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Executives

William L. McComb - Former Chief Executive Officer and Executive Director

Craig A. Leavitt - Chief Executive Officer and Director

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

Analysts

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

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

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

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

David Wu - Telsey Advisory Group LLC

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Jennifer Black

Fifth & Pacific Companies (FNP) Q4 2013 Earnings Call February 25, 2014 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Fifth & Pacific Companies, Inc. Year-End 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 those qualifications and cautionary statements set out in this morning's press release, including those under the caption, Cautionary Statements Regarding Forward-Looking Statements, as well as in the company's annual report on Form 10-K for the fiscal year ending December 28, 2013, under the captions Item 1A Risk Factors and Statement Regarding Forward-Looking Statements to be filed with the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Also please note that during this call and in the accompanying slides and press release, net sales, gross profit, gross margin, SG&A, SG&A margin, operating income loss, other expense income, net interest expense, net income loss before provision, benefit for income taxes, provision benefit for income taxes, income loss from continuing operations and EPS are presented on both a GAAP and non-GAAP-adjusted basis. In addition, adjusted EBITDA net of foreign currency transaction adjustments, company-wide adjusted EBITDA and comparable adjusted EBITDA are non-GAAP measures that are also presented in the accompanying slides and press release.

The company presents these adjusted EBITDA measures because the company believes that these measures represent a more meaningful presentation of the company's historical operations and projected financial performance as these measures provide period-to-period comparisons that are consistent and more easily understood.

The company considers these measures as important supplemental measures of its performance and believes they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies and its industry. Reconciliations of adjusted results to the GAAP results are available on the tables attached to the earnings release and slides captioned Reconciliation of Non-GAAP Financial Information, which will be posted to the company's website at www.fifthandpacific.com in the Investor Relations section after this call.

The company believes that the adjusted results for the fourth quarter and 2012 and 2013 fiscal years represent a more meaningful presentation of the company's historical operations and the financial performance since they provide period-to-period comparisons that are consistent and more easily understood.

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

William L. McComb

Good morning. Thank you all for joining our call this morning as we report performance metrics and earnings results for fiscal 2013 and its fourth quarter. I'm joined by Craig Leavitt, who officially becomes CEO of the newly named Kate Spade & Company tomorrow; and, of course, George Carrara, who has been our Chief Financial Officer and Chief Operating Officer throughout 2013 and is becoming President and Chief Operating Officer of Kate Spade & Company tomorrow as well; and I'd be remiss if I didn't mention Deborah Lloyd, Chief Creative Officer of Kate Spade & Company and the creative force behind the brand.

We reported our earnings results in the press release this morning, much of which had been estimated and made public back on January 9 when we also provided an outlook for 2014 and announced my departure from Fifth & Pacific Companies as well as the transition to the new corporate name and the management successions that I just described.

On the call today, I'll review company highlights for the quarter. Craig will then provide a detailed commentary on the fourth quarter Kate Spade businesses and then George will provide a summary of key financials, corporate operating update and our 2014 outlook. And then before we open it up to questions, I'd like to take a few minutes to direct some of my own questions to Craig and George for the benefit of the listening audience. And finally, all 3 of us will be available to answer your questions. As usual, we're broadcasting today with the aid of speaker-support slides found in the Investor Relations section of our website, www.fifthandpacific.com.

So let's go ahead and dive into the results. The fourth quarter was, overall, a very strong quarter for the company. Kate Spade posted total revenue of $256 million, reflecting a growth rate of 48% versus fourth quarter of 2012, and direct-to-consumer comp sales up 30% and an adjusted brand EBITDA expansion of 48% to $64 million, all on the heels of product wins in a rapidly expanding consumer base. While the overall marketplace was even more promotional than holiday 2012, we ran a strong full-price business while competing where we needed to with some sharp price points.

Kate Spade gross margins for the quarter were down about 90 basis points versus 2012, driven by a higher promotion rate. As in third quarter, small leather goods and the core handbag business were sell-through leaders for the business along with gifting, which is a major category every holiday. During the quarter, the brand opened 11 new full-price stores and 3 new outlet stores domestically. Internationally, we opened 2 concessions and via partners in our JV in China, a total of 7 new stores were opened. Kate Spade ended the quarter with comp store sales of $1,265 per square foot, up about 14% over the latest 12 months. This marks our 14th consecutive quarter of annualized productivity growth.

We'll turn here to Slide Page 3. Overall, I'd characterize 2013 as an outstanding year. On a comparable basis, inclusive of the results of Lucky Brand, but excluding Juicy Couture, adjusted EBITDA was $126 million, consistent with our preliminary results issued in early January. Lucky Brand is now being accounted for as discontinued operations, so we'll no longer include the brand in our results. While managing 2 complicated and protracted strategic reviews, one at Juicy Couture and one at Lucky Brand, we managed to keep a laser focus on Kate Spade.

The strategic reviews resulted in transactions that we expect will provide the company an estimated total $370 million to $380 million in net proceeds and enable the kind of resource allocation and management attention that's now needed to fully fund an accelerated growth plan at Kate Spade. George will speak more on how the company is impacted in light of these divestitures.

Kate Spade saw total 2013 revenue jump 61% to $743 million. Direct-to-consumer comp sales for the business were up 28% for the year. Comps for the e-commerce business were up 49%, while brick-and-mortar same-store sales were up approximately 16%. Customer acquisition overall in 2013 was extraordinary. And the business in Japan, now wholly-owned following the buyout of our JV partner in the fourth quarter of 2012, grew 36% in total sales and posted organic growth in direct-to-consumer comps of up plus 19% for the year in total. For the quarter, Kate Spade Japan posted organic DTC comps of 26%. Please note, beginning December 2013, the direct-to-consumer comps for Kate Spade Japan are now included in the comps for the total brand.

We launched the Kate Spade Saturday brand this past March, carefully leveraging operating expense where that makes sense, but distinctly targeting that brand as a new business for more entry-level customer and one that is inherently more casual. The timing of this investment is critical in my view. We need the asset to address the distinct high-opportunity customer groups as we expand around the world. I personally view 2013 for Kate Spade Saturday as the year not unlike 2008 for Kate Spade New York: foundational, establishing, awareness-generating and filled with learning and early traction with a new demographic.

The overall brand's adjusted EBITDA margin for the year was 17.6%, down 300 basis points compared to 2012, reflecting the dilution from 4 preplanned factors: one, the accounting impact of consolidating the Japan business; two, investments in organizational infrastructure to enable the recently announced buyout of our distributor, Globalluxe, in Southeast Asia; three, the investment in Kate Spade Saturday; and finally, very slight dilution from Jack Spade. What was not planned were the headwinds from the depreciation of the Japanese yen, which had a significant impact.

For the year, we opened 40 new stores in North America, 2 in Brazil and 6 in Japan. We also opened a total of 11 international concessions, 10 in Japan and 1 in France. Our joint venture in China opened 7 new stores, now totaling 20, and the partnership in the Middle East is now managing 6 stores across 3 countries. And finally as I mentioned, our team spent the year preparing for the buyout of Globalluxe, which we closed earlier this month, an operation that ran a total of 14 stores across Singapore, Macau, Taiwan, Hong Kong and Malaysia and generated approximately $44 million in retail equivalent sales. An additional $8 million in retail equivalent sales were generated in 13 stores in Indonesia and Thailand.

So with that overview of the quarter and the year, let me now turn it over to Craig Leavitt, who will add even greater detail to fourth quarter performance at Kate Spade. Craig?

Craig A. Leavitt

Thanks, Bill. First, let me make some overall comments about the marketplace in the fourth quarter. For one, the marketplace was very promotional and we've seen this since fourth quarter 2008 and every year, the holiday promotion intensity seems to increase. I think this is especially true for power retailers. We all see what's happening with deep discounts that used to appear in the malls in mid-December have been slowly creeping into the space earlier and earlier every year. And now it seems that Black Friday is really Black Wednesday Night and Black Thursday and Cyber Monday is really Cyber Thursday, and once these events begin, they don't really end.

We aim to be in the middle of the pack of our direct competitive set in terms of promotional presence. Don't forget, unlike some competitors, we're still in the early days of acquiring new customers. We see some of our promotional activity as a gateway to introduce our brand to a new audience and build our database. We then use brand marketing campaigns to convert this group into full-price customers. We will continue to be nimble and leverage promotional strategies thoughtfully and strategically. We have seen our promotional approach working, and customers are entering our brand through online promotional sales then also making purchases on our site or in our stores.

We've heard many analysts asking whether or not the handbag and accessories markets are beginning to slow growth-wise. The answer is no. No. We still see more and more women putting the investment share of their disposable income into luxury and near-luxury brand accessories. Now the race to the bottom may be moving faster and faster in some apparel categories, but accessories remains a growth category fueled by primary and longitudinal consumer attitudes and behavior.

We saw nothing to buck that trend in the fourth quarter. In fact, handbags and small leather goods and Kate Spade gift accessories were our strongest growth categories this year overall and in the fourth quarter, as Bill mentioned.

We continue to like what we see with new store openings. We opened 14 new doors in North America during Q4. I think one of our strengths is the broad base of brand acceptance geographically for what feel like instant successes in place like the Derby Street Shoppes in Hingham, Massachusetts and Burlingame Avenue in the San Francisco area, as well as our new outlet in St. Louis that opened just prior to the start of Q4, all of which continue to see incredibly strong demand.

Internationally, we had a very strong quarter in our Japan business both in stores and online, with comps of 26%, with some of the biggest increases coming from higher-priced products especially in handbags. We opened 4 new doors in China this quarter as we continue to build brand awareness in the region. In Hong Kong and Southeast Asia, we've prepared for the recent acquisition of our business and the launch of our distribution agreement in Singapore, Malaysia, Indonesia and Australia.

Leading performers for the quarter by category included core handbags, wallets, jewelry and apparel. Within apparel, top performers were outerwear, dresses and separates like woven tops and sweaters. Even with the positive comp results we reported, we had some missed opportunities due to low inventories on best-selling items, particularly in core handbags in the last weeks of holiday. We relaunched our paper-and-desk accessories with a new licensee at the start of the fourth quarter, which added to the comp increases during the important gifting period. Particularly important in our wholesale environments are gifting programs which focus on small leather goods, jewelry and watches were [ph] successful again this quarter.

Our e-commerce business experienced a significant increase in traffic, and we found that the shoulder-pricing approach to our business continues to work. During Q4, we saw consumers looking for sale as well as entry points to the brand, but consumers also responded positively to aspirational products with price points ranging from $498 all the way to $1,998. Among the highest sell-throughs were the Swarovski statement necklace at $698, as well as our best-selling Emma dress at $798, which had a 100% sell-through.

As we continue to focus on building licensing revenue as a key pillar of our margin expansion with new categories, we also saw increases in existing licenses, particularly tabletop which was driven by a strong gifting program and continued success in bridal registry. In the stationary category, which I previously mentioned, we saw results of nearly twice our expectation.

Marketing efforts during this quarter continued to drive buzz, customer engagement and acquisition. Our holiday video marked the first time a shoppable video was able to be used outside the brand's own web page. We integrated into a range of sites and generated 8 million impressions and as a whole, 318,947 minutes of watch time. That's 221 days' worth.

In London, our holiday campaign included a full takeover of 2 tube stations, and we reached nearly 7.5 million consumers through outdoor advertising and 4 million target customers through print advertising. These efforts are part of our critical marketing investment as we begin to expand in Europe.

In 2013, we grew our customer database by more than 55% and our social media following by a similar amount. And I'd like to make another point. As we acquire new customers, our demographic breadth continues to grow. Today, roughly 60% of our customer base is under age 44, and we see a noticeable mother-daughter dynamic in our stores.

With regard to Kate Spade Saturday, we were pleased with our holiday results, and we continue to see meaningful growth for the brand from quarter-to-quarter. It is important to note we are seeing results from our efforts to increase penetration of accessories categories where we believe there is significant opportunity.

Accessories are now the majority of Kate Spade Saturday sales. In Q4, we launched new core handbag groups, which were key drivers of this improvement. We also saw continued success in customer acquisitions through marketing efforts like our pop-up shop at JFK's Terminal 5 during the busy holiday travel season.

So before I hand it over to George, let me comment briefly on current trends in the market. Even with all the bad weather, I'm happy with the business trends in the first quarter to date, which are consistent overall with our expectations. We are seeing continued strong performance in the key handbags, small leather goods category in particular. And we can also reaffirm our previously guided range of $115 million to $125 million for adjusted EBITDA for fiscal 2014, which includes Kate Spade, Adelington Design Group and corporate. So with that, I'll turn it over to George to discuss the P&L and the balance sheet.

George M. Carrara

Thanks, Craig, and good morning, all. Let's begin with a look at the consolidated financial results. Slide 5, our fourth quarter comparable adjusted P&L summary. This slide provides an overview of our comparable adjusted financials in a go-forward view, excluding the results of Lucky and Juicy and a rebased corporate expense structure to reflect the anticipated impact resulting from the Juicy and Lucky divestitures.

Although our GAAP financials exclude the results of Lucky, which are now reported as discontinued operations, GAAP requires that Juicy's results be reported within continuing operations through completion of the wind-down. So let's dive in.

Total comparable adjusted net sales for the quarter were $275 million, up $80 million or 41% versus 2012. This increase was principally driven by an $83 million or 48% increase in Kate Spade sales. This $83 million increase results from posting a 30% comp sales increase, growth from the opening of 16 new retail stores and a healthy and growing domestic and international wholesale business.

Additionally, $10 million was attributable to Kate Spade Japan. Bear in mind that we closed the acquisition of Kate Spade Japan at the end of October 2012, so roughly $7 million of the Kate Spade Japan increase is the inclusion of October 2013 net sales for that business versus no reported net sales for October 2012. These increases were offset by a $3 million decrease at Adelington.

Our total comparable adjusted gross margin rate decreased approximately 30 basis points to 61.6%. Total adjusted SG&A was up approximately $34 million for the quarter versus 2012, a year-over-year increase of 37%. This compares to our sales increase of 41%. Of this $35 million increase, $23 million was attributable to the expansion of our store base, investment in additional brand marketing and cost to launch Kate Spade Saturday. As a percentage of sales, adjusted SG&A decreased to 45.8% versus 47.1% in LY.

Total comparable adjusted EBITDA increased $20 million to $57 million in the fourth quarter. The primary driver is Kate Spade adjusted EBITDA growth of 48%, which Bill mentioned earlier. The Kate Spade adjusted EBITDA margin of 25% is essentially flat versus LY. EBITDA for the Adelington Design Group decreased by $2 million, and I will discuss this in a subsequent slide.

Now the slides on Pages 6 and 7. I won't go through slides Pages 6 and 7 in detail, but here we've bridged our GAAP results to the comparable adjusted results to show the walk from the press release financials to the go-forward view that we just discussed.

Now continuing on to Slide 8. We have some selected balance sheet and cash flow data. As you compare the net year-over-year amounts shown here, keep in mind that Lucky Brand net assets are presented as assets held for sale in the year-end 2013 balance sheet. So these balances exclude Lucky Brand in 2013, but amounts for Lucky are included in the 2012 balance sheet. Conversely, Juicy positions are included in both periods. So to avoid the noise related to our divestitures, I'll only comment on Kate Spade accounts receivable and inventory.

Accounts receivable. Kate Spade receivables grew generally in line with wholesale sales. Inventory. Kate Spade inventory increased 46%, in line with sales growth and consistent with planned sales increases. Next, total net debt was $264 million as compared to $347 million at end of fourth quarter 2012, a decrease of $83 million. This decrease is principally driven by the proceeds from the Juicy divestiture partially offset by the funding of the Kate Spade expansion.

Slide Page 9, Adelington. As we announced in our business update on January 9, the Adelington Design Group will be included within my areas of responsibility. So let me share a brief update on that business. Fourth quarter net sales were $20 million, down $3 million or 13% versus LY. This decrease was primarily driven by declines in the licensed Liz Claiborne brands, including our Lizwear club business and the Liz Claiborne New York business with QVC. Additionally, the expiration of the Dana Buchman-Kohl's supply agreement with the last shipments completed at the end of the third quarter also contributed to this decline. This was partially offset by sales increases in the Monet, JCPenney business and growth of the Trifari brand.

Overall, the financial performance of Adelington underscores a year of transformation tied to the merchandising changes within JCPenney. In prior quarterly calls this year, we discussed the impact of JCPenney's jewelry strategy on Adelington's performance. With JCPenney recently returning to their prior promotional strategies, we anticipate a positive impact on Adelington's financial results. We're seeing this already with recent outperformance relative to LY.

Slide 10, an update on our corporate operating strategies. We entered the fourth quarter after the completion of 2 key 2013 technology initiatives: the re-platforming of our U.S. e-commerce operating model, which consisted of the relaunch of 14 new web stores all supported by eBay's order management and fulfillment platform, and the deployment of an advanced POS system with full omni-channel capability.

In summary, we are extremely pleased with the resulting success that we are experiencing at retail attributable to these 2 initiatives. In our Kate e-commerce channel, our transaction capacity more than doubled relative to LY. And in our brick-and-mortar channel, our store associates applauded the efficiencies of the new POS system, which enhanced their ability to more effectively engage customers.

Additionally, during 2013, we further strengthened our e-commerce presence with varying levels of feature-rich functionality such as geographical Internet protocol, shipping to key foreign markets, gamification and the ability to customize products. Further, our consumer can engage with us through the key social media avenues and can even participate in a customer loyalty program on our Kate Spade Saturday's site. Our POS system brought about many efficiencies with chain-wide merchandise visibility along with enhanced merchandise management capability. It also provided for enhanced consumer-centric features such as receipts via email. Finally, we successfully piloted our mobile POS module, and I am pleased to report that we are currently deploying this to all of our stores with completion slated for early during quarter 2.

With respect to our U.S. distribution center, we are now beyond transition with our new 3PL partner, Ridge Global Services, fully ramped up. I should remind you that we sold the related distribution center building in August 2013 and entered into a long-term lease. We did the same with our New Jersey administrative headquarters in May 2013. These 2 real estate transactions netted approximately $29 million.

As you know, during the second half of 2013, my finance operation and IT team leads supported our divestiture initiatives, which consummated with the Juicy IP sale in November 2013 and the Lucky sale in February 2014. We are now supporting the Lucky buyer, Leonard Green, with a transition services agreement across our shared service groups, while we also wind down the Juicy operation. We are very pleased with the progress of this wind-down. Sales, margins, wind-down expenses, restructuring costs and inventory levels are on plan.

Further, the Fifth Avenue transaction is scheduled to occur sometime in the next 90 days. Recall that the value of this deal is $51 million, and that we received a $5 million nonrefundable deposit against this in January.

We're also excited about the contemplated conversion of approximately 30 high-performing Juicy stores in the Kate Spade stores. This is already underway as planned, and the related sales, EBITDA and CapEx are reflected in our guidance, which I will review with you in a moment.

Finally, you may recall that Tom Linko, the COO and CFO of Juicy, is leading the Juicy wind-down process. We expect to substantially complete these efforts by midyear. And at that time, our intent is to name Tom Linko as CFO of Kate Spade & Company, enabling me to dedicate my time supporting the key drivers of Kate Spade's growth that Craig will discuss shortly. In a few moments, I will speak about key 2014's initiatives, but for now, let's move on to the next slide.

Slide 11. Now I'll conclude my discussion by reaffirming the 2014 financial outlook as shown on Slide 11. Recall that we introduced these metrics several weeks ago in our January pre-release and also note that these estimates exclude results for Juicy and Lucky Brand. For 2014, we are continuing to forecast a total adjusted EBITDA range of $115 million to $125 million net of foreign currency transaction adjustments. The key driver here is Kate Spade adjusted EBITDA, which we are continuing to forecast in the range of $165 million to $175 million. This implies an adjusted EBITDA margin improvement of approximately 100 basis points versus 2013. Further, we are assuming annualized Kate Spade direct-to-consumer comps of 10% to 13%.

For corporate overhead and other items, we are targeting $50 million to $55 million for 2014. I should note this estimate is net of the revenue derived from the transition services agreement in place for Lucky Brand. As mentioned before, 2014 represents a transition year as we manage Lucky for the month of January prior to the closing of its sale, and we'll continue to support Juicy in its wind-down. As its [ph] Lucky TSA phases down over the next 24 months, we expect corporate costs to range 4% to 5% of net sales on a pro forma basis, and that is in line with peer expense levels.

Continuing through the slide: depreciation and amortization, $40 million to $45 million; annual CapEx and investments are targeted at approximately $140 million. We expect interest to be approximately $30 million to $45 million for the year. The low end of this range assumes a refinancing, which we'll speak to momentarily. Our normalized tax rate for 2014 applied to adjusted earnings will be between 38% and 40%. Following the close of the Lucky Brand sale, our NOL position is anticipated at a level in excess of $450 million. And lastly, our forecasted full year 2014 basic share count is approximately 124 million shares. Now me hand the call back to Bill.

William L. McComb

Okay. Thanks, guys. All right, before I open up the phone for some questions, I wanted to use this forum for an expanded conversation about the future of Kate Spade & Company. I realize that there are many new names out there interested in the stock. So we're about to flip the switch and begin trading as K-A-T-E, KATE, on the New York Stock Exchange. And with that, I'd like to ask Craig and George some questions that I know would be helpful to those now looking at the stock for the first time and even many of our current shareholders.

Question-and-Answer Session

William L. McComb

So Craig, you first. This brand started in handbags and that continues to be your core category. Talk a little bit about your handbag strategy going forward.

Craig A. Leavitt

Well, we're a company that will always be anchored in handbags and small leather goods. We design differentiated products to offer our customer a clear point of view. Shoulder pricing is especially important in this category. It's our term for line architecture with strong opening price points and meaningful premium prices, allowing accessibility into the brand and also aspiration for luxury. Our Millennial customer is attracted to new styles and entry prices, and we have $178 and $198 cross-body bags or $198 totes. We also offer options at the lux end of the spectrum in the $498 to $1,298 range. And in fact, sell-through penetration was very high for our $998 beau shopper. And on the other shoulder, sales were really strong for our popular $298 Cedar Street Maise satchel in Saffiano. Our handbag assortment consists of everyday staples down to the more fashion-forward bags, and we insure the right levels of inventory investment. So our investment is centered around practical everyday basics, but we also offer a smaller aspirational assortment with new silhouettes. And I think it's important to note that the novelty items that are so much a part of our brand personality and continue to drive customer interest and [ph] engagement as well as demographic breadth. So this balanced approach inspires you be part of the brand really in all occasions of your life.

William L. McComb

Okay, all right. You said yourself that the overall apparel market is really like a giant race to the bottom. Clearly, there are segments and brands that defy that. We've been successful on the high-margin segment. Why don't you talk a little bit about how your strategy veers your inventory dollar away from the commodity purchases to focus instead on our customers' investment dollar in apparel?

Craig A. Leavitt

Well, our customers are willing to pay, or as we say, invest, for quality and enduring style. And our research shows that our ready-to-wear has highly perceived value among consumers and mostly as a result of raw materials we use as well as the quality and fit of each item. Our products offer consumers a modern twist on classics, so our customer views our collections as timeless. She's not giving away our pieces after one season, and she expects us to lead her in terms of what is relevant and modern, not overly trending. And I think she also finds our fit incredibly flattering, so that helps her feel more confident. And therefore, she wears our pieces more often and comes back for more. And our customers are responding positively to separates as well, which can be worn in a variety of ways and fit into her overall wardrobe. Our apparel customers are not dressing head to toe in one brand, but mixing our collection into her wardrobe and embracing the high-low trend. And our ready-to-wear customer is more likely to buy across categories, and her transaction is 1/3 larger on average.

William L. McComb

Okay, Craig, one more question for you, changing gears a little. The Globalluxe buyout in Southeast Asia is now complete. We spent money last year investing in office and talent there, not only to ensure a smooth buyout but to achieve our goal of growth acceleration in that very important geography. Talk a little bit about that market, how it interacts with the Japan team and even the JV in China.

Craig A. Leavitt

Well, the Globalluxe acquisition is a really important milestone as we focus on our long-term goal of reaching 2/3 of our retail footprint outside of North America, and there is still significant opportunity in China and Southeast Asia. So throughout the past year, we've allocated additional resources in Hong Kong to prepare for this buyout and then operate on the market. So at present, we're operating 7 stores in Hong Kong, including an outlet, a store in Taiwan and 1 in Macau, so it's a total of 9 stores in the region. Now that teams are firmly established in the region, they also serve as a resource for partners. So we provide things like marketing support, store design, real estate counsel and visual merchandising expertise as we expand our presence there. To answer your question as it relates to Japan, our team in Japan, we have a long-term, consistent management team and a more mature business. So they will continue to operate independently from the operation in the balance of Asia. So overall, I think this illustrates our global approach to growing our brand. We respect the nuances of local markets and rely on local teams to share insights. This method allows us to enter markets authentically and customize efforts such as adjusting our fit standards in Japan for our customer there.

William L. McComb

All right. Thanks, Craig. George, let me ask you a question. What are your top operational initiatives this year, and how are they going to accelerate margin expansion and top line growth?

George M. Carrara

Well, there's the launch of our e-commerce platform in Europe starting first with the U.K. This long-awaited initiative is planned for the second half and will set the stage for accelerated development of the Kate Spade brand in Europe. It will be a key means of both marketing the brand and transacting sales in a capital-efficient way. The U.K. site is being designed and configured to also suit the needs of the key countries within continental Europe. This will enable us to launch in subsequent countries in a more expedited manner beginning in 2015. This is my team's single most important initiative. I spoke about another one earlier, the deployment of mobile POS which is taking place, as we speak, and is expected to be completed during the second quarter. This is proven to drive both conversion and UBT [ph] and enhances our customer's in-store experience. Then we have the continual evolution of our omni-channel capability. Here, the plan is to leverage a single CRM database for all DTC channels and optimize cross-channel selling as we continue our drive of becoming truly channel-agnostic. In this regard, we expect by year's end to have a fully automated ship-from-store feature and thereafter upgrade our pick-up-from-store functionality. In terms of other initiatives, I previously discussed our plan to re-platform the software and hardware of our U.S. distribution center model. This is underway and we will expedite our DTC turnaround time and reduce labor costs. Next, the team is working on the integrations and establishment of operating platforms for our recently acquired businesses in Japan, Hong Kong, Taiwan and Macau. Additionally, we have been and will continue to manage the Juicy wind-down, which leads me to our final key initiative now that our divestitures of Juicy and Lucky are complete: a recapitalization of our balance sheet.

William L. McComb

Could you elaborate on that a little bit more? Tell us a little bit more about the balance sheet strategy going forward?

George M. Carrara

Sure, Bill. In our 2014 guidance, which I discussed earlier, you'll note that for interest expense, I provided an unusually wide range of $30 million to $45 million. The low end of this range assumes the first half refinancing of our very expensive 10.5% high-yield bonds. As you may recall, these bonds become fully callable beginning April 15 at 105.25. Based upon our improved financial profile resulting from the Juicy and Lucky divestitures, coupled with the strength of the capital markets, we see this is as an opportunity to refinance with less expensive, more flexible debt. In fact, we see this as an opportunity to realize annualized interest savings of approximately $20 million. Many of you have asked if we plan a permanent reduction in our long-term debt. As Bill has said before, it is our ultimate goal to reduce long-term debt to 0. But in the near term, we want to maintain more-than-ample liquidity to support the planned growth of Kate Spade. As a result, although we expect to secure less expensive debt during 2014, we don't expect to permanently reduce our long-term debt position during 2014. We also plan to resize and extend our ABL during 2014. Beginning in 2015, we expect to begin managing down our long-term debt with our ultimate goal to have a debt-free balance sheet.

William L. McComb

It's kind of remarkable listening to you kick through not only the exciting and interesting balance sheet strategy, short term and long term. But just in listening to your operational initiatives, it's clear this is a company that's move from fixing things and being defensive to clearly deploying our capital and our people and our resources for growth. Really exciting.

Craig, I want to flip back to you. Why are the comps in 2014 plan only guided at plus 10% to plus 13%, given that the business has been historically outperforming that level?

Craig A. Leavitt

Well, I think if you look at the stock comps over the last 3 years, it's nearly 200% stock comp growth over that period. So once we see meaningful expansion on the store base including as comp, we'll expect those comps to start to accelerate again. But we think we've really provided an achievable outlook for 2014. And I think it's important to also add, as I mentioned earlier, our current plan calls for a pullback on some promotional activity from 2013, not only in the number of events, but also in terms of discount posture. And that's included in our forecast, where we expect the first quarter of 2014 comp in the high teens. And then with the planned reduction and promotional activity, comps by quarter will moderate resulting in that guided range of plus 10% to plus 13%.

William L. McComb

Okay. All right. But digging a little bit deeper on that topic, this time more on the operational side, George, could you address the evolution of the store productivity as we see additional tranches of stores maturing in the comp base? This is a question that I hear a lot from investors.

George M. Carrara

Yes, definitely. If you look at the annual growth of our store openings, you see that we clearly accelerated store expansion over the last 2 years, 2012 and 2013. According to our accounting policies, stores achieved comp status after 14 months of operation. So these stores are entering the comp base and tranches over time, lagging our investment but still on a parallel track. Craig explained at last year's Investor Day that new stores typically generate sales per square foot in the $700 range after 1 full year and ramp up from there, with a target of reaching the current comp productivity of over $1,200 per square foot, although we do expect to see some moderation of productivity growth as our store base matures and expands. At year-end 2013, there were approximately 135 stores on our comp base including e-com. By year-end 2015, this will grow by approximately 100 stores based upon both our actual store openings during the last 2 years and our planned 2014 store openings, with the largest tranches being added to the comp base in late 2014, early 2015 and then again in the back end of 2015. This should help you think about the development of our comp store base and the productivity of such.

William L. McComb

Okay, good. Craig, back to you. Can you talk about the surprise sales that we have online, these events that we sponsor via our own flash site? For those that are questioning why we have surprise sales, can you explain this strategy?

Craig A. Leavitt

Sure, sure. So first, let me explain what a surprise sale is or what the industry calls a flash sale. In some ways, I guess it's like an outlet online, offering product in limited quantities for short periods of time. In short, I think flash is here to stay because it matters to the consumer. So being smart about these sales, not becoming addicted to them and adopting their role over time, that's what's key. We have a limited distribution of our product in the e-commerce world, to really just a few of our wholesale partners, among them, Nordstrom, Bloomingdale's, Neiman Marcus and Saks, as well as premier pure-play online retailers like Shopbop, and of course, our own full-price e-commerce site. That said, we don't have a 24/7 365 e-com site to offer our high-value outlet product consumers either, and we don't want one. So instead, we created a pop-up flash sale site, borrowing from the model that developed retailers like Gilt. We control it. We have less than 1 dozen events per year. And some of our direct competitors pop up or flash every week. We don't. So we believe we have to really continue to watch and listen to our customers. And it may seem illogical that flash sale events are vehicles for customer acquisition, but we're really still small brand in terms of overall customer franchise. There is so much more market share to take and so many new customers to attract. And we have also seen that flash sales are a good way to convert lapsed customers. I have to say, I very much like the margin, the acquisition and the stickiness of these events. That said, we'll not only be cutting back a little in 2014, but in a number of cases, using them to focus on certain product themes with a less promotional posture, like travel products and bridesmaid. And as I mentioned earlier, we have grown our database significantly over the last year, more than 55%, and I have to say that this is partially as a result of this type of event. And now we can focus on acquiring full-priced customers rather than converting promotional customers. Our budget, it calls for growth on the full-price side of our e-commerce business at almost double the rate of our promotional e-commerce business. So we're going to display fewer markdown and clearance SKUs, and we'll be investing in acquiring more full-price customers through our online business. We will also focus on making our e-commerce site more aspirational. For example, we're going to launch an online boutique featuring our complete Madison Avenue collection later this quarter. And this collection targets luxury consumers with pieces made from lux fabrics ranging from $398 for a woven top up to $1,998 for shearling coat.

William L. McComb

Excellent. Thanks on that one. Another interesting question. A lot of people ask me why we're still committed to doing Kate Spade Saturday right now. Many of our shareholders know my answer to that. I've been out there talking about it for over a year now. But for the benefit of the new investors looking at the stock, as well as our investors that know us well, can you talk about the benefits to establishing Kate Spade Saturday now, while we're still scaling operating margin on the core brand?

Craig A. Leavitt

Absolutely. Now is the time to build on the brand heat of the Kate Spade name. Kate Spade Saturday lets us reach that all-important millennial customer. The price point is about 50% below Kate Spade New York, allowing us to introduce the brand to consumers who really love the idea of Kate Spade New York, but are just not quite ready for it yet. So in 2014, we will continue to grow our Kate Spade Saturday e-commerce business, and we will continue to test and learn from brick-and-mortar store formats. And Bill, you made a comment for the 2013 for Kate Spade Saturday reminds you of Kate Spade New York's relaunch in 2008. And in fact, there is some great comparisons to be made. First, regarding e-commerce, in 2013, Kate Spade Saturday sold more units on its e-commerce site than the Kate Spade New York site did in all of 2008. Also Kate Spade Saturday brought 60% more customers to its database than Kate Spade New York did in 2008. And additionally, Kate Spade Saturday's most successful handbag of the year, the A Satchel Mini, which launched in the fourth quarter, sold the same number of units in those 3 months that the best-selling Kate Spade New York handbags sold throughout all of 2008. So we view this as a totally non-cannibalizing brand. Instead, it allows us to reach a broader group of customers with a unique design point of view. So we will continue to invest in marketing and customer acquisition, as we believe very strongly that this brand is a key vehicle for us in the years ahead, from a sales and profitability standpoint. Our 2014 investment will be less than last year, our launch year, and less dilutive to our overall probability.

William L. McComb

Okay. I got to say, well said on both the surprise sales question as well as this one on Kate Spade Saturday. Totally agree with you on both. Last question, for me at least, before we open it up for both you, George, and you, Craig. Walk us through your top 5 initiatives driving the company.

Craig A. Leavitt

Well, I guess we see 5 primary drivers fueling our growth. The first is growing the Kate Spade New York top line. This encompasses not only opening new stores around world, but also launching new product categories like swimwear and home. And we've talked a lot about our shoulder pricing strategy, balancing accessible and aspirational price points to reach the maximum number of consumers. We will also expand our elastic categories which include things like watches and jewelry and sunglasses, fragrance, and these categories have broader distribution than some of our core products. It helps increase our wholesale footprint and build brand equity. Second, we will take more partnered approach in certain product categories and regions that we believe will drive margin expansion. So this will include more product category licenses, while at the same time driving meaningful growth in existing licenses like expansion into casual tabletop and casual shoes. And this approach allows us to move into new categories quickly and with little investment. On the international side, we will continue to look at appropriate business models as we move into new territories, and where appropriate, identify strong distribution or licensing partners. So this approach allows us to expand rapidly in a brand-appropriate and capital-light manner. Third, we will continue to expand our marketing efforts across the board, including an increased number of ad campaigns, CRM investment and social media and digital efforts, and we planned our marketing spending to be up more than 40% in 2014. Fourth, we'll continue to build a foundation for Kate Spade Saturday, building the brand database and overall brand awareness. We view this brand as a driver for sales and profitability, allowing us to reach a broader group of consumers as I said a moment ago. And finally, we'll expand our customer experience, which includes exceptional service in our stores and for example, things like personal styling appointments, complementary tailoring, tablet optimization in e-commerce and rolling out flagship experiences to a broader number of stores as well as our e-commerce site.

George M. Carrara

So before we wrap up this discussion, let me make a clarifying point about Kate's brand EBITDA margin. You'll recall that we targeted a 2016 brand EBITDA margin of 25% plus. We concluded 2013 at a brand EBITDA margin of 17.6% and guided you to expect 100 basis points of expansion during 2014. Absent the dilutive impact of our investments in Kate Spade Saturday, the incremental marketing and the dilution brought about by Jack Spade, we will be nicely above 20% in both 2013 and 2014 and much closer to our 2016 goal of 25% or greater. I think that these are important points to consider in thinking about your models. With that, let me pass it back to Bill.

William L. McComb

Thanks, George. Thanks, Craig. Great perspective. Hopefully, that's helpful for our listening audience. So this call is literally my last activity here as the CEO of Fifth & Pacific Companies. And while the Fifth & Pacific corporate identity was short-lived, it served our shareholders and us quite well since 2012. I'm leaving the company this afternoon, literally walking out the door shortly, as we flip the switch tonight and begin trading as KATE on the New York Stock Exchange.

Not just as a former CEO but also as a shareholder, I am extremely excited about the future of this company. As Craig said, we've enjoyed explosive growth since 2007. But from my chair, I see this business as having a relatively small footprint today, with massive opportunity for expansion ahead in every region of the world. Had these opportunities not been so great, we would not have executed the portfolio changes that we just completed.

But the opportunities are profound. As we ended 2013, I looked at our team, the brand market research, the white space geographically, the digital strength that we built from scratch here, the omni-channel mindset that we cultivated. And as I take a moment to celebrate those accomplishments, I can also tell you that I can feel my heart race with the anticipation of what this thing is going to look like in another few years.

And while this isn't really a going away speech, I need to thank some of you on the buy side for your vision and patience. Many of you recall that back in the summer of 2007, in the face of crisis, I called our portfolio A Tale of Two Cities, 3 very strong brands with a bright future and a legacy portfolio, with thinning profit margins and waning brand and channel strength.

Ironically, what's followed for the management team, for our board, for you our shareholders and our advisers, was in fact straight out of the first verses of A Tale of Two Cities. It was the best of times. It was the worst of times. It was the age of wisdom. It was the age of foolishness. It was the epoch of belief. It was the epoch of incredulity. It was the season of life. It was the season of darkness. It was the spring of hope, and it was the winter of despair.

I could go on, but lo and behold, this tale ended well, as we ended up with everything before us. Every corporation in the world today is facing massive change in pressure from the forces of change coming from technology, globalization and commoditization. These times call for vision and courage. It's important that management teams and boards step up to these challenges and face them head-on, as we did back in 2007, when our own business imploded.

It was never any surprise to me that our basic ideas were rejected at the time, but the tenants of our strategy, focusing on direct-to-consumer, making investment focused on brand strength, spending on quality versus quantity, and getting global and digital as fast as possible, wound up not only working for us, but also redefining for our industry as a whole.

So now, let's open up the lines and take a few of your questions.

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 most of my questions have been answered, but the question I wanted to ask, I guess to George, now you guided Kate's EBITDA margins up about 100 basis points for the year. Just curious, with the Southeast Asia business coming on in the yen and currency fluctuations, should we expect any kind of volatility quarter-to-quarter? And just curious if there's any call outs for bumpiness along the way? And then are there any quarters for the year that you would expect margins to be down?

George M. Carrara

No. Generally speaking, I think you can expect, Ike, flat to up margins consistently throughout the quarters. Nothing out of the ordinary that I would call out. But I think that's just about the way it'll flow. Should be pretty straightforward.

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

And have you commented on the EBITDA margins for the Southeast Asia business?

George M. Carrara

We mentioned in our press release, that we sent out earlier this month, that those margins, on a pro forma basis, would be in the mid-teens, if you recall.

Craig A. Leavitt

Yes.

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

And then your assumption and your guidance for the EBITDA loss on the Saturday business, have you -- can you give us some help there?

George M. Carrara

No, we haven't commented on that but we did say...

Craig A. Leavitt

Dilutive than [ph] last year...

George M. Carrara

Yes. Yes.

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

Less dilutive than last year?

Craig A. Leavitt

Yes. Less dilutive than last year, of course.

Operator

Your next question comes from Edward Yruma of KeyBanc Capital Markets.

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

You guys picked up most of the questions. But I guess I just want to think about -- you indicated that inventory was light in the handbag and I guess, any quantification as to kind of impact to sales or maybe if it's at all possible, kind of when you might be back in a more comfortable in-stock position?

Craig A. Leavitt

Yes. I think that comment was really focused on our overall inventory position is good. So there's no real call out there. I think the issue was that on a couple of those core handbag groups that were outperformers, during that holiday period, we had some challenges in terms of missing some of that upside opportunity...

William L. McComb

We [ph] have some new items that frankly hadn't had a sell-through history to abide to and it's caused [ph] a high-class problem.

Craig A. Leavitt

It is indeed. And we are already catching up on that. In one of the 2 groups that I'm referencing, we are back in stock and the other one will be in the weeks ahead. So that's the good news. It was a good problem and a short-term problem.

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

Got it. And now that you've had a little bit more runway with Saturdays, any kind of understanding in terms of the overlap in the consumer base of their consumer file? And have you been able to kind of get customers to move from both -- from Saturdays to the full -- or to the Kate Spade New York business?

Craig A. Leavitt

Well -- so there's 2 comments on that. First, obviously, we have this very significant database with Kate Spade New York as we launched Kate Spade Saturday. So we utilize that to -- for initial outreach. So initially, of course, it was a very big part of our overall business was drawn from the Kate Spade New York database. And that has continued to fall month after month after month, which is exactly what we want to see happen. So ultimately, we see that a moderating overlap between those 2 businesses. And as we -- as our main focus for 2014 is new customer acquisition, we expect that to continue to shrink in the months and quarters ahead.

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

Got it and one final follow-up. Any insight into kind of what the pro forma cash balance look like? I know you talked about AR and a couple of the balance sheet items. And I guess if you hit your guidance this year, how much cash can you generate from the NOL?

George M. Carrara

Yes, so I'll respond to that. As I said in our prepared remarks, we don't expect our gross level of debt to come down dramatically this year. As we think about our recap, our free cash flow, as you would expect just from doing the math, Ed, is going to be negative as expected, with $140 million between CapEx and investments, a sizable investment in working capital continue to support the growth of Kate. So we will end -- we do expect to end with a cash balance at the end of the year. And you should think about if our net debt ended at around $260 million for 2013, you can expect it to be slightly above $300 million at the end of this fiscal year.

Operator

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

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

Just going back to the pro forma results that you filed a couple of weeks ago. The gross margins have been down both first 9 months of the year and Q3, Q4. How much of that is attributed, first of all to the weakness in the yen?

George M. Carrara

So, I think generally speaking, the headwinds from the yen is probably -- if you think about it in the context of 30 to 50 basis points.

William L. McComb

The other 2 factors are, what we -- Craig spoke to, a slight increase in overall promotion tenor in 2013. And secondly, and importantly, a deliberate strategy to grow the brand footprint and what I'll call a units per transaction sell. That includes some dilution to gross margin, as additional product categories come online that are slightly dilutive. But take-up, overall take-up, the units per transaction, and the basket size.

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

And then just to clear, is that a pure merchandise margin, and they're buying distribution or occupancy and the grosses?

George M. Carrara

There is no occupancy, but of course, there are other costs like shrink, employee discounts, but they're generally -- and freight, but generally not material.

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

Okay. And then any chance we can get a pro forma breakdown by quarter for Q1 and Q2?

George M. Carrara

On gross margin?

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

On -- yes, the pro forma, the same way you reported the portfolio.

George M. Carrara

Yes, we're not -- we won't be doing that unfortunately, Scott. But nice try though.

Operator

Your next question comes from Corinna Freedman of Wedbush.

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

I just wanted to dig in a little bit on George's comments about recrafting some Juicy stores to Lucky. Does that mean growth this year is going to be capital-light? And if you could just expound on that?

Craig A. Leavitt

So we talked about 25 to 30 stores being converted from Juicy to Kate Spade. In the context -- in the context of capital investment related to those doors, we do realize some synergies from some overlapping consistencies in the F&P portfolio, but a small amount. So I would not think about that having a positive impact on the amount of capital we have to spend per store related to the Juicy stores.

George M. Carrara

The real story there is the opportunity for us to be able to take advantage of a great portfolio that Juicy has in terms of advancing some of the strong locations earlier in our expansion than we may otherwise have been able to do. So I think that's the real win for us in that regard.

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

You previously indicated 30 to 40 new stores for Kate Spade for 2014. Is that number still -- does that mean the [ph] agree [ph] with the conversions or is that...

Craig A. Leavitt

That's inclusive -- so we said about 35 stores in North America, and that's inclusive of those 25 to 30 Juicy conversions, correct. So again, it's not about incremental stores. It's about advancing some of those best stores. And that's obviously exclusive of the 50 to 60 stores internationally that we'll also be opening during 2014.

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

Great. And if you could talk a little bit about the Jack Spade dilution? And what that means?

George M. Carrara

Yes, so Jack Spade total sales are a very small percentage. So although it's dilutive, it's not speaking to Jack Spade operationally is not so -- it's not so relevant at this stage.

William L. McComb

It's too early to call out.

Craig A. Leavitt

Yes.

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

Okay. And then if you can talk about -- you said the first year stores are about 700. Do you have what that number is on the second year? Like a -- what's the store's growth just to comp base, on a currency level? As soon as it gets to that $1,265 over time, then what is the level that it gets to in that second year? Do you have that?

Craig A. Leavitt

Yes -- no, we haven't talked about that specifically...

William L. McComb

I think we're 1 quarter away from giving you some kind of planned model. With this July, August last year that we are at, as we talk to the 700. We need the empirical data. we have what our plan is because we don't -- it, by the way, it -- it's a step-up...

Craig A. Leavitt

It's a step-up. And it's a several year run to get to that $1,265. That's somewhere...

William L. McComb

Somewhere between 2 and 3 years.

Craig A. Leavitt

Exactly.

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

Okay. And if there's anything -- any call outs from that Kate Spade wholesale? And what's your strategy going out for 2014? And that's the last question.

William L. McComb

Yes, thanks. Craig?

Craig A. Leavitt

I'm sorry, Corinna, can you say the question again?

William L. McComb

No, it's -- at the wholesale business, any big changes in it?

Craig A. Leavitt

Yes. I mean the wholesale business continues to be very strong for us. And as we've said we continue to focus on door performance, door-by-door performance and in terms of including -- increasing our comp performance as opposed to major expansion of additional doors, particularly in our core categories of apparel and handbags. So that game is about greater productivity in our door, existing doors. For the most part, there'll be of course, some modest expansion. The larger opportunity, in terms of distribution expansion, is in those categories that we've identified as there's elastic categories, those categories that we can have a broader footprint that can help build, not only our overall wholesale business, but really brand equity. And those are categories like watches and jewelry and fragrance and some licensed categories like sunglasses. So that's going to be that focus for 2014.

William L. McComb

And I would just add that, Corinna, that, that is the standout difference in our business model versus Tory Burch, Michael Kors and even lately Coach. The idea to be a partner that drives incremental productivity for these guys. And Craig's view of -- all right, we picked the right doors. Let's have a great business in those doors. And let's let it help drive a certain level of exclusivity for the overall brand. I think that's a defining difference versus the other brands that we're up against directly. But thank you.

Craig A. Leavitt

Thanks for the question.

Operator

Your next question comes from David Wu of Telsey Advisory Group.

David Wu - Telsey Advisory Group LLC

First, in terms of the -- the low inventories that you saw around some of the core handbags during holiday, I was wondering if you thought, perhaps you were promoting more than you needed to during the holiday? And also to what extent will you be pulling back on promotions? And how should we think about sort of the gross margin of the Kate Spade brand going forward?

William L. McComb

Well, I mean, I would just say -- Craig, before you jump in, I do think we answered most of those questions. Give him your best highlights.

Craig A. Leavitt

Yes. I mean -- so first of all, the promotional activity that we had was quite focused. So we certainly -- the issue with the inventory on these couple of groups was not related to heavy promotional activity, because those wouldn't have been included in most of that. So this is really just about consumer response, really strong response to a couple of these newer groups. And so I think that in terms of looking ahead, as I've said, I think that we are looking at fewer promotional events during the year and also reducing the promotional posture that is the level of discount on some of these activities.

David Wu - Telsey Advisory Group LLC

Got it. And so are you expecting the gross margin of the Kate Spade brand to start to improve? Or still expecting some degree of compression?

William L. McComb

We talked not about compression, but improving gross margin profile, given what Craig called out and even George spoke too about slightly less and even more targeted promotional strategies for the brand.

George M. Carrara

And that relates, just more to DTC, which of course, as you all know, has a stronger -- longer vertical margin.

William L. McComb

That said, I mean, I'll give you my commentary on it. I think it's important that these guys keep one eye on brand integrity and pricing strategy and one eye on the evolving sentiment in the marketplace. And when Craig says and has always said that he wants to manage to the middle of the pack of the direct competitive set, I think that's exactly right. First of all, we're not talking about the overall marketplace, but some of those middle of the mall brands that have giant 40% and 50% and 60% off signs, they're not the ones that we're talking about. But keeping an eye on the evolving competitive nature is important because it impacts our customer. And choosing a mean between excess and defect with that is the way to go. And while it's searching with a little more promotional that Craig would have liked. It's, by no means is -- we're not -- we're not hanging our heads low, looking back and saying, "Wow, we went too far." Because we definitely didn't.

David Wu - Telsey Advisory Group LLC

Great. And in terms of the licensing business, can you maybe talk about sort of, if it makes sense from sort of a product distribution margin standpoint to perhaps license out the Kate Spade watch business, or sort of maybe provide your thoughts on your rationale of keeping that in-house?

Craig A. Leavitt

Yes, I mean, we've said and continued to say that when we evaluate product categories, we look at a number of factors in terms of deciding whether to do them in-house or to do them with a licensed partner. And I think those include things like making sure that we either have or can import the expertise to deliver a fantastic product. That's certainly most important. But also whether or not we feel that there is a meaningful difference in the distribution capabilities that we have versus what a partner may have or the ability to bring the product expansion from a distribution perspective and total sales perspective, meaningfully faster than we could otherwise do. And that's what we're going to continue to evaluate, as we look at both existing product categories that we have chosen to do in-house, as well as future categories. So we're going to take a product category by product category approach, and we'll evaluate them not only prelaunch but also post-launch. So...

William L. McComb

Yes, I mean, I think that what you talked about with watches is important. You talked about, while you're doing them in-house, you're doing the concept design, product development and primary distribution, you're looking at brokers around the world to get to the secondary distribution markets. And so that's a combined model.

Craig A. Leavitt

Correct.

William L. McComb

And we've got it very enlightened [ph] . And there are probably more examples of categories you'll do that with and/or have a different type of alliance partnership, or where you may segment out a component of the category and sublicense -- a sub-piece of a category.

Craig A. Leavitt

Correct. We're looking at both of those things. And already, to your point, in certain regions globally, we have already signed on with distribution partners who will help to move that needle on categories like watches.

David Wu - Telsey Advisory Group LLC

Excellent. And then just lastly, on the 30% Kate Spade comp, can you perhaps talk about the complexion between traffic conversion ticket trends? And also, did you see any performance differences to call out between the full price and outlet locations?

William L. McComb

Okay. That's the last question. Go ahead, Craig.

Craig A. Leavitt

So -- you've got a lot David. So the good news is that we're in nice positive territory on all those metrics as we look into 2014...

William L. McComb

And fourth quarter.

Craig A. Leavitt

And fourth quarter, correct, when you talk about things like traffic and like conversion. But I think, it's fair to say that our big win was really in conversion, where we were extremely pleased with the improvements that we made over LY, for both the fourth quarter and for the entire year. So I think all the metrics are firing positively and I think that's probably the standout metric is our ability to continue to convert the customer when she's in our store. And I think in terms of talking about channels, we don't talk about the individual channels except that we're pleased with the results overall...

William L. McComb

Across the board.

Craig A. Leavitt

Across the board.

Operator

Your next question comes from Mary Ross Gilbert of Imperial Capital.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

So I had a question on kind of looking out and looking at the potential for the business. So in looking at reaching let's say 26%, you're still on track and you're still reiterating that guidance for 2016? Is that correct?

George M. Carrara

We said that -- we were addressing in our prepared remarks, that for 2016, we're looking...

Craig A. Leavitt

2016, that we're still -- we still have that 25% brand adjusted EBITDA...

William L. McComb

25% or greater for our adjusted EBITDA margin.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay, great. Perfect. And then can you...

William L. McComb

That's like a religion around here, by the way. You can keep testing us, but these guys -- it is in the ether here.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay, I just want to make sure. Also, when you talk about -- and this kind of went very quickly, but when you're talking about balance sheet, did you say that you expect to be completely out of debt by 2015?

William L. McComb

No.

Craig A. Leavitt

No. No. No.

William L. McComb

No. We said that this year is about restructuring the debt profile and lowering our interest costs in 2014 meaningfully and in 2015, returning to a meaningful deleveraging over time, and the company and the board had as a core goal to be debt-free, over time. But we couldn't guide that as a year-end '15 goal. If we got there, we would be starving the company in terms of cash spending, and that's not what our -- these shareholders want.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Right, right, absolutely. We don't want that to happen. And then can you talk about -- so with, Japan, you guys made some good progress in taking that brand, which was growing at a slower rate. After you've taken it over, you've accelerated that growth rate. And so in looking at 2014 and with Southeast Asia, because wasn't the comps up mid-teens there as well? Was that correct?

William L. McComb

Yes.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay. And so is there a chance that...

William L. McComb

Yes. And Japan, it was 19.

Craig A. Leavitt

It was 19 for the year.

William L. McComb

For the year...

Craig A. Leavitt

And accelerated even further to 26% at the year-end in Q4.

William L. McComb

At the year-end. I mean the answer to your question is obviously us taking over Globalluxe. It looks a lot like the formula that we had in Japan. It was a [ph] more resource and focus and connection back to New York that we put in to those regions. We absolutely expect to get a year 1, year 2, year 3 return via acceleration.

Craig A. Leavitt

Yes. And it's about just as it was in Japan, having a strong local management and feeding the nuances of that market to our global teams, so that we can react. And we don't have a one size fits all approach. And I think a great example of that is our -- what we've done in terms of apparel fit to reflect the needs of particular markets in Asia that have been enormous successes. So this idea of having a global strategy with local expertise, feeding us that important market information is a formula that's been winning for us. And so we expect to see that continue.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay. And then with regard to e-com being launched, it seems like it's gotten pushed back. I thought it was going to be launched in the first half. But it sounds like in Europe, beginning with the U.K., it's going to be in the second half. Is that correct? And what is the reason for the delay? And it sounds like it's going to be U.K. and then 2015 for the rest of Europe. Did I hear that right?

Craig A. Leavitt

Yes, so we're going to start in the U.K. So there was really no specific reason for the delay other than we wanted -- yes, we wanted to -- we want to ensure that -- Europe is more complicated, of course, and with that, it's not one country as you know, but multiple countries. So we wanted to make sure we have the model appropriately set that we made some adjustments along the way, reevaluated and took course. So we're looking for the second half of 2014 to begin in the U.K., use that model and configure it so that it could be then quickly rolled out starting in 2015 to the rest of the countries in a sequential way, based upon the brand awareness in those countries. I mean, we all know the countries that are more compelling there. So I think you also have to consider that in the fourth quarter, we go to a blackout period. So certainly, we're not going to be implementing anything October, November. Right.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay, got it. That's very helpful. And one last thing. And I know it's very, very early, but you just launched, last week, Kate Spade Madison Avenue online. And I was just curious as to what kind of initial response you're getting?

Craig A. Leavitt

Well I mean, it's literally days. But I can say that, yes it is. But I think the response to that collection has been strong from the start, starting in bricks and mortar. We now -- we've just opened our second flagship in the U.S. That's also carrying it from bricks-and-mortar perspective. So we have those 3 doors, if you will, in North America, and we're very pleased with those results so far.

William L. McComb

A little more on the next call.

Craig A. Leavitt

Yes.

William L. McComb

You'll have a longer selling time. Thank you, Mary.

Operator

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

Jennifer Black

I have a couple of questions. I wonder first of all, I don't know if you're ready to talk about this. But about the kiosk strategy, I asked about it on the last call, for Saturday as well as your screen points -- your screen touch point of sale in the Kate Spade New York stores. Where you are today and where would you envision yourself 1 year from now? And that was my first question.

Craig A. Leavitt

Yes, so we still feel very bullish about that. And that is one of the top priorities. George obviously wasn't able to go through every IT and operational priority. That's certainly a high-ranking one, so we are -- our IT team is working very hard on being able to execute that strategy. So we don't have a specific timeline for you today except to say that it remains something that is a high priority, we think, from both a marketing, a sales perspective and a brand awareness perspective. So we are -- we embrace technology, very strongly and we think this is a really big opportunity on many levels. So we'll have more to report in the future. But it is in works as we speak.

Jennifer Black

And then as far as Saturday goes, it -- and maybe you talked about this and I missed it. But it seems as though you have expanded your price point especially on the higher side. And I just wondered if what you have found that has maybe been surprising with Kate Spade Saturday, the brand -- I'm very excited about that brand. So anything that you could say that maybe you haven't said?

Craig A. Leavitt

Well, I mean, I think what I would reiterate is a couple things. One is that we're very excited about the growth, particularly in the accessories area, which as you know, we believe is really where a lot of the white space is for that brand and that consumer. And so the fact that we are now able to report that we have the majority of our sales in the accessories area, where as you know, when we -- at the initial launching, we talked about it being the majority of sales and apparel. We're really happy with that shift that we have been working on from a line architecture perspective. So I think with the really strong results that we are seeing in handbags, that's probably where you're seeing some expansion. So it's not a move North, if you will, in pricing. It's just an expansion of product offer that includes some price points that are a little bit higher than where we started with. But overall, we're still talking about price points that are, on average, about 50% of the Kate New York line. So that's all good news for us. And the fact that our strongest handbag group was a great leather handbag group that has a range of price points that are higher than the average price points for the brand, all feels really good to us.

Jennifer Black

Great. I just have one more question. The year of travel is brilliant and it seems like each floor site gets better and better. And I wondered if you planned all of 2015, and can you give us any hints as to what's to come?

Craig A. Leavitt

Well, you have to stay tuned for that exactly. So...

William L. McComb

We haven't announced a theme for that.

Craig A. Leavitt

Exactly. But we will continue to be -- based on those annual themes, which we feel very good about. The consumer reacts really strongly. And it's also a great context for our design and merchandising teams as well. So you'll definitely be hearing more as we move closer to 2015, but you can expect that, that thought process will continue, for sure.

William L. McComb

Yes. I mean it's -- they're well into 2015 product line. And it just happened. It's not ready for prime time for you all yet.

Operator

At this time, this concludes the Q&A session of our presentation. I'll now turn the floor back over to management for any additional or closing remarks.

William L. McComb

Thank you, all, for participating. Long call, good transition. I've worked very closely here in the last quarter with Craig and George. The team is ready to go. Thank you, all, very much.

Operator

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

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