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Executives

William L. McComb - Chief Executive Officer and Executive Director

Andrew C. Warren - Chief Financial Officer and Executive Vice President

Jennifer Black - President

Jennifer Black -

Analysts

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

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Janet Kloppenburg

Kate McShane - Citigroup Inc, Research Division

Jessica Schoen

Jessica Schoen - Barclays Capital, Research Division

Unknown Analyst

Robin S. Murchison - SunTrust Robinson Humphrey, Inc., Research Division

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

Liz Claiborne (LIZ) Q4 2011 Earnings Call February 29, 2012 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Liz Claiborne Year End 2011 Conference Call hosted by Chief Executive Officer, Bill McComb. After the opening remarks, we will be taking questions. This call is being recorded and is copyrighted material. Therefore, please note that it cannot be recorded, transcribed or rebroadcasted without Liz Claiborne's permission. Your participation implies compliance with this requirement. If you do not agree, simply drop off the line.

The please note that there will be a slide presentation accompanying the prepared remarks. The slides and earnings release can be accessed at www.lizclaiborneinc.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 qualifications set out in this morning's press release, as well as in the company's 2011 annual report on Form 10-K filed with the SEC under the caption Part 2, Item 1A., Risk Factors and statement regarding forward-looking statements.

Also please note that during this call and in the accompanying slides and press release, sales, gross profit, gross margins, SG&A, SG&A as a percentage of sales, operating income, operating margin and interest expense, net income or loss from continuing operations and EPS are presented on both a GAAP and non-GAAP basis. EBITDA; adjusted EBITDA; adjusted EBITDA, excluding foreign currency gains and losses; adjusted EBITDA margin and pro forma adjusted EBITDA, excluding foreign currency gains and losses are non-GAAP measures that are also presented in the accompanying slides and press release.

The company presents EBITDA measures because it considers them 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 in its industry. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release and slides captioned Reconciliation of Non-GAAP Financial Information which will be posted to the company's website at www.lizclaiborneinc.com in the Investor Relations section after this call.

The company believes that the adjusted results for the fourth quarter and full year 2011 and 2010 represent a more meaningful presentation of its historical operations and financial performance since they provide period-to-period comparisons that are consistent and more easily understood.

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

William L. McComb

Good morning. Welcome to our Fourth Quarter and Year End 2011 Earnings Results Conference Call. I'm joined today for the last time by our current CFO, Andy Warren, who will be with the company through March 16. And as announced back in early January, he will then be moving to Discovery Communications as their CFO. I'm very grateful that Andy has been able to stay with us through the quarter and year-end close and through the filing of the 10-K today.

Okay, so let's have a look at our results. 2011 marked a year of significant transformation for the company. For me, the highlight of the year was the extraordinary performance of our core Direct Brands portfolio. We saw outstanding growth and profit expansion at both kate spade and Lucky Brand. And at Juicy Couture, we saw a team come together and rally behind a very compelling vision for that brand, a vision that is now beginning to manifest itself in stores. Many years of hard work have come together to give this total portfolio a very inspiring future and to create momentum.

For others, the highlight came from our balance sheet deleveraging achieved through portfolio rationalization. This also allowed us to meaningfully de-risk our operations, which now include the 3 global lifestyle brands we've been positioning for growth for the past several years, plus a cluster of profitable, wholesale brand relationships, most of which are based on exclusive vendor agreements with strategic partners. This group is now called the Adelington Design Group. And although small in stature, it's expected to provide an annuity-like profit stream for several years to come.

Turning now to Slide Page 3, key priorities for 2012. So as we turn the page on the calendar to early January, we identified 3 major priorities for our company for 2012. First, we're forecasting adjusted EBITDA of $125 million to $140 million. To achieve this, we will take action aimed at further unlocking growth opportunities in each of the core brands. This means we will again anniversary growth at kate spade with comps this year projected to be in the teens, and 2012 total revenue growth to be expected to exceed 30%. It also calls for a second year of substantial growth at Lucky Brand, where we have planned comps to be around the 10%-plus mark. And importantly, it means seeing the start of the same kind of growth turnaround at Juicy Couture that we've achieved in the past at both kate spade and Lucky Brand, with Juicy Couture projected to deliver a flat comp in the first half and a 10-plus comp in the second half. We plan to open a total of 35 to 40 additional stores this year across the 3 brands as part of this growth agenda, most of which will go to the kate spade and Jack Spade brands.

Our second major goal is to implement a transformation our corporate infrastructure to better and more cost effectively serve our brand portfolio. We showed you back in November that the adjusted EBITDA of this group will be negative $70 million to negative $75 million in 2012 after already making some major reductions. We're working to get that number down to a range between minus $55 million to minus $60 million in 2013, with the longer-term goal of it costing between $45 million and $50 million of adjusted EBITDA per year. To do so, we have to make some systems investments and this is the year that we plan to structure these initiatives and get to work on them. We will provide a clear outline of the timing and costs of these initiatives on our April 26 conference call.

Our third major priority then is to sharpen our skills, develop partnerships and invest in 2 very critical future sources of growth. The first, to strengthen our global footprint, the second is to enable world-class e-commerce capabilities in the U.S. and in Europe to achieve significant growth in becoming an outstanding CRM player with our brands. I'm happy with our momentum in both of these areas, but they remain important places for our teams to focus.

So let's see how it's going so far. Looking here on Slide Page 4, I'm happy to report that we're off to a strong start at retail. This chart summarizes the direct-to-consumer comp sales for December, which we already presented back on January 9, as well as the fourth quarter total comp result. We're also showing here the January and preliminary February month-to-date comp sales results for 2012. At kate spade, December came in up 39% and fourth quarter was up 58% in total. I'll remind you that, that was against the fourth quarter 2010 that was up 45%. The brand had a strong January with comps up 30%, and February comps through last Saturday were up 16%. That February comp of plus 16% is on top of a reported 2011 February comp of plus 87% and a reported 2010 February comp of up 49%. So we remain very pleased with this performance as it continues to come from all parts of the business.

Lucky Brand also continues to post very impressive results, with December comps up 21% and fourth quarter up 20%. With strong conversion and the momentum in the women's business, January's comp is up 29%, and February through last Saturday is up 21%. Lucky Brand's February comp of plus 21% is on top of a reported 2011 February comp of plus 12%. Stunning numbers, very much so. And Juicy Couture has a trend that's actually quite exciting, too. While December was down 6% and fourth quarter was down 8% in total, we are actually off to a stronger start than these numbers indicate. The total comp for Juicy Couture for January is minus 8% and for February through last Saturday, it's down 2%.

But let's flip to the next page for a more insightful look. I told you that we ended 2011 with very clean inventory levels at Juicy Couture. I also told you that we learned from our mistake a year ago at Lucky Brand, where we made large bets on inventory for the new management team's first new product deliveries. At Lucky Brand, that meant that we had huge inventory levels to clear at low margins in January 2011. For the new Juicy Couture team's first season, we erred on the side of caution and bought spring very lightly. In fact, it appears that we bought it too lightly. Factor in that a year ago at Juicy Couture, we had very high levels of inventory and significant clearance, pumping up comp store sales but bringing down actual gross margin in the comparative 2011 base. So January and February 2012 comparisons are showing the impact of comparably light inventory.

But to measure how the new product is doing, we looked at comps of spring merchandise. Here, we have an analysis of spring 2012 product versus spring 2011 product as of February 25. It shows that spring 2012 is up 18% versus spring 2011. In fact, our stores are consistently reporting out-of-stocks and broken sizes across the line. The same season code analysis shows that merchandise in the stores from before spring 2012 comped down 23% against merchandise from before spring 2011 in the year-ago period. That minus 23% is where you see the impact of our very lean inventory position at year end.

The bottom box on this chart shows a deeper analysis of the spring versus non-spring product performance. Notably, spring unit sales are up 15% compared to last year, while non-spring unit sales are down 19%. Similarly, spring inventory units on hand are up 1%, while non-spring inventory units on hand are down 17%. And important, the gross margin rate is 800 basis points higher than non-spring and healthy at a 70% level. And finally, gross margin dollars are up 23% for spring product and down 24% for pre-spring product. This indicates the impact of high full price sell-throughs and increasing average unit retail prices.

We placed a deeper buy for the summer line, which delivers in mid-April, but we won't be at a more demand-appropriate inventory level until the fall line. This factored into the guidance and projected comp profile that I reviewed before, which essentially calls for a total comp in the first half to be flat and then up around plus 10% in the second half. With these trends we're seeing, with the continued impact of the marketing and in-store merchandising improvements and with the right investments and inventory, we believe that our outlook is cautiously optimistic on the year ahead for Juicy Couture.

Let's flip to the next slide now. Total net sales for the brand were down 15% in the quarter, driven by a much smaller wholesale footprint year-over-year. Comp sales for the quarter were down 8%. And for the year, sales were $531 million, reflecting a 6.4% decrease compared to 2010. Total net store count was up 3 versus fourth quarter 2010, and sales per square foot for comp stores were $666 for the year. International accounted for 20% of total and was up 7% versus 2010. Our business in Asia was particularly strong last year. I've already make comments about the spring line here in 2012 and the very encouraging metrics that we're seeing in spite of light buys. I'll add that our partners in Asia and the Middle East are also seeing very strong consumer reactions to the spring line as well. And on the international front, we've decided to move our store in Central London from Bruton Street to Regent Street later this year to complement the very successful location in the Westfield Mall at Shepherds Bush that we opened in the fourth quarter of 2011.

And finally, 2 weeks ago we announced the appointment of David Bassuk as Co-President and Chief Operating Officer for the business. He will oversee the financial and operational side of the business and will partner with Co-President and Chief Creative Officer, Leann Nealz, on the overall management of the brand and the leadership of the team. I'm very happy about this addition and about the powerful duo that they make.

Turning now to Slide Page 7, you'll see a summary for the kate spade brand. Total net sales for the brand were up 73% for the quarter. For the year, total net sales were up 70% to $313 million. Comp sales were up 58% during the quarter, and the total net store count was up 6 versus fourth quarter 2010. Sales per square foot were $955 for the year. The brand posted strong growth across channels and geographies, with international sales accounting for 14% of total sales, up 51% versus year ago. During the quarter, we implemented a very successful gifting program for holiday that focused on multiple pricing levels, a program that had a big presence not only in our stores, but also in pop-up locations and wholesale accounts as well. The team also rolled out a redesign of our outlet stores, bringing the merchandising and store environment up to snuff with the specialty store fleet. And with this rollout, we're seeing an immediate improvement in sales in that channel.

Overall, the theme at kate spade is growth acceleration. This means accelerating our store rollout domestically while moving ahead with our international rollout. During the fourth quarter, we began operations in China with our JV partner E-Land, where we anticipate opening 9 new points of distribution in 2012, which add to the 4 already in place in China for kate spade. And the brand also signed an agreement for distribution in the Middle East. We will see 4 points of distribution opening this year and 3 more in 2013. We've also said we will open approximately 25 doors for kate spade and Jack Spade this year, most in the back half of the year. Next year, that number should increase to 35 to 40 for the year. Our models assume that comps will be up in the teens for the brand, reflecting that we were near $1,000 per square foot across the fleet in 2011 and with an e-commerce penetration in the 20-plus percent range. With comps in 2010 at plus 36% and 69% on top of that in 2011, this remains a story of impressive growth and expansion.

And now turning to Page 8, you'll see our summary for Lucky Brand. Total net sales for the quarter were up 23% and as we showed earlier, up 20% on a comp basis. For the year, net sales were $418 million, down 8% compared to 2010. We saw the wholesale business decline in 2011 as department stores held back earlier in the year to see how the new product performed. Their response didn't come until the fourth quarter where they began to support the brand a bit more, and we can now expect modest growth from that channel on a go-forward basis. Total net store count was down 6 doors versus fourth quarter 2010, and productivity was $429 per square foot for the year. As our primary area of focus at Lucky Brand, we are aiming to drive our productivity to $650 per square foot. The product initiatives that you've seen can get us there, coupled with the marketing campaigns and the in-store merchandising.

As I've remarked over the past 3 quarters, Lucky Brand's turnaround success has come from a reinvigoration of the denim business and the women's business overall. New fabrics, fits and washes in denim have attracted a fashion-oriented customer, resulting in increases in average unit retail prices of 19% in 2011. The brand has also extended its marketing campaigns and combined them with direct marketing, which is stimulating lapse to new users to come into the stores. Lucky Brand is now planning to drive growth in the wholesale channel through a launch of women's plus size denim and the men's "Big and Tall" line later this year. The team is also expanding their presence in Canada in wholesale.

E-commerce is getting significant attention as well, where the group has implemented an online denim guide and improved navigation and functionality. And given their success in outlet, we have the opportunity to roll out more doors. Recall Lucky Brand store count included 179 full price specialty stores and only 42 outlet stores at year end. They're expanding their focus on licensing, looking now at tech accessories, expanding kids through a licensee for wholesale and adding men's footwear via our existing women's shoe licensee to complement the very successful women's shoe business that we have today. And finally, while Lucky Brand's international footprint is limited to Canada today, we've begun to look for a location on Regent Street in London for 2012.

And finally on Slide Page 9, you'll see a recap of performance for the Adelington Design Group. This group shows pro forma net sales of $19 million, up $1 million from the fourth quarter 2010. Sales for 2012 are projected to be less than $100 million. On the right here, you see a reminder of what's in this group. It includes royalties from the QVC license for Liz Claiborne New York, wholesale sales of Lizwear at Club Stores, sales of the Trifari brand and wholesale sales for Liz Claiborne and Monet jewelry to J.C. Penney. It also includes wholesale sales for the Dana Buchman jewelry brand to Kohl's. We're excited about the relaunch of Monet at J.C. Penney this fall.

With that brand level overview, let me now ask Andy Warren to review the P&L and the balance sheet. Andy?

Andrew C. Warren

Thank you, Bill, and good morning, everyone. Let me start on Slide 10 to walk you through our adjusted P&L statement for the fourth quarter 2011.

The slide has 3 columns. The first 2 columns represent our fourth quarter results for both 2011 and 2010, respectively, excluding the impact of operating results, which have now been re-classed as discontinued operations. The third column reflects our fourth quarter 2010 results as reported back in February of last year on our year-end conference call. Adjusted net sales were $453 million for the fourth quarter, down $6 million versus the revised figure last year. But when you exclude the decrease in net sales associated with brands that are either sold or exited but not accounted for at discontinued operations, i.e., the Liz Claiborne royalties in J.C. Penney and DKNY JEANS. Total company adjusted net sales actually increased 12% for the quarter. Adjusted gross margin rate was up 280 basis points to 54.5%, primarily reflecting improved full price sell-through at our brands overall, and a higher percentage of direct-to-consumer sales were drawn at a higher gross profit rate, partially offset by the impact of higher raw material costs in the fourth quarter 2011 compared to 2010.

While adjusted SG&A was up $16 million for the quarter, the majority of this increase was to fuel and drive top line growth, additional investment in marketing, e-comp and our global retail platforms, especially kate spade. Adjusted EPS, excluding unrealized foreign exchange, was $0.06, $0.19 better than the reported result last year and adjusted EBITDA was $48 million, $11 million better than the reported 4Q '10 result. And very importantly, on a pro forma basis, adjusted EBITDA, excluding unrealized FX, was up $12 million over the adjusted fourth quarter of last year to $56 million.

Turning now to Slide 11, I'll quickly summarize our full year 2011 adjusted P&L results. Adjusted net sales were $1.524 billion, down $99 million versus the revised 2010 adjusted net sales, but up 11% excluding the decline in sales related to brands that have been sold or exited. Adjusted gross margin for the year was 53.5%, a 470 basis point improvement from last year. As we look to 2012, we expect higher go-in in margins in the second half of the year as cotton and raw material prices have dropped versus 2011. Adjusted SG&A was up $32 million versus last year, driven entirely by increased investment in marketing, e-com and our global retail platforms. We continue to be highly focused on reducing our global corporate overhead while cautiously increasing growth-driving investments. Adjusted EPS, excluding unrealized foreign exchange, was negative $0.30, $0.65 better than our reported result last year, while adjusted EBITDA was $98 million, $48 million better than the reported 4Q '10 results. On a pro forma basis adjusted EBITDA, excluding unrealized FX, was $82 million for the year, right in line with our recently provided outlook.

The next page, Slide 12, is new earnings deck and provides greater disclosure on brand level performance. This refers our new reporting structure where we will now have 4 reportable segments: Juicy Couture, Lucky Brand, kate spade and Adelington Design Group/Other. This structure is the right approach as the brands execute their growth strategies and is consistent with how we manage the businesses. We will be reporting the key metrics in this schedule every quarter going forward.

Now walking left to right on the chart, we start with gap operating income. We then add back streamlining and brand exiting activity, as well as undo the allocation of true corporate overhead to the brands. This derives in adjusted operating income by segment with corporate overhead highlighted separately. Next we add back depreciation, amortization, non-cash impairments and share-based comp expenses, as well as other income in order to yield total adjusted EBITDA. The circle of $98 million ties to the adjusted EBITDA that I just described in the prior page. Next, we adjust for non-pro forma EBITDA in order to eliminate the full year adjusted EBITDA impact associated with brands that were either sold or exited in 2011, but not accounted for in discontinued operations. This net result yields a pro forma adjusted EBITDA of $82 million, which again ties to the previous page. Lastly, on the right-hand side of the page, we provide pro forma adjusted net sales in order to calculate our pro forma adjusted EBITDA margin rate. We do believe that this slide construct and additional disclosure will be very helpful to our investors.

I'll now highlight a few other more important numbers on the slide. First, the second column adds $98 million of streamlining activity, which includes costs associated with our Ohio D.C. closure, corporate costs and initiatives and brand sales and exiting activities. Second, corporate adjusted EBITDA was negative $88 million in 2011. This is apples-to-apples to the negative $70 million to $75 million forecast we provided for 2012. This year-over-year reduction and true corporate overhead reflects the cost reductions that we have already successfully completed in 2011 in order to fully benefit 2012. Lastly, on a pro forma adjusted EBITDA basis, Juicy Couture posted $66 million; Lucky Brand $23 million; kate spade $58 million; and the Adelington Design Group $23 million, which as a segment resulted in an adjusted EBITDA margin rate of 28%.

Now let me walk you through the fourth quarter balance sheet and cash flow schedule on Slide 13. Note that Mexx has been adjusted out of all the metrics and time periods on the slide. Accounts receivables were down 27% to $120 million and inventories are managed carefully, down 9% to $193 million. Total net debt was $266 million at year-end, in line with our previously forecasted range of $265 million to $270 million. We continue to strengthen our balance sheet, utilizing cash on hand to purchase EUR 140 million of our 5% Euro Notes since November, leaving us with just 81.5 million of Euro Notes outstanding today, which mature in July 2013. And finally, CapEx for the last 12 months was $77 million, including $22 million for the purchase of the Ohio DC.

Slide 14 provides a better picture of our inventory reduction story. Total inventory x Mexx was down 9% to $193 million as all brand teams have been watching and maintaining their positions carefully. Increases in inventory at kate spade were directly in line with our growing direct-to-consumer sales trends, while inventories were actually down at all 3 of the other business segments, particularly at Juicy. In my 4.5 years at LCI, I've never been more comfortable with our total company inventory position.

Slide 15 shows the quarterly progression over the past 5 quarters of our net debt position to just $266 million. This metric has served as the north star in formulating strategy to 2011 and remains a key area of focus for the management team and the Board of Directors. In the fourth quarter, gross debt was $446 million, offset by $180 million of cash and marketable securities. Importantly, we still expect to have enough cash availability to ultimately settle in full the remaining 81.5 million of Euro Notes outstanding on or before July 2013.

And finally on Slide 16, I'll update you on a few of the key metrics embedded in our financial outlook for 2012. As Bill indicated and as we discussed in early January, we continue to forecast adjusted EBITDA of $125 million to $140 million for the year ahead. We are expecting depreciation and amortization in the range of $70 million to $75 million, and our planned capital expenditures were approximately $75 million for the year. Importantly, our actual year-end 2011 NOL carryforward balance was $455 million, significantly higher than the $200 million to $250 million investment range provided back on our third quarter earnings call. As a result of closing both the Mexx's position and the sale of intellectual property to both J.C. Penney and Kohl's during the fourth quarter, capital losses generated on the sale of the Mexx business were able to offset capital gains generated on the sale of the intellectual properties. This treatment allowed us to preserve over $200 million of additional net operating losses for use against future income. Our normalized tax rate for 2012 that we will apply to our adjusted earnings is expected to be between 38% and 40%. And lastly, our basic share count to calculate our market capitalization is now 101 million shares while our diluted share count, taking into account the remaining convertible bonds and to a lesser extent dilution related to our in the money stock options, is approximately 121 million shares.

Before I turn the call back over to Bill, this is my last earnings call for Liz Claiborne. I could not be more proud of what we've accomplished over the past several years together. I believe tremendously in Bill, these brands and our global teams. I feel the company is very well positioned for future growth. As you've heard me say before, I intend to remain a shareholder of Liz Claiborne, Inc. and soon-to-be Fifth & Pacific Companies, with the meaningful amount of my net worth invested in the company.

So with that, I'll turn the call back over to Bill.

William L. McComb

Okay. Thanks, Andy. There's just one more topic I'd like to cover briefly. We anticipate announcing Andy's replacement during the month of March, but I'm not prepared to do so today. The search has been well received in the market, and we are seeing some excellent candidates. I'm sure we'll be welcoming an outstanding successor for Andy very soon. I am, however, announcing that Bob Vill will be acting as interim CFO for the period after Andy leaves and prior to his successor joining us. That means that Bob assumes the interim CFO role beginning on March 16. With those comments, and the inherent confidentiality of a search of this nature, I prefer to make no further remarks on the process at this time. So that means I won't be in a position today to answer questions on this topic during the call.

Now let's go to the phone lines and take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Edward Yruma of KeyBanc.

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

So in terms of thinking about kate spade, Bill, I know you've outlined some longer-term profitability targets for the business. And again, thanks for providing more current period disclosure. What time frame should we think about in achieving some of those longer-term operating profit targets for kate spade?

William L. McComb

Well, I just -- we're just not prepared to lay out for you guys. We've given you a lot of detail here. This Slide Page 12 is a really important chart. I mean, what you see -- because in the press release, you look at and see a margin rate that has a full allocation of corporate costs. We think that it's actually very important for current and mid-term valuations on this brand to -- as a key metric to look at this column that was the total adjusted EBITDA, which was $58 million for the full year 2011. You've seen very high growth rates on the brand. I mean, we talked about a 30% total revenue gain this year for 2012. And we said comps would be in the mid-teens. I'll comment on that. As the brand has gone from in the low $300 per square foot on a comp basis to nearly $1,000, we plan for the business on a comp basis. We've squeezed an awful lot of productivity out of that comp fleet. And so we are expecting that this comp fleet will comp in the -- I'm just going to call it the teens for this year. And -- but you heard me say that the key theme is growth acceleration. And if there's one thing that I wish could have been different, I wish that we had more than net new stores of just plus 6 in this last year. And so this year, you're going to year that -- or you know that in the back half of the year, we will be opening almost 25 doors between Jack and kate spade. And next year, I've just said we're going to be looking to increase that number 35 to 40. That's the soup that I'm giving you right now in terms of how to think about the growth. I talked about the E-Land deal in China, this year resulting in an opening of 9 points of distribution on top of the 4 that we have. But 2013, which I haven't laid out for you, you'll see a dramatic number of increase in points of distribution in that region. So the growth isn't linear. It hasn't been, and it won't be. But I'm not prepared, Ed, to lay out a specific date at what point the brand is going to be a $2 billion brand. But I will say that the infrastructure is very well built. The -- obviously, the marketing and the positioning of the brand is very well done. They have some very creative ideas to fully max the opportunity here. We've got to get going with opening our door count. At kate, we've done an outstanding, nothing less than outstanding job with e-commerce, with penetration just over 20%, which is almost double the industry average. But it -- now that we've gotten our balance sheet together and we're putting -- making this our capital spending priority #1. So I...

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

Great. And one follow-up if I might. It sounds like you've had some pretty good initial reads on Juicy for spring. How long, Bill, until you think you see buy-in in the wholesale channel?

William L. McComb

Wait, come back on. What did you say about the wholesale channel?

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

How long until you see kind of more buy-in from the wholesale channel as they acknowledge some of the strength you're seeing at Juicy?

William L. McComb

We said on -- we've said for the last few of these calls at ICR that my experience on this, including at kate spade, which wasn't that long ago, when we went through the same kind of regeneration cycle, it's usually a whole year later, which amounts to a few seasons. I will say, fall has been very well received. We're very happy with how that has come in. But it -- your models shouldn't get ahead of themselves in terms of the wholesale comeback. The good news is there's really no more -- there's no more down to go, so to speak, on wholesale at Juicy. I think it's found its bottom and it will have the opportunity to come back up, which is just like what you saw at Lucky Brand. I mean today, domestic wholesale, because remember wholesale, how we report wholesale, we include in that number sales that -- to partners in -- distribution partners like ImagineX in Asia. Actual domestic wholesale is less than 15% and a good chunk of that is accessories, which is frankly very stable right now.

Operator

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

Jennifer Black

At Juicy, are you -- what are you seeing in terms of willingness to buy? Is there any resistance on price? Is it the more fashion-forward merchandise that's selling? And how is your tops to bottoms ratio since you're starting to build the non-bottoms tracksuit business? I mean, since you are starting to build the non-tracksuit bottoms business? And then I have a follow-up.

William L. McComb

Okay. Based on the numbers that I showed you, the biggest comment I would make is that we really were very conservative with this buy. We ended up being broken in sizes very quickly. We are really happy with that season code analysis that we showed. I mean, we looked -- we've used the kind of analysis on the other brands early in their day like at kate in fall of 2009. It's the right way to look at the business, especially when the year-ago stub period had a huge amount. Much of the comp was driven by clearance activity. So low margin and a lot of volume. We're seeing no price resistance. We are seeing that she -- it's the same story that we've seen on the other 2 brands well, that the novel, special, new and fashion-forward pieces of the business are doing extremely, extremely well. So we just look forward to riding the floor in terms of allocations and the buys. And like I said, I think that we will be at demand-appropriate inventory levels by fall. And I think that the outlook we've laid out is cautiously optimistic. I don't have, Jennifer, here how the inroads that we're making on tops to bottoms because it's -- I think it's still too early to lay that kind of metric out. I think that when we normalize our buys and we actually get it weighted more appropriately to what we're seeing, I think -- then I'll throw that out for you. But your point is a good one, which is it's definitely a merchandise strategy that you're seeing, which is we have more bottoms that are non-track in the mix and a lot more going on with fashion tops. And so you'll see that in the sell-through or in the market share percentages of the line, but also in the buys themselves. You said you had a second question?

Jennifer Black

Great. Yes, and then my next question is on kate, which looks the best I've ever seen it at this -- today. I wanted to know -- you've been on such a tear. What are the opportunities to drive the comps such as new product categories? Are you doing anything new in outerwear or bottom silhouettes? And are you going to expand knit tops? And are you seeing a more diverse customer base since you've added denim and you have a little bit as far as knits go? And then I just wondered, too, if you have plans longer-term for Jack Spade as far as the number of stores and the percent wholesale versus retail like you've talked about with the other brands?

William L. McComb

Well on the first question, the sensation at kate spade is that they've been very successful with a very wide range of assortment introductions. I talked before about how not long after they introduced their one consumer choice of denim, it became the #1 consumer choice code in the whole story. You're seeing now they're rolling that out with a broader array of colors, they're doing that seasonally. Yes, they are getting -- they're taking the "kate spade girl", and they're getting her -- they're getting a broader share of her wallet. That's clearly a strategy that these guys have. I will tell you that in the plans on a go-forward basis, we're going to test some store formats that allow for a deeper mix of apparel as they get deeper into other parts of that business, categories like the ones you called out, yes, knits are -- I know Deborah is very interested in that. I talked about a sensational gifting program at very different price points, some low price points that went to very high price points. And this is a brand that will always have that opportunity. Tech accessories is really in all 3 of the business, a huge area for focus. Kate spade happens to have the distinction of being at the top of the list of branded tech accessories sold at Apple, both in their stores and apple.com, I've mentioned that before. But yes, you're seeing a broadening of the line, and I don't think that -- I'm not prepared to give any percentage call-outs as strategy around things like knits or outerwear, but what we have seen season on season on season is that she gives us, the customer, keeps giving the brand more permission to do more both on the casual side and in the very classic realm that it is, which is dressy. And that is probably what makes this brand so exciting in my view. Like I said, it's got elements of Coach and elements of Ralph Lauren in it, with this femininity that can project across so many different product categories. Jack Spade, it is -- people are waking up to this opportunity, this business. This is a business that we think in the overall franchise of kate and Jack Spade can be $100 million men's business with very high margins. It's very premium. We have a very select distribution in wholesale, and we're going to just keep it that way. Barneys is a customer, for example. Some very high-end specialty stores sell the product. But we're at a point where we have our store at Abbot Kinney in L.A., our store in Oak Street in Chicago, a store on Wisconsin Avenue in Georgetown in D.C., our 2 stores in New York. We'll be opening one in London and one in Tokyo, and one in Miami and one in San Francisco. And it's the building blocks of a great business. In the meantime, we're enjoying, although small, a very high growth, very high margin men's property. And I think that our -- hats off to our people at kate spade for how they managed that business as a separate brand within the company. So thanks for asking.

Operator

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

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Kind of following on the opportunities with expanding the brand. How -- within Juicy, what's happening with Bird? That's been a strong performer, but very small, I guess. I don't know if it's as small as Jack Spade or what's happening with that?

William L. McComb

It is smaller than Jack Spade, and it is similar to Jack Spade in that I do think that we have a very distinct property, although one that's inside the Juicy footprint. LeeAnn has appropriately allocated the bulk of management time, effort, resource, OpEx to fixing Juicy. And she's well on her way with the core label. And she's kept Bird alive, but it hasn't been a huge area of focus. You'll see a slightly wider line for fall of 2012 and then again in spring 2013, but we're not going to hit the gas on it. We want to -- we're just -- we're doing what you're supposed to do, which is fix the core first and then start pushing the pedal on that. It's a business that -- it's a very important concept for our international businesses, and we think here as well. So it remains niche in the U.S. in the -- in a handful of our own stores. And -- but we like where it can go for the brand.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay, great. And then also, how are negotiations going with the convert holders? Could we see additional opportunities for additional conversion there?

Andrew C. Warren

Yes, it's Andy. Look, we've been able to opportunistically take advantage of the desire for people to convert. And -- but look, at this point, we're not committing to anything right now. It's simply opportunistic based on pricing. And if the opportunity arises, we'll do more.

Operator

Your next question comes from the line of Janet Kloppenburg of JJK Research.

Janet Kloppenburg

I have 3 questions, one on each brand. First on kate spade. I think the acceleration of the growth program sounds exciting. But I'm just wondering given how significant the step-up is, if we should expect operating margin pressure versus fiscal -- versus last year because of the significant number of new store openings? Also on Lucky, I'm wondering what the hurdle rate is to start leveraging operating margins there? I mean, I know your sales per square foot are not where you want them to be, but they're respectable and likely higher than most of the average for the malls you're operating in. So I'm wondering if there's a rent structure problem there or what the issues may be that are constraining the operating margins of that business. And lastly I'm wondering, Bill, if you could highlight the progress on the accessory front there because I know you have a goal to drive that category to 50% of the mix. And I think that would influence -- positively influence the operating margins going forward. And lastly, I'd like to say lots of luck to Andy.

William L. McComb

Okay. Let's start with kate spade. No, I'm not prepared -- well, when you open a fleet of stores and you've seen this, Janet, a million times in your career, when you gate more store opening, you see a dilution in your fleet-wide productivity. But -- and there are operating costs associated with opening stores. But no, I mean, I believe that one of the reasons that we've been very careful, arguably maybe too careful in not going forward and opening more doors is that we really wanted to learn and get the merchandise mix right so that when we open, we don't open at $200 a square foot; we open at 4 to 5, and then ramp from there. And that's really -- that's what's gone into the science of understanding what we've got here. That said, this asset has to be managed for growth right now. And I believe the larger it gets, actually, the more leverage there is to be had in the operating margin.

Janet Kloppenburg

Okay. So we should expect leverage this year then, though?

William L. McComb

Yes, you should. Yes, you should. And -- but I'm trying to not let you get afraid of next year.

Andrew C. Warren

I'll make 2 other comments, Janet. First, the -- for the kate doors we've been opening, they do come out of the gate very strong. So that ramp-up period you often see for new doors, while it's true for kate, it's a much shorter, condensed period of time. And secondly, that magical 20% IRR hurdle rate that you've heard me talk about on prior calls, we well exceed that very quickly with these kate doors. So the hurdle rates are great, and the acceleration of growth is very good. So there is less dilution than you may expect.

William L. McComb

On Lucky Brand, I would just -- I would right now dispel the notion that we've got a big rent problem and that that's a driver of the operating margin pressure. And while I don't disagree with your point about the productivity that we have, these doors, the pro formas always recognized that $650 per square foot and the whole time that I've been here, with the profit margin structure that we've got and the volume, the turn profile of -- at this kind of a price point that that's the productivity that delivers 4 wall in the 20%-plus range. And so I will tell you that it is about productivity, and that is the answer. That is the answer to the operating margin flow through. And I'm really, really comfortable with our ability to do that, as I said during my remarks, with the tools that the merchants have right now. And I think that they will hit it. You made the comment that I have a goal to get the accessories there to 50%. That's actually not at Lucky Brand.

Janet Kloppenburg

No, no, at Juicy, Bill.

William L. McComb

Okay, right. I was just going to say that's actually Juicy.

Janet Kloppenburg

Yes, yes. And so I'm wondering what's happening there, yes.

William L. McComb

Okay. Yes, yes. So at Lucky Brand, like I said, the way that the math works and I know enough to say this, that the rents -- well, every company or every brand has -- you can do a decile analysis and you can look back and you can say, "Relative to how the mall or how the street location performs, this rent is too high." Dave actually has done a very good job of managing those, and he's had some kick out clauses come up where we've renegotiated to either stay or to go. And you saw that he's down net 6 doors. And that's with some openings of some outlets during that time. So I actually -- I don't feel like Lucky Brand has got a chain around its ankles in terms of a rent structure that's not right. There were leases done in 2007 and '08 that you all know. Pre-September 2008 were set of high watermark years. But not to the point where we can't get to the kind of 4 walls that I'm saying our investors deserve us to get to, which is 20 plus. And that's how we get capital. On Juicy, I think LeAnn would tell you that we're not as happy with accessories, to be honest with you. We are really, really happy with the reception. Look, it took a step forward, but it's not the step forward that we wanted to take. And she's made more changes and she's tweaking it some more. I think it's going to be very easy to get it in line with where she's gotten the fashion and even the track line. And I look at the 50 -- the north of 50. I actually want to push it closer to 55%, that's part of the longer-term strategy and goal. But we're really, really happy with what we're seeing right now and what we showed you in the slide deck.

Operator

Your next question comes from the line of Kate McShane with Citi Investment Research.

Kate McShane - Citigroup Inc, Research Division

Bill, I was wondering if you could comment a little bit about traffic and conversion at Lucky, kate and Juicy, just with mall traffic data still being somewhat anemic. I thought that might be helpful in understanding how the comps are being driven.

William L. McComb

At kate, it's -- we've seen -- it's a combination of both traffic and conversion, sustained growth in both of those metrics and increasingly higher AURs and UPTs, very importantly. As the mix at kate spade has grown beyond just handbags and footwear, the units per transaction have helped drive a larger basket in this great productivity. At Lucky Brand, we saw tremendous conversion last year. And the conversion was the first step with the expanded marketing efforts and the interlinking of the direct marketing in this new ad campaign. There's now an emphasis on building traffic, and they are -- we're seeing a return of lapsed users from the direct marketing sell and the introduction of new users. So we actually believe that on a -- this year, we're going to sustain what I'm going to call some very high levels of conversion also with increased units per transaction. They've gotten their tops right. They've got jewelry right again. And as they have nailed it on bottoms with denim, their AUR, their UPT, their conversion are up, and they're now entering a period of increased traffic. And at Juicy, it's sort of too early to call, right? I don't really have any comments on them other than to say that we saw traffic last year as the brand declined on a comp basis. It was with the traffic situation more than it was conversion. We actually did -- we held some decent conversion levels. We're a few weeks into, actually, a sensational marketing campaign and let's relook at that on the next call.

Kate McShane - Citigroup Inc, Research Division

Okay, great. And is e-commerce then included in these comps as well?

William L. McComb

Yes. These are -- we report direct-to-consumer comps, and we do that for a lot of reasons, the most important one is that we know and believe that we have to be channel agnostic, that some of our best shoppers will buy in all 3 channels -- 4 channels counting wholesale. That we can't capture in the metric. But because we don't want to run a separate e-commerce division where one arm is competing against the other, we want to share data, we want the e-com business to drive new users into our stores and we want that name capture in stores to drive increased loyalty via e-commerce, we capture it all in the comp together.

Kate McShane - Citigroup Inc, Research Division

Okay, great. My very last question is on the 25 stores that you're opening for kate. How much is the mall versus off mall, high street-type real estate?

William L. McComb

I don't have the mix here. I will tell you that right now, it skews towards street. And the next year's opening fleet will skew toward mall.

Operator

Your next question comes from the line of Bob Drbul of Barclays Capital.

Jessica Schoen

This is Jessica Schoen on for Bob. At -- in the last question, you mentioned the marketing campaign for Juicy. I was wondering if you could elaborate on initiatives behind marketing for Juicy and how you're letting customers know about the new merchandise?

William L. McComb

It's a sensational print ad campaign that's very visible in fashion books. They hosted the Vanity Fair Oscar Week Vanity's party that kicked off the whole week in L.A. on Monday night of last week. They've got sensational coverage in the digital sphere. Their PR is as strong as it's ever been in terms of celebrity -- celebrities and celebrity tracking. We really have a great and a sensational marketing team at Juicy. And their budgets, we're spending more. The campaign is being acclaimed critically by editors and bloggers. And it features the best of the new merchandise, and we have -- here's an anecdotal: when I hear store managers say people are walking in with magazines saying, "I want this dress." You know it's something that's clicking. And we're in the early days of that. The social media program at Juicy is very, very strong. You've heard me talk about Facebook, but Tumblr is really important now, too. So I mean, it's all of those things. But increased spending is definitely at play.

Jessica Schoen - Barclays Capital, Research Division

Okay, great. And then you mentioned also when you're talking about the mix of wholesale, I believe it was for kate, you said 15%. Could give us -- remind us on the other brands how the mix between wholesale and retail breaks down?

William L. McComb

That number was -- I was quoting Juicy. I said that less than 15% -- the domestic wholesale is less than 15%. Let's see, for Lucky Brand I think it's around 20%. And at kate spade, it's around 20% as well.

Operator

Your next question comes from the line of Casey Flavin of Hedgeye Risk Management.

Unknown Analyst

Bill, this is Matt Durulla [ph] stepping in for Casey. On Slide 16, you break out some of the buckets included in the unallocated corporate expense lines. As we look over the next few years, can you help us understand and break out some of the buckets that you plan to eliminate or reduce the most this year or next? And then importantly, how much variability is there to accelerate these efforts over the next few years?

William L. McComb

You're talking about which page -- Slide Page 16 that says the 2012 financial outlook?

Unknown Analyst

Yes. The corporate overhead that you highlight below on the asterisk, it breaks out some of the buckets that you have in there? I was just curious over the next year or 2, if you could maybe highlight some of the buckets that you plan to focus on most, and then what kind of variability you see there over the next few years?

William L. McComb

Well, I mean, I'm going to let Andy give you a broad answer but specifically, the one that we've given guidance for and that we were putting a lot of energy in is that corporate overhead number, that we want to see it go from today's $70 million to $75 million level as an outlook for 2012 to after 2013 at the $55 million to $60 million level. Andy, what else would you want to say to that?

Andrew C. Warren

Yes, and again that number -- that true corporate overhead was $88 million in 2011, and that's on Slide 12 and we've highlighted before this idea of -- that already being decreased down to $70 million to $75 million. Those actions are already competed. So that $70 million, $75 million we have in 2012 is a done number and as Bill said, we're going to drive that down further for 2013 and '14. Basically, that true corporate overhead is finance, IT, HR, corporate executive, et cetera. It's really true -- it's corporate overhead that's there to service the brands, but really not specifically allocated to the brands. So it really is true corporate overhead that we have a very strong point of view on how to get reductions there.

Operator

Your next question comes from the line of Robin Murchison of SunTrust.

Robin S. Murchison - SunTrust Robinson Humphrey, Inc., Research Division

At one point you had -- Bill, this is for you. At one point, you had commented on just the wholesale market environment indicating that, I think some time during the fourth quarter that there's a little bit of caution and as you looked into the first quarter. And I just wondered if you could update us on your observations about the wholesale environment as you sit today?

William L. McComb

Sure. I'll tell you that, I guess versus that outlook, we had said earlier, specifically at the ICR conference back in early January, that as we finalized our forecast in December and look forward to year, one of the places that we just wanted to be cautious and not bullish in both the Lucky year 2 growth and in the year 1 turn at Juicy, we said that we were going to be cautious about we were putting in for wholesale. Then on this call today, you heard me say that on both businesses, Lucky and Juicy, we've called bottom on wholesale. And that we actually believe that we can get some nice progress at Lucky Brand that I don't think it'll burn the barn down, but I think that we'll see some good growth that will be strategically right for the brand at Lucky Brand. But it's modest. And at Juicy, I'm really saying the wholesale inflection point and the opportunity will present itself more in 2013. So I'm sticking to what we said at ICR, which is that these forecasts are -- they're viable. They are not so rosy, but they are post bottom. And really, no change in what I would call out on that.

Robin S. Murchison - SunTrust Robinson Humphrey, Inc., Research Division

So, may ask you second question? In terms of just across the board in your brands, are you seeing -- and in regard to bottoms, are you seeing any meaningful changes in silhouettes at this point?

William L. McComb

Well, it's -- fall is about skinny again. I mean, that's one call-out I'll give you. It's also about color. But no, nothing else worthy of a call-out.

Robin S. Murchison - SunTrust Robinson Humphrey, Inc., Research Division

And I agree. The Juicy ads look fabulous.

William L. McComb

Yes, they are. And they're generating a lot of interest and buzz with customers that have really wanted to shop Juicy and they're running in with the ads. It's great.

Operator

We have time for one more question, and it comes from the line of Jim Chartier with Monness, Crespi, Hardt.

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

Bill, could you just update us on the Juicy store remodels, how the first test is going? And when you would plan to remodel additional stores?

William L. McComb

Well, we're moving forward with it. And it's been - it's hard to read when you've got the unit and the inventory situation that I laid out there because there's a lot of "white noise" in it. But we've done enough research on it to know that it's a very big improvement. And so -- and I don't know if any of you have seen it, we've got about a dozen out there, and we're rolling more. And so we're -- it's in the plan to roll through, I want to say, another 20 this year. And we may accelerate that as the business performs. It's a -- it's super important to do because it -- when we do it, we re-fixture and we have more table presentations, and that ties to the overall plan and the line assortment.

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

And then in the slide deck, you mentioned a kate spade outlet redesign?

William L. McComb

Yes, what we did was -- and that we're going to be rolling all year. What we did was we took -- the team took the fundamental store concept that you see at specialty. And I'm talking about things like wallpaper treatment, fixture treatment, lighting and flooring. And we've given it an upgrade in a handful of stores in the fourth quarter and saw the same kind of wild, immediate improvement in sell-throughs and productivity in outlets that we saw when we had done it 2 years, 3 years ago, let's see, 3 years ago at -- in the specialty fleet. And so as we introduce new elements in the full price stores, we're introducing sort of last year's elements, if you will, and that's really more about wallpaper than not in the outlets. But I'm calling out there a productivity improvement opportunity with the outlets that we have at kate spade. Just like I called out there's a real opportunity for growth at Lucky Brand with more outlets. Dave and his team they figured that outlet, and it's a real growth driver for lucky.

Okay. Thanks, folks. Thank you very much for dialing in. Thanks for your attention, and thanks for your comments. And as many of you said, we all wish Andy the best. Thanks very much.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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