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Kate Spade & Company (NYSE:KATE)

Q2 2014 Earnings Conference Call

August 12, 2014 10:00 AM ET

Executives

Craig Leavitt - CEO

George Carrara - President and COO

Analysts

Ike Boruchow - Sterne Agee & Leach Inc.

Jessica Schmidt - KeyBanc

Janet Kloppenburg - JJK Research

Joan Payson – Barclays Capital

Gene Vladimirov - Nomura Securities

Jennifer Black - Jennifer Black & Associates

John Morris - BMO Capital Markets

Mary Gilbert – Imperial

Corinna Freedman - Wedbush Securities

Dana Telsey - Telsey Advisory Group

Operator

Good morning, everyone, and welcome to the Kate Spade & Company Second Quarter 2014 Conference Call hosted by Chief Executive Officer, Craig Leavitt. (Operator Instructions) This call is being recorded and is copyrighted material. Therefore, please note that it cannot be recorded, transcribed or rebroadcasted without Kate Spade & Company’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. katespadeandcompany.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 ended December 28, 2013, filed with the SEC and a quarterly report on form 10-Q for the quarterly period ended July 5, 2014 to be filed with the SEC, 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 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, adjusted EBITDA margins and comparable adjusted EBITDA are non-GAAP measures that are also presented in the accompanying slides and press release.

The company also presents comparable adjusted results including comparable adjusted SG&A expense and operating income loss which the company uses to measure its performance after gaining effect to the anticipated impact resulting from the Juicy Couture and Lucky Brand divestitures on the company’s corporate expense structure to show 2013 on a comparable basis to 2014. 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.katespadeandcompany.com in the Investor Relations section after this call.

The company believes that the adjusted results for the second quarter and for six months of 2014 and 2013 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. Leavitt. Please go ahead, sir.

Craig Leavitt

Good morning. Thank you all for joining our call as we report earnings results and performance metrics for the second quarter of 2014. Also joining me is George Carrara, Kate Spade & Company’s President and Chief Operating Officer. We reported our second quarter 2014 earnings results in the press release this morning.

On the call today, I will review company highlights and provide and provide an update on our business during the second quarter. In addition, George will provide a description of our new segment reporting, a summary of key financials and a corporate operating update. We will also discuss our financial outlook. And afterward we will take a few questions. As usual, we are broadcasting today with the aid of speaker-support slides found in the Investor Relations section of our website, at www.katespadeandcompany.com.

So onto our financial results on Slide 3. Overall Kate Spade & Company had another strong quarter with increases in both our North American and international segments. We posted total company net sales of $266 million reflecting a growth rate of 49% versus a second quarter of 2013. This includes a 55% sales increase in our North American segment and a 54% increase in our sales in our international segment.

Direct to consumer comps were 30% and we achieved comparable store productivity of $1,477 per square foot over the last 12 months marking the 16th consecutive quarter of annualized store productivity growth. Adjusted EBITDA for Kate Spade & Company foreign currency transaction adjustments was $32 million for the second quarter of 2014 a $21 million increase compared to the second quarter of 2013.

Moving to Slide 4, I want to discuss the retail environment for the second quarter. We saw the landscape continue to remain promotional with increased activity over last year and key sale periods starting earlier than last year among retailers. This situation was aggravated by online and full line stores price matching amongst competitors. This environment combined with the shift of the July 4th holiday into our fiscal June also added to the overall level of markdowns during the period and we saw higher penetration of markdown sales versus last year.

We’ll be increasingly focused on monitoring this environment to ensure we protect our long-term strategy of deemphasizing promotional activity. This July 4th calendar shift and increased competitor promotional activity are elements that contributed to our gross margin rate erosion in the quarter as we moved our semi-annual sale approximately two weeks earlier than planned. It is important to note we did not lengthen it in total but rather shifted more of this markdown activity into the second quarter than originally planned.

However the largest impact on gross margin rate for the quarter was the result of off price sales margin primarily driven by the Kate Spade Saturday brand due to excess inventory and raw material disposal from prior seasons that were the result of a launch business that lacked scale. As we have said in the past it is our long-term goal to achieve two-thirds of our retail footprint outside of North America and we have structured our organization and strategic plans to achieve this goal. In this regard I am happy to announce that Roy Chan joined Kate Spade & Company as our Senior Vice President of International to oversee the strategic expansion of our international business.

By way of background Roy was most recently President of International at Jones Group and previously held executive roles focusing on international business at both Ralph Lauren and Tommy Hilfiger.

So now on to our areas of focus. As a quick reminder to the Group we will continue to organize our comments around five key management priorities and areas of focus that are fueling the growth of Kate Spade & Company and discuss initiatives driving our growth and momentum.

Once again they are one, growing Kate Spade & Company New York’s top line; two, taking a partnered approach to drive margin expansion; three, expanding our marketing efforts; four, expanding our customer service experience; and five continuing to build the foundation for Kate Spade Saturday.

So first on growing Kate Spade New York top line. We saw growth in all product categories across channels. In our specialty business we saw particular success in handbags driven by solid growth of our core handbag business. We continued to focus on building penetration of our core offering to generate strong store productivities and manage inventory risk which will help us support our strong gross margin rates in the long-term. Our Cedar Street collection continues to be our most popular group, contributing to growth in the category. We continued to apply our shoulder pricing strategy to our overall business. As we build the aspirational site of our architecture, we are seeing traction with what we call our splurge customer who spends more than $500 on a single item, buys multiple items each time she shops and makes multiple purchases throughout the year. As we consider our product assortment we will continue to extend our offering to satisfy this customer's desire for luxury both in our stores and online.

Overall we’ve experienced continued success with our higher priced fashion handbags consistently making or exceeding expectations including the Mayfair Drive, Beverly Road and Firefly Drive collections. In addition we continued to see our ready to wear customers shopping for handbags as well.

Our ready to wear AURs are increasing year-over-year and we see an improved penetration in our separates offering. In fact two of our best selling items this quarter were the Hutton Pant and the silk frill top. Dresses continued to be a robust part of our business and we’re seeing a trend toward more expensive emotional pieces into July. Highlights for the quarter included our $498 Angelica dress and the $398 Corley dress and structured silk mini dress, all of which exceeded our expectations and were up to plan.

On the entry price point shoulder of our pricing architecture are small leather goods product category performed well driven by the popularity of our Cedar Street Monday cross body collection available in multiple colors and both crosshatch or perforated leather.

Moving onto our ecommerce channel, our full price business continues to perform well and we are seeing particular success with our ready to wear offering there. We are pleased with the result of our migration from flash sales to theme driven sales which have a less promotional posture and blend full priced and discounted products. This quarter’s most popular theme sale focused around bridal and our full price penetration continued to grow.

We continued to see these events bringing new customers to our brand, and this quarter we increased our overall customer database by just over 70% versus the second quarter last year. Our Kate Spade New York North America specialty fleet rollout continues to be strong and we have opened six new stores net of one closure in this channel this year all of which are running well ahead of our plans.

As we have indicated we still feel that we’re only approximately 40% penetrated in this channel versus our long range plans. We expect to open 10 specialty stores net of one additional closure during the balance of this year totaling 16 net openings for the year. Our store sense has also included an unplanned shift in outlet openings this quarter. This was a result of our taking advantage of the Juicy real estate portfolio, while the brand opened five new Kate Spade New York specialty stores in North America including a much anticipated location in East Hampton a former Juicy location. We also took advantage of the Juicy portfolio by opening nine outlet doors all of which were a conversion of former Juicy doors. While we open more outlets than anticipated, it is important to note that all the new stores exceeding our expectations. And I want to underscore that this does not represent a shift in our strategy relating to our retail expansion plans which emphasize our focus on full price specialty stores. We took advantage of a one-time opportunity of the Juicy divestiture and speed our ratio of outlet to specialty store openings for the year.

In fact we now expect that we will reduce our previously stated long-term goal of 125 outlet stores to 100 or less in North America. Overall our wholesale business continues to be strong with double-digit increases in retail sales to last year driven by strong handbag sales and particularly significant growth in our watch and jewelry elastic categories.

In addition our novelty bags which are signature part of our brand have generated significant sales in our full price offering year-to-date. This quarter we launched the highly successful jewelry table program in all 117 doors resulting in significant sales growth. These tables are a good example of the entry point shoulder of our pricing architecture and feature Small Square Stud Earrings at a MSRP of $38 offering an opening price point for those wanted to be part of the Kate Spade New York brand.

We also launch tech accessory pop-ups and 50 Messi’s doors which have been successful and indicate a desire for accessible price point of our brand moving forward. You may recall on our prior earnings call that we outlined nearly 1,400 points of wholesale distribution in more than 400 locations throughout North America including nearly 800 points of distribution within these elastic categories, in fact the number of point of distribution at the end of Q1 was over 1,900 including 1,100 points of distribution in the elastic categories. We inadvertently did not include tech and fashion accessories categories in Q1. We ended Q2 with nearly 2,000 points of wholesale distribution which again we define as a category in a door across our own product categories in more than 400 locations throughout North America that includes both core and elastic categories.

Our elastic category points of distribution have grown to nearly 1,200 primarily driven by growth in jewelry and watches. Our core categories handbags, small leather goods and ready to wear remain at the top of our product pyramid and we have no change in distribution for the quarter. We continue to take a studied measured approach to identifying opportunities for our core categories including testing with potential additional distribution partners as I’ve outlined in the past.

Moving to our international segment, as we continue our expansion of Kate Spade New York top line we see positive growth in our international fleet. It’s important to note that our Kate Spade New York brand comps increased 17% this quarter in Japan reflecting significant strength and success despite overall regional department store performance which experienced negative comps between 5% and 12% over the last three months following the April consumption tax increase.

Total Kate Spade Japan comps for the quarter increased 18%. This quarter we expanded the Kate Spade New York brand across nearly every region including two new stores in Japan, two in the Middle East including the first store in Abu Dhabi, two in Malaysia expanding our footprint there outside of Kuala Lumpur, one in Mexico bringing us with total of three in the market and three in China. On a related note an important focus and opportunity for growth in our international segment is Travel Retail. We saw strong double-digit growth especially in places like Hawaii and Hong Kong and opened our first travel retail location in the Sao Paulo Airport in Brazil during the World Cup in June.

In Japan our e-commerce business experienced solid gains doubling its business this quarter. On an e-com note our website katespade.jp drove strong traffic in our store and more than half of our customers who purchased our newest flagship in Ginza browsed our site before they visited us, underscoring our effective digital approach. It is clear that our website allows us to immerse customers in our brand and tell our story, creating an emotional connection that we then build on in our stores. We also saw growth across other important markets including Hong Kong, Brazil, China and Southeast Asia. Specifically in Hong Kong, Taiwan, Macau region we’re seeing double-digit growth that is especially promising and we are planning additional store openings in the rapid growing Macau market in the coming months. These overall regional improvements are meaningful as this market is seeing a general softening of consumer sentiment and mall traffic.

Hong Kong Government statistic show a 10% to 15% drop in same-store sales in May. Since taking over a Hong Kong business from our former distribution partner we embarked on a renovation program to update our fleet, in this quarter we completed a successful relocation of our highly productive store in the IFC Mall in Hong Kong and we’re seeing strong results.

Brazil continues to show meaningful growth with this market demonstrating the biggest regional comp growth globally and improvement and conversion in all doors and channels. In addition we had nearly 35% growth in new customers to the brand and also increased our AUR significantly. In China, we are seeing more than 50% increase in net sales year-over-year with particular growth in our Beijing business where we now have our top performing store in the market. Earlier on this call we briefly mentioned our elastic categories, which as you remember include watches, jewelry, fragrance and tech have a broader distribution in some of our core products, help increase our wholesale footprint and build grand equity.

In addition, these categories offer an entry point for customers who want to be part of the Kate Spade New York brand. As we told you previously we reached an agreement with the distribution partner in the U.K. to expand our watch offering an important elastic category for us. In addition to our current distribution and retailer such as Selfridges, we are also now adding John Lewis, Goldsmiths and ASOS.com and we expect to broaden this reach further in the balance of 2014.

In addition we are finalizing new deals with watch distributors for Singapore, Malaysia and Indonesia and plan to launch in the back half of 2014. And in Japan we nearly doubled our watch business during the quarter over last year. Moving onto our fragrance category, in the second quarter we signed an agreement with a third quarter distributors that supports the expansion of our fragrance footprint. By the end of the year we expect to add approximately 230 new premium retail points of distribution including Bloomingdale’s and Von Maur.

In addition, we signed an agreement to expand our fragrance distribution into military and independent fragrant specialty stores that we expect to total an additional 300 points of distribution by the end of the year. In addition, we signed a license with Incipio to design manufacturer market and distribute tech accessories into broader distribution channels, which may ultimately include 3,000 doors. This new agreement will cover a wider range of devices allowing us to add devices like Samsung and Kindle to our offering, as well as offer portable power solutions.

Well, we continue building on our strong relationship with Apple through our license partner Contour. We will also expand a premium carriers and top consumer electronic stores where devices are sold. This strategic approach allows our customer to purchase our tech cases in the same place with she buy her device, as well as reaches a new customer for the brand. It’s important to note that sales of our Kate Spade New York accessories at Apple remains strong with performance up significantly this quarter.

Next, we want to talk about our use of partnerships. We continue to take a thoughtful partnered approach to drive significant margin expansion and expand it to new categories. As you know in the fourth quarter we will introduce a limited edition Gap Kids Children’s Wear collaboration for holiday 2014. Building on this momentum in children’s wear we signed an agreement with TAO Associates and will introduce a Kate Spade New York toddler and girls collection including clothing and accessories that will launch in February 2015 in select Kate Spade New York doors and online as well as in premier department stores.

Following in fall 2015 we expect to introduce a newborn and infant line that will include clothing and accessories. Last quarter we discussed our swim collection with Swimwear Anywhere which will launch this November at retail. Reaction from both department and specialty stores at the Miami Swim Week was strong. We continue to evaluate partnerships that will drive margin expansion and expect that it will continue to have news on additional license categories and classifications later this year.

Next, we want to discuss our increased investment in marketing. We balance our digital efforts with more traditional forms of marketing like direct mail pieces to ensure that we are reaching customers and reinforcing our brand story. We create unique strategies for each of our platforms to engage in meaningful conversations with our customer and deliver interesting, relevant content. These quarter our Instagram following was again our fastest growing online community.

Our strategy here is to visually tell the story of the Kate Spade New York girls interesting life and create unique content rather than simply reposting advertising images. On Facebook we transitioned to a new global brand page this means we streamlined our separate international brand pages into one master page, now nearly 2 million fans are automatically directed to the appropriate regional Facebook page based on location or they can actively choose to view other regional pages. This approach ensures we deliver a consistent unified brand message around the world.

Our increased marketing activity and overall mix is working. Our most recent consumer research shows a 4.0 increase in unaided brand awareness, as well as an aided brand awareness that for the first time is in line with many of our competitors. In addition this quarter we increased our total customer file over 70% compared to the second quarter of 2013 and active customers are up approximately 20% to last year. In addition, searches for our brand name on Google continue to increase year-over-year. In the second quarter we saw a 33% overall increase year-over-year with mobile increasing 67% over last year.

In our e-commerce channel our marketing spend will continue to lean heavily towards demand generation with a specific focus on acquiring full price customers. We will be investing in channels including paid search, SEO and retargeting to drive customers to katespade.com and support our fall and holiday campaigns and collections. As we turn to our fourth management focus evolving our customer service experience we believe our channel agnostic customer approach is in the end an important customer service story.

We do business with our customer wherever and whenever she wants which is in fact the ultimate in customer service. We also know that our ability to communicate our brand story to our customers not only in our stores but also through our robust display of digital content on our website and digital platforms is a key competitive advantage. Our focus on rolling out additional ecommerce sites to support both topline growth and brand building efforts continues to be a priority and we expect to roll out our UK site in the fourth quarter this year. Additional international sites will follow in the first half of 2015.

We have already seen positive results from our site re-launch in Japan where as I said earlier we doubled our ecommerce business this quarter. Moreover we now expect to launch additional ecommerce capabilities including a comprehensive ship from store and pick up from store feature in 2015. We are also committed to continuing to lead in terms of our overall digital consumer experience and are proud to announce an innovative initiative that builds on our success and learnings from the shoppable windows that help launch Kate Spade Saturday last spring.

This fall Kate Spade New York will be testing new shoppable store construction barriers which will allow us to engage with our consumer and share our brand’s story in new locations prior to opening. She will experience our brand and product as well as be able to make purchases via dynamic multimedia display screens right from the store locations. More to come on this as we get closer to launch.

In our physical stores, we rolled out what we call our gold service package to five new stores which features an elevated personalized customer experience that includes services like personal styling appointments, tailoring and valet and messenger services.

Now moving on to Kate Spade Saturday, sales and traffic from the first quarter to the second quarter were very strong showing engagement and curiosity in the brand coupled with a strong consumer reaction to the Saturday Is campaign that we launched earlier this year.

The Kate Spade Saturday product assortment focuses on key areas such as accessories and apparel while deemphasizing smaller categories like home and desktop. Consistent with what we have seen accessories drove significant volume and now make up nearly 60% of sales year-to-date. In addition we continue to streamline and optimize our overall assortment focusing on fewer styles and emphasizing key groups and shapes like our bestselling A Satchel handbag.

In terms of stores we are applying our learnings over the past year and identifying what works best for our brand. We are selecting high traffic locations near transit hubs in key magnet cities where our customers either are fashion engaged local customer or a tourist consumer. Our domestic store traffic is up 26% in the second quarter compared to the first quarter and store conversion is up as well.

Second quarter AUR is also up based especially on the strength of our leather handbags. In the second quarter we opened our first store in Boston exceeding plans by over 20% year-to-date. Conversion is also nearly one-third higher than the Kate Spade New York fleet average. Kate Spade Saturday resonates digitally and we continue to see strong ecommerce penetration. Our year-to-date comp show a nearly tripling of our volume in this channel. Internationally Kate Spade Saturday stores are performing well with meaningful traffic in sales, in fact our key fashion building prototype in Japan is seeing comp sales results of more than 50%.

Moving onto marketing efforts. This quarter we completed a number of successful initiatives including a partnership with Birchbox all of which increased Kate Spade Saturday awareness and added new customers to its growing database. Later this year we expect to share news about some large scale collaborations that will help drive additional awareness and reach new customers.

And for the Jack Spade brand in the quarter we saw a modest increase in direct to consumer channels offset by a decrease in wholesale. As we have referenced previously we recently completed a brand positioning and consumer research study for Jack Spade to help us develop an effective roadmap for the brand. We expect to share more details behind this approach in the months ahead.

Turning to our 2014 outlook on Slide 11. We continued to be pleased with the green (sheets) [ph] of our Kate Spade Saturday business and as we have said before remain confident in the value of our continued investment in this growing brand. This investment is an important factor among several that leads us to revise view of our margin expansion for 2014. While we continue to expect expansion for the year at the Kate Spade segment level, we now anticipate it to be approximately 50 basis points of improvement and at the Kate Spade & Company level we expect approximately 150 basis points of improvement.

Our most recent view on Kate Spade Saturday performance as we referenced last quarter is a somewhat larger investment and less improvement in the adjusted EBITDA margin compared to our plan coming into the year. We’re also now projecting that our Kate Spade New York brick and mortar business in North America will drive incremental adjusted EBITDA but at a slightly reduced EBITDA margin rate, also compared to plan.

I should note that a significant part of first decrease in that margin rate is due to unplanned rent increases resulting from landlord negotiations for the Kate Spade stores relocating to former Juicy Couture locations. We are energized and feel very positive about the continued momentum of our upward growth trajectory across regional segments, product categories and brands. And to that point we now expect our direct to consumer comp results for 2014 to be in the range of 15% to 17% versus our previously guided range of 12% to 15%.

And now George will take you through our financial results in greater detail.

George Carrara

Thanks Craig and good morning all. Slide 12; our new segments. Before we get into the numbers for the quarter, I want to update you on our segment reporting change. After completing the sales of Juicy and Lucky and substantially completing the Juicy line down activities we determine it was appropriate to make two changes in our segment reporting. First, we are separating what we reported to first quarter 2014 as Kate Spade segment in the segments Kate Spade North America, which includes all U.S. and Canadian operations and Kate Spade International which includes the principal international markets you’re already familiar with Japan, Southeast Asia, Europe and South America, each houses our Kate Spade New York, Kate Spade Saturday and Jack Spade brands were applicable. The Adelington Design Group continues as its own segment.

Second, you are aware we’ve reported the adjusted EBITDA of our back office separately those costs including finance, investor relations, communications, legal, human resources, information technology, corporate facilities and other departments are now fully allocated to the three segments I just mentioned. Slide 13 provides a bridge starting with the previous Kate Spade segment reporting basis then separating the Kate Spade segment into North America and international and then allocating corporate costs.

Note that 2013 amounts include a rebase corporate expense structure to reflect the anticipated impact resulting from the Juicy and Lucky divestitures in order to show 2013 on a comparable basis to 2014. Going forward we will discuss segment performance in this format and the adjusted EBITDA amounts we provide will include allocated corporate expenses, so we will no longer breakout corporate adjusted EBITDA separately.

However, I do want to point out that the minus $11 million of adjusted EBITDA for corporate is favorable to our expected run rate largely due to timing of expenses. We continue to expect corporate adjusted EBITDA to be within the guided range of minus $50 million to minus $55 million for the year.

Slide 14, our second quarter adjusted P&L. Our GAAP income statement now shows Juicy in discontinued operations along with Lucky brand which was already presented as discontinued ops at the end of last year. Consisting with the first quarter adjusted EBITDA for 2013 include the rebase corporate expense structure. With that said let’s get into the number showing on the slide.

Net sales for the quarter were $266 million an increase of $87 million or 49% compared to second quarter 2013. In total our comparable direct to consumer sales increased 30% over last year and excluding e-commerce sales, our brick and motor stores increased 32%. Sales in our Kate Spade North America segment increased 74 million or 55% and sales in our Kate Spade International segment increased $17 million or 54%. I should note that for the second half of the year we expect international sales to grow at a greater rate than North America sales.

In North America 27 specialty and 18 outlet stores in the last 12 months increasing our average retail square footage by 48% compared to the second quarter of last year. Our Kate Spade New York brand posted an approximate 28% increase in sales per square foot across the North American retail fleet and the wholesale business continues to perform nicely as we execute a studied measured approach to growth.

We discuss the Easter shift on our previous call. Easter occurred in the second quarter of this year but in our first quarter last year. The favorable impact of that shift in the quarter was offset by a corresponding planned shift in our promotional calendar that moves an offsetting amount of sales into the first quarter. Accordingly quarter two did not benefit from the Easter shift but did benefit from the inclusion of the 4th July holiday in our second fiscal quarter which ended on July 5th.

Internationally we opened or acquired 11 specialty stores, two outlet stores and nine concessions in the last 12 months resulting in a 36% increase in retail square footage compared to second quarter of last year. We also posted a 20% increase in sales per square foot across the retail fleet in our international segment. We noted Japan comps grew 37% in the first quarter due impart to the consumption tax increase in Japan that willing to effect in April 1st. Following the tax increase the business continue to exceed expectations with the plus 18% DTC comp sales increase in the second quarter also the acquisition of the Hong Kong, Macau and Taiwan territories increased net sales by $7 million for the quarter compared to last year.

We continue to estimate the annualized incremental sales impact of this acquisition for these three territories is approximately $20 million. Sales in our Adelington Design Group's segment were $8 million a decrease of $4 million versus LY. Most of this was planned and was driven by the Q3 2013 exploration of the Dana Buchman/Kohl’s supplier agreement.

The Liz and Monet businesses at JCPenney are showing significant improvement with increases in both retail sales and terms. Additionally Trifari sold primarily at Kohl’s is showing an improvement in quality of sales as we expand fashion offerings and importantly sales are on plan with stocks down to last year.

Finally we launched Trina Turk jewelry under a license agreement earlier this year with strong customer response and positive results from spring selling. Planned full launches include Belk, Dubey and other top tier department stores.

Moving on to gross margin. Our gross margin rate for the quarter decreased from 61.8% to 58.6% about 320 basis points. This variance is principally related to two factors. First as we described last quarter our inventory balance was disproportionate with our sales trend. This was especially proved in Kate Spade Saturday as in our initial launch year we intentionally maintained our inventory as we balanced our consumer demand.

Overall the brand represented about 240 basis points of the gross margin rate decrease and most of that was the result of the liquidation of 2013 inventory. We view this as a non-recurring event as we believe future inventory buys are better aligned with sales growth plans. Second the retail environment continues to be more promotional. Craig just discussed this trend and as a result our gross margin rate is being affected. Coupled with the dilutive impact of Kate Spade Saturday, we expect our full year gross margin rate to decline approximately 125 to 175 basis points.

Total adjusted SG&A was up $32 million or 30% for the quarter compared to a sales increase of 49%. As a percentage of sales adjusted SG&A decreased to 52.7% versus 60.3% last year. This 760 basis point improvement was due to several factors. The launch of Kate Spade Saturday last year resulted in launch and startup expenses that exceeded Saturday sales volume in second quarter 2013. That combined with the liquidation of excess inventory in 2014 created a favorable year-over-year SG&A rate comparison that will moderate in the second half. Also beginning the semi-annual sale in June and the calendar shift drove sales this year that reduced our SG&A rate compared to last year. We did achieve some operating leverage in the quarter that we expect to continue for the full year 2014.

Total comparable adjusted EBITDA increased 21 million to 32 million or 12.1% of net sales in the quarter as compared to 6% in 2013. The dollar and rate variances were driven principally by results in our Kate Spade North America segment with most of the additional operating leverage in the quarter attributable to sales and gross margin derived from sales outperformance and the liquidation of excess inventory I just mentioned.

In our international segment the acquisition of the Hong Kong, Macau and Taiwan territories increased adjusted EBITDA by 1 million for the quarter compared to last year. Also quality sales increases across all geographies drove gross margin dollars but those increases were offset by planned investments in Kate Spade Saturday and in our less mature markets like Europe and South America resulting in flat adjusted EBITDA year-over-year.

Although our first half adjusted EBITDA margin expansion was in excess of 400 basis points, our expectation of total company adjusted EBITDA margin expansion is approximately 150 basis points for the full year. This moderation is principally due to the timing of several factors including the benefit in the prior year of accrual of certain expanse estimates in the fourth quarter of 2013. The sales benefit during the first half attributable to the 53rd week, the July 4th calendar shift and the headwinds related to rent and occupancy costs in the second half of 2014 as Craig previously mentioned.

Now the slides on pages 15 and 16. Here we bridged our GAAP results to adjusted results in 2014 and to the comparable adjusted results in 2013. This is consistent with the view we provided during our first quarter earnings release call except that you see is now in discontinued operations. As a result the only reconciling items from our GAAP results are streamlining charges in both periods and an adjustment to re-base corporate expenses to show 2013 on a comparable basis to 2014.

Slide 17, selected balance sheet and cash flow data. As you compare the year-over-year amount shown here, keep in mind that inventory amounts include Lucky and Juicy in the second quarter 2013. However by the second quarter of 2014 Lucky was sold and the Juicy wind down was substantially complete, so only incidental amounts for Juicy remain in our consolidated inventory balance. In any event I’ll limit my comments to Kate Spade and Adelington amounts.

We noted on the last call that Kate Spade inventory growth of about 70% at the end of first quarter was ahead of plan. Our inventory balance is now more aligned to sales trends and at the end of the second quarter inventory increased approximately 60% compared to last year relative to a 49% increase in sales. We expect inventory levels to continue to further align with sales growth in the ensuing quarters. Year-to-date capital expenditures of $48 million we expect to finish the year in line with our estimate of $100 million.

Net debt, total net debt was $232 million as compared to $481 million at the end of second quarter 2013, a decrease of $249 million. This decrease was principally driven by the growth proceeds received from the Juicy and Lucky brand dispositions, reduced by associated net restructuring and transaction cost of approximately $15 million, $43 million of proceeds from stock option exercises, the funding of the Kate Spade expansion, including LTM capital expenditures of $86 million and $32 million for the acquisition of the South East Asia business from Globalluxe. We expect our year-end net debt position to range between $275 million to $300 million and I should note that our current liquidity is more than sufficient with $162 million excess availability under our revolver.

Moving to Slide 18, an update of our operating leverage strategies. We are well underway in the execution stage for our digital commerce and marketing platform in Europe beginning with the flagship e-shop in the U.K. The functional roadmap will include feature rich integrations that will closely nearer the user experience offered in our U.S. flagship e-shop. The site is been built with a so called responsive design that will allow us for one build that will optimize desktop, tablet and mobile experiences. We anticipate the U.K. launch for Q4, once we launch the U.K. flagship site technical capabilities will be in place to support sequential site launches in key markets in Continental Europe in 2015.

On the logistics front, our team continues to develop a new model for our Ohio distribution center than incorporates a more fashion centric warehouse management system, along with upgrades of our material handling equipment. This project current is in the development stage and we expect to begin testing functionality later this year. The plan is to expedite merchant night flow and reduce unit labor costs. Our major international initiative as discussed during the last call is the establishment of standalone systems and infrastructure to support our high growth Japan business.

Kate Spade Japan continues to be supported by our TSA provided by Sanei our former JV partner. We are now in the testing phase of establishing a standalone technology and logistics platform along with the planned redeployment of the global point of sales system or POS. The POS will leverage functionality that is common throughout the world of Kate Spade and also addresses local cultural and statutory requirements. Dependent on the results of our progressive testing plans and commercial calendar our goal life for Japan is expected to occur in the first half of 2015. We'll keep you updated on or progress here.

In addition to those important initiatives we are currently pursuing various partnerships including licenses, distribution agreements in joint ventures, strategies consistent with the concepts we have discussed to fuel Kate Spade New York top line momentum and at the same time achieve margin expansion. Importantly, these initiatives are also consistent with our capital light approach to certain international markets that would meaningfully improve operating leverage, more to come in the next few months.

The Juicy wind down is substantially complete and virtually all of our Juicy inventory has been liquidated. The net result achieved was better than expectation and with Lucky we continue to support the TSA.

Slide 19, the 2014 financial outlook. Craig has already touched on some of these items, but I want to take a momentum to run through some assumptions and business developments embedded in our financial outlook.

Note again that these estimates exclude results for Juicy and Luck brand. First, we have progressed in our efforts to better align inventory levels with sales plans and out plans for the year already reflects additional liquidation of Kate Spade Saturday inventory. We have also seen North American and international DTC comp sales trends for our KSNY brand outpace the assumptions embedded in our previous guidance. As we have communicated previously Kate Spade Saturday represents a similar size investment to last year. Also Craig mentioned in our Kate Spade New York brick and motor businesses in North America will drive incremental adjusted EBITDA but as a slightly reduced adjusted EBITDA margin rate compared to plan coming into the year.

Put all that together for the full year and you have first an increase in our estimate of full year adjusted EBITDA from a range of 115 million to 125 million to a new range of $120 million to $130 million. Second, a further improvement in our estimated comparable sales increased from a range of 12% to 15% to a range of 15% to 17% including the benefit of the additional week.

And finally a reduction to our planned adjusted EBITDA margin expansion. We guided this metric to an increase of around 100 basis points compared to 2013 at the Kate Spade segment level. As Craig explained, we now expect adjusted EBITDA margin expansion of about 50 basis points, also at the former Kate Spade segment level. That translates to an adjusted EBITDA margin expansion of about 150 basis points for total Kate Spade and Company.

With respect to our 2016 targets which we outlined at our Investor Day last year, we expect to achieve an adjusted EBITDA margin of 25% for the former Kate Spade segment. Given the longer than expected Kate Spade as a ramp up coupled with our revised 2014 margin rate outlook and because of our limited visibility in the 2016 we feel it is responsible to reevaluate the timeframe of achieving this goal which we will perform as part of our annual business planning process later this year. We will assess whether any short term adjustment to the timeframe is warranted and we’ll update you in November during our third quarter earnings call. To be clear if a short term adjustment is even necessary we expect the most likely adjustment would be a shift to 2017. This is all the commentary we will have on this topic today and we will not address this further during the Q&A.

On the topic of margin expansion, it is important to note that the adjusted EBITDA margin at the Kate Spade New York brand level is exceeding both our 2014 expectation and the target we introduced at the March 2013 Investor Day. You are aware the target of 25% adjusted EBITDA margin at the Kate Spade segment level excluding corporate expenses. We have also told you to expect corporate adjusted EBITDA cost in the range of 4% to 5% of total company net sales, so without giving any affect to Adelington that equates to a targeted 2016 adjusted EBITDA margin of 20% for the entire company.

Rebasing margin expansion in the context of the total company is important since we will no longer report at the Kate Spade segment level due to the segment changes I mentioned before. Accordingly we will no longer speak in the context of Kate Spade brand adjusted EBITDA or unallocated corporate expenses.

Continuing the discussion of our 2014 outlook. In addition to the overall DTC comp sales guidance I just updated, I want to provide some inside on the impact to comp sales of the relocations we discussed on the last call.

We noted on the last call that under our comp store policy these stores become non-comp throughout the year when the relocations are complete and as a result that we expected some deceleration in our comps and productivity growth until those stores become comping in 2015. We estimate that these relocations reduce our overall full year DTC comp sales increase by a few 100 basis points and this is of course already reflected in our updated guidance. So our comps for the second half our plan in the high single digit range versus nearly 30% in the first half as a result of the shift within our comp door base, the additional week included in the first half, the shift of the July 4th sales out of the second half and finally the plan pull back in Q3 and Q4 surprise sales.

On the real estate front we remain on track to open approximately 80 new stores or concessions with overall square footage growth of our company operated stores expected to be in excess of 30%. Continuing depreciation and amortization, capital expenditures and investments, interest, tax and shares remain unchanged. I remind you that our estimated interest expense of 32 million to 37 million does not include any interest income we earn on the $85 million note due from Leonard Green in connection with the Lucky Brand disposition, which amounts to $13 million on an annualized basis, 8 million in cash and 5 million of payment in kind.

Now, I will hand the call back to Craig. Craig?

Craig Leavitt

Thank you George. At this time we’d like to open the phone line up for a few questions. As we mention at the start of the call, in the interest of time, we ask that you keep it to one or two questions.

Question-and-Answer Session

Operator

The floor is now open for questions (Operator Instructions) Thank you. Our first question comes from Ike Boruchow of Sterne Agee.

Ike Boruchow - Sterne Agee & Leach Inc.

I guess Craig I just want to focus on the Saturday brand, just a couple of questions about that. The first one I know you said you didn’t want to comment on the long-term margin target. My only question is, it sounded like the reduction, the potential reduction or the potential pushing out is solely a Saturday issue and not a Kate Spade New York issue. I was wondering if you could comment on that.

The other question about Saturday is now that you’ve had the off price liquidations and it sounds like you tweaked the assortment a little bit in terms of apparel and accessories and pricing. How do you think about the gross margins and the inventory going forward into the back half of the year? Thanks so much.

Craig Leavitt

So first just to answer the first part of your question I think you are correct and that’s what we outlined that this is really an issue of the timing of the ramp up of the Kate Spade Saturday business and I think the -- what’s important is as we’ve said in our comments earlier that we are exceeding our expectations on the Kate Spade New York brand and continue to do so.

So this is really entirely based on the ramp up timing versus our original expectations of the Kate Spade Saturday brand. But that said as I outlined in my comments we still feel very good about what the direction of that brand and the continued improvement quarter-over-quarter in terms of continued to improve on metrics.

Relative to your question about margins. Again we’re not going to talk specifically about margins in that brand, although we have said previously that we would expect in the long-term that those margins will be slightly lower than Kate Spade New York based on the competitive step that brand plays in. But as it relates to looking towards the back half of this year, we certainly do see a moderation in the dilution that the Kate Spade Saturday brand is causing based on having the overwhelming majority of our liquidation challenges behind us for the year. And as we said those were based on the prior seasons kind of modulating learning about our customer and making sure that we have the right inventory levels to make those adjustments. And now as we applied those learnings we have liquidated that prior season inventory.

George Carrara

We see Saturday as a compelling business and that’s why we continued to invest in it. So as Craig explained although the operating margin over time will be expected to be less than Kate Spade New York, we are getting the benefit of brand operating leverage on the marketing end. So that’s an important point. And just to wrap it up on gross margin as we said in our prepared remarks our gross margin rate for the full year will be about 125 to 175 points less than LY and this results from the two factors that we discussed.

Operator

Our next question comes from Edward Yruma of KeyBanc.

Jessica Schmidt - KeyBanc

Hi, this is Jessica Schmidt on for Ed. Just first question can you talk about e-commerce and why it's lagging in store sales trends. Is there any particular pocket of weakness? And I guess how should we think about your strategy to focus on theme sales. And what else can you do to drive growth there?

Craig Leavitt

So I think there is a couple of things, one the -- we’re still seeing robust growth in that channel. So I think that’s the first point that we need to underscore. And I think that some of the moderation in the growth in that channel results from what we’ve been talking about for some time and we’ll continue to be talking about even as we move into 2015 which is the fact that we are slowly over time reducing our focus and dependency on promotional activity and moving away from that same level of activity.

While again as we said we’re still going to have some of these flash sales. We are reducing that number and we’re reducing that number in the back half and we’ll reduce it further as we move into 2015. And we are also -- again as we’ve said shifting some of those from pure discount flash sales to these hybrids or theme sales. And so I think that is certainly one of the things that in the short-term is going to moderate some of the growth in that channel.

But it continues to be an important customer acquisition tool and I think again as I said in my comments about marketing that we are going to be shifting more and more on that emphasis of our digital marketing onto full priced customer acquisition and search engine optimization as well. So I think that’s what you can expect as we look forward. And again I think this moderation in those comps is going to continue based on our strategy.

Operator

Your next question comes from Janet Kloppenburg of JJK Research.

Janet Kloppenburg - JJK Research

A couple of questions. George first of all on the comps, should we expect that the high single-digit guidance is generally the same with the third and the fourth or would we expect a bit more in the third and a little less in the fourth, I think you’ll be discounting or trying to discount less during the holiday season, is that fair?

Craig Leavitt

Yes. That’s a fair statement and correct.

Janet Kloppenburg - JJK Research

Okay. And then another question I had for Craig was, that the outlook for EBITDA to perhaps to be something a bit lower than we expected in fiscal '16. Could that be made up at all by the potential increase in business from the new partnerships on the wholesale side and in the elastic categories as well? I mean is that included in your assumptions the growth potential of these new partnerships or could there be more to come there?

Craig Leavitt

So I mean again this is what I -- we don’t want to have a lot of comments on this today because our visibility is growing, each month that passes we have more visibility into some of things that you just outlined. So I don’t want to comment further on that, except to underscore what George said is that we are not saying that there is going to be any change in our targets. We’re saying that as part of our annual business planning process which we are in the midst of going through now, we are going to evaluate that to keep you informed so we’re just trying to be fully transparent in that. But there’s no news to say, so there’s nothing to talk about in that regard.

Janet Kloppenburg - JJK Research

Okay. And just in terms of the promotional activity that you saw in the quarter, was that pretty much in the wholesale channel or did you face that promotional pressure in the directly operated stores as well?

Craig Leavitt

I would say that we saw that across all channels.

Janet Kloppenburg - JJK Research

Okay. And is something you’re expecting to continue through the remainder of the year?

Craig Leavitt

Yes. At this point unfortunately that is -- I think we have to move forward on the basis of that expectation and we’ve said -- many times you’ve heard me say that we -- we’re not going to be in the front of the path, but we’re not going to be last either and risk losing market share. So we’re going to respond, react and respond to what’s happening competitively and try and stay towards middle, back middle of the pack and that’s what we’ve done and we'll continue to do but we can’t just sit on the side lines and risk the potential bleeding market share.

Operator

Your next question comes from Joan Payson of Barclays.

Joan Payson – Barclays Capital

Yes. I just -- if you could talk about the international EBITDA and EBITDA margins where you think they can go longer term and how quickly they can ramp up?

George Carrara

So looking at international EBITDA margin, of course right now we’re in an investing stage. So as you would expect as we invest in the same way back a few years ago, we’re investing in North America we’re experiencing some margin headwinds but of course the international market is very attractive. The brand is performing between than expectation. So longer term we expect that margin to benefit from the leverage of the brand's evolution of course North American and beyond. So we’re very confident about our outlook of profitability on the international side.

Craig Leavitt

And I think to that point as we mentioned a little bit in our comments that is, the international segment is one of the areas that we are very focused on developing partner approach to our business. And I think that that ability to enter and expand in markets in a more capital like fashion with a lower risk profile, with partners is something that’s really important and we are looking to expand that methodology or that modeling in the appropriate markets and I think that’s another opportunity in that regard.

Joan Payson – Barclays Capital

Okay. Great. And then also you mentioned you were testing the wholesale business with new distribution partners than, I think the elastic categories in particular, but has any of that changed how you think about distributing the core categories and maybe potential to get those into a few additional doors as well.

Craig Leavitt

Well, as I said before I think, I think that there are certain markets around North America where we think that there are strong regional players where we could in a limited door distribution, find success with some of our core categories in particular handbags and small other goods not likely in ready to wear but we think that there is a small number of doors. But as you heard me say we have been stable in terms of our level of distribution on those core categories of handbags and leather goods and apparel, since last quarter. And we expect some modest growth in that -- from a census perspective as we move into the back half of the year, but not significant. Certainly, the growth story in terms of census is going to be on the elastic category side, where we’ve already seen since last year, growth rates in those elastic categories on a door count basis of between 50% and 100%. So and I outlined looking towards more of that for the back half. So that's certainly going to be the key driver of wholesale door growth, but we do to your question, we do see that there are some opportunities with strong regional players in some of the core categories in a limited way and that is exactly what we are testing in the back half to gain the appropriate learnings for the future.

Operator

All right. We will move along at this time Simeon Siegel of Nomura Securities.

Gene Vladimirov - Nomura Securities

Hi. This is Gene Vladimirov for Simeon Siegel, good morning. Congratulations on a great quarter. So we heard a little bit about Kate Spade Saturday and the promotional environment there, can you talk a little bit about the core Kate Saturday, Kate Spade brand and perhaps how it’s playing through the promotional environment?

Craig Leavitt

Well, I think what we reference is that in general we saw promotional environment, we weren’t referencing specifically Kate Spade Saturday, we thinking -- there is certainly the promotional activity or the emotional environment in general was higher than we expected and that includes the Kate Spade New York brand and in particular that’s one of the things that we referenced in terms of the margin dilution in addition to the key driver which was the Kate Spade Saturday inventory liquidation and raw material disposal, it was the impact of additional markdown activity in the Kate Spade New York brand as well, as well as which was not only from a perspective of promotional activity but also partly was a result of the calendar shift of the July 4th holiday into our fiscal June second quarter. So it was both of those things.

George Carrara

But we should note in spite of the promotional environment Kate Spade New York is outperforming its EBITDA expectation for both the year and what we established as our Investor Day expectations for this year.

Operator

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

Jennifer Black - Jennifer Black & Associates

I have a couple of questions, my first question, you’ve expanded your footwear collection to include more flaps and boots and it looks like you’re already sold out in sizes of your newest boots and I just wondered your early reads were and do you think footwear as a category is bigger than you thought?

Craig Leavitt

Yes, thanks Jennifer. So to answer the second part of your question yes, I think we are seeing that there is a really meaningful opportunity and I think I’ve said in the past that two of our largest license product categories footwear being one and tabletop being the other while they are two of our more mature businesses from a license product perspective both have significant upside potential in terms of the big growth in addition to obviously all the new license product categories that we’re bringing on board. So we feel really good about that. And you mentioned a couple of classifications within footwear one thing that I talked about in the past that we think is a really big idea and a big opportunity is expansion of the casual component of our footwear assortment and we’re seeing early results of that we’re seeing some of that in [indiscernible] you’ll see a lot more of that as we go forward.

And to your point things like boot as an example where we know that we were underpenetrated in the past and we had a little bit of catch up to do it wasn’t part of our original poor assortment historically by adding that and seeing those great results that again gives us that confidence in what that’s going to mean for us as a growth license category for sure. So thanks for noticing that.

Jennifer Black - Jennifer Black & Associates

Great. And then I wondered if you can talk about your Perch technology. I think it was introduced into 10 stores in Q1 and what you’ve learnt from that and will you be expanding that to additional doors?

Craig Leavitt

Yes, so we’re continuing to look at the results and tweaking at and looking at different ways to use that in our stores in different locations. We always want to balance and it’s very important for us to be leaders on the digital technology side in our business and I talked about something that’s coming up in the fall in terms of these shoppable construction barricade. Perch is certainly another one of those efforts and we want to do as make sure that we continue to balance the idea of being able to share more information with the consumer about the brand which is really what the purchase tables are about, consumers lifting products up on a table and getting detail about that product and also about our brand messaging for that month of that season with bouncing that need to engage the customer with making sure that we also are keeping our spaces, our flat surfaces and our stores as highly productive as possible and so we’re looking for ways to make sure that we can get the right amount of product integrate with those marketing messages. So we are going to see more tweaks on that as we continue to test that including some potentially new locations for that purchase technology in our store and continue to apply learnings and we’ll do that before we expand that any further at this point.

Jennifer Black - Jennifer Black & Associates

And did you just already talk about the 24/7 touch screen pads for the Saturday line?

Craig Leavitt

I am sorry; I couldn’t hear your question Jenifer.

Jennifer Black - Jennifer Black & Associates

Did you already speak about the 24/7 touch screen pads for the Saturday line or are you continuing to -- are you going to continue to roll those out, I know it was a test.

Craig Leavitt

Yes, so certainly that was a test and we’re again looking at ways to use that kind of similar technology and I think that it’s similar technology that we are using as an element of these construction barricade shoppable walls that we are testing beginning in the fall. And so it’s using that technology together with other elements that are going to be engaging the customer with the brand and providing them an opportunity to shop for the brand prior to a new store opening. So I think that’s an application of that effort.

And I think things like use of iPads in our stores to more fully engage the consumer and increase the UPTs on sales that when the consumers are in our stores is another element of using that digital technology. So we’re looking for new applications of what we’ve been successful with all the time.

Operator

Your next question comes from the line of John Morris of BMO Capital Markets.

John Morris - BMO Capital Markets

So I think just -- if you've been watching them and the stock has obviously rolled around pretty dramatically during the conversation of the conference call. I'm sure a lot of that has to do with the discussion about promotional activity happening at Kate Spade New York. So I think, to the extent that you can clarify a little bit more for us, the outlook and the degree of promotional activity that you guys are seeing so far, that would probably be very, very helpful in terms of understanding. So for example, just ask specifically without the sale shift, which was two weeks earlier for Kate Spade New York, were your gross margins, relative to plan, were they on plan, above plan, below plan? And to what degree do you see that promotional activity continuing at Kate Spade New York, to what degree, that would help?

George Carrara

Yes, so we see the environment continuing to be promotional so accordingly in our forecast we’ve taken what we think is a prudent approach and planned it accordingly. We expect however that the impact on the gross margin in the second quarter resulting from the 4th of July shift will certainly not be as dramatic in the ensuing quarters. However that being said we still expect our margin rate to be effected by the promotional environment.

Craig Leavitt

But you can see based on what we reported about Q2 and what we’re talking about for the year that they’re certainly a significant moderation in that as we look to the balance of the year. So particularly with the liquidation that is largely behind us that obviously had an impact on Q2. And now it’s really going to be the margin dilution impact is really going to be a result of the promotional activity.

So as George said this is about planning judiciously but again we are not going to be leading a promotional charge. So any opportunity that we have to pull back based on the competitive landscape we are absolutely going to take advantage of. And again it speaks for things that we have planned in. We’re going to have about one-third fewer flash sales this Q3, Q4 than last year. And of those two of them are going to be converted to these theme sales that we talked about so.

So where we can control, where our destiny if you will, we’re going to work towards that pull back for the back half of ’14 and frankly moving into ’15. But as I said earlier we’re not going to sit on the sidelines while there is a meaningful promotional activity amongst retailers and competitors.

John Morris - BMO Capital Markets

And just following up, opportunity for holiday, fourth quarter this year as you approach that particular period new strategies, gifting strategies and things like that where is the opportunity for holiday from a product and marketing perspective versus last year?

Craig Leavitt

Yes, so I think we’ve got a great product, the product I think actually continues to improve as we move through this year, we continue to get strong response to our annual theme that we have for this year and these monthly deliveries places to go and people to see like the Tokyo theme that we have for this month. So those I think going to continue to resonate with consumer, we feel that we have a strong gifting strategy associated with that as we move into the holiday period.

One of the theme sales that I talked about was these hybrid flash sales that we have in the back half in December is actually going to be about boxed gifting. So I think that speaks to making sure that we’ve got product at accessible price points that is very gifting oriented that our stores and our e-com side are going to be merchandised for easy gifting. That continues to be an opportunity for us. It’s not necessarily a place where we’ve excelled in the past. And so we think that there’s upside opportunity as we move into holiday with a more refined gifting program.

Operator

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

Mary Gilbert – Imperial

Hi. I wondered if you could -- I am not sure if you fully address this at least, it’s not clear in my mind but the weakness in the e-com, what’s happening there?

Craig Leavitt

Okay. Again as I tried to -- I tried to address this earlier. I am not sure where people are seeing a weakness in e-com because again we continue to have robust comp results. And I think the moderation in the level of growth is a result of what I have been talking quite a bit which is the reduction in some of the promotional activity and the movement from on some of these sales, these online sales to pure clearance mechanisms to these hybrid so that has, there’s no question it has moderated the level of e-com growth. But still seeing robust growth, so I want to clarify that there is no dings in the armor there. We’re seeing still strong growth and healthier growth which is really more important in terms of quality of sale, which is going to be our key strategy moving forward. So I want to set levels of expectations that we are going to continue to plan a moderation in those levels of growth as we work to improve the quality of sale and move away more and more from not eliminating but moving away more and more overtime from this level of promotional activity in the e-com area which is even more competitive than the bricks-n-motor area. So expect this moderation to continue even into 2015 and it is by design.

Mary Gilbert – Imperial

Okay. And so in a way if by doing it sort of throughout 2014 it kind of puts us in better position from a comparison standpoint in 2015 should we look it at that way?

Craig Leavitt

Well, I would say that really more towards the back half of 2015 because if you remember we didn’t have any reduction in Q1, we’re very clear about that, we had some reduction in Q2 more in Q3 so it’s building so you’re going to see that really the full annualized impact of that, from a comp basis it won’t be until 2016, but you’ll see some quarters of that in '15, but '16 will be the full year where we will be comping a reduced promotional activity schedule.

Mary Gilbert – Imperial

And this is primarily North America right?

Craig Leavitt

Yes. I’m representing North America in that regard yes.

Mary Gilbert – Imperial

So what was the comp sales growth in e-com in North America?

Craig Leavitt

Yes. I mean, we don’t break that out but I mean it’s -- I think it’s really easy to do that that…

Mary Gilbert – Imperial

I am sorry?

Craig Leavitt

As we said we don’t break that up specifically but I think you can, we give you the total comps and the brick and motor so I mean the math is fairly easy to do, I think.

Mary Gilbert – Imperial

Okay. Then back on Saturday, are there, are you shifting in terms of the strategy or the tweaking and what, because I did see that was incredibly promotional, and you had to liquidate a lot of inventory there. So when you look at your assortments, and particularly with some of the new stuff that's coming out now, how do you feel like we're positioned now, and where we expect to be? And then, how much of a margin differential are we looking at between Saturday and Kate Spade New York through the core business, and how we can understand that on a go-forward basis? Because you're making it very clear that is going to be a lower-margin business, but you still see tremendous growth opportunity. And I just want to understand more about, that business, because it seems in my mind, highly differentiated from New York.

Craig Leavitt

Yes. So thank you for the last part, because it is highly differentiated both in product and consumer offer but there will also be some differences in the economics. I think what I have said and what we’re really excited about is that as we continue to treat the assortments with a real focus on accessories and apparel, deemphasizing some of the other areas like home and small gifting, that’s a really important effort on our part. The fact that we as I said before, always visualize this business as driven by accessories early on in the launch period we were over indexing in apparel which was fine in terms of introducing new customers to the brand but not what our strategy was in terms of having a higher margin lower risk business.

And so the fact that that we are now seeing those penetrations of accessories in the 60% range makes us feel very good about the assortment tweaks that we are continuing to make. I think we are continuing to make adjustments in and you’ll see this as we move into the back half of this year, but particularly as we move into spring, making sure that we have our retail pricing architecture correct on some key classifications, so we’re going to see some movement there. And -- but we’re feeling very good about that - about the tweaks that we’re making in terms of the assortments in that liquidation obviously was from prior seasons and that’s when we were to be frank throwing a lot of product at the wall because we had no history and needed to understand where the consumers are responding. Now we’ve been able to apply those learning into future assortment planning.

George Carrara

And Mary, just one clarification, you mentioned the term promotional as it related to Saturday, we did not liquidate any significant inventory through our retail channel but rather through the normal off price channel, so that’s one important clarification and overtime Saturday you would expect because of scale and because of the greater penetration of the ready to wear component margins will be a bit lower but when you look at Saturday’s operating margin and the opportunity and the leverage it provides we view it as a very compelling opportunity and that’s why we continue to invest in it.

Mary Gilbert – Imperial

Okay. And so when you say 60% accessories, what is the core category, is it handbags, can you just kind of give us in small leather goods how do you look at that?

Craig Leavitt

Yes, I mean I think that it's fair to say that handbags is really the key driver in the accessories assortment.

Operator

Your next question comes from Corinna Freedman of Wedbush Securities.

Corinna Freedman - Wedbush Securities

Just wondering if you can expound on the -- I know you don’t want to talk about long-term outlook, but you did indicate that you were reducing the outlook store growth or store expansion from 125 to 100 so just want to understand will that volume be shifting online or does it mean 25 outlets keeps the Saturday brand, so just wanted to understand the comment.

Craig Leavitt

Yes, I think that, that will wind up some of that -- may wind up being diffused into some of the other channel certainly, but also I think this is about having a -- from a consumer facing perspective having fewer doors and some of the doors are certainly highly productive and so this is about having fewer highly productive doors and in a way it’s not too similar to what we think about in terms of expansion in wholesaling core categories that are rather is to have a greater sense of urgency from the consumer perspective in terms of the availability of product in terms of the number of locations. We’ve said many times that we have no designs on being a ubiquitous brand in terms of number of locations where it's available. So it’s similar to that same kind of strategy where we’d rather have fewer highly productive doors than continuing to just have more and more places for the consumer to buy the product particularly at off price. And so we’re quite sensitive to the number of locations where the consumer can buy the [indiscernible] off price and that’s what’s driving that decision to guide the number of outlet doors down from our original targets.

Operator

We have time for one more question and that question comes from Dana Telsey of Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Hi, good morning everyone. Can you give us any little -- bit more color on your thoughts from the comps for the back half of the year. Is the deceleration related to timing of events or is it anything that you’re seeing either domestically, internationally or how you think about the promotional environment, just to wrap it up? Thank you.

Craig Leavitt

Thanks. So I guess there are three or four things that we’ve said that are going to impact that moderation. So one and we talked about this a little bit at last call that, there is some shifts in our comp door base based on some relocations of stores and renovations of stores that cause them to fall out of our comp buckets and some important doors so they have an impact on our overall comp performance as they pull out of comp. As you know we also have the 53rd week this year in our fiscal year, we talked about the shift of the July 4th holiday from fiscal Q3 to fiscal Q2 so that's certainly one of the shifts and then what I mentioned a little while ago having fewer flat sales in the back half as well. So those are I guess the four key driver of the moderation in comps with the back half.

Dana Telsey - Telsey Advisory Group

And in terms of pricing, anything in pricing given the higher price points that work well as you see the mix of pricing among the categories?

Craig Leavitt

Well, I guess I would say that we’ve seen -- I gave a few examples in fact I think we’ve seen some of that in apparel in terms of the -- and particularly in the dress category, these are some of the more expensive what we call emotional thesis have been successful and I think there are several groups in the handbag category that are also driving that. So we’re seeing that really cross category in terms of our core categories, we’re seeing that. Again emotional thesis, novelty those are things that really resonate with our consumer and those continue to be successful for us.

So that’s why we’re seeing this balance and in fact growth in many categories of AUR because we’re taking this balanced approach. So while we’re introducing these entry level price points as part of our effort at customer acquisition we are also balancing that with these higher price points that are really directed at that splurge customer that I described in my opening comments. So we’re seeing quite a balance in that regard.

Dana Telsey - Telsey Advisory Group

Thank you.

Craig Leavitt

Okay. So before let you all go, I just want to really quickly sum up our thoughts regarding today’s results and our outlook. I want to underscore that we’re seeing continued growth in all segments, channels, product categories and geographies. I think what we underscore today is that we’re staying on our strategy. We saw a significant increase in comparable store productivity to $1,477 per square foot over the last 12 months. We had incredibly strong comparable store growth at 30%. And I think the other thing that I really want to underscore and we said it earlier is that the adjusted EBITDA margin at the Kate Spade New York brand level is exceeding and continue to exceed both our 2014 expectations that we set for ourselves and the target that we introduced to you at the March 2013 Investor Day. So the team is focused and energized and we continue to have a very positive outlook about the momentum of our growth trajectory. So thanks all very much for your participation today. Thank you.

Operator

Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time and have a wonderful day.

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