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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

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

Eric M. Beder - Brean Capital LLC, Research Division

Janet Kloppenburg

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

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

Jennifer Black

Carla Casella - JP Morgan Chase & Co, Research Division

Fifth & Pacific Companies (FNP) Q3 2013 Earnings Call November 7, 2013 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Fifth & Pacific Companies, Inc. Third 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 the company's quarterly report on Form 10-Q for the quarterly period ending June 29, 2013, filed with the SEC, and in the company's quarterly report on Form 10-Q with the quarterly period ending September 28, 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 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, net sales, gross profit, gross margin, SG&A, SG&A margin, operating income, 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 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 is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in this 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 third quarter and first 9 months 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

Thank you, Paula, and I guess thank you, Katy Perry. We got the Eye of the Tiger here. Thank you all for joining us on the call this morning as we report our third quarter earnings for fiscal year 2013. Joining me on the call is our Chief Operating Officer, George Carrara. 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.

Here's a look at the agenda for the call. I'll start with a recap of the quarter in total and by brand. And George will present our income statement and balance sheet metrics for the quarter, followed by an update on the Juicy Couture sale. By now, by the way, you should not only have seen our press release, which summarizes our earnings results, but also the notice that we have closed the transaction on the sale of Juicy Couture to Authentic Brands Group. George will elaborate on that announcement, and then we'll open the call up for some Q&A.

So turning now to Slide Page 2, total company highlights. The quarter performance was right in line with our expectations overall. Total sales were up during the quarter by 18% versus year ago, and total adjusted EBITDA was $25 million, up from $21 million in third quarter of 2012. Driving these results were strong sales and direct-to-consumer comps continuing at Kate Spade, strong overall sales growth at Lucky Brand with a flat comp in our direct-to-consumer business and direct-to-consumer comps down slightly at Juicy Couture. Judging from what we've heard reported from competitors, I'm pleased with these results. I'm especially pleased with our operational achievements during the quarter, with kudos to George and his team for completing the domestic rollout of the new POS system in all of the brands and finishing up all phases of the U.S. e-commerce re-platforming as well. All in all, it was a good quarter for the company.

Lastly, looking toward year end, we're now tightening our forecast of total Fifth & Pacific Companies adjusted EBITDA, excluding Juicy Couture results and net of foreign currency transaction adjustments, to the range of $120 million to $140 million. We'll elaborate on this during our remarks.

So looking at the Kate Spade businesses. Total sales were up 76% to $180 million, including the now consolidated Kate Spade Japan sales at $25 million. Excluding the impact of Kate Spade Japan, net sales for the brand increased 52%. Total direct-to-consumer comps were up 31% for the quarter, and last 12 months comp sales per square foot was $1,226. Comp sales growth in the company-run retail stores was up 22% for the quarter. And in terms of penetration, e-commerce sales accounted for 18% of total sales during the third quarter, and comp sales of the online business were up 48%.

Total points of sale at retail during the quarter increased by 103 doors to 196 compared to last year. That aggregate number includes the addition of the stores in Japan. New stores added to the fleet, excluding the pre-existing Kate Spade Japan stores, were plus 50 for the quarter. Adjusted brand EBITDA for the quarter was up 50% to $24 million. Overall, product trends include very strong growth in small leather goods and in handbags, especially leather, which we've been focused on all year. And despite a softening for some key competitors in watches, we saw tremendous growth in that category again in the third quarter and believe it will be a key driver in 2014 as we expand both distribution and our product offering globally.

Looking at the international business. X Japan, international sales were up 26% during the quarter, supported by overall strong double-digit comp sales increase and trending right to plan. We opened 1 new store in Brazil, 2 in China with our JV partner and a concession at Galeries Lafayette in Paris, our first appearance in Paris, and one that I should note is off to a strong start, with the highest price points actually selling through the best. Sales from our JV and China doubled versus year ago, as comp sales grew 28% and the store rollout is continuing. Five new full-priced stores and one new outlet will be opened during the fourth quarter in China. Hong Kong and Southeast Asia are another area of strength, with comp sales growth of 15%. As the store fleet in Hong Kong gets upgrades with our most modern look and features, we're seeing even stronger results there as well.

Turning to the U.K. We've hired a watch distributor for that region, while also launching watches now at Selfridges in London. We're also working with Selfridges on a holiday gifting pop-up, which opened in October. And it's off to a great start, with strong sales in handbags, small leather goods and jewelry. Comp sales in the U.K. grew 18% during the quarter. And finally, Kate Spade New York is launching this month with very capable partners in Turkey and Mexico.

Notable Kate Spade New York store openings in the U.S. during the quarter included 7 new full-priced stores, one on the Upper West Side of Manhattan at 70th and Columbus, The Commons in Calabasas in greater L.A. and locations in Texas, Georgia, Ohio, New Jersey and Alabama. They also added 6 new North American outlets, one in Toronto, Ontario, marking our first outlet in Canada, and other openings in California, Arizona, Missouri, Georgia and Florida. During the quarter, we also opened a number of international locations. I mentioned several of these just a few minutes ago, the concession in France at Galeries Lafayette and a full-price store in Brazil, and we also opened one new concession in Japan.

Kate Spade Saturday continues its rollout, with still modest total results, but a very compelling consumer reaction, a growing awareness via social media and very strong retail sales results in our stores in Tokyo and New York. Total sales for the quarter were still immaterial to total brand sales, as Kate Spade Saturday is still in its early stages of development. E-commerce is the leading channel, but retail is showing unusual strength this early in a new concept. With 3 specialty stores in the U.S., including our pop-up on Gansevoort Street in New York City and 6 specialty stores in Japan, we're seeing a nice reaction quickly from local communities. The Gansevoort pop-up store has a conversion rate of 11% with healthy traffic. And as a result of its performance, we decided to extend our lease through the holiday season.

Our strongest store in Japan is the flagship in Harajuku, a street location with a wide mix of traffic, specialty tourists, Millennials, mothers and daughters and Kate Spade New York customers. On October 26, we opened our first store in Singapore at the ION mall on Orchard Road, and the results there have been encouraging as well. What's clear is that the brand does well in areas where the consumer sees its presence, and by definition, where affinity is high, which we've achieved by picking these exact right locations.

In our e-commerce channel, we're especially -- I basically say we're still in what I'm calling, for lack of a better term, a beta-test mode on our marketing and demand generation plan. Conversion year-to-date is at 1% and traffic is growing. We've registered nearly 300,000 users, and the ratio of new visitors to returning is now 60 to 40. Year-to-date, our average order value was $130, considerably above our plan. We're learning about our customer. Naturally, the majority of traffic we enjoy in this first semester is coming from Kate Spade loyalists. That's because we decided to spend our first marketing dollar leveraging our Kate Spade New York database. And in so doing, we've created an overlap today of 75% between the Kate Spade Saturday database and the Kate Spade New York database. This is helped even further by the visibility of the Kate Spade Saturday site on the homepage of the Kate Spade New York site. And even better, our consumer can shop both brands with one shopping cart and check out in one transaction, a fact that's actually driving sales.

But as you know, the strategic mission for Kate Spade Saturday is reaching a new consumer, a younger one, one that isn't quite ready for all the glitter and shimmer of Kate Spade New York. The next inflection point for Kate Spade Saturday will come from shifts in the digital marketing plan and social media efforts towards these Millennials that are new to the overall franchise. The team is now testing and learning in their studied way the different digital strategies to drive the best and most efficient spend to spread the word and recruit these new users.

Within the database overlap, we can see a difference in consumer profiles. The woman who was shopping both Kate Spade New York and Kate Spade Saturday is older than the woman who shops just Kate Spade Saturday. The Kate Spade Saturday-only consumer is younger and more likely to come back and shop more often. So far, our customers tend to be Caucasian, but over-indexed as well across the Asian ethnicity. The number of Kate Spade Saturday-only buyers grew 15% in September. And the database is sourcing most strongly from areas where we have the beginnings of a retail presence, around New York City in the northeast and California.

Apparel continues to be our strongest category at Kate Spade Saturday, across all countries and channels, hovering at right around 45%. She loves our dresses, skirts, slip neck tees, even our denim picked up in the fall. The Weekender Bag continues to drive our accessories business. However, we saw some great wins in the leather category with our Inside-Out Tote. The shoe category has also shown promise. Home accessories is a bit more of a challenge for us to produce at this stage, but we're exploring alternative avenues for that for 2015.

Our view that the sales will be too small to matter critically to the overall franchise this year and next year, but will, by 2015, has not changed. Clearly, our decision to make the investment now to launch the brand is a major strategic one for the company. It's worth noting that we are in fact investing more this year than we had planned in terms of net adjusted EBITDA. The total investment for this year is approximately $16 million in adjusted EBITDA loss, driving -- driven primarily by investments in marketing and infrastructure related start-up expenses. This means Kate Spade Saturday will be more dilutive to the whole of Kate Spade in 2013 than we planned, adding an extra 150 basis points of dilution to the adjusted EBITDA rate for total Kate Spade, although we still expect brand adjusted EBITDA to be in the forecasted range of $130 million to $140 million for the year. This investment rate will ease in 2014, but it's very important and I believe smart that we do this now. We do believe our emphasis on digital, while more difficult in some ways than opening stores in the early days, will become an anchoring strength for the brand.

Okay, shifting gears. Turning to Slide Page 6. Lucky Brand's third quarter performance was just fine, frankly, in light of the overall marketing competitor results that we've heard. Total sales were up 7.3% or $8.4 million to $120 million. $4.2 million of the growth comes from our direct-to-consumer channel. The domestic wholesale business is up 5% or $2.1 million, with the balance provided by our new international business, which contributed $2 million of sales in our first full quarter of international shipping. Lucky Brand has entered the fourth quarter in a good inventory position. And holiday is off to a very strong start there, particularly in our men's and women's fashion categories.

Overall direct-to-consumer comp sales were flat, and the retail store direct-to-consumer comp was also flat for the quarter. E-commerce sales were up 4% for the quarter, representing 5% of total third quarter sales. And our latest 12-month direct-to-consumer comp sales per square foot were $462. Year-to-date, the direct-to-consumer business is up in comp terms, plus 1.2%, delivering a 2% gross margin comp. During the quarter, we opened 13 new outlet and 3 new specialty stores. For the balance of the year, we'll open an additional 3 new outlets and recently opened our new flagship specialty store on Beverly Drive in Beverly Hills, California, which is spectacular.

At the end of June, Lucky Brand's e-commerce business underwent a major transformation, migrating to a new operating platform with significant, and by the way, visible improvements in functionality and moving to a new service provider as well. This transition disrupted business early in the quarter as the team worked through various issues. But the site is now performing to expectations, and we're very excited about the opportunity there. I'd say now that this team is about as focused on the omni-channel opportunity as their sister company at Kate Spade.

We continue to be excited about new business in our direct-to-consumer channel, which includes Lucky Kids and our new handbag line. We ended third quarter with our Lucky Kids line in approximately 42 doors, including 22 outlets doors. Most notably, we launched extended sizes to reach kids 7 to 14 in the quarter. And the results exceeded our expectations to the extent that we're actually in the process now of chasing inventory for that line. Also in line with our plans to increase productivity in our stores, we launched our new handbag line in our specialty stores in the quarter, and that business is off to a strong start.

This new line has also been very well-received in the wholesale channel, and we couldn't be more excited about the incremental opportunity here. Lucky Brand's wholesale business continues to perform. Following solid results with $10 million or 13% of the growth in the first half, wholesale sales in the quarter were up 5% or $2.1 million. We plan to end the year with wholesale sales up about 20%, with positive momentum at our department -- major department store accounts, particularly in women's. Our new plus size business continues to drive growth and will contribute approximately $7 million of the wholesale sales growth this year.

Our international expansion continues to move forward, as I mentioned, as we began shipping to several of our new partners in the third quarter, as they prepare for initial shop-in-shop and freestanding store launches, particularly in South Africa and South America.

In terms of earnings for the third quarter, adjusted reported EBITDA of $4.9 million was down 1.8 to last year. The decline in third quarter earnings was largely driven by the impact of new store openings throughout 2013, the impact of the e-commerce transition, particularly in July, and the impact of the implementation of our new point-of-sale system during the quarter. Year-to-date, adjusted EBITDA is up 6% to year ago.

Turning now to Slide Page 7. As we announced yesterday, the Juicy Couture IP sale to Authentic Brands Group was completed. Although we've announced that we will be exiting the Juicy business, that we have sold the intellectual property and have begun a restructuring plan, we'll not be able to account for Juicy results as discontinued operations just yet. As we disclosed, we've entered a license agreement with Authentic Brands Group to operate its retail and wholesale operations to ensure an orderly transition of the business. Because we're winding down our operations rather than disposing of them in a conventional sale transaction, under U.S. GAAP, we will report the operations of Juicy Couture in continuing operations until they are disposed. We will, however, also provide adjusted results, which will exclude the impact of Juicy Couture, in order to provide you a clearer picture of the go-forward company. George will reiterate some of the important messages about the transition and comment on our estimated net proceeds from the sale and from the shutdown of operations after transactions costs are included.

Here's a brief summary of how the brand performed during the quarter. Overall, that business was also right on forecast for us. Total sales were down 9.1%, largely driven by our exit of most of the U.S. department stores back in January of this year. Total direct-to-consumer comp sales were down 3% during the quarter. Direct-to-consumer retail store comps for the quarter were down 6%. E-commerce accounted for 8% of total sales and continues to grow as a percentage. E-commerce comp sales for the third quarter were up 23%. Productivity, as measured in the latest 12-month direct-to-consumer comp sales, came in at $645 per square foot. Adjusted brand EBITDA was flat at $7 million for the quarter.

In Europe, our full-price retail stores sell comp increases of plus 26%. On inventory, down 18%. The outlets in Europe were up 17% on roughly flat inventory, and comp sales in Southeast Asia were up 14%. Finally, the U.S.-based outlets that have been re-Coutured since spring are outperforming the fleet in sales, traffic, margin and conversion. Paul Blum and his team have done an absolutely outstanding job on this business this year.

The overall product trends we saw in second quarter got even stronger. In particular, the apparel business is now growing, while accessories continues to decline. In apparel, the relaunch of track with the modern tracksuit drove sales in that category up 12% on inventory units down 18%. Fashion dresses accounted for 18% of total apparel sales and were up 6% to last year, again on inventory that was down 6%. And woven tops were up 71% on an inventory plan that was up only 36%. We expect these apparel trends to continue to improve with each delivery. And we believe we are in fact handing over a business that has a lot of potential, very solid to ABG's partners.

Elizabeth Arden, their launch of Viva Noir, had an 83% sell-through which outperformed all of our expectations for the launch. In the meantime, improvements to accessories are still forecast to improve during the first half of 2014. We see fall handbags selling through slightly better, but not yet all the way to plan. We're looking forward to playing our role in the transition of this business to Authentic Brands Group and their chosen partners. In the meantime, you'll be hearing from George in a second here, who will share what we know today about the transition and the closure of the sale of the brand to ABG.

Turning to Slide Page 8, this is really a reference chart. You can see a summary then of the direct-to-consumer comp trends that I've just described for each of the brands.

And on Slide Page 9, very briefly, sales at Adelington Design Group were down for the quarter 39%, totaling $13 million. As I've noted on the last 2 quarterly calls, sales in this group have been badly affected by the performance of the jewelry business at J.C. Penney. While Monet shipping was up versus the same quarter last year, overall reported sales have been hit hard. The team though is very excited by the return to a proven promotional calendar, the return of boxed gift sets to the floor and the reactivation of the formerly successful replenishment programs and a pricing structure that the consumer understands.

How fast will this normalize in 2014? We don't know, but we're supporting J.C. Penney and we share their optimism. The elements that changed in 2012 and '13 were so against the grain of category history, that I believe returning them to the marketplace will produce a very positive result next year.

So that's the overall update by brand. Now my most capable partner here, George Carrara, will take over to share the key outcome of -- or I should say key income statement and balance sheet metrics and then give you some more details about the Juicy deal, as I said. George, take it away.

George M. Carrara

Thanks, Bill, and good morning, all. Slide 10, our third quarter adjusted P&L summary. Net sales for the quarter were $431 million, up $66 million or 18% versus 2012. This increase was principally driven by a $78 million or 76% increase in Kate Spade sales. Of this total $78 million increase, $25 million was attributable to Kate Spade Japan, which was acquired in October 2012. Lucky Brand sales also increased this quarter by $8 million or 7% versus 2012. These increases were offset by decreases of $12 million at Juicy and $8 million at Adelington.

Our adjusted gross margin rate increased 75 basis points to 56.5%, primarily reflecting increased gross profit rates in our Juicy and Adelington segments, as well as the effect of the increased penetration of the Kate Spade business, which is accretive to the total company rate.

Adjusted SG&A was up $39 million for the quarter versus 2012, a year-over-year increase of 20%, as compared to our sales increase of 18%. As a percentage of sales, adjusted SG&A increased to 55% versus 54.2% in LY, an increase of approximately 82 basis points. And all of this yielded an adjusted EBITDA of $25 million versus $21 million last year and an adjusted loss per share, net of foreign exchange transaction adjustments, of negative $0.04, up from negative $0.05 last year. The improvement of $0.01 resulted from the adjusted EBITDA improvement, partially offset by a $2 million increase in depreciation and the impact of the increase in our share count.

Slide Page 11, our year-over-year operating results by segment. Kate Spade, the x Japan sales growth of $53 million or 52%, results from a 31% DTC comp, 19 new store openings and growth in the wholesale channel, both domestically and internationally. With respect to Kate Spade Japan, I should point out that, on an organic basis, comp sales increased 19% and total sales increased 36% in local currency terms.

In terms of Kate Spade adjusted EBITDA, you can see that the adjusted EBITDA margin decreased by 229 basis points compared to the third quarter of 2012. At the ICR meeting in January and on each call since then, we've said 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. In Q1, we saw an adjusted EBITDA margin decline of 565 basis points, followed by a decline of 486 basis points in Q2, and we're announcing some accelerated reversion to the LY level. But we expect to land the year at an adjusted EBITDA margin that is now a few hundred basis points below LY, given the Kate Spade Saturday results that Bill explained earlier, coupled with the adverse effect associated with the depreciation of the yen, which approximates 50 basis points.

Now let's discuss Lucky. Lucky Brand sales increased by $8 million or 7%. DTC comps came in flat for the quarter, slightly below plan. Adjusted EBITDA margin was 4% versus 6% last year, driven by the start of a ramp associated with new stores, the e-commerce platform transition and the implementation of the new POS system, which came with a steeper learning curve for our Lucky associates, given their wider U.S. store network and broader SKU base. We expect a notable year-over-year increase in Lucky's fourth quarter adjusted EBITDA, given the increase in the store base and wholesale bookings relative to LY. Further, Lucky's comps are off to a good start, as the Lucky team executes on numerous strategic initiatives that Bill discussed.

Juicy. Juicy sales declined by $12 million or 9%. This is consistent with expectations for the quarter and in line with our prior guidance of a sequential improvement on a quarter-to-quarter basis. Bill noted that the business was right on forecast for us and in a few minutes, I'll speak about our transition plans for the go-forward.

The Adelington Design Group net sales dropped $8 million and adjusted EBITDA decreased by $3 million. This principally results from a decline of our Lizwear Club business, and we are still seeing softness at retail for jewelry across the mid-tier wholesale space, as Bill explained.

Finally, corporate. Corporate costs of $15 million were lower by nearly $1 million compared to 2012. This is exactly in line with our plans, resulting in a residual positive impact from the streamlining actions initiated last June. In a few moments, I will address the anticipated impact on our corporate cost center that is expected to result from the Juicy transaction.

Continuing on to Slide 12. We have some selected balance sheet and cash flow data. Accounts receivable. Accounts receivable is down 4% or $5 million to $122 million. This is principally driven by decreased wholesale sales in our Juicy Couture and Adelington segments, partially offset by increased wholesale sales in our Kate Spade and Lucky Brand segments. We continue to turn our receivables at a rate that is consistent with the industry norm. Inventory is up 26% or $65 million to $311 million. The increase is driven by increases in Kate Spade inventory to support growth. Lucky, Juicy and the Adelington Design Group ended the quarter on inventory plan and at appropriate levels relative to sales trends.

Next, total debt was $522 million as compared to $386 million at the end of Q3 2012, an increase of $136 million. This results from $109 million of CapEx, the $41 million acquisition of Kate Spade Japan, the funding of inventory to support the accelerated growth at Kate Spade, the impact of exchanging $32 million of our convertible notes into equity. And finally, this reflects net proceeds of $29 million from the sale-leaseback of our Ohio distribution facility and our corporate office in North Bergen, New Jersey. Finally, CapEx for the first 9 months increased to $80 million from $57 million LY. This is consistent with our plans.

Slide 13, an update on our corporate operating strategies. Toward the end of last quarter, we completed our e-commerce re-platforming and are very happy with the results. We continue to develop new features and functionality to further capitalize on this distribution channel. We built and are in the process of rolling out a geolocation web service that returns visitor information at the city level. As we grow these analytics, this functionality will allow us to perform directed marketing campaigns on a segmented basis.

We also now offer international shipping to select countries across our entire portfolio. This ability not only expands our sales potential, but the related functionality has been designed with the consumer in mind by identifying, during checkout, all of the relevant important freight costs. These are just a few examples, as we continue to cater to our social media-adept consumer by adding attributes such as gamification and streaming content for a more lifestyle appeal.

On our new POS system, we completed our domestic rollout as planned in time for the holiday season. This feature-rich initiative gives the stores real-time visibility to stock across their respective fleets. We've also gained operational efficiencies with the management of our inventory through instantaneous processes for merchandise adjustments and transfers, while also being able to send customer receipts via email. We're testing mobile POS functionality in the hopes of piloting in select stores during the fourth quarter.

We're also in test mode to pilot our CRM, in which our e-commerce and brick-and-mortar information will be fully integrated for easy access in our stores. Bill refers to this as the one database initiative.

With these pivotal strategies in place, we are in the planning stages to establish an e-commerce platform in Europe, starting with our Kate Spade business. It has been a great year for accomplishing key initiatives and transitioning to best-in-class operating solutions.

Finally, I'm pleased to report that our distribution center in Ohio has transitioned nicely to our new 3PL Ridge Global Services, and we are in the design and development phase of revamping the related operating platform. The ultimate result of this initiative will yield several million dollars of savings.

Slide 14, the Juicy IP transaction. Let's first recap some basic terms of the deal, which we officially closed yesterday. On October 7, we announced that we signed a definitive agreement to sell the intellectual property of the Juicy Couture brand to Authentic Brands Group for $195 million in cash. Pursuant to this, we also announced the short-term licensing agreement that allows us to unwind our inventory ownership in an orderly basis and to transition key operating elements of the Juicy business to ABG and/or its licensees through the first half of 2014 and for a short sell-off tail thereafter. Our overall objective during this period is to make the transition as seamless as possible, both to the consumer and to our wholesale and international partners.

Accordingly, we intend to operate Juicy in a business-as-usual mode through June 2014. Our initiatives, such as Juicy Sport for example, will launch as planned during Q1, including supporting marketing. In exchange for this short-term license, we must pay ABG a minimum guaranteed royalty of $10 million plus a percentage royalty if our actual DTC and wholesale sales exceed a predetermined amount. Based upon our current sales forecast, I should note that we do not expect to pay ABG much more than the minimum royalty.

When we announced the sale on October 7, you'll recall that we deferred the discussion of the related estimate of restructuring cost pending the development of ABG's business plan and pending the development of our detailed transition plan. As you know, pursuant to this transaction, we are required to wind down or transition the operating elements, leases and contracts of the Juicy business. In order to prepare our detailed transition plan and determine estimated restructuring cost, we had to complete extensive diligence that entailed a fair market value analysis of the Juicy lease portfolio, both stores and corporate; a review of the related lease agreements; consultation with third-party real estate experts; a comparison of the Juicy store locations with the Kate and Lucky store opening plans and analysis of our sales and merchandising plans; a review of all other Juicy-related contracts; and an assessment of the employee-related costs. As we successfully closed the sale yesterday and now formulated our wind-down plan, while ABG's license partnerships continued to evolve, I'm prepared to discuss certain transitional developments today.

So now to Slide 15. Slide 15, the Juicy transition overview. On Slide 15, we're providing some key updates on the transition of the Juicy business. Upon closing yesterday, Authentic Brands Group assumed all licensing agreements and international distributor arrangements. Additionally, we anticipate that ABG will soon announce a strategic partnership or partnerships that will transition the product development infrastructure, the distribution of merchandise to ABG's international partners and assume other operating segments of the Juicy business. The goal for this partnership is to preserve continuity of the supply chain and help enable a smooth handover of the brand, including buying and delivering all merchandise starting with the fall 2014 collection. We believe such an arrangement will also provide a seamless transition for international operations, while providing a platform for the business in North America as well.

With respect to the Juicy store fleet, we anticipate converting a number of Juicy stores to Lucky Brand and Kate Spade New York. Additionally, we retained RCS Real Estate Advisors to manage the redeployment, transfer and transition of the remainder of the Juicy Couture retail stores in the United States in a cost-effective manner. I want to note that the Juicy lease portfolio is extremely attractive, with approximately 70% of the fleet having rents that are below market. Accordingly, we expect this, along with our 8-month marketing period lead time, to facilitate the transition of those stores not being converted to Kate and Lucky.

On our prior call of October 7, you had specifically inquired about our plans for the Juicy Fifth Avenue store, as it is no secret that there is significant value there. We are currently evaluating our options to unlock this value, either to exit the lease or convert to a new Kate Spade location. We believe that proceeds from an exit transaction will likely materially improve the total net proceeds resulting from our decision to exit the Juicy business. We expect to finalize our decision in the near future.

So let's now flip to Slide 16 for a view of our estimated net proceeds. On the first line, you see the $195 million of gross proceeds, which we received via wire yesterday. Of this amount, $70 million was transferred to our main operating account and is immediately available for general corporate purposes. The balance of $125 million is being held on our behalf in a trustee account for the benefit of the holders of our high-yield bonds. In a few moments, we will revisit this topic and fill you in on our plan with respect to this $125 million.

On the next line, you'll note that we anticipate cash restructuring costs in the range of $50 million to $60 million. This will be incurred and dispersed through the third quarter of 2014. In addition, we anticipate a total of $10 million in transaction cost, inclusive of professional fees. All this sums down to net proceeds of $125 million to $135 million. And let me remind you that this is before consideration of the guaranteed minimum royalty of $10 million, which will be paid during the wind-down period.

On the next line of the slide, we've noted that any proceeds from the monetization of the Juicy Fifth Avenue lease will be incremental. And as described earlier, we believe such are likely to materially improve the total proceeds resulting from our decision to sell and exit the Juicy Couture business. All this is before consideration of taxes, which will be in the low- to mid-single-digit millions. This tax amount is principally comprised of alternative minimum taxes and some state taxes. I should also note that after consideration of the net proceeds, we expect that our NOL position will be depleted by less than $20 million. Of course, a greater amount of NOLs would be depleted should we monetize Fifth Avenue. Finally, I should point out that we expect a wind-down of our DTC and wholesale merchandise pipeline to be cash flow neutral.

Now let's quickly address our plan with respect to the $125 million of proceeds that are currently restricted and being held for the benefit of the holders of our high-yield bonds. As you may know, the high-yield bondholders have a first lien against the intellectual property of Juicy, Lucky and Kate. Accordingly, any value net of restructuring and transaction cost derived from the sale of this IP must be offered to the high-yield holders in the form of a tender offer made at par. Our plan is to make a tender offer at par for $125 million of face value of our high-yield bonds. We expect to do this during November, and the indenture requires a 30-day tender period. Given that the bonds are trading around $109, we expect -- we don't expect the bondholders to tender. Accordingly, upon expiry of the tender window, any proceeds that will not be used to fund their tender revert back to us to be used for general corporate purposes.

Now let's conclude our presentation by reviewing our financial outlook on Slide 17. Given what we know about the implications of the Juicy Couture transaction, let's update a few key metrics that are embedded in our financial outlook for 2013. Note again, these ranges now exclude Juicy's results for the year.

As Bill indicated, we are tightening our 2013 forecasted range of total F&P adjusted EBITDA to $120 million to $140 million, which excludes Juicy Couture results and is net of foreign currency transaction adjustments. Incorporated within this range are annualized direct-to-consumer comps for Kate Spade in the high 20s and comps in the low-single digits at Lucky Brand. As Bill mentioned, we are reaffirming our Kate adjusted EBITDA range of $130 million to $140 million, which includes the impact of higher DTC comps mostly offset by the dilution from Kate Spade Saturday and the adverse FX impact associated with the depreciation of the yen.

For corporate overhead, we are targeting $68 million for 2013. I should note cost savings at the corporate level resulting from the Juicy transaction will not take place until the second half of 2014 and will likely only amount to $3 million to $5 million on an annualized basis. We believe that if we operated as a model brand company, these corporate costs would ultimately amount to 4% to 5% of net sales on a pro forma basis, and that is in line with peer expense levels.

Let's continue through the slide. Depreciation and amortization, $70 million to $75 million. Annual CapEx is targeted at approximately $115 million. We expect interest to be approximately $46 million to $48 million for the year, with a year-end debt balance in the range of $280 million. Our normalized tax rate for 2013 applied to adjusted earnings will be between 38% and 48%. And finally, after consideration of all aspects of the Juicy transaction, our NOL position will be relatively preserved at a level in excess of $500 million. And lastly, our forecasted full year 2013 basic share count is approximately 121 million shares. We anticipate Q4 diluted share count of approximately 125 million shares.

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

William L. McComb

Thanks, George. I'm especially pleased with our operational achievements during the quarter, the list of things that George discussed, with big kudos to both George and his team in completing the domestic rollout of the new POS system in all the brands, and finishing up the first phase of that very important U.S. e-commerce re-platforming as well. George and his team have done a tremendous job moving these operational initiatives forward so that these brand growth plans can be achieved. But also, George has helped unlock substantial value for our shareholders while managing the Juicy transaction. Really impressive. So thank you, George.

Let's go ahead and open up the phone line now for some questions. Paula?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ike Boruchow of Sterne Agee.

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

I guess, Bill, the Kate Spade comp guidance, it had been in the teens. Now it's the high 20s. So -- and yet -- and you put up a great quarter. I guess the implied guidance for your holiday quarter just looks mid- to high-20s kind of comp, again, for Q4. Could you just talk about what you're seeing with Kate right now and the confidence you have with the product assortment in to holiday?

William L. McComb

This is always the tough call, right? Because this is the call where we're not quite, but almost halfway through the quarter. All I'll say is this, we're off to another strong -- a very strong quarter. I mentioned the same for Lucky Brand. Both brands are having a strong quarter. I'd rather not get any more granular with it than that.

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

Okay. And then, again, just trying to back into some things from your full year outlook at Kate, if you're sticking with the EBITDA guidance you had given and you have that kind of top line growth, should be expect the Kate margins could maybe hit that inflection point where maybe they start to flatten out in Q4? Or is that more of a 2014, early 2014, kind of event?

George M. Carrara

Where we led you in our prepared remarks was to expect our EBITDA margin to conclude the year at approximately 17% to 17.5%. So you should -- you could do the math for Q4, Ike.

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

Just, you threw us a lot of good information on Kate Spade, so I guess I'll dig a little bit more. As we're getting a little bit closer, I know Kate Spade's gross margin's run at a higher rate than the company average. Can you help us understand sort of at what level?

William L. McComb

No. I don't think we want to speak to it yet. I mean, maybe we'll address it at the next quarter. It -- they are -- it is exactly what you portrayed.

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

Okay. Can you tell us what the penetration of apparel or sportswear is right now for the brand?

William L. McComb

Oh, gosh. I want to say hovering around 30%.

George M. Carrara

Mid-20s.

William L. McComb

Mid-20s, George? Yes? Yes, okay.

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

And then what is the strategic thought around -- you opened this store that you said was actually apparel-focused. What are the thoughts, what are the opportunities there in both retail and wholesale? Because that seems...

William L. McComb

Well -- so the good news is that, for those of you analysts that are based on the East Coast and specifically in New York, you can go see it. It's a test concept. And so what we're doing is in neighborhoods where we believe there is a high density or concentration of the whole lifestyle Kate Spade woman, we -- we sell handbags there, we sell jewelry, we sell tech items. But the assortment is skewed significantly more to apparel than what you would find in what I'll call an average Kate Spade store. So it has more of a flagship assortment of inventory on the apparel side, but it's a smaller store than a flagship store. What we are wanting to learn there is what happens -- who is the shopper? What does her average transaction look like? And how much broader can the brand go by distorting inventory that way? At the same time, in Chicago, I can tell you a different story. We just opened at 900 North Michigan, a store, right there on the main level. And that store, which is only a few blocks away, but a radically different sourcing, a radically different traffic pattern and different customer, that store is skewed more than our average to accessories, while the Oak Street store, we're also skewing more toward apparel. And this is our way of learning about -- I want to say subtle, but changes in assortment and inventory at the store and what it does in terms of both broadening the consumer base and going deeper in penetration in some of those categories that we're emphasizing. So it's very interesting. I mean, we -- the store on the Upper West Side that we're talking about has a wonderful out-of-the-gates performance. And so it's -- in a city like New York, where we have multiple points of distribution between our own company-owned stores, as well as what our wholesale partners bring to the table, we're looking for these neighborhood stores to actually deliver something sort of new and different. And that's the benefit of not just being -- you've heard us talk -- Craig spoke at length at the April Investor Day, and the team, in the future, will talk even more directly to you all about this. We're a little bit Coach and we're a little bit Ralph Lauren. We're clearly a brand anchored in accessories. But as a lifestyle brand, we aren't exactly like what you would say Coach was as it was beginning its rollout from Sara Lee. And that's what we think makes us special. There are elements of the Ralph Lauren brand in the globality of what they offer that are important to the Kate brand equity.

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

That's huge. That's great. And then just last, the China sales doubling comps up 28, is it the same mix of business there? Are they gravitating towards accessories? Do you have the sizing right on sportswear, et cetera?

William L. McComb

Yes, yes. It is -- that business is, by definition, by assortment, by SKU, much more skewed toward accessories. We do have sizing right. That's one of the advantages of having such a great heritage in Japan. But the business is built in being driven by accessories right now.

Operator

Your next question comes from the line of Edward Yruma of KeyBanc.

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

Can you talk a little bit -- I think it's been sometime since you refreshed us on kind of where Kate Spade could hit you from a sales per [indiscernible] level. I think at one point, you thought 1,000 was the physical limit of the box. Clearly, you're north of 1,200, so you're past that. What's your latest thought? Are you seeing any stores that are hitting kind of maturity levels, and does this, over time, necessitate a bigger box?

William L. McComb

Okay, look, it's a great question. I don't really have much to update you on. We -- it's -- just by definition, if you look at the comp guidance we've given in the last 2 years, I've made the comment that, if anything, you can say we were -- we held back on the release of a big tranche of capital like the expansion that you're seeing in '13 and that you'll see again next year in '14. We probably should have done that a whole year earlier. That said, we ended up driving to a productivity level that honestly was a little higher than what I thought the asymptote might be. I would have thought that closer to $1,100 a square foot is what I would have guided you to expect. We -- I wouldn't use the word maturity. That doesn't feel right in terms of what we're seeing in stores. We're still seeing -- we're seeing a growth profile. But I do think that there is, by definition, some kind of limit there. Although I will tell you that as we go up in price point, not across the line, Craig talks about the 2 shoulders, right? The right shoulder being the lower end or opening price point range of the line and the left shoulder being the higher price point. As the shoulder breadth gets wider and we're having success with the sell-through on that higher end, I think that you will see continued productivity gains in our retail stores without even counting on incremental traffic. We don't want to -- I know that there's a big call to action from some shareholders on get to bigger square footage, get to bigger square footage. And it's fair to say that we ought to learn about it and test it. I'll tell you, I've learned a lot in 2-weeks time just from the significant store at Lucky Brand on Beverly Drive, which is about 6,500 square feet, and what that can mean for the business. I think that clearly, there's an opportunity to do it and to try it. But more than not, if you look at the stunning statistics that you're seeing from us, from the e-commerce channel, it -- our goal is not to source every drop of volume from a brick-and-mortar format but to have these women fall in love with us and give her -- and get her eyeballs at home all the time and get a lot of purchase and transaction power from that. And so we aren't -- there isn't a call to action to greatly upsize our average footprint. But there is a learning plan out there. And not only is it what I was just describing for Scott around SKUs of inventory in different stores, but also, eventually, some upsizing of stores. But not as a radical player or call out that you're hearing me say is the driver of next year's plan.

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

Got it. And one quick follow-up. I know you guys are taking aggressive steps to eliminate corporate overhead. I know some of that future savings may be predicated on some of the strategic alternatives you're looking at. But do you need to wait for a resolution to Lucky before you embark on more cuts? And I guess based on what you've done with Juicy, how much more is available if that's the transaction that transpires?

William L. McComb

Well, I think George gave you the magic bullet. I think he laid out -- George basically said we would envision if we were to become a mono-brand corporation, we believe that, that SG&A, what you call corporate component, should be in the 4% to 5% of net sales range. And we believe that we could get there, and I would -- but that assumes a mono-brand scenario.

George M. Carrara

And absent that, you should -- if we're at $68 million now, in the absence of Juicy, you could expect, as I said, $3 million to $5 million improvement to that on an annualized basis after we get through the wind-down, so something more along the lines of $63 million to $65 million.

William L. McComb

Yes, so the headline, I would say, on that is, Ed, there isn't a drive -- cutting corporate any more, and we've said this before, isn't a driver unless there is a more profound strategic alternative like a selling of Lucky. And if that happens, we've given you the answer as to what we think that, that corporate amount would be, and that's 4% to 5% of sales. Other than that, it's $3 million to $5 million in 2014 off of the company that stands today.

Operator

Your next question comes from the line of Eric Beder of Brean Capital.

Eric M. Beder - Brean Capital LLC, Research Division

Let's switch gears a little and talk about Lucky. You spent -- last quarter, you rolled out the Made in America denim line, and you've been trying to go beyond kind of the core $99 denim. What has been the success with that? And how are you looking at the apparel in terms of is that adding to the average transaction? Is that adding to the average units people are purchasing from there?

William L. McComb

Really great question. So if you take a giant step back, I'll tell you, I believe that the #1 driver of growth at Lucky in the next 24 to 30 months is dollar per square foot productivity of the store fleet that we have. There is a significant EBITDA opportunity from expanding the size of the outlet fleet to what you'd call an industry conventional number. And you see us working on that right now as we roll out more outlet stores. But we have a very -- a smart, well-installed footprint of stores on the specialty retail side. And at $462 a square foot, I will tell you that when you get to a level of profit flow-through, once you cross -- get close to and start crossing into that $600 range, that is stunning. And I mean, we've engineered ultimately this store fleet to have four-wall profitability levels in the 25-plus range once you get north of that $600 per square foot level. And how we are accomplishing that is what you just said. Yes, listen, the good news is our denim business has held together very well. We know innovation is what drives it. I indicated that we're having a fantastic month in October, and that's being driven by men's and women's fashion as well as a good strong denim business. Made in America, it is a small percentage of total denim inventory. So I will tell you that we weren't expecting to see the SKU of the average retail price to go above that $99 mark. But we're really happy with the quality and innovation. And for the denim aficionado, the denim aficionado that we -- that Lucky is all about, that's a really important [indiscernible]. But yes, fashion is going to drive a higher penetration, or I'll say a higher mix above that $462. But then handbags, the launch of the plus line, as we add footwear into the stores, these things are driving overall productivity up.

Operator

Your next question comes from Janet Kloppenburg of JJK Research.

Janet Kloppenburg

A couple of questions. First, you did a major breakdown of the comp bill for the quarter. It -- the 31% includes all markets. Was that the same breakdown as the 27% for the second quarter?

William L. McComb

Yes, same base, yes.

Janet Kloppenburg

Okay. So the domestic comp, George, in the second quarter was what? And what was the domestic comp in the third quarter?

George M. Carrara

Yes, we don't have that in front of us right now handy.

Janet Kloppenburg

Well, I think you gave it for...

George M. Carrara

We did give it. I just don't have it handy. You're right, of course, we gave it. It's in our second quarter slide. I don't know that we...

Janet Kloppenburg

No, what was it for the third quarter? Was it -- you gave the number so quickly. It was high 22%, was that it? I'm not sure.

George M. Carrara

Yes, hold on one second. It's -- it was 22%, that's correct. So of the 31%, 22% was the brick-and-mortar component for the quarter.

Janet Kloppenburg

Do you think that -- do you think, George, do you think that the domestic comp accelerated from the second quarter?

George M. Carrara

I don't know that we have that here with us, and that is just domestic versus international. So I think it's a bit too detailed for the call right now.

Janet Kloppenburg

Okay, I apologize for that. Another question I have is on -- maybe I should have been able to pick this up. But I know that the Juicy EBITDA has remained intact at $130 million to $140 million. Yet you took off the higher end of your EBITDA range, and I'm not sure I know why that is, George.

William L. McComb

Well, I think we showed you. The incremental investment, really 2 things. The incremental investment in Kate Spade Saturday, a bit of a hit from FX from -- in the yen and clearly, Lucky Brand in second and third quarter. And while we're right on track for what we -- for our holiday plan at Lucky, we reduced our overall forecast on Lucky Brand. And that number excluded Juicy, the tightened range. So no -- but you notice, no change to that Kate range, the total health of Kate range, even though we -- Kate Spade Saturday ended up being more dilutive.

Janet Kloppenburg

Okay, great. And then the EBITDA range for Kate now is $17 million to $17.5 million for this year. That's the rate?

William L. McComb

Yes.

Janet Kloppenburg

And so my question there, Bill, is as you look longer term and you think about the multichannel, multi-market, multi-category rollout of the Kate Spade business, can you give us an idea -- because if you think operating margins for this brand can ramp to something comparable to where Michael Kors is today. Obviously a business that's at $3 billion, so much higher, a much bigger revenue base and store base than Kate. But are you following in the footsteps to ramp the operating margins to that level?

William L. McComb

Well, we -- yes, I mean, this is something we've talked a lot about. A couple things I'll -- a couple coordinates I'll give on the map. We had said the taking a giant -- look, I mean, we aren't letting the string out as fast as they have at Michael, and we have a little bit of a difference in that they have a...

Janet Kloppenburg

Because the wholesale business is different. I understand. Yes.

William L. McComb

Yes, their wholesale business is a lot bigger than where we want ours to be. That said, when you look at the price points, the gross margin profile, the mix, the answer to the question is ultimately yes, Janet, they're comfortable. But the most important call out that we gave at the April Investor Day discussion was we put a milestone out there. We said by the end of 2016, the total franchise will deliver an adjusted brand EBITDA margin of 25% or greater. And some of you have said, "Oh, wow, come on, you're sandbagging. Can it be higher?" Look, those are decisions we will make as it relates to the scaling and ramping of investments like Kate Spade Saturday. We're not going to launch another Kate Spade Saturday between now and then. Jack Spade is sort of more than not living within its means, and we'll be doing that in '14. And we are really, really comfortable with what the forecast and ramp looks like on Kate Spade Saturday. But the guidance -- and I don't want to get out any further than that 25 or greater that -- by the end of 2016 for the franchise as a whole that we've set except to acknowledge that the product mix, the price range, the gross margin structure is very similar to Michael's.

Janet Kloppenburg

So this -- to be frank, the Kate Spade revenues are coming in higher than I modeled for this year. And the EBITDA margin is coming in lower for the reasons that you explained. So my question is then we can still bank on the 25% or greater for 2016 that you did give at the Analyst Day? Or as you just indicated...

William L. McComb

What we said is -- I mean, keep in mind, that's many quarters out. That is a management line in the sand. That is a managerial goal that we are pointing and allocating resources to. It is a target, and it has not changed at all. It's a very important target for us.

Janet Kloppenburg

Okay. And then George, if I could just a get a little more clarity on the corporate overhead guidance. It's going to run at about 63 to 65 as we know the business today with Adelington, Lucky and Kate. And if you become a mono-brand, then we can be modeling something at about 4% to 5% of total revenues.

George M. Carrara

That's correct. That's exactly right. And I'll just clarify, Janet, that the 63 to 65 is on an annualized basis. So you shouldn't expect that for 2014 as we're continuing to support the Juicy business corporately on a business-as-usual basis.

Janet Kloppenburg

No, I appreciate. You mean for next year?

George M. Carrara

For next year, right.

Janet Kloppenburg

Yes, it'll be higher than that in other words?

George M. Carrara

That's right.

Janet Kloppenburg

Okay. And lastly on the Juicy Fifth Avenue store, how big is that store? And is that -- is it a store that would be materially larger than any other Kate Spade flagship store you currently run? And I'm just thinking about what the conversion would look like there.

William L. McComb

Yes, okay. We'll talk more about that store. I think what we've done is we've given you a peek into the different considerations we're looking at. Overall, it's 17,000 square foot. We're using 12,000 right now as salable with Juicy. And so yes, it would be -- that would be a major, major global flagship with big square footage. But you'll be hearing more on that as we go forward. Decisions [indiscernible] in the future. Thank you.

Operator

Your next question comes from Corinna Freedman of Wedbush Securities.

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

Just a quick question on these store opening plans for Kate Spade for fourth quarter. I think you opened a few less this quarter than you had planned. Should we assume that those move into the fourth quarter? And any expectations for 2014, as far as store growth for Kate Spade? Do you -- are you considering ramping up store openings? Or do you find that this level is -- has been manageable?

William L. McComb

This is -- the level in 2013 is what we've also guided for next year. It's a manageable level. We can -- physically, logistically, we can manage it, and it's right where -- it takes us right to where we want our capital budget to be. And so we think it's strong. We think, Corinna, for fourth quarter 2013, we will have 18 new doors opened globally, globally for the franchise.

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

Okay. And then as far as category goes for fourth quarter, it seems like there's more of an emphasis on gifting, both online and in the store. Can you speak a little bit about that and any changes you've made this year versus last?

William L. McComb

No, it's -- for the last 2 years, we've had a major, major gifting emphasis. And I think you might be seeing a slightly earlier introduction of some of the gifting categories. But in terms of overall presence, it's right there. It's about the same.

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

Okay, and any comments you can make about home or bridal and some of the newer initiatives that you have in place this year would be helpful.

William L. McComb

No visibility or callouts right now. I think when we do the year-end recap, I'll do that for you. I'll pull those.

Operator

Your next question comes from Mary Gilbert of Imperial Capital.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

I wondered if you could give us an update on the composition of sales at Kate Spade by channel, meaning wholesale, retail. And then I just wanted to verify mix of the business. So it sounded like apparel was about 25%. So I thought you could give us a little more granularity on that. And then Kate Spade Saturday, what the magnitude of revenues are and how that compares to plan. It sounds like Kate Spade Saturday is coming in better than planned. I just wanted to get a little bit more granularity on that.

William L. McComb

Really quickly, we don't -- I mean, we read off 1,000 numbers. That's all we give you. We don't break out the channels any more than that. There's good reason for it. We develop a customer and we market her from headquarters and from retail stores, and she goes between channels. And so the latest breakout that we gave you, we began on the last quarter by putting more of a spotlight around the role that e-commerce plays. And all of that is in the data set. In terms of composition, I'm going to be very rough here, because I don't have the third quarter splits in front of me. But roughly speaking, wholesale accounts for...

George M. Carrara

25%...

William L. McComb

Yes, 20% -- I was going to say between 20% and 25% of the business, might be a little bit closer to 20%. And the rest is what we call DTC and that splits -- you can figure out the e-com amount based on the penetration. I said in third quarter, it was 18%. That's a seasonal thing. The business runs close to a 25% on an annualized basis, 25% of total sales coming from e-commerce. On Kate Spade Saturday, no, I think you drew the wrong conclusion. It -- I would say one of the reasons why the EBITDA investment at minus $16 million for the year is a higher number than we had anticipated is that the sales curve is a little slower. And it's not discouraging in any way, but it does reflect the fact that we are continuing to spend at a marketing level and the sales curve is coming in slower. And that's really just the ramp from e-com. So while e-com is doing well, I had -- what you walked away with, Mary, as I said, actually, the uptake in start-up productivity of the few retail stores that we have in Japan and New York and now Los Angeles are actually stunning for a brand-new concept. But in terms of the overall, the slower ramp in revenue coming from e-commerce is what's driving up that higher "net investment rate." So I think that answers...

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Yes, that's helpful. Yes, that was it. I guess it was the retail stores. So as a result, it sounds like you're seeing how important it is, I guess, to have these retail stores in order to be able to get the ramp at e-com. Is that fair to say, that...

William L. McComb

I don't want to go there yet, because I will still tell you, I -- look, what it shows is how unbelievably salient the concept is. When we have a store which is a brand-new concept and we're in one of those neighborhoods that has a high-density of Millennials, bang, it -- the traffic, the conversion, the average transaction, it exceeds what we thought it would have done. That actually is a reflection of the saliency of the concept and of the product inside the stores as well. And so, there's a whole learning curve that goes with the business. There's a whole -- a learning curve around sizing, around product categories, around pricing, and I got to tell you, I think we're really happy with the learning on that front. The demand generation model, we are -- I call it a beta test because we're playing with different lists. We're playing with different search engine strategies. We're playing with -- and as we play with that, we get -- it's direct marketing. We learn instantly what gives us the best exposure. So at this point, I mean, as a brand marketing guy, as a concept creating guy, I will tell you, I'm really excited about the concept, and that the learning is just that we've got to keep beating away at that customer digitally. There's no question that the stores help, but that doesn't mean that we're stopping and saying after our first semester in the business, "Gee, we're going to rethink radically the penetration of retail stores." What actually -- one of the things that Craig will tell you that his team loves about having a retail store is it's a live laboratory. So while we're getting unbelievable metrics real-time from the website, from the traffic, from the transactions, you get the qualitative piece from people in the stores by having some retail stores. So right now, we aren't looking to tilt the capital investment plan over the course of the next 5 years to more -- to dramatically increase the number of Kate Spade Saturday stores that opened. Although, wouldn't it be wonderful if we had a concept that was so hot, that it was deserving of more physical real estate? Right now, it's still in the proving box. And we remain -- I said, I think that digital will be an anchoring strength of that management team with that concept given who our woman is. Our shopper is this Millennial that is obsessed with her cell phone and her iPad and shopping and looking, and this brand catches her eye.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay, that's helpful. One thing on Kate Spade, if you could talk about a couple things. One, the sort of Madison Avenue product expansion, you're utilizing e-com that way. And then expansion of watches. And then -- because that sounded really interesting, especially the whole upgrading of it to be more -- you kind of used the term Michele-like. And then, also, 2 other things. On the store on Fifth Avenue. If you could talk about the -- would you look at splitting the square footage, maybe, and max -- being able to tap value there, while at the same time having a Kate presence there? And then finally, what's going on with an e-com wall in the stores that you were thinking of introducing into some of the Kate stores?

William L. McComb

We'll skim through. I mean, good questions, obviously. I need almost a meeting format to kind of walk through some of those. Fifth Avenue, guys, let us come back to you. We've been transparent that we had a lot of optionality. The theme that George named was unlocking value. There are different ways we can go on it. I don't want to start getting into the micro-strategies on would we divide it up, would we do this or that. So just hold your horses. You'll hear from us soon enough. Good news is, there's value to be unlocked, and that could come in 2 different forms. The Madison Avenue collection is, we are going to be expanding it, it's a part of the 2014 business plan, where those kinds of items, which elevate the average purchase price and reach that high-end aspiring customer, will be available online as an e-com concept/shop soon, but not this fourth quarter. So the good news is we've reacted to what we've learned in that store and we'll be bringing that to the customer then. I...

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Watches?

George M. Carrara

Watches.

William L. McComb

Yes, watches, so watches, and then I've got to -- we've got to go to the next because I'm getting the signal that we're running low on time. But yes, watches, it's what Craig calls these elastic categories. The management team there looks at it that way. Deborah, Deborah sees an opportunity to go -- again, apply the shoulder strategy to go up in quality, in price and compete more at that -- sort of head-to-head with what you might call the Michele watches. But we also know that we've hit a sweet spot with the assortment that we currently have now. And for that, what we're talking about doing -- so there are 2 things that I said that the team is doing. One, is expanding its product offering, and that is applying the shoulder strategy. And number two, adding distribution depths in all of the regions of the world. So right now, we're adding a distributor in the U.K. You all know that the watch business is one that a significant amount of share of the category is done in what we call out-of-channel. And whether these are mom-and-pop shops or chain shops that specialize in watches, you know when you go to the big cities across Europe or Asia that there are whole stores that are -- that have this assortment of these elevated brands. And to get that very important distribution, we have to work with distributors. And so we're working on that in addition to the widening and broadening of the range. But it's exciting and once again, it's a category that we very clearly, the consumer has voted, we have clear permission to operate there. And it's good for the business, so we're going after it. So thank you, Mary. I appreciate your questions.

Operator

Your next question comes from Jim Chartier of Monness, Crespi, Hardt.

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

My questions were answered.

William L. McComb

Thanks, Jim.

Operator

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

Jennifer Black

I wondered if you could talk about any new line extensions you might have at Kate Spade. Are you doing anything at all with kids for either Kate or Jack Spade, and anything new with fragrance? I know Live Colorfully has been such a big success. Are you going to do anything as far as sub-lines? That's my first question, as far as fragrances.

William L. McComb

Okay, well the -- you're right, the fragrance line is doing well, and we just have continued rollout of that from a distribution perspective. And there's an innovation plan on that, just as we have done with our partner at Elizabeth Arden, where you constantly bring news and versions of. We're doing that with Live Colorfully next year. So expanded distribution on fragrances is the primary call. In terms of other line extensions, we're chasing a lot right now. So no, we don't have anything -- we talk longer term about the opportunities with kids, but we're not going after that in either the Jack or the core Kate New York business. I'd say we have a full plate with what we're currently doing with the points of distribution with an even broader rollout internationally of the e-com platform and taking what is already a very wide platform and making it even more available to the customers by virtue of getting these elastic categories more broadly distributed. And that really is the focus, as you know, if you harken back to Janet's question about turn it inside out and say, "How do you get to 25% or greater adjusted brand EBITDA coming out of 2016?" There's an enormous amount of leverage to be had in volume in those categories that we call elastic, which are things like watches, and even the jewelry business and clearly fragrance. So -- and I can say, nominally speaking, we're adding color to more parts of the line as well, in terms of -- I don't want to call it cosmetics, but components of cosmetics line, that's being added. But those aren't really the big callouts. I mean, I would say, Jennifer, for your clients, keeping the eye on the prize is really just the core growth plan for the business, not so much lots and lots of new categories. At Lucky, it really is a lot about the new categories and continued penetration of fashion. Here, it's just -- it's the core growth strategy of the footprint of the brand as it is, with much deeper distribution of the elastic categories and the expansion of points of distribution of the core brand.

Jennifer Black

Okay, great. And I just wondered, do you have any updates on the kiosk strategy, as far as Kate Spade Saturday?

William L. McComb

I don't right now, but we will probably talk to that at the ICR conference in Orlando.

Jennifer Black

Okay, great. And just lastly, is footwear -- are you really focused on footwear at Kate Spade? We've received some interesting questionnaires. And it looks like you're -- I don't know if you're more focused on footwear, or that was random?

William L. McComb

It wasn't random. I mean, nothing is random in the world, right? No, we were absolutely -- there are areas -- we know footwear can be a huge growth strategy. We have a partner, a licensee that we work with, and we're wanting to understand customer satisfaction. We're wanting to understand fit, and we're wanting to understand where they want to see us. Things like that Keds promotion that we've now done twice. It is -- we get such a bang out of our customer. They just love it. And it says to us that the whole line architecture of what we're doing in footwear can be expanded dramatically. So we're helping our partner by doing primal research, which helps us back understand that, what I call, or what Craig will refer to as that Ralph Lauren component of the brand. So bottom line, we know footwear can be -- it's an elastic category. It's one that -- I mean, look, I stop and say, "We've got a business that's over $100 million in footwear at Lucky Brand, $100 million at retail." At Kate, it's not there. And so I know our partner is eager to get on the growth bandwagon here and do it in just the right way, and that's the purpose of the research.

Operator

Your last question comes from Carla Casella of JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

It relates to the debt. You had mentioned you're going to make the offer on the senior notes, assuming nobody will take that at par. Would you use the proceeds then to pay down your revolver? Or what is your target for debt going forward?

George M. Carrara

Yes, so in essence, we would use the proceeds to pay down the revolver. And of course, once we've put that behind us, we're going to be looking at the merits of a recap. So we'll give you more information on the go-forward.

William L. McComb

Yes, I mean the target -- I lunge at that question, right? Because for me, the target is 0. People ask on this call about where are your corporate costs, and we've said, in a mono-brand configuration, 4% to 5% is the number. I'd tell you what I look at, I look at the interest charges. I look at the interest payments at over $40 million and say, "I want to save a lot of money on that." And so ultimately, ultimately the target is 0. We'll do it in a prudent way. But clearly, that's where we're headed.

Okay. Thank you, all. We look forward to seeing you at ICR at that conference in Orlando, 13th and 14th of January. If not, sooner, in the malls across America during what is going to be a busy holiday season. Thanks for joining the call today.

George M. Carrara

Thank you, all.

Operator

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

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