Last week, Fifth and Pacific (FNP) announced plans to change its official name to Kate Spade (KATE). The name change shouldn't come as a big surprise since the company changed its name previously due to asset sales and has now sold off all business units, with the exception of the high growth Kate Spade.
The company also announced that CEO William McComb has stepped down and will be replaced by current Kate Spade unit head Craig Leavitt. McComb recently said he thought Kate Spade was set to be the next Coach (COH). I guess now it will be up to Leavitt to determine the direction the company is going, but under his leadership so far the brand has done just fine.
On December 10th, Fifth and Pacific sold Lucky Brand jeans to Leonard Green, a private equity firm, for $225 million. Earlier in October, Fifth and Pacific sold its Juicy Couture brand to Authentic Brands for $195 million. Both of these deals fell shy of the $700 million some analysts thought the company could get. However, getting rid of these brands provides a better focus for Kate Spade on the future of the company in high growth brands and markets.
In the most recent third quarter, total Fifth and Pacific revenue increased 18.6% to $430.6 million. Total net sales of the Kate Spade brand grew 76%. Direct to consumer sales of Kate Spade were up 31%. The company also saw $25 million in net sales from Kate Spade Japan, which it bought out for $41 million. Kate Spade saw total third quarter sales of $180 million. In the last nine months, Kate Spade brand sales have increased to $487.5 million.
Focusing on Kate Spade, the third quarter provided a glimpse at the stand-alone company. At the end of the third quarter, there were 107 Kate Spade retail stores, 48 outlet stores, and 41 concessions. There were also 21 retail stores and 33 concessions from the company's Kate Spade Japan unit. Kate Spade has a commanding $1266 sales per square foot, greatly ahead of its previous brands of Juicy Couture ($645) and Lucky Brand ($462).
There has also been strong interest in Kate Spade on its own. With the company shedding off its other units, Kate Spade could easily be bought at a nice premium by a growing retail brand. My guess is Kate Spade could be acquired within two years at a valuation of $5 billion.
Currently, shares of Fifth and Pacific/Kate Spade are trading close to fifty two week highs ($34.41). The company trades at around four times the expected sales in fiscal 2014 ($1.0 billion). Competitor Coach sells at three times its expected fiscal 2014 sales of $5.1 billion. I believe Kate Spade should trade at a higher premium, with its coming double digit growth. Look for shares of Kate Spade to see increases as the February name change takes place. Shares should see $40 by the end of 2014.