, partially offset by a reduction in fixed asset impairments and the increase in our share count.

Now to Slide 11. Our year-over-year operating results by segment. Kate Spade sales increased $66 million, including $22 million attributable to the acquisition of Kate Spade Japan. Excluding this acquisition, Kate sales increased $44 million or approximately 43%. This resulted from the 27% DTC comp, 16 store openings and across-the-board increases within the DTC and wholesale channels, both domestically and internationally.

With respect to Kate Spade Japan, I should point out, on an organic basis, comp sales increased 16% and total sales increased 30%.

Now in terms of Kate Spade adjusted EBITDA, you can see that our adjusted EBITDA margin decreased by 486 basis points compared to the second quarter of 2012. You'll recall in our last several discussions, we mentioned that in 2013, Kate would experience a full year adjusted EBITDA margin decrease of a couple hundred basis points compared to 2012 due to the dilutive effects of the Kate Spade Japan accounting treatment, the launch of Kate Spade Saturday, the expansion of Jack Spade and finally, the start up of operations in Asia.

With the exception of starting up Hong Kong operations, which will not take effect until the third and fourth quarter, these dilutive effects still hold true in the second quarter, but to a greater effect in the full year due to timing.

I should also note that Kate Spade Japan was adversely impacted by the depreciation of the yen. In any event, we expect to see offsetting operating leverage in the third quarter and in the fourth quarter, resulting in full year Kate dilution to land a couple hundred basis points below LY as expected.

Now let's discuss Lucky Brand. Lucky Brand sales decreased by $3 million or 2%. This was principally driven by a shift in the timing of shipments to certain wholesale accounts from Q2 to Q1 to better match merchandise flow with consumers shopping patterns. Bill and I mentioned this impact on the last call, as we experienced the benefit from the timing shift into the first quarter.

Lucky also experienced DTC sales softness in the second quarter as a result of traffic patterns in April and May, which Bill highlighted earlier. While DTC comp sales were positive for the quarter, with healthy sell-throughs, Lucky Brand underperformed slightly relative to the mid- to single-high-digit comps targeted for the period.

Adjusted EBITDA margin for Lucky was 4% versus 7% last year, a decline of approximately 317 basis points. This principally reflects the negative operating leverage associated with the wholesale shift we've called out.

Looking at the full year, we still anticipate a noteworthy improvement in adjusted EBITDA margin compared to 2012, driven by both operating leverage and gross margin rate of improvements across all channels.

Juicy. Juicy sales declined $11 million or 11%. This is consistent with expectations for the quarter. Juicy's adjusted EBITDA declined by $7 million, also in line with our expectations. Although we experienced DTC gross margin rate deterioration of nearly 442 basis points for the quarter, we saw an improvement in trend compared to the decline of approximately 1,000 basis points experienced in the first quarter. Further, we saw improvements in some areas of the business, particularly in apparel. As expected, Q2 adjusted EBITDA was down to LY, but by a lesser extent than the $11 million drop that we experienced in Q1. We anticipate Q3 improving sequentially relative to Q2. And finally, in Q4, we expect to see a noticeable improvement in adjusted EBITDA relative to LY as many of the initiatives put in place by Paul take effect.

The Adelington Design Group net sales dropped $7 million, and adjusted EBITDA decreased by $3 million. Bill mentioned softness in retail sales for jewelry across the mid-tier wholesale space, as well as the impact of an evolving strategic focus at J.C. Penney. These conditions represent challenges to ADG in the near term, but provide opportunities for overall improvement going forward.

Finally, corporate. Unallocated corporate costs decreased by $3 million versus LY. This reflects reduced payroll and related expenses, resulting from corporate streamlining actions initiated last June.

Slide 12, some selected balance sheet and cash flow data. Just taking a sip of water. Accounts receivable are down 18% or $20 million to $91 million. This is primarily driven by decreased wholesale sales in our Juicy, Lucky and Adelington segments, partially offset by increased wholesale sales in our Kate Spade segment. Overall, we are happy with our DSOs and receivable collections. Inventory is up 27% or $50 million to $238 million. Overall, we are comfortable with inventory levels, which will -- we will discuss in greater detail on the next slide.

Next, total debt was $481 million as compared to $329 million at the end of Q2 2012, an increase of $152 million. This results from the $103 million buildout of new doors, principally at Kate and Lucky over the last 12 months, as well as consumer-facing IT investments, which we will discuss in a later slide. This also includes the $41 million acquisition of Kate Spade Japan, the funding of inventory to support the accelerated growth at Kate Spade and our streamlining initiatives which are now nearly complete.

The change in total debt balance over the last 12 months also includes the impact of exchanging $23 million of our convertible notes into equity.

Finally, CapEx for the first half increased to $49 million from $32 million LY.

Slide 13. Slide 13 provides some additional insight into our inventory levels. Total inventory was up 27% to $238 million as compared to the aggregate sales increase of 13%. The delta here reflects an investment in Kate Spade to support the recent 2013 launches of Kate Spade Saturday and Kate Spade's Live Colorfully fragrance. We've also stepped up investments in Kate Spade and Jack Spade watches. In Kate, to support replenishment demand, and in Jack, to support the launch. Also, recall that the Kate Spade Japan business is predominantly a retail business, so consolidation into our results impacts total inventory to a greater degree than the resulting impact on sales. Lucky Brand's UC and the Adelington Design Group ended the quarter on inventory plan and at levels appropriate relative to sales trends.

Now let's turn to Slide 14 for an update on our corporate operating strategies. First, our e-commerce replatforming. During the quarter, we continued to roll out a redesigned web stores and a best-in-class order management and fulfillment system. We are happy to report that with last week's launch of Jack Spade, we have concluded this value-driving project. We are super excited with the successful completion of this game-changing initiative and are eager to further capitalize on this highly profitable distribution channel.

Our new POS system. We began the rollout of the POS system as planned in the second quarter, while our implementation partner proceeded with the development of the related Phase 2 mobile functionality. We expect to complete the rollout during Q3. And then, once all stores at all the brands contain the new POS system, we will deploy the mobile POS functionality early in the fourth quarter.

As previously discussed, with the implementation, our e-commerce and brick-and-mortar CRM will be fully integrated, mobile in-store checkout will be enabled, e-receipts will be possible and our associates will have mobile inventory management functionality, which will reduce time spent on administrative tasks. The e-commerce project, coupled with the POS implementation, represents a major step in the evolution of our omni-channel platform.

Finally, on the real estate front. We completed the $9 million sale and partial leaseback of our back-office headquarters facility in North Bergen, New Jersey. And we have also signed an agreement for the sale and leaseback of our Ohio distribution center facility, and expect to close this $21 million transaction in mid-August. Our relationship with Ridge Global Services is unaffected by this transaction.

Now that we are substantially complete with the foregoing key initiatives, we have embarked on establishing an e-commerce platform in Europe and enhancing our Ohio distribution center software and hardware platform, integrating certain Kate Spade international business lines and further developing our omni-channel capability. We will speak in greater details about these initiatives during our third quarter call.

Slide 15, the Mexx settlement. Let me now update you quickly on our recent settlement with The Gores Group regarding the divested Mexx business. As described in the 8-K filed last Friday, we agreed to settle the legal claim for $22 million. In connection with this settlement, we also sold to Gores our remaining noncontrolling interest in the Mexx business for $4 million cash.

Slide 16, our 2013 financial outlook. So now, let's update and reconfirm a few metrics that are embedded in our financial outlook for 2013. As Bill indicated, we are reiterating our adjusted EBITDA guidance for the full year in the range of $120 million to $150 million, net of foreign currency transaction adjustments. Incorporated within this range, our annualized DTC comps for Kate in the teens, and slightly negative to flat comps at Juicy. Given the year-to-date trends, we now anticipate comps in the low single-digits at Lucky.

With respect to the guidance by brand that we shared with you in January 2013, there are no changes to our adjusted EBITDA targets for the full year. Additionally, I'd like to emphasize that the quarterly flow of the adjusted EBITDA performance will be similar to 2012, with a heavy back-end weighting, with the biggest year-over-year increase coming in Q4.

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...

[Technical Difficulty]

Our normalized tax rate for 2013 applies to adjusted earnings will be between 38% and 40%. I should note that we currently hold more than $550 million of NOLs.

And lastly, our full year 2013 basic share count is approximately 121 million shares. We anticipate Q3 and Q4 diluted share counts of approximately 125 million shares.

Now back to Bill for some closing comments before we open it up to Q&A, but hold on for 1 second.

William L. McComb

[Technical Difficulty] I think we can call it a wrap. George, thank you. Nice review.

Bottom line here. We remain on track with our 2013 business plan, while also continuing to work to identify the best path forward with our brand portfolio that will maximize shareholder value. We have no further comments on that work at this time. In the meantime, all of our business segments continue to make progress.

So Paula, let's go ahead and open up the call for some questions. Hopefully, we're not having any more problems with the broadcast here.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Janet Kloppenburg of JJK Research.

Janet Kloppenburg

I wanted to ask just 2 questions. The first is on Kate Spade. With respect to the EBITDA margin decline, was it in line with your expectations for the first quarter? And if you just look at the core Kate Spade business minus all of the investments on Japan and Saturday, et cetera, are you seeing improvement in the EBITDA in the core business of Kate Spade, apples-to-apples?

William L. McComb

Yes. Yes, apples-to-apples. Kate Spade, apples-to-apples, Kate Spade New York gross margins -- or sorry, adjusted EBITDA margins are up year-over-year. And in terms of the offsetting -- I think George summarized it well. And notice, every time we talk to you, we remind you, we walk you through that paragraph. The 4 factors that are driving dilution on a total-year basis, he eliminated the smallest one, which is investment in Kate Spade Asia when we take over our distributor there. That will impact third and fourth quarter. But the dilution factors came -- were in line with our forecast. Any other comments on that, George?

George M. Carrara

No, that sums it up.

Janet Kloppenburg

And then with respect to Lucky, do you feel confident in the denim performance for the current season? We're hearing some very -- such -- there's challenging trends going on in denim right now, some resistance by the consumer perhaps or maybe a lot of competition. But just wondering if you could give us your outlook there?

William L. McComb

No. Okay, thank you. No. As a call-out, denim was strong for the quarter in both men's and women's. So I wouldn't say that we have softness there. I would attribute the softness in comp. The plus 2 relative to what we had called mid- to high-single digits was really coming from the traffic metric. And we saw that competitively. The malls were very promotional. Lucky held out. They really did. They've been running a very strong full price business. This is a choice that we've made. We frankly didn't have the inventory to support markdowns, especially in denim, and so we stuck with it. But no, not seeing a softness in denim, not with our adult 25-plus core target customer. I can't speak to what that market's like for the teens.

Janet Kloppenburg

And so by lowering your comp expectation, does that imply that you could still do mid-single-digit comps at the back half for Lucky?

William L. McComb

Yes. Yes, I think you can.

George M. Carrara

That's right.

Janet Kloppenburg

Okay. So it just reflects the weaker [ph] in the second quarter, right, George?

George M. Carrara

Yes, that is correct. And I'll add that on denim, denim performance overall was better than the 2% aggregate performance at Lucky for the quarter.

William L. McComb

And Janet, we have a really strong Made in America denim program that's just now trickling into stores and has a very big marketing campaign for the back half. And so all of our news at Lucky in the back half is focused on that, on Made in America.

Janet Kloppenburg

Okay, great. And I wanted to tell you that I -- I just headed into a couple of the Kate Spade Saturday stores in Tokyo, and I thought the execution was very strong. So congratulations.

William L. McComb

Thank you. Thank you. I -- it is very strong. It really is. We have a very clear idea with this business. And while we're just getting started in it, we're excited about how the consumer is responding, both on the web and in those stores, so thank you.

George M. Carrara

Let me just add something. The operator informed me that some of my script was cut off, so let me just touch upon the points you might have missed.

William L. McComb

I think, George, it was only 2 or 3 comments that were probably missed.

George M. Carrara

Yes. So it relates to the tax rate that we're going to apply to our adjusted earnings will be between 38% to 40%. Our NOL position, being $550 million. And then finally, our forecasted full year 2013 basic share count, 121 million shares. And in Q3 and Q4, we anticipate diluted share counts of approximately 125 million shares, just for clarity.

Operator

Your next question comes from Ike Boruchow of Sterne Agee.

Irwin Bernard Boruchow - Sterne Agee & Leach Inc., Research Division

I guess, Bill, I wanted to ask about the Kate Spade business. You've been opening stores a lot faster the last couple of quarters than you have in the past. What are you seeing in terms of new store productivity versus kind of some of the goals that you laid out at the Kate Analyst Day? And then could you talk about the wholesale part of Kate Spade in Q2 as well?

William L. McComb

Okay. Well, we do -- all we've really got -- all we've really reported today is that the wholesale business was up very nicely and in line with the growth of the business that we're seeing in retail, so that pretty much answers that. In terms of the new stores, I -- what we said back at the Investor Day in April was that we assumed that the tranche of stores that we plan to open in 2000 -- or the fleet of stores, the categories of stores that we're going to open in 2013, should end their first year at an average of $700 -- in the area of approximately $700 a square foot. And as I reported in my comments, I'm happy to report that the first tranche of those 2013 doors that are open are pacing to exceed that target.

George M. Carrara

By approximately 10%, that's correct.

William L. McComb

Yes, so we're happy.

Irwin Bernard Boruchow - Sterne Agee & Leach Inc., Research Division

Okay. And then just a quick follow-up. Bill, on the last call, you kind of gave us some color on how to think about adjusted EBITDA for Q2. You maintained your outlook. In Q3 and in Q4, when we think about those 2 quarters, should we expect adjusted EBITDA to grow in Q3 in order to hit your plan? Just trying to get...

George M. Carrara

I'll take that one. I think a good way to think about adjusted EBITDA for Q3 will be either flat -- approximately flat to LY, and we expect growth in Q4.

Operator

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

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

In respect to -- I forgot exactly what you call it, but the categories, like watches and fragrance that can have broader distribution, where are you on the rollout of those categories? Or maybe dig in maybe even a little more on the performance.

William L. McComb

Yes, okay. Well, the performance is fantastic. We call those elastic categories. And you remember it well from Investor Day, a very important category that Craig looks at having much broader distribution capability. Not a lot of news to report this quarter other than that they all continue to do well. We launched Live Colorfully, and it is tracking to or slightly above what our projection was. We're really happy, that's a fragrance. But this year, we told you our launch of that was -- we picked a partner, Nordstrom, who has done an outstanding job, it exceeded expectations there. And then that, plus what we're doing on the web and in our own stores, it's sort of, I'll call it, a Phase 1 rollout of it. I -- we see lift. We know we've gotten it right now. And so the idea of that going into a bigger mass position is still coming forward, as is watches. We love the assortment, we love the pricing. I think that we can go higher in price. I think that we've learned that, that there's -- we're not seeing any price sensitivity. And if anything, the customer is telling us that they can get -- that we can put even more product into it. So I think that you'll see us going up in price, but maintaining the full wide range that -- of assortment that we've started with now. But the big news coming in terms of that elastic category is that we are hiring distributors to get us into as many points of distribution in Asia that we can get, and that is the way to have a very big watch business. Same for Europe. We're going to be doing the same thing in Europe. So I would tell you that, I guess, by the end of first quarter of 2014, we'll have a meaningful update on the role that elastic categories are playing. If you recall, we had said that it -- beyond what we have already talked about for 2013, that would be a big rollout in '14. And in fact, the team is working very hard on it.

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

No. Okay. No, that's great. And then just to follow up on international. Can you remind us what the sales per square foot were in Japan? And then are you seeing similar above average or above U.S. productivity out of your U.K. DTC operations? And what are the growth opportunities there again?

William L. McComb

Well, George, I'll give you the first part. But the second part, I'll tell you that the U.K. is building toward the average productivity. It started out lighter because, of course, the brand equity there wasn't as well developed. But we reported this comp a positive 14 comp, DTC comp in the U.K. And what we're really excited about, George referenced it, we're very excited about launching e-commerce over there, and we know that the U.K. is the most developed market for apparel and accessories online. And so we think it's going to complement it and do what it's done here, which is brick-and-mortar and e-commerce. We have lots of back-and-forth reversed franchise building, so...

George M. Carrara

And I'll just add that in Japan, in the U.K., our productivity per square foot is greater than the average that we report.

William L. McComb

Yes, thanks.

Operator

Your next question comes from Edward Yruma of KeyBanc.

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

Just really quickly, kind of a follow-up to Ike's. Bill, you have -- I guess, a number of the class of '12 stores entered in the comp base in the back half of '13. I guess, how have those stores been performing? And I guess, what kind of improvements in the comp -- or within the comp should we expect as the stores enter the base in the back half?

William L. McComb

I don't -- in front of me, I don't have that data. I mean, what I would tell you is that there -- it all -- it's one consistent story. So in fact, those stores are what we had based, at their year 1, it's what we had based our projections go forward on the class of 2013. They're growing nicely. They continue to grow. And the pace of growth this year is sort of consistent with the overall franchise.

George M. Carrara

Agree, no fall outs in our non-comp store performance.

William L. McComb

Yes. And remember, important comment. New stores that we're opening this year, the comp formula here is, you don't start reporting in our comp base until after month 13. So all the stores that we're opening now, they're -- they've got to go through 13 months of sales, in fact, before they actually show up in comp.

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

Got it. And Bill, it seems like the department store space may have hit, certainly, a weakness that maybe you observed in own stores. I guess, how do you feel about inventory in the channel for some of your businesses that have bigger wholesale businesses? And have you seen any adjustments to buys for the back half of the year, particularly for the holiday season?

William L. McComb

No. No, we haven't. I mean, the change in inventory in general as it relates to Kate has been just to support new launches, new category launches, like watches or like Live Colorfully. And so I would say that Kate, it's obviously -- it's a growth situation. And even though we're not expanding the points of distribution in the U.S. market, within a point of distribution, there is incremental inventory going to new categories or -- outpost placement, that kind of thing. So I would steer your question more towards the question for Juicy and Lucky. Juicy, of course, 2013 wholesale has taken a year off, so to speak, with a little bit of exception to some accessories. And I see that changing, by the way, for 2014. We're getting very nice reactions to all of Paul's apparel strategy, especially and including Juicy Sport, which clearly I'll talk about on the next call. But as it relates to Lucky, Lucky is having and showing very strong natural margins with the wholesale partners, which are largely Macy’s and Dillard's and Belk's. And the inventory positions are not being cut down at all. In fact, we -- the business is growing in some of those accounts in double digits, and so the inventory is tracking along with that. So we're not seeing what you just described.

Operator

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

Jennifer Black

My first question is, I was curious to know what did you find the most surprising with the Saturday pop-up stores? We'd love a little more color, no pun intended. And what new categories -- or what categories do you feel have the greatest opportunities?

William L. McComb

Probably, the call-out surprise, although you heard the numbers. Apparel is about 40%, bags and accessories are about 45%, and then home is in that 12% to 15% range. I would say it's coming off very strong in apparel. And maybe that surprises us just a little bit in a positive way. The price points, the silhouettes, the uniqueness, it's -- we've got -- we're doing something really right there. And of course, there's a lot. But 2013 at Saturday has got to be a learning lab, right? We've got to have the customers come, try things on, buy things, ship things back. Then we've got to -- they've got to shake out size, and we've got to make sure we get it all right. I would tell you, off of this first full quarter of learning, we're really excited by what we're seeing with that apparel contribution. We just have a couple of stores, right? We have a couple in Tokyo, and we have 1 now in -- on Gansevoort in New York, which was the touchscreen -- the 45-day touchscreen module. It's now a full store. What I would tell you is that they -- it's a unique concept, that's for sure, and they really get it, and they really like it. And I think it's got, maybe it's fair to say, broader age appeal than I would have even thought, and I think our team would say the same thing. So we're excited, but it's very early. We've got a lot to learn on it. I'm just -- sitting in my chair, I'm pleased that we have greenlighted this. I'm pleased that we have -- that we're investing in it, albeit in a contained way. This isn't something where you're going to hear me get on a call and say we're so excited we're now going to open 50 stores. We -- it's -- the discipline of building the business online is the big idea, but we know that we said we're going to open 2 full permanent stores, 1 in SoHo on Spring Street and 1 right near Rice University in Houston. I think that, that will add to the learning. And if there's one thing that I could say about what I'm most proud of it at the relaunch of Kate Spade that started from 2007 to now, it's that, that it really is -- as a company, it's an omni-channel company. And so the few stores that we do have, I think, will be helpful, but we're excited about the product offering, the price value, the quality, that kind of thing.

Jennifer Black

Great. And then my second question is on -- do you have metrics as far as your average transaction value and the conversion online?

William L. McComb

For Saturday, for Kate Spade Saturday?

Jennifer Black

Yes, sorry.

William L. McComb

Yes, oh, that's okay. No, I don't. I actually -- I don't have them with me right here. Maybe when we -- when the business gets a little more robust, we'll start talking to those things. It -- we're at the point where even -- we're experimenting. One day or 1 week can really change those metrics, so we're going to let it scale to what I'll call an opening normative level, and then I think we can start talking to some of those things.

Jennifer Black

Great. And then lastly, can you give us an update on Lucky Kids and your Weight Watchers partnership?

William L. McComb

I don't have any news on the Weight Watchers partnership, except that we're full-bore into a direct mail and our Internet program with them. And it -- this is to support the Ginger launch, which we did at the end of last year and is off to a really strong start, which is one of the facets of our growing denim business with wholesale partners and in a differentiated segment, obviously. So in terms of we're -- since we're in the middle of it, really nothing to report here other than I'll make a note to circle back and maybe make some more comments on that later in the year. And Lucky Kids. Lucky Kids is doing really well. It's short. I mean it's 16. I think 16 doors, I think.

George M. Carrara

Right. Yes.

William L. McComb

And we're expanding to 50 by the end of the year, and -- but sums up, we're happy on it.

Operator

Your next question comes from Jessica Schoen of Barclays.

Jessica Schoen - Barclays Capital, Research Division

My first question is on the Lucky gross margin. I know earlier on the call and on the last call you talked about some of the trade-offs between productivity and overall comps versus gross margin. And I was just wondering if you could give us a little bit more insight on your thoughts on that and what we should expect for the rest of the year?

William L. McComb

Well, I think that we've continued to buy inventory to a full price strategy, which I think is just great. We have innovation, and so I -- we think that Made in America is going to drive -- I think it's a traffic driver. I think it's a marketing statement, whether they walk in and convert into that particular product or some of our other denim. I think it's going to be good for the brand, and it's going to drive traffic. So I would say that for the rest of the year, the comp guidance that we've given, where, on an annualized basis, we've said low- to mid-singles, that's still based on not changing that strategy. It's too good a business. It's too good a brand. We've really cleaned it up, to say, okay, the consumer needs this to be a lot more promotional. We're going to change our inventory position, and we're going to decrease our full price sell-throughs and we're going to -- that's not the way we're going to do it. So George, I don't know if you -- do you have anything to add?

George M. Carrara

That's right. And we're still seeing a slight gross margin expansion in the Lucky DTC channel, so that will continue.

William L. McComb

It's slight, but at off -- last year it was quite high.

George M. Carrara

That's right.

William L. McComb

It's flat at a high level or slightly expanding.

Jessica Schoen - Barclays Capital, Research Division

Okay, understood. Great. And then my second question is on the corporate streamlining. I think you said that was nearly complete. And I was wondering if you could just give us an update on the impact that should have going forward.

William L. McComb

Well, we've been consistent on this. We said, especially with Kate Spade growing the way that it is, we've said, you're really not going to hear us talk about any more corporate streamlining right now, not as we're configured like this. It -- we made a lot of cuts, and you're seeing the benefit of those, George talked about that flow-through being $3 million, SG&A -- corp SG&A being $3 million below in the second quarter versus year ago. It -- so we're at our new run rate for the company as configured the way that it is. And I just -- that's just going to flow through like that and no more additional steps.

George M. Carrara

That's right. I agree, Bill. And I think with the 2 sale leasebacks we just consummated, that draws the end to the corporate streamlining, and I think the 1 area -- it's not technically in corporate for reporting purposes, but it's controlled by us corporately. It's distributional logistics expenses. We expect and continue to see improvement in that zone, with the transition to Ridge and then with the replatforming of our Ohio facility. So we'll see that now appear in the brand results on the go forward, for '14 and beyond.

Operator

Your next question comes from Eric Beder of Brean Capital.

Eric M. Beder - Brean Capital LLC, Research Division

Could you talk a little bit about the Lucky expansion with accessories? I know we're heading to the point where we're starting to see it in the stores, the accessories are kind of a bigger piece of the mix. And how is that going?

William L. McComb

Early results are really good, but it's -- it really is, as you noted, beyond what we call the dozen alpha stores, where we kind of flow things early and see how they go. It's just now hitting. I am very, very bullish on it. The product is great, the price value is fantastic. Feedback from wholesalers has been very, very good. The handbags are done by Trebbiano, which is an absolute -- they're as good at handbags as Vince Camuto's group is at Lucky Brand footwear which, as you know, is $100 million retail [indiscernible] business and growing fast. So I really -- I think that we've got something here, and we anticipate it driving transaction value at UPT, as well as margin in the fourth quarter.

Eric M. Beder - Brean Capital LLC, Research Division

Great. And in terms of Juicy, I know you're pleased with what's going on. When should we start to see, in terms of getting profitability back, and really kind of getting both the outlets and the retail stores be looking where they should be?

William L. McComb

Well, it -- the short answer is, as you could tell from our guidance, that's a 2014 phenomenon. But what's good -- here's what's good: We've proven now that apparel's bottomed out. In fact, now growing. And that is in second quarter off of what I'll still call a still not optimized mix. Third quarter gets that much better in terms of what we call pillar strategies around key product segments, and inventory and assortment buys and marketing, all that come together that support it. So Paul has had a very strong influence on third quarter, and third quarter is going to get better. But -- and fourth quarter is that much better. And by the end of fourth quarter, I mean, when -- the comments that I made about outlet are it -- this isn't marginal. The improvement that we're seeing, it is like a snapping back to historic high levels, the kind of sales growth and productivity that this changed in the outlet model. It's a physical change, which does not cost us a lot to do. But it's a massive change in terms of merchandise planning and allocation. So the answer to your question is, 2014, I think is going to get a lot better. I'm a little less bullish about the time line for accessories. Paul has some very talented new people coming in and working with the team that's been there, and they have some good ideas, and I think it's moving the right way. But I'm going to be a little less guarded in terms of when I see the change there coming through. But I -- we're feeling good. I mean, I'm characterizing Paul's changes as, we're right where we want to be. I know -- I didn't spend a lot of time on this call because it's a shorter call talking about his 2014 product initiatives. We'll do that a little bit later.

George M. Carrara

And I'll just add that, that will -- you'll see a decline. The way we planned our business, a decline in the third quarter, as I mentioned in my prepared remarks. It'll be less than the second quarter, and then we expect to see a ramp-up in profitability in Q4. That's how we built our plan.

William L. McComb

That's right.

Operator

Your next question comes from Mary Gilbert of Imperial Capital.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

I wanted to follow up on Juicy. Can you give us the international performance in the quarter and the outlook there?

William L. McComb

Yes. It's -- international at Juicy is looking good. Total international sales were up 13%. Our business in Asia comped, I believe, it was a plus 8%. Is that right, George?

George M. Carrara

That's right, yes.

William L. McComb

Yes. So international continues to be a strong point. The Middle East is a little softer, due to some of the disruption there. Actually, believe it or not, we actually had a plan to open some stores in Egypt through our partner at MAF that are now delayed, and Bahrain is tough. The overall business is -- it's stratospheric, but a little softer due to some of the disruption over there.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay. Great, that's helpful. And then the other thing is on Kate Spade. I wondered if you could talk about opportunities on, let's say, handbags and other pieces of the business in terms of ramping up price points or what you see there? And then...

William L. McComb

Yes. I think the only call-out I'd give there is what we had said, which was, Craig likes to talk about managing the 2 shoulders of the brand in core categories, both apparel and handbags, in terms of pricing. So he talks about these shoulders, and that means that we have innovation taking place at the opening price points and at the high end. And truly, at the high end, you're seeing some product innovation in handbags where we have, what I'll call, a bag that can be an iconic bag launching into stores right now. And it's at the higher price point, at the $489 and up. And that had a very positive reaction and strong buy by wholesale. So I think that this idea of sort of burning the candle at both ends on price point, they're successful. They're pushing -- they're drawing more in at the opening price point, and they're taking their existing customers, and frankly, some that are new to the franchise, but are coming in at the highest end. And this Madison Avenue line that -- this line of exclusives that we've done, the price points are quite high. They're right now exclusive at Madison Avenue. But one of the things that I think that we're learning is, we're hearing from store associates in other -- on the East Coast that have been to the Madison Avenue store that they're asking us to make available that assortment online because they would like to refer their customers. I talked about, in my web and e-comm remarks, how well developed our store associates are at using web inventory. And I think that this Madison Avenue line can become a sub-brand, not like Kate Spade Saturday, but a sub-brand within the Kate Spade New York line and have much bigger reach than just a couple of stores. So that's what I'm hoping to see us do next year, take the Madison Avenue exclusives and make them available more broadly.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay, that sounds great. And then I just had 2 other questions. One is on Lucky Made in the U.S.A. I've been hearing very strong response to that program. I know it's very early and it's just starting to roll out. And wondered if you were planning to expand that in other categories within Lucky, and maybe introducing it in some of the other brands, like Kate Spade or Juicy. And then I had a question on J.C. Penney.

William L. McComb

Okay. Well, real quick. No, no further plans on any of the other brands or any other categories, but it's something that we'll learn from on this. It's a big deal for Lucky. And by the way, I'll mention for the foreign tourists that come to our strong stores in California and New York or the East Coast and West Coast where Lucky is so well developed, having a Made in America blue jean at that Lucky -- in that core Lucky price point is a great thing. It is -- it's off to a really good start, and we do think it will be very good. The last question, go ahead on J.C. Penney and then...

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Yes. So on J.C. Penney, I wondered if you could talk about what you're learning or seeing in terms of J.C. Penney and their transformation? And -- because it sounded like you were saying that you expect to see some improvement with your business with J.C. Penney. And then I wondered about the private label development, if part of that relates to them or other...

William L. McComb

No, my comment on private label is -- relates to other customers, which as a private label division, we generally don't disclose who we're doing private label for. But the point of it is that we have -- or we're actually prospecting additional new business for the Adelington Design Group through new partners. At Penny's, here's what I'll tell you. It -- the old recipe for success is back in place, maybe with a couple of improvements and some new flair. But generally speaking, they are very quickly returning to the core areas that were abandoned in the attempt in 2012 to remake the whole store. And I think this is good. What I'm seeing, I like. I'm seeing a commitment to getting back to a core customer that they were very good with in jewelry. And so we -- the time to market means that it's fourth quarter before that stuff really gets going, but we think that they'll have it. I can't comment on -- I don't know anything about their traffic patterns or those kinds of things. I just see their merchants. The merchant team is keenly moving quickly back to what they have been good at before. So that's really all I can say there so...

Operator

Your final question comes from Corinna Freedman of Wedbush Securities.

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

I just had a question on the comps at Kate Spade. You mentioned that Lucky did see some improvement towards the end of the quarter. Would you characterize the Kate Spade comps as showing a similar cadence? And any comments you have on quarter-to-date traffic?

William L. McComb

Well, I won't comment on quarter-to-date just because in not doing -- that I'm doing monthlies, and we said we're only going to do quarterlies. But Kate's growth was more robust than even across the entire second quarter, as opposed to Lucky that saw softness in April and May, and then came back strong in June. So I would say that, that wasn't -- that Kate didn't have that same cadence. It was more consistently strong throughout the whole second quarter.

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

Okay, were there any Jack Spade call-outs for the quarter?

William L. McComb

No, no, no.

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

And then a final question for George. On the presentation, it does say biggest year-over-year increase in the fourth quarter for adjusted EBITDA. I just wanted to confirm that, that was in line with comments that you made last quarter that the cadence would be similar to last year. I just wanted to [indiscernible] you're not expecting any change to that.

George M. Carrara

No change, that's correct.

Operator

This concludes the allotted time for today's question-and-answer session. I would now like to turn the floor back over to Mr. McComb for any closing remarks.

William L. McComb

Okay. We thank you very much for joining us today, and look forward to talking again soon. Thank you.

Operator

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

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