Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

William L. McComb - Chief Executive Officer and Executive Director

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

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

Analysts

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

Casey Flavin

Jennifer Black

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

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Jessica Schoen - Barclays Capital, Research Division

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

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

Carla Casella - JP Morgan Chase & Co, Research Division

Fifth & Pacific Companies (FNP) Q2 2012 Earnings Call July 26, 2012 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Fifth & Pacific Companies, Inc. Second Quarter 2012 Conference Call hosted by Chief Executive Officer Bill McComb. [Operator Instructions] This call is being recorded and is copyrighted material. Therefore, please note that it cannot be recorded, transcribed or rebroadcasted without Fifth & Pacific's permission. Your participation implies compliance with these requirements. If you do not agree, simply drop off the line.

Please note that there will be a slide presentation accompanying the prepared remarks. The slides and earnings release can be accessed at www.fifthandpacific.com in the Investor Relations section. There are separate links to the slides for the webcast and phone participants.

Please note that statements made during this call that relate to the company's future performance and future events are forward-looking statements within the Private Securities Litigation Reform Act. These forward-looking statements are based on current expectations and are subject to the qualifications set out in this morning's press release, as well as in the company's 2011 annual report on Form 10-K previously filed with the SEC and in its second quarter 2012 Form 10-Q under the captions Item 1A, Risk Factors and Statement Regarding Forward-looking Statements, which is being filed with the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statement, 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, sales, gross profit, gross margins, SG&A, SG&A as a percentage of sales, operating income, operating margin, interest expense, net income or loss from continuing operations and EPS are presented on both a GAAP and a non-GAAP basis. EBITDA; adjusted EBITDA; adjusted EBITDA, excluding foreign currency gains and losses; adjusted EBITDA margin; and comparable 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 slide captioned Reconciliation of non-GAAP Financial Information, which will be posted to the company's website at www.fifthandpacific.com in the Investor Relations section after this call. The company believes that the adjusted results for the second quarter and first half of the 2012 and 2011 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, and thank you for dialing in to hear our remarks for our second quarter 2012 earnings results, which we posted in our press release this morning. Joining me here on the call is George Carrara, our CFO and our Chief Operating Officer. During the call, I'll review the sales and operating results for the segments and I'll provide commentary on each brand's performance, and then George will walk you through some detailed P&L and balance sheet metrics that we routinely provide. And of course, we'll end the call with a Q&A session.

Overall, we're pleased with how the business performed during the second quarter. kate spade and Lucky Brand posted strong positive growth, both overall and on a comparable basis, with strong margin performance. You'll hear shortly how these brands are not only executing well, but also capitalizing on firmly established strengths to achieve future growth. At Juicy Couture, we've seen positive reactions around the globe to the elevated image and product that we launched during the spring and summer seasons, but we have many operational challenges still to fix there, challenge which unnecessarily impeded performance and impaired our ability to present a cohesive new presentation during the past 2 quarters. We're making some progress on these issues, which I'll discuss in greater detail shortly, and we expect to see ongoing improvements sequentially as planning and allocation enhancements are realized along with product improvements in accessories, as well as assortment adjustments in apparel.

I'll also say right here at the outset that we believe the markets that we serve demographically and geographically are holding their own in terms of state of demand. I realize that there are widespread external concerns about Europe and even a slowdown in China. Our exposure to Continental Europe though is limited, and we are still nascent in China even with kate spade and Juicy Couture's presence there.

So here's how it shakes out in our forward-looking perspective. We expect kate spade and Lucky Brand to deliver ahead of plan. We expect Juicy Couture to come in below plan, and we expect that corporate costs will be right in line. Therefore, we are reiterating our adjusted EBITDA guidance of $125 million to $140 million for the 2012 fiscal and calendar year. And during the quarter, we made 2 very important announcements. First, in June, we completed a $152 million add-on to the 10.5% senior secured notes due in 2019. The add-on was priced at 108 1/4 [ph]. The primary use of this add-on was to redeem the remaining 5% Euro Notes in July 2012 that were coming due in the summer of 2013 and to pay down $37 million in revolver borrowings that we had used to fund repurchases of the Euro Notes earlier in June of this year.

Second, we announced that we plan to use most of the remaining proceeds from the add-on to exercise a conditional call option on the kate spade Japan joint venture. This means we expect to acquire the remaining 51% of a very healthy and fast-growing business and integrate it into the global kate spade operation. This is a business with revenues of $71 million in the JV's last full fiscal year, which ended August 2011, and incremental low double-digit EBITDA, both of which, after closing, will be incrementally consolidated into kate spade's results in 2013. Really tremendous.

Let's now look a little deeper at the second quarter, starting here on Slide Page 3 with kate spade's performance. kate spade's direct-to consumer comp for the quarter was up 34%, showing continued and growing momentum through the quarter with strong sell-throughs, great margins and healthy growth in all of the channels. The brand has been redressing its outlet stores recently with strong results showing while sustaining momentum in both the full price and e-commerce channels and wholesale performance has exceeded expectations.

Comps were up 23% in April, up 35% in May and up 46% in June, incredibly, really, given that year-ago comps were also up 56% for the month of June. kate spade is on track to meet or exceed its key goals for the year, including reaching a blended fleet average of $1,100 per square feet in 2012, broadening its customer base by launching new product categories in more entry price points. Results from these efforts include a 25% increase in Facebook fans year-to-date, a 54% increase in Twitter followers and a 16% increase in the CRM database, as well as a 30% increase in traffic in our retail stores. Really stunning metrics.

In 2012, the brand will meaningfully move forward in its agenda to expand globally. This includes a focus on Asia comprising our recently launched JV in China and the announced conditional exercise of our option to acquire the remaining 51% of the Japan JV, as well as new stores in Rio de Janeiro, São Paulo and London. And the brand will do it all in a smart, healthy and sustainable way based on learnings from its proven business model to date. We continue to avoid image diluting points of sale.

As a result, we see strong growth across categories, geographies and channels with total sales for the quarter up 48% and for the whole first half up 47%. The second quarter adjusted gross margin rate was in line with the plan and with first quarter as well. It reflects our strategy of broadening the brand assortment, doing more at entry price points with jewelry and tech, for example. And while this can bring down the AUR, the average unit retail price, it drives more in higher transactions by attracting new shoppers to the brand. Very important initiative.

During the quarter, we opened 2 new locations, a kate spade store in Seattle and a Jack Spade store in Brazil. As I said on the last call, we will be adding more stores more quickly over the next 18 months in this business with plans to open between 40 and 45 between now and the end of 2013.

Turning to Slide Page 4. At Lucky Brand, DTC comp for the quarter was up 8%. April and May showed strong comps at plus 10% and plus 9% In June, the comps slowed to plus 3%, reflecting the deliberate strategy to position the business for more full price selling during that month. June at Lucky Brand specialty retail stores saw an increase in full price sales of 22% on a comp basis and a 31% reduction in comp sales of markdown goods. In other words, they traded markdown sales in June based on a strategy to more tightly manage and control inventory and drive gross margin, and it worked.

In June, gross margin at full price stores was 870 basis points higher than year ago. In fact, the brand showed outstanding direct-to-consumer gross margins performance throughout the quarter with direct-to-consumer gross margin dollar comp up 20% during the quarter and direct-to-consumer gross margin rate up 720 basis points to last year. And specialty women's fashion was up 10% for the quarter, and women's denim was up 8%.

The brand is now working, and we're seeing consistent product sell-through trends in each channel. Our direct-to-consumer business in Canada also has begun to turn around as well with the same strong product and merchandising strategies that turned the U.S. fleet. And wholesale is working well, as I said, and is now growing again. We expect continued progress here with the launch of Ginger, Lucky Brand's plus size product offering, which has been very well received. After focusing for 2 years on improving product and inventory management, Lucky Brand is driving solid comp store sales and margin gains on leaner inventory.

End-of-quarter comp store inventory in the direct-to-consumer business was down 12% in the second quarter of 2012 versus last year, and that is clearly a great accomplishment. And while the team was successful in finding a good balance with the right product allocations on the newer fits to drive the top line and meaningfully improve turn, in hindsight, we probably tightened the inventory a little too much on the legacy relax fits, losing some potential sales. But the team has fixed this now going into the fall season.

One of the most exciting trends during this last quarter was the fix to the outlet business. By replicating the merchandising strategies from the full price specialty store fleet into the outlets, after first dramatically clearing old inventory, the outlet business is showing high growth rates and very strong gross margin expansion. I've said we believe this is a business that could support a fleet of up to 100 outlet stores and the team is now ready to start expanding, given their accomplishments with sourcing, inventory management, sizing, pricing and style innovation for this channel.

On the real estate front, we opened 1 new store during the quarter and closed 4. We've secured locations in the Time Warner Center in New York City for this fall, replacing a store that we closed earlier on the Upper West Side, and we will announce a new store in West L.A. to replace a store in The Grove.

In terms of growth and innovation, we just announced that Lucky Brand has signed a licensing agreement with Parigi to officially relaunch Lucky Kids. The product includes boys and girls denim, tops and outerwear and is targeted for kids from 18 months to age 12. It will be sold in department stores and in our own stores, including, of course, in our own online business starting in spring of 2013. We're also working on plans to grow the handbag business again, and I’ll have a lot more to say on that this coming fall.

Finally, we're beginning to explore real expansion opportunities for Lucky Brand in international markets, another topic that we'll expound upon in the weeks and months to come. I know I've said this before but the momentum that we're talking about now at Lucky Brand reminds me a lot of the momentum that we saw at kate spade in year 2 of its turnaround, momentum across channels, in each category, in the team, including men's and women's, tops and bottoms and a very solid denim business.

So turning to Slide Page 5, Juicy Couture. Despite some important accomplishments, the overall metrics for Juicy Couture are poor as you can see from looking at the comps and even the overall total sales line, which was down 10% for the quarter. Specifically, comps at Juicy Couture were down 9% for the quarter. April was down 13%. May was down 4%, and June was down 10%. Fashion apparel full price sales for the brand during the quarter were up 26% in our specialty stores, where we deliberately skewed inventory away from what we call core categories to convert more sales into higher AUR fashion items. This is where we're seeing the progress at Juicy. Within the growth of fashion apparel, we saw success in denim, dresses, fashion pants and woven tops, specifically. We've shown our consumers a new highly trend relevant look, and she's buying it when we have her size in stock.

So what didn't work in the first half at Juicy? 3 things deserve calling out. First, the inventory management situation at Juicy Couture absolutely shot us in the foot. Average inventory units at specialty retail were down for the second quarter by 22% versus year ago. I've talked about inventory buys for the first half that were overly conservative. For each of the deliveries for January through June, we initially allocated anywhere from 20% to 30% fewer units. This was the result of being overly conservative, yes, but equally, just plain poor planning, and even more to the point, poor planning processes. Juicy's systemwide global merchandise planning and allocation process has been overly complicated, a process that treated channels and geographies in silos, not managing total systemwide global inventory like a true vertical retailer would. So on top of just being overly conservative on units bought, the allocation of product really foiled our results. We were lightest on the best products, had poor size allocations to the stores and the replenishment mechanism was neither nimble nor responsive.

I think it's fair to say that no aspect of the planning and allocation process was working. While we were starving for units and density in our U.S.-based stores throughout the first 4 months of the year, we saw inventory available to sell from May and June deliveries in 2 overseas warehouses to support partner business at inventory levels that would have exceeded demand plans for those markets. So we made the decision, albeit late in the game, to move those units into our U.S. stores by June and to run a full clearance promotion to end the quarter with a clean inventory position. Late arrival of these goods did, in fact, bring retail inventory levels to a better place than we had seen in the first 5 months but landed just in time for our clearance sale. We took the decision to clean up the remaining inventory and make room for new fall goods by July 8. The sale was effective in driving traffic and conversion. We took some deep markdowns and moved a lot of product.

The second major callout is outlet. Outlet at Juicy is now really lagging. The product direction there reflects Juicy Couture in 2010 and 2011. It has none of the newness that we're showing and selling in fashion apparel in the full price channel. We're seeing declines in sales and margins there, and I point to the success that both kate spade and Lucky Brand have seen when they develop merchandising and product strategies for outlet that mirror the current seasonal trends that they show in their full price channel. So LeAnn Nealz is now putting the design and merchandising attention into our outlet for 2013 that Dave DeMattei did late last year at Lucky Brand, which I just discussed. The most significant change is increasing the amount of merchandise that will be designed for the channel, reflecting the best color, fabric and style trends of the main line.

Juicy Couture has been shipping goods from the full price stores to the outlets instead of clearing the goods within the full price channel. We all know how that eventually impacts the business. What doesn't sell well in full price eventually doesn't sell well either in the outlet channel, so we expect Leann's changes will bring an end to that practice.

And the third area to call out overall for what didn't work in the whole first half is a product mix that comes mostly from handbags. While the fashion apparel is definitely moving in the right direction to elevate the brand and drive meaningful growth, the handbag product offering in the first half lacked the relevance, newness and punch that we needed. Accessories in the second quarter were down 26% on a comp basis in our specialty stores, and the poor performance really hurt our wholesale business too, where handbags are the most important category remaining in that channel. I called out accessories as being disappointing on the last call, and I indicated that we have made some process in improving it and bringing it more in line with the fashion apparel for holiday 2012. Well, even greater progress has now been made since then on spring 2013.

So to address these operational issues, we made 2 critical leadership appointments during the second quarter. First, we named Tom Linko CFO of Juicy Couture in late June. Tom had worked with George Carrara at Tommy Hilfiger in North America prior to taking the CFO role at Delta Galil last year. He's joined the Juicy team. And in addition to running finance, he's going to oversee customer service, order management, merchandise planning and allocation and real estate. Tom's a true retail operator and a very strong financial executive.

This is a great complement to Annie Bernstein who we brought in to Juicy in April and is now the Senior Vice President global business and strategy for the brand reporting to LeAnn. Annie worked closely with me in leading our corporate financial planning and analysis function for 4 years and then led our business development function last year, in particular having led the successful sale of Mexx to the JV that we formed with The Gores Group. Annie reports to Leann and now oversees international, licensing, retail, wholesale and e-commerce operations. She's an outstanding strategist, as well as a very strong financial leader.

Together, LeAnn and Annie have made good progress with respect to the inventory ownership process and the metrics reports and markdown cadence for all of the channels, even in advance of Tom Linko's arrival. Tom will now continue to enhance those processes. Both of these appointments and the related staffing changes in the organization are aimed at addressing the strategic and operational gaps that materialized over the past 2 quarters.

In addition to addressing the leadership team, the outlet strategy and the handbag design, the team has made other accomplishments that will add to the turnaround. They opened an even larger store in the Westfield London, which is tracking above its plan. The Regent Street store in London opened last Monday, July 16, with incredible fanfare and strong sales. The business in Asia and the Middle East continues to perform very well, and we're seeing a very positive response to the fashion apparel here, too.

International sales for these regions were up 25% for the quarter, with comps for our stores operated by our partners in Greater China up 10.5% and comps for the Middle East up 2%. The brand made meaningful progress during the quarter to finalize plans to accelerate its rollout in China, in Southeast Asia, where we have a very strong partner with ImagineX, plans that we expect to discuss in greater length later this year.

The e-commerce business continues to grow double digits. Strong traffic at the site and a very loyal and engaged customer is staying close to our brand. And finally, the brand accelerated its plans to re-couture 16 more stores by November of this year. Keep in mind, these stores are our most visible and more important volume contributors. There's no question, the new store visual package changes the environment and suits the brand positioning far more than the legacy store formats.

So on balance, frustrations included, I remain quite optimistic because in some sense, I see that we've made progress on what I think is the toughest part of reestablishing a brand-driven business. And that's the work on the image, the product and the experience. We've shown that you will come to Juicy for apparel items other than just the tracksuit, something that we've always known inside the brand but we are now seeing born out very strongly empirically in the data from both the first and the second quarters. These operational fixes are much more straightforward. And frankly, we've achieved them in all of our other businesses. The market research continues to show that Juicy is a top-tier brand in awareness and desirability, and some of these metrics have actually shown improvement in the past 6 months.

So I see Juicy Couture making sequential progress over the next few quarters. We've now tempered our expectations for the rest of this year at Juicy, bringing down the back half forecast and staging more realistic assumptions to be more in line with the timing of the outlet fix, the handbag and accessories restage and continued growth in apparel as the inventory management takes affect. We all remain very grateful for the feverish energy that LeAnn has brought along with her extremely talented teams in design and marketing to reimage the brand and unleash the kind of sustainable growth that we're enjoying at both kate spade and Lucky Brand.

Turning now to Slide Page 8. We've summarized the second quarter direct-to-consumer comps here in this table for your future reference.

And looking at the Adelington Design Group, we're eagerly anticipating the Monet launch starting August 1 on the floor at JCPenney. With regard to Liz Claiborne jewelry, September 1 is the opening of the new Liz Claiborne shop at JCPenney, which will now house a separate jewelry fixture with product designs specifically to complement the apparel line. Overall, there's a greater focus on brand alignment and the synergy by category. We're excited about it. At Target stores, starting this fall, we've expanded our store presence there through private label unbranded key item assortments.

We're also refocusing our Kensie jewelry line, for which we hold the jewelry license, with a new pricing and product strategy beginning with spring 2013. And the Trifari brand continues to expand our look of real niche in that mid-tier marketplace. So the Adelington Design Group continues to pursue many opportunities through private label initiatives across all tiers of business, and you'll undoubtedly hear me talk more about that in each of the upcoming quarters.

So with that background and overview on the brand's performance, let me now turn the call over to my partner here, George Carrara, to review key P&L and balance sheet metrics. George.

George M. Carrara

Thanks, Bill, and good morning, all. Now to Slide 10. Slide 10 is our adjusted P&L summary for Q2. Adjusted net sales for the second quarter were $337 million, up $39 million or 13% versus last year against the comparable brands in 2011. As Bill explained, this increase was driven by strong sales increases at kate spade and Lucky Brand, partially offset by our 10% sales decrease at Juicy. Adjusted gross margin rate was up 290 basis points to 56.6% versus the comparable adjusted gross margin last year, reflecting specialty retail gross margin improvement across all 3 brands. Lucky Brand, in particular, dramatically improved its gross margin across all channels. This was attributable to both tighter inventory control, which drove promotional activity downward and continued success transforming Lucky Brand outlets to a more vertically integrated model, sourcing more product on a direct basis.

Adjusted SG&A was up $24 million for the quarter versus the comparable spend in the second quarter of 2011, a year-over-year increase of 13%. As discussed during last quarter's call, this increase principally results from infrastructure investment within high-performing channels and expansion in regions where we are underpenetrated. Additionally, within Juicy, we are experiencing negative operating expense leverage. Further, as Bill explained earlier, there is an urgent need to streamline the Juicy business processes. Given these 2 factors, we now have to address the Juicy organizational chart in the same manner that we rationalize the corporate segment last month, and I will personally lead this effort.

Continuing on SG&A, corporate costs were held flat to LY. In June, as you know, we announced the realignment of our workforce, which resulted in an annualized reduction in payroll and related costs of $15 million. This action coupled with other in-process initiatives places us on a path toward our stated goals of approximately $75 million in corporate costs in 2012 and approximately $60 million in 2013, which, at less than 4% of sales, is an appropriate level.

Finally, as a percentage of sales, our aggregate SG&A is still well above industry benchmarks at the brand level. Although we are pleased with our overall sales growth, we are somewhat disappointed with the corresponding growth in SG&A. Going forward, we need to better leverage this expense base, and we are working with the brands on this now. Additionally, Bill and I plan to incorporate this metric into our 2013 planning process and incentive targets.

Now onto the next line item. Adjusted EPS, excluding unrealized foreign exchange, was negative $0.11, $0.08 better than our comparable result last year, and adjusted EBITDA was $16 million, $9 million better than the comparable result in quarter 2 2011.

Flipping to Slide 11, our brand financial summary. This chart shows the breakdown of our adjusted EBITDA and sales by brand along with a view into our corporate overhead component, as well as comparable results for second quarter 2011. For Lucky Brand, kate spade and the Adelington Design Group, adjusted EBITDA improved year-over-year as a result of increases in sales and margins, partially offset by the SG&A investments I just reviewed. Juicy Couture's adjusted EBITDA declined year-over-year with their decrease in sales. As discussed, corporate adjusted EBITDA is flat at a negative $19 million for the quarter, and we are forecasting a reduction in the quarterly run rate throughout this year pursuant to the quarterly phasing of our $15 million workforce reduction.

Now to Slide 12, some selected balance sheet and cash flow data. Please note that Mexx has been adjusted out of all of the metrics and time periods on this chart. Accounts receivable are down 16% to $111 million, primarily reflecting the impact of businesses exited and/or sold in 2011. As I mentioned last quarter, we are comfortable overall with the quality of our receivable balance. Inventory is down 13% to $188 million, also showing the impact of the sold and exited brands. In the subsequent slide, we will give you a view on inventory at the brand level.

Next, total net debt was $329 million as compared to $742 million at the end of Q2 2011. This principally results from the utilization of cash proceeds from asset sales during the trailing 12 months. I should also note, we ended the quarter with ABL availability in excess of $300 million. And finally, CapEx cash spend for the last 12 months was $62 million.

Slide 13, key financing activities. As Bill mentioned earlier, in June, we issued $152 million of 10.5% add-on high yield bonds. We've since used a substantial portion of the $161 million in net proceeds to pay down our Eurobonds. The remaining balance of the proceeds will be used to finance our expected Q4 buyout of our kate spade Japan joint venture partner. These add-on bonds were priced at a yield to maturity of 8.9%. The Eurobonds were retired during both Q2 and then earlier this month when we exercised our right to call all of the remaining EUR 53 million of 5% Eurobonds, which were due July 2013. We are extremely pleased with the pricing and execution of this refinancing. It enabled us to extend our debt maturity profile and eliminates foreign currency exposure associated with the Eurobonds.

Finally, I'll point out that we also exchanged $38 million of convertible notes for 10.8 million shares of company stock. This exchange reduces outstanding convertible notes of $32 million and results in excess of $3.5 million of annualized interest expense savings.

Slide 14. This page shows our progression over the past 5 quarters of our net debt position to $329 million. This significant deleveraging has resulted in a much stronger credit profile and dramatically increased our financial flexibility.

Now to Slide 15, which provides some additional insight into our inventory levels. Total inventory, excluding Mexx, was down 13% to $188 million. kate spade continues to sensibly invest in inventory to keep pace with their rapid growth. As Bill discussed, Juicy Couture's inventory has decreased 8% versus second quarter a year ago. Inventory was too low in domestic specialty stores in the first half at Juicy and is planned to be at more appropriate levels for the second half, starting with the full floor set that arrived earlier this month. For Lucky Brand, inventory levels have decreased year-over-year despite the increase in sales as the team has exercised incredible focus and discipline in managing inventory levels.

And finally, Slide 16. Let's update and reconfirm a few key metrics that are embedded in our financial outlook for 2012. As Bill indicated, we are reiterating our adjusted EBITDA guidance for the year in the range of $125 million to $140 million, excluding impact from unrealized foreign currency gains or losses. Incorporated within this range are second half comps for Juicy in the mid single digits, Lucky Brand in the high single digits and kate spade in the high teens. For corporate overhead, as discussed, we are still targeting $75 million.

Depreciation and amortization, $70 million to $75 million. We increased CapEx to approximately $90 million, including $5 million of high ROI transformational projects compared with our previous guidance of $75 million. The primary driver of this increase is the re-couture of an additional 16 Juicy stores, additionally Lucky Brand outlets to seize upon that momentum and a Lucky specialty store in the Time Warner Center in New York. We expect interest to be between $50 million and $55 million for the year, including approximately $11 million of noncash interest. This slight increase is consistent with our debt maturity extension.

Our normalized tax rate for 2012 applied to adjusted earnings will be between 38% and 40%. And lastly, our forecasted full year 2012 basic share count is now 109 million shares. This includes the weighted average effect of the June 2012 exchange of convertible notes.

Before we turn the call back over to Bill, I'd like to share with you some observations related to my short time here that I hope you will find insightful. The culture at our corporate offices is exactly what I had hoped it would be, entrepreneurial with lots of passion, energy, teamwork and all of this within a spirit of good humor. Establishing a rapport with all key members of the corporate team was rather natural. The Lucky and kate management teams are operating at a best-in-class level, and it is reassuring to know that these brands are being well navigated. At Juicy, the team has made some incredible progress on the image and creative side.

Although work is needed in the other areas, I am most excited about Juicy's prospects and profit potential. It is in fact what attracted me to Fifth & Pacific Companies, and I will gain great personal satisfaction when we see Juicy reach its point of success. And finally, Bill has been a great partner and coach in guiding my acclimation to the company.

With that, I will now turn it back to Bill. Bill?

William L. McComb

Thank you, George. Nice comments. So there you have it. As I've said before, I'm still comfortable with the state of the consumer. I'm very pleased with the continued growth and health of the kate spade business. I believe Lucky Brand had a tremendous first half and is creatively, operationally and organizationally making outstanding progress here as well. Juicy Couture definitely had a disappointing first half in terms of key retail metrics, but it's shown traction in product areas that are critical to its future. I'm certain that we have the capability to correct the systemic operational challenges in the upcoming quarters while improving the accessories product line.

So with that, let us now open up the phone lines and field some of your questions.

Question-and-Answer Session

Operator

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

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

In regards to store growth, both at Lucky and kate spade, can you talk a little bit about your infrastructure? I know it's been some time since you had such aggressive store openings. Do you feel like you’ll need incremental investment to hit some of these store opening targets by the end of 2013?

William L. McComb

No. The answer is no, not on a net incremental basis. No. I think we're in great shape and have the capability to do it.

George M. Carrara

I agree, Bill.

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

Great. And as it relates to Juicy, I know that you have been in the process of re-couturing and I know you gave some clarified guidance there. Are you seeing a difference in the re-coutured stores versus the older prototypes?

William L. McComb

Qualitatively we are but the inventory problem and operational situation is, I'll just say, evenly distributed between re-coutured and non-re-coutured stores. So you know what, you see some lifts in traffic. But in terms of total, you really can't tease it out because we haven't had the inventory density. We haven't had the conviction in the buys to drive it, so it's really not readable. We definitely have store managers say it improves the traffic profile and the merchandise-ability of the items. I mean, built into their re-coutured, it's not just an art package. There are actual fixtures that enhance conversion by virtue of putting more product on the floor and facing more product out and more mannequins, that kind of thing.

George M. Carrara

We did see a lift though in a test store where we increased the density in terms of the inventory and the inventory per square foot.

William L. McComb

Yes. So what George is getting at, in one of our re-coutured stores, we actually did a density up test to take some of the components that I just described and push it even farther and actually get the inventory right. And we saw a trend of negative comp swing to positive comp with that, so we're bullish on that. Definitely, it's something that we need to get done.

Operator

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

Casey Flavin

So given the top line trends, I mean you obviously had a very strong quarter on particularly Lucky and kate, and quite frankly, I would expect perhaps a little bit more opportunity on the store growth side through next year and perhaps, it's more a function of just the timing of leases and availability. Just wondering if you could provide some color there, Bill. And if that's the case, might we see some additional upside or the timing of those stores to roll out into '14? And I guess how much flexibility is there in terms of if you guys decide to actually step up the rate at which you grow the doors there?

William L. McComb

Well, what I would tell you is I'm just reminded of the 2007 retail push, which was a very important part of our strategy change, and it was really about the numbers of stores. And we made some mistakes. And we did it; we made the mistakes because we had all of these white space and all this opportunity. We care a lot about the quality of the real estate. And both the kate management team and the Lucky management team, they're very experienced direct retailers. They know every center. They care about their adjacencies. So when I say that we see kate expanding by, let's call it, 40 to 45 doors between Jack and kate, obviously, mostly kate doors, between now and the end of December 2013, I think we're less bounded by the constraints that Ed was referring to a second ago around our operational capability. We're mostly bounded by leases that we want to be in with the right adjacencies and the right locations and the right square footage. So right now, that's as far as I would go in terms of guiding. Obviously, we're absolutely increasing our pace. The important thing to know is there are a lot of great locations that we can get and that where leasing management wants us and we'll be able to go so that's what we're doing. And at Lucky Brand, we're -- Dave is still making some important adjustments, like I called out, like the store for the Upper East Side -- or the Upper West Side of New York and a store for West L.A., like we just talked about. But his biggest attention right now has been focused on a meaningful expansion of his outlet fleet, which is, as I said, extremely profitable, low CapEx and very gettable in terms of location. So while I haven’t put numbers on that, that's the big -- that's where we're doing it. And at Juicy, other than the kind of adjustments that we just made in London, which, by the way, are magnificent, magnificent stores and very important strategically and also good from a short-term sales and profit perspective, at Juicy, it really is, as you can imagine, as we went through for couple of years in both of the other brands, it's about sitting still with our footprint and getting productivity moving in the right direction. George?

George M. Carrara

And to my point about best-in-class operators within kate and Lucky, we want to expand our footprint in a sensible way. So we're very cautious and conservative in that regard, particularly, we often see in this industry over expansions.

William L. McComb

And you're just not going to get that from Dave DeMattei at Lucky or Craig Leavitt at kate spade. They're excellent curators of the retail footprint.

Casey Flavin

That's great color. So I also just wanted to get some of your views on while you guys have sort of modest international exposure, can you just give a little bit of color in terms of how each of the brands are received by the international consumer in the various markets and how that might actually differ from the reception that you get here domestically and particularly at kate where you're taking in greater control, as well as the other brands?

William L. McComb

I don't know that there's a lot of geographic or regional difference with kate spade. I mean you've got slightly different levels of awareness. We're really building awareness of the brand in South America. And even in, I'll say, China, that we're building the awareness there. But it is a brand that has a very, I'll call it, happy brand registration across the globe very evenly. Lucky Brand is the one with the overall lowest awareness globally and the greatest opportunity to begin a rollout strategy. And I can say that in the last quarter, we've actually gotten inbound calls from some that are interested. And so later in the year and into 2013, we'll talk about a smart strategy to roll the brand out. This isn't going to be a short-term value driver. It is a big part of a long-term thesis on Lucky. But the U.S. is doing so well and the marketing is registered very well. So both at the landlord and potential alliance partner level, we're getting a lot of inbound interest. And Dave is sorting it out in a methodical and strategically sequentially right way. And Juicy is the one that has the broadest global awareness. It has really, really top-tier market research findings on -- not just on awareness levels but on brand desirability and relevance. And as I said during the call, I mean, we actually saw in North America some very important improvements in some key metrics on the brand, which is a good thing. We got to get our operational house in order to deliver against that. But I think the marketing is actually working to position the brand in even more relevant ways. And overseas, it's a brand with very, very strong and positive registration. So in Asia, you don't have the sort of mist that we've had here as we've repositioned the brand. In the Middle East, the business is also incredibly powerful and strong. So in Europe, the business is -- it's good. It's strong. We don't have a huge footprint on the continent. We have sort of a niche presence. We have a specialty wholesale presence, the mom and pop shops, through a distributor in Europe on the continent. And then we have just a few doors of some key department stores on the continent. Generally speaking, just in terms of some broader market comments, Germany continues to look like, at the consumer level, a good strong market. And obviously, the south of Europe is troubled. The business in England is strong and the consumer there -- I mean, we mostly are a London business, Metro London, so I can't speak to the North and I can't speak to Scotland. But the markets -- the centers that we're in and the traffic profiles in London are still good. So like I said, even in a market like China where we've got a good business, our presence is still emerging or nascent and so we have a lot of upside potential there. And I know you guys are all freaked out about China's swelling GDP growth of 7%. I mean it's a very robust market still. And some of the luxury brands that have enjoyed year upon year upon year or quarter upon quarter upon quarter of growth, they seem slowing. I mean, for us, it's still the wild Wild West, with a great opportunity in strong brands.

Casey Flavin

Great. And then just lastly, Bill, as it relates to Lucky, I mean the second half update that you've given here for comp expectations, they're in line with essentially where your full year outlook was at the beginning of the year. But I'd argue that results have actually come in much better than initially expected at least for the first half. So can you just give any – offer up any considerations for what you're seeing that might suggest why they shouldn't be viewed as conservative in the back half here?

William L. McComb

Not really. I mean, I don't think on this call, I could tear that apart and break it down. I think our assumption is it's definitely reasonable and appropriate. And it reflects mix. It reflects the market. I think we got it right.

Operator

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

Jennifer Black

My first question is on kate spade, and then I have follow-up on Juicy. I wondered about beauty, how did lipstick and fragrance do? Would you do skin care? It seems like it dovetails with home. And are cosmetics also a consideration? And then I wondered if you have anything to say about the rumored Saturday line?

William L. McComb

Okay. I mean, Jennifer, you're often way ahead of the market in terms of thinking about things like the strategic footprint of a brand. All I can do is sort of bow and say, yes, sort of categorically to the comments and insights that you just put in a question. Definitely, kate spade has potential to go into some of those categories and to do smart things. It's sort of not ready for prime time in terms of what the thinking is. The items like what you're referring to, we have lips and nails that are branded kate spade in our own store, which we do ourselves. And you know what, they add a lot to average transaction value, and we have great sell-throughs of them. And store managers, they delight in that because it's a great upsell opportunity. And what it does show is the brand has the chops to do those things. It's not ready for prime time is basically how I would answer in terms of what and when other than to acknowledge that, in fact, the brand definitely could do it. Your second question, which was the rumors on the Saturday. I just have to leave it that we don't comment on rumors. I just have to say it like that. Again, we talked about that the brand has incredible sub-brand opportunity, and we know that. And brands that go all the way and are multibillion in potential, they seize upon those opportunities. That's clearly what our goal is with the brand. And there are multiple segments that we want to serve with the brand, and we'll do it in a smart way. But I can't make a specific comment on Saturday.

Jennifer Black

Okay, great. Okay. And then on Juicy, I was curious about your marketing, the spring marketing campaign with the palm trees and the scarf dress seemed to do really well. It didn't seem like you did marketing for summer, and I wondered what your marketing rollout was for the upcoming quarters. And then, also, I was really curious, because the fall collection is so much more sophisticated, how do you plan to rebuild that client base? And it seems like you could attract clients who have not shopped Juicy in years.

William L. McComb

Well, you're right. That's exactly right, and that is the idea. And what is super important to the whole Juicy thing is consistency and presence in marketing. So no, we didn't do a summer campaign, but we have an incredible one for fall. And I got to tell you, I think it's a game changer. I do. I think the campaign is outrageous, and I can't wait for it to get into the marketplace. I said in my prepared comments that I really believe that this team has nailed it on brand image and marketing, and those elements of the product are -- they're shining through and I'm happy with the response from the customer. How it all comes together in the store operationally, has great opportunities for improvement. And we will make big steps sequentially over the next few quarters, and we will do that. So you will see what you just described as a sophisticated product, but it still is true to Juicy. And it still takes that irreverent, sophisticated, playful, Malibu-casual, luxury-L.A. thing and it puts it in a dimension that I think is the right space and that nobody else is really serving out there. And I think that we're doing it at quality levels that are discernibly different and better, and it's definitely turning heads and consumers are noticing it. So that said, we've got to get our arms around these operational pieces. I've kind of talked about them all year. There's absolutely no question, it impaired our ability to make great progress in the business and we're going to do it. But I will tell you the flag that flies high right now over Juicy is what they've been able to do from a marketing perspective. And it's just going to be imperative that we stick with it because we're changing minds and changing attitudes with it. And that's why you're seeing it now. We're seeing it in our market research, which we all know is a leading indicator, not a lagging indicator.

Jennifer Black

Great. I guess my last question is will we see all stores get the fashion product in the fourth quarter?

William L. McComb

Yes. Probably the most important and dramatic change to the MP&A decision-making that we made for the fourth quarter was to make sure that not only that the depth was there but that we have a presence throughout the fleet because we did not have that. We did not have that. We did not have the best-selling items in every store nor did we have the right size allocations. But I'll still say it won't be perfect even through fourth quarter. It will not be perfect even through fourth quarter. We're going to make improvements sequentially, and we will get there. I mean, these are all things that David DeMattei tackled at Lucky, where things were really tough. And kate spade, well, it was a different situation at kate but they had to sort to invent all of this as they went. And so we're doing this. Juicy was our biggest business. And this shift from being sort of a full-on wholesaler to being a vertical retailer, it's coming in stages. And the biggest and toughest move, I think, is the one that we made in design and marketing and now flowing it through into these other areas.

Operator

Your next question comes from the line of Corinna Freedman of Wedbush.

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

I wanted to ask about your store opening plans for kate. Are we assuming a large – a slightly larger store, given that so many categories are performing well?

William L. McComb

What I would tell you is assume that, that fleet average remains the same. But what we're going to be doing, as I've indicated in the last call, I don't know if we use the word test, but we're going to selectively upsize in some locations that, that makes sense to do. But we're not going to get a little ahead of ourselves. I mean, I've definitely heard from a number of shareholders, "Gosh, you guys need to expand your square footage.” When you hit 1,000 or 1,100 like we're doing now, that's a warning sign on the dashboard that you could use some bigger stores. We're going to kind of test our way to do that, and we will. We won't be stupid or timid, but we're also not going to be gun shy. Because when I -- in my prepared remarks, I used -- I made the comment, within proven business models, within the brands. And that's an important theme that I believe in personally. I don't want to get reckless, and I don't want to get ahead of ourselves here. But the square footage expansion is coming.

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

And as far as the accessory strategy goes for the Juicy brand, can you talk to us about what your plans are for holiday and accessories? I think you had mentioned before that you were changing vendors or changing on the sourcing of the -- so I was just wondering what the strategy is for holiday.

William L. McComb

It really is styling, to be honest with you. I mean what -- if I were to give you one big callout as it relates to handbags, because jewelry has gotten better and better; in handbags, we have to be able to perform at the right price points, the right price value and to be able to do that in the leather segment. It's a critical segment. It's not one that we had done very well with before. Our customer tells us she comes to Juicy and she'd like to see it, and our conversion into leather hasn't been outstanding. And we've done a lot within what I'll call the fabric, the velour range, but that's not going to cut it. We needed to achieve our eventual goal of what I'm going to say 50% to 55% accessories penetration. We need to perform on the leather segment and add price value that's stronger than where we currently are. So that's the aim of it and doing it with still a pretty edited assortment, not overly proliferating it.

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

Any color you can give us on the kate brand at wholesale and how it performed and where you see that business going?

William L. McComb

It's ahead of plan. The performance is outstanding. We are not -- in the last call, I made the comment, somebody had asked me the question about would we consider a more expansive rollout, somebody even mentioned Michael Kors, and I’ve said, no. I mean, we're not -- we want to stay pretty much within the stores that we're in. There's a great productivity opportunity I referenced in the last call, for example, category expansion like watches. There's a lot of gas left in that engine in terms of being strategic, keeping the presence at wholesale edited to kind of in the lanes that we're in and being great partners to those guys but really having a business that's primarily anchored as a direct retailer. And honestly, the mindset that we have towards wholesale is to look at those relationships and those points of distribution almost like a vertical retailer would. Where possible, we're convincing the retailers to position and merchandise multiple categories at kate spade together, world of -- brand worlds kind of thing. And that's really important to us.

Operator

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

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

I just wanted to follow up on Juicy. Could you talk about the trends that you're seeing so far since the product has been launched? I know it's early, and I know July is not been a big month for the quarter. But could you talk about what you're seeing? And also, as it relates to the guidance, the adjusted guidance for Juicy comps being up in the mid single digits, how should we look at the EBITDA performance of Juicy given the executional issues that you were having?

William L. McComb

Okay. Not a lot to say on either count, to be honest with you. July is very spotty and very inconsistent, which is kind of what we see in July in general. We see some good performance on some days, and we see some days when there's just not a lot of traffic in the month. So July, I don't think there's any glaring insight here to give you on that. And George, do you want to make any comments for Mary on her EBITDA question for Juicy?

George M. Carrara

Yes. I would say, as we explained, we tempered our expectations. We do expect sequential growth so I want to reiterate that point. I think that's enough to say at this point.

William L. McComb

But if Mary's asking the EBITDA question, George, you may want to comment on from an overall perspective, we've reiterated our guided range of $125 million to $140 million. And in the last call, we had made the comment that second quarter -- that the quarterly splits from a percentage perspective would be in line in 2012 within the guided range that we'd given of the splits in 2011. And second quarter's number was up a little higher than last year's. I think what we're looking at is I'd still stick to what we said before. I think that there's a little bit of shift between second and third quarter. So first quarter was in line with the percentage of -- in 2011, fourth quarter will be and second and third quarter together will be in line. Isn't that about right, George?

George M. Carrara

Yes. So Q2 and Q3, in the aggregate, will resemble last year in the aggregate, but you should -- you'll expect -- you'll see a shift from Q3 to Q2.

William L. McComb

And the only other comment, I think, within that discussion point, it's a little off what you asked but I think it's relevant to what you asked. We also had said on the last call that we expected kate spade's total fiscal year sales to be in the 30% range. I think we're now looking that to be for the year in the 40% range. And that jives with this analytical model that we've given you, the annual guidance, as well as the comp numbers that we've suggested here. So there's a little bit of modeling dust for you, Mary.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Yes, it sounds like it. So it sounds like if we break it out by brand, that Juicy is likely from an EBITDA perspective or profitability perspective to be down year-over-year, and then we're going to see the pickup from kate spade and Lucky Brand.

George M. Carrara

Yes, Mary, that's fairly accurate.

William L. McComb

We'll let you do the model. We've given -- I just gave you a little bit extra there so we'll let you play that out.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay, that's very helpful. Okay. So then if we look at the transition going at Juicy in terms of getting MP&A and everything where you want it to be, will we be in a good -- a better position? And it sounds like for the rest of 2012, we're still going to be making progress. And that as we go into 2013, should we be at a better position? Where would we stand in terms of re-couturing all the full price stores in 2013?

William L. McComb

Okay. So I guess the way -- when I say things like sequential improvement, I mean, I do think that we're getting some critical mass around each of those 3 things that I called out. I think that the outlet fix is not a 2012 thing. I think we're just getting our arms around it now, and we want to have a good impact on that for spring. But really, the second half will be an even bigger impact, and so that was the second area of callout. The accessories, that is definitely a sequential improvement. And I think that 2013, we'll really be able to make some stride on it, with an incremental improvement in the fourth quarter. Fourth quarter is definitely -- we're putting a much better foot forward on all 3 areas, including MP&A. George was very involved with the team on the buy, on rightsizing it, on getting allocations right, on what the segmentation framework looked like, on managing the AURs, those kinds of things for fourth quarter. And I know that, that added a lot of help to the team, and that much more is going into spring. And other than sticking to the kind of sequential slope, probably next call, I'll be able to give you a lot more granularity around those things. I think we've been really transparent here, maybe even more transparent, frankly, than some of our competitors are when they get on these calls about what's working and not -- and what's not working. And we've been kind of open kimono here on what we're working on and people-wise and that kind of thing. George, what would you add to that?

George M. Carrara

And what I could tell you, Mary, is in the 90 or 100 days that I've been here, I could -- in looking at the process 100 days ago versus today, we are, as we keep saying, sequentially improved. And now that Tom has come aboard, Tom has expertise in that specific area, so I think we'll continue to get into a better and better place as we move along.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay. Yes so it sounds like Q4 is going to be a dramatically improved position. But then it sounds like first quarter of 2013, we should really be at a good point in terms of execution and then continuing to make greater progress on the assortment for accessories in terms of being positioned there. And then what about the re-couturing? So we're going to do 16 stores. Where will we stand for the need to re-couture in 2013 to address the rest?

William L. McComb

There are -- after that 16, in the first quarter of next year, we'll do another 15, and that will finish it up. And at that same time, we will take a pass through the outlets while we're putting our new product strategy. And those are -- that's a very light touch, low capital thing to do in the outlets. But in addition to the product strategy, we'll do that as well. I think the more important point to make is the 16 that we'll hit by fourth quarter are -- they are the very visible, very important, high-volume, high-profit important doors. So I'm really pleased that we're just moving forward and getting that done.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

That's very helpful. And then on kate spade and the Japan JV, can you give us an update on the revenue numbers? Because, I mean, that $71 million -- I mean, those numbers is almost a year old. So can we get an idea of where we stand, let's say, today in terms of this?

William L. McComb

I can't. Contractually, I can't do that. After we take over the business, I promise, I'll give that to you. And you are right, the $71 million in revenue that I quoted was for kate spade Japan's last fiscal year, which ended August 2011. So it's an old number. I've indicated it's a fast-growing unit, and it's a profitable company. And what I think the Street in some ways may or may not have missed from that last announcement was that this is incrementally consolidated after we close in the fourth quarter on it so...

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Yes, absolutely. And then finally, the Japan JV, could you give us an update on where we stand in terms of stores opened, what you're seeing in the revenues per store and the overall trends? Because as you said it, for you, being small and growing, it's still the wild Wild West.

William L. McComb

I heard everything but your first 3 words. What brand were you talking about?

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Oh, I'm sorry, kate spade and the China JV.

William L. McComb

Got it. Okay, all right. We're just getting started. We anticipate having, let's see, I want to say, like 8 stores opened by spring of next year. It's 8 to 12. I don't have the number in front of me. It's -- call it a dozen, just under a dozen by spring of 2013. So we're in startup mode and we have an outstanding partner with E-Land. Craig personally and Karen Jones [ph], who runs the international piece for Craig, they're working very hard with their team over there. And it's on its way. But think about it as by spring, call it just under a dozen stores.

Operator

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

Jessica Schoen - Barclays Capital, Research Division

This is Jessica Schoen on for Bob. I was wondering if you could go back to the comment you made on the kate spade and the potential for some pressure on AUR in the quarters ahead due to some products at lower entry price points. I was wondering if you could discuss how you expect to drive productivity in your stores and how we should expect comp traffic and ticket to drive the comp going forward.

William L. McComb

It's multiple -- multi-category selling is the answer. Generally speaking, within categories, we're not driving AURs up. We are fearlessly -- as I indicated, that really wasn't a warning callout. It was more of a stroke of optimism to say that the team is fearlessly adding opening price point categories that are incremental to a transaction and in some ways, may bring in new users to the store, younger demographics, those that may not have the full price handbag or full price dress sell. And we want to include them in the franchise, and we're happily doing it. It's working, and that's really the answer.

George M. Carrara

And what we're seeing in that regard, to Bill's point, we're seeing an increase of -- in traffic, so that has been offsetting the AUR.

William L. McComb

Yes, and that was the strategy so that's what we're doing.

Jessica Schoen - Barclays Capital, Research Division

All right, understood. And then just to make sure I understand, I think it was your answer to Mary's question, but about the contribution of each of the brands to the reaffirmed EBITDA guidance sounded like potential shortfall in Juicy would be made up with a better than expected result in kate spade. I was wondering if there's any change to the expected contribution from Lucky.

William L. McComb

Well, I think that what we said before, which was that kate spade and Lucky Brand are both over plan and that Juicy is below plan and that costs are coming right in line and that directly goes into that $125 million to $140 million. But we won't go below that qualitative assessment because we're not sitting here and guiding to the EBITDA level by brand. But your models should reflect those arrows.

Operator

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

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

I was wondering if you could talk a little bit about Lucky's margins in the quarter, given the 700 basis points of gross margin improvement. I was expecting more than 200 basis points of EBITDA margin. What's going on with SG&A at Lucky?

William L. McComb

Well, okay, marketing spend is up. What other areas, George, would you call out there? I mean there's, I don't want to say continued organization investment although there has been. There has been some. I mean we've built up the -- Dave has -- as he's sort of rounded the corner and fixed each of these pieces of the business, he's built the infrastructure up a little bit. So what went into the outlet fix frankly involved beefing up the design and product teams to be able to support a more robust product strategy there. Marketing is up.

George M. Carrara

And I think what we're seeing is, as we said, it's a best-in-class team, so we've added positions in critical areas. So I think we're at a place now where you'll see on the go-forward, better leverage.

William L. McComb

Leverage. That's the -- and George, you called that out in your comments. I mean it's -- look, one of the tough things about doing what we're doing as a strategy here is that we have made a bet on the future of all 3 of these multichannel, multi-geography businesses. And you actually can't get there without first making some of the investment. And that, in general, is why our SG&A levels, they haven't been -- we haven't managed to benchmark upfront on that because we could never get to -- we're building something here. That said, I think what the spirit of what George got at was there's an opportunity to do a cost adjustment at Juicy in line with being more focused and better allocating resources and having more conviction about fewer things in the brand and building productivity. And in the other 2 brands, it's now time to actually see some flow-through and some leveraging. And the management teams, they are embracing that. They are in agreement with that. We told you on the last call where you asked this question about kate spade, that the biggest opportunity for leverage is going to come, frankly, in the global expansion. Global at Lucky, isn’t -- it's not ready to explode, so to speak, like kate spade is. And so we're going to see it from continued productivity enhancements. And I'm very bullish that these improved comps and these improved gross margin rates are going to actually start delivering a much better profit profile for the Lucky Brand, domestically speaking.

George M. Carrara

But in summary, Jim, we're with you and we're watching it closely and we expect to see that coming soon.

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

Great. And just -- so on kate spade, have you built out the international infrastructure at this point? And as you start to build it out next year, should we start to see some better leverage at kate as well?

William L. McComb

Yes, you're going to -- for a long time, infrastructure will continue to grow at international kate spade, but sales will outpace that. They should, they can, they will and that's how that will work. So yes. I mean, you get to a point where if you're starting entry point is 10 to 12 kate spade stores, back to Mary Gilbert's question, and that's the entry point for China, from there up, like I said, sales will outpace infrastructure expansion at least from the perspective of what's flowing through our P&Ls.

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

Right. And Lucky Canada, how many stores do you have up there now and what's the potential?

William L. McComb

We have 10 stores. We're happy with 10 stores. There's a small emerging outlet opportunity up there, but it's 10 to 12. Right, George?

George M. Carrara

Yes, that's correct.

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

Great. And then, Bill, you talked about the fashion apparel comp. At Juicy, how are overall apparel comps at Juicy in the quarter?

William L. McComb

You know what? I don't have the number in front of me. I don't have the number in front of me. We look at it as fashion apparel and then what we call core apparel. And in full disclosure, we skew the inventory toward fashion. So it was up 26% on a meaningfully increased inventory skew. And that said, not enough inventory, not to a demand-appropriate level or not enough, to Jennifer's question, to penetrate all the stores equally. I don't have it in front of me here at this desk, the core fashion split. Accessories were down 26%. Core was probably down in the single digits along with inventory allocations.

Operator

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

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

With the better performance from Juicy fashion apparel, do you ever think about repositioning the split of the business, accessories, apparel? And I'm guessing, not based on an earlier question, but just wanted to get you to address that. And secondly, Lucky Kids, just in terms of the existing store structure and space constraints, how would we expect to see that manifest in the stores? Or are you talking about separate stores?

William L. McComb

What we're talking about, we will do that. We will test a very small -- we had done it in 2006 but that was back in a different era and a different day. The real callout on accessories or on -- sorry, on Lucky Kids is we have an outstanding licensee who's going to go after what is a large department store business, and that actually is the biggest single profit pool probably that going to -- that will come from that. But we have the ability within that license to buy at FOB plus the Kids product for our stores and for our online business. We think our online business and catalog will be bigger, faster than what we do in-store. What Dave is doing is what he calls kid's corner. He's got a little small -- a single fixture that can put a very productive assortment in the right stores. And he's going to test and learn and grow his way. It's definitely an area that in terms of our own physical real estate, we're going to test our way to -- anything to a 60-store concept, to expand its square footage that includes just the right amount for it. So the headline is a capital light expansion right now.

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

Got you. And on the Juicy?

William L. McComb

Whoops, I can't hear you, Robin.

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

I'm sorry, on the Juicy, the apparel accessories, you want to maintain that 50-50 split essentially?

William L. McComb

On a prospective strategy outlook, yes, we want to see the business 50% to 55% accessories, and that's longer term. The brand has that unlike some other brands that have a nice following in apparel but have never made a translation. This is a brand that whether it's footwear, whether it's handbags, whether it's jewelry, it has had a stunning record in the past and the brand is relevant to each of those categories. We're not executing right in accessories. We've called that out. So I don't think that there's any reason to say, "Oh, this is now the new affinity zone and this isn't." I think the affinity is there. I think we have to execute well. The place that we've executed well is full price fashion apparel. And now we need to be able to do -- bring more newness to the core line in apparel and bring -- for the value channel, we need to do a good job with both segments and then across the board for accessories. And so that's where the attention is turning. But this doesn't change our strategic outlook on the business. The business at $1 billion, we’re segment-wise where we see it. And I can tell you, that's an important callout because internationally, there's just so much potential for the accessories line. So we don't want to walk that at all.

Operator

Your final question comes from the line of Carla Casella of JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

I just have a follow-up on Juicy Couture. You saw some weakness in the same-store sales. Could you just talk about if you saw the similar weakness in the wholesale business and whether you've lost floor space at some of the department stores?

William L. McComb

Well, yes, we have and that's kind of an old tape. I mean, we've said that we really -- our wholesale business domestically, this is -- I'm going to assume your question is domestic.

Carla Casella - JP Morgan Chase & Co, Research Division

Yes.

Andrew C. Warren

Domestically speaking, we're -- the apparel business is in a handful of doors at Bloomingdale's and Nordstrom's. It's not a lot. And our bigger business is on the accessories side. And I said during my prepared remarks that accessories were down in the second quarter in wholesale, and that definitely put pressure on the total sales line for the business.

Carla Casella - JP Morgan Chase & Co, Research Division

Because you had mentioned going into this quarter that you were under inventoried in some items at Juicy and you thought it was holding back. Was it that you overcorrected in the third quarter or it was different product that you were under-inventoried on versus over inventoried at the end of this current quarter?

William L. McComb

Well, I wouldn't talk about third quarter. I just -- this was all about the second quarter. And we said that the overall units allocated to our specialty stores were down on average 22%, and that was -- it was an across-the-board phenomenon. It wasn't just apparel or fashion apparel or core. It was across the board.

George M. Carrara

And the over inventory was at a segment, not across the board.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay, great. And then a follow-up on Lucky. Are you seeing a trend away from denim into non-denim? And how are you addressing that or how is it impacting Lucky?

William L. McComb

We're not seeing that at all. We're seeing the opposite. We are absolutely seeing the opposite. But that's not to say that all of Lucky's progress is coming from its stunning denim strategy. They're making unbelievable progress on their tops to bottoms ratios and their cross-selling. And it's men's and women's. So the success at Lucky is tops and bottoms and men's and women's, and denim is absolutely doing well.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay. And then, one, I may have missed it but did you say whether the second quarter margin reflected any benefit from cotton yet? Or is that something that we should see in third or will it be ‘til fourth quarter until we see it?

William L. McComb

Well, we had said that, generally speaking, second quarter it was still more of a headwind than a tailwind. And that by fourth quarter, it becomes slightly more of a tailwind.

Well, thank you, all, for dialing in and thank you for your questions. And we look forward to talking to you this fall.

George M. Carrara

Thank you.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Fifth & Pacific Companies Management Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts