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

Analysts

Jennifer Black

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

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

Jessica Schoen - Barclays Capital, Research Division

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

Kate McShane - Citigroup Inc, Research Division

Casey Flavin

Carla Casella - JP Morgan Chase & Co, Research Division

Fifth & Pacific Companies (FNP) Q3 2012 Earnings Call October 25, 2012 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Fifth & Pacific Companies, Inc. Third 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 and cautionary statements set out in this morning's press release, including those under the caption Fifth & Pacific Companies Inc. forward-looking statements, as well as in the company's third 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 statements, whether as a result of new information, future events or otherwise.

Also please note that during this call and in the accompanying slides and press release, 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 non-GAAP adjusted basis. In addition, 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 the company believes that these measures represent a more meaningful presentation of the company's historical operations and projected financial performance as these measures provide period-to-period comparisons that are consistent and more easily understood. And the company considers these measures as important supplemental measures of its performance and believe 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 the slides captioned reconciliation of non-GAAP financial information, which will be posted to the company's website at www.fifthandpacific.com in the Investor Relations section after this call.

The company believes that the adjusted results for the third quarter and 9 months of 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'd like to turn the call over to your host, Mr. McComb. Please go ahead, sir.

William L. McComb

Good morning. Today, we announced our third quarter earnings results. Virtually all of what we reported this morning is in line with what we disclosed during our pre-announcement back on October 1. On the call today, we'll briefly reiterate some of the key messages coming out of the quarter while looking at the financial results in a little more depth. As usual, I'm joined here on the call by my most capable CFO and COO partner, George Carrara.

As for the headlines, the quarter came in just above the range we've guided for adjusted EBITDA at $21 million. The adjusted EBITDA guidance for fiscal year 2012 remains $100 million to $115 million. kate spade turned in another outstanding quarter, continuing to deliver strong growth and gross margin expansion while moving forward with Strategic Initiatives that'll take the brand to yet another level in the years to come. Lucky Brand Jeans delivered a strong performance as well, and like kate spade, is now growing across channels and categories. Lucky has developed an agenda that is expected to deliver higher productivity in the retail stores, while reaping the benefit of an outstanding operating platform and a brand that's growing in both relevance and reach.

Juicy Couture's restage is progressing via marketing, store resets and elevated product and quality. We need to make important adjustments still to the merchandising mix in ways that we've detailed on the last 2 conference calls in order to deliver the right transaction profile for our stores, but the brand has real chops with consumers and has an enviable international position. We're moving forward there, and I'm confident about the path that we're on.

The Adelington Design Group is right on plan and continues to be a profitable niche business for us with a low risk profile and a small cost structure. Even with the strategies we have yet to implement at Juicy Couture, we're well-positioned going forward. We have a unique portfolio here, 3 early-stage brand platforms with multiple avenues for value creation. Our focus on building scale while leveraging the capability built over the past 5 years is now reaching the turning point where meaningful sales and earnings growth are now taking place and our focus on digital relationship management on global markets and direct-to-consumer will continue to push these assets to the best possible margin scenarios.

Let's take a look at the performance in each of these brands for the quarter. And before I start, you'll notice that we have only provided quarterly direct-to-consumer comps for the brands for third quarter. This is going to be our practice going forward as reporting on a quarterly basis is now consistent with the majority of our peer group.

So, let's first talk about kate spade. At kate spade, total sales were 35% in the quarter. Direct-to-consumer comp was up 22%. Store count was up during the quarter by 15 to a total of 93 stores versus third quarter of 2011. Comp sales per square foot for the past 12 months were a stunning $1,052. And month-to-date in October, kate spade's direct-to-consumer comp is estimated up about 28%.

During the quarter the brand opened 9 new stores in North America. We've also signed a lease at 67th and Madison to bring the brand to the Upper East Side of New York. We plan to open 6 stores in the fourth quarter of 2012, 4 of them in North America, 1 of them in Brazil and 1 of them in the U.K. We also plan to open more than 40 new stores in North America and approximately 25 retail points of distribution outside the U.S. in 2013.

For 2013, kate spade New York has embraced another theme designed to drive continuous newness and innovation in its stores. Whereas 2011 was the year of color and 2012 is the year of patterns and prints, 2013 will be the year of our favorite things in recognition of the brand's 20th anniversary. The Things We Love theme will enable our team to present a monthly assortment variety that our consumer has come to crave. There will be many creative collaborations throughout the year that will enable editorial and consumer interest, so just watch.

In addition to the collaborations, there are several specific product initiatives aimed at inviting new customers into the brand. These include delivering great value at the $258 to $298 price points, an area where we see our key competitors outperforming us, and getting into a broader assortment of key shapes like hobo bags and adding more cross bodies, both of which will expand kate spade's appeal among the younger audience. The brand is also planning to increase the breadth of assortment in apparel, adding more skirts, pants, woven and knit tops and sweaters. And while we're not aiming to skew the overall penetration of apparel, kate spade will deliver newness to the consumer and outfit her more completely than just in dresses and coats.

On the international front, the kate spade Japan joint venture acquisition is expected to be completed in the fourth quarter of this year. As indicated earlier, we anticipate this business to be meaningfully accretive to the kate spade P&L in 2013 and beyond. We get a lot of questions in the international territories, so I'd like to lay some of that out for you here.

Following the completion of the acquisition of kate spade Japan, we expect that going forward, total international sales will exceed 20% of total kate spade annual sales. But that metric understates the true international penetration because it mixes wholesale shipments into some international markets with direct territories, which are measured in retail dollars. Brazil and London are direct territories and have sales that are both wholesale and direct-to-consumer retail. We have 4 stores in London today, 3 in Brazil, with the fourth opening in the fourth quarter. As you know, we're finalizing the acquisition of kate spade Japan right now. When complete, that will bring under direct control an additional 53 points of distribution.

In China, we'll finish the year with 13 doors via our joint venture partnership with E-Land. They anticipate opening 12 to 16 doors in 2013 on what we expect to be a steep ramp to kate spade's largest presence outside the United States. We had a large press event in Shanghai last week that was very well-received.

In the Middle East, we're in year 1 of an excellent rollout via a distributor arrangement. Today, there are 3 freestanding stores and 1 shop-in-shop and by the end of 2013, we expect to have 2 to 3 additional doors there. Other priority markets include the planned launch of locally fulfilled, locally marketed e-commerce across Europe during the second half of 2013. And we anticipate entering Turkey, India and Russia through third-party arrangements by the end of 2013 as well.

In all of these markets, the core kate spade New York concept lies with the same category approaches and one global standard for marketing, visual merchandising and assortment. So that's the round up of the kate spade International business. As you saw from Tuesday's announcement, the kate spade team has been working for more than 2 years on a sub-brand that makes a 7-day proposition at a casual spirit of Saturday in the form of an apparel, accessories and home product line, conceived as a global concept. So, right on for markets like Japan, China and Brazil. Kate Spade Saturday has real potential in the United States as well.

Priced at about half of what kate spade New York averages, Kate Spade Saturday is a younger, more accessible sister, sharing the same core values, colorful, optimistic, bold, but expressing them in a more casual, carefree way. The concept is totally original and we find it hard to compare to any other single concept out there. It has a little bit of the Marimekko spirit in terms of the assortment strategy, but with the editorial voice and the handwriting of kate spade. It is to kate spade New York what CB2 is to Crate & Barrel. Just 2 examples. The target audience sweet spot is the 25 to 35-year-old, but as we see with all of our brands, we expect to see a broad age base of actual customers. 2013 is our launch year for the brand with the debut plan in Japan in spring through e-commerce at www.saturday.jp and the flagship store in Tokyo. Kate Spade Saturday is expected to come to the U.S. customer exclusively online at saturday.com in spring 2013. And the brand is planned to arrive in Brazil through e-commerce and stores in early Fall 2013.

You might ask why we would focus the brand online in the U.S. The answer is simple. The kate spade Saturday consumer is a girl who lives and breathes online, leading us to create a site that seamlessly integrates the content and features of social with those of traditional e-commerce in a pioneering way. Stay tuned for more on this incredible initiative.

Turning to Slide Page 5, Lucky Brand Jeans. Overall, Lucky Brand Jeans posted a strong quarter compared to last year with sales and earnings growth in both the direct-to-consumer and the wholesale channels. Total sales increased 11% for the quarter to $112 million. Direct-to-consumer comp sales were up 5% during the quarter on a store base of 218 doors, down 3 from the third quarter of 2011; and the latest 12 months comp sales per square foot were $461, a nice increase from the 2010 year average of $372 per square foot and nearly one data point on our way to the more than $600 per square foot that we desire.

As I indicated on the last conference call, while comp store performance softened a bit at the end of August and early September, we finished the quarter very strong with a significant acceleration in comp store performance in the latter part of September. The positive comp in direct-to-consumer was led by the strength in denim which was up for the quarter on prior year double-digit increases. We expanded on the success of our Super Stretch and Super Soft denim by focusing our efforts on continuing to offer accessible premium denim for all ages and bodies while at the same time, refining our denim inventories based on more detailed analysis.

For example, the biggest consumer trend we saw in women's denim was a migration out of bootlegs and into skinny. In men's denim, it was a move from roomier fit to slimmer ones. Bringing more newness to the tops categories in both men's and women's is a priority for 2013 in an effort to help drive overall store productivity.

During the quarter, we opened 3 new stores: 2 specialty and 1 outlet. In the fourth quarter, we plan to open 3 new specialty stores, including a Lucky Brand flagship here in New York City at Columbus Circle and 3 new outlet stores, adding to the 4 outlets that we've opened year-to-date. Our outlet stores have been performing exceptionally well and we believe we have a very good growth story ahead of us here in that channel.

With regard to the Lucky wholesale business, we've seen a significant improvement in this business unfold over the past year. We've not only stabilized our key account base, we've seen notable increases in our retailers' performance this year. As a result of this, we're gaining additional doors and floor space with many of our key accounts going forward. That business is now very healthy.

Other exciting opportunities to grow our wholesale business include our new plus size business, which launched both online and in-stores in several key accounts during the third quarter. To date, our new plus size results have exceeded our expectations and retailers have been very pleased with our performance and their customers' reactions.

In terms of consolidated Lucky Brand inventory levels, average inventory is down 8% on an LTM basis, which has contributed nicely to overall margin improvement. So looking forward to 2013, our key areas of focus at Lucky Brand will be, one, improving existing retail store and wholesale productivity a couple of ways: One through product innovation and newness; secondly through category expansion; and third through inventory management. We also plan as a priority to drive e-commerce growth. We'll also be opening some new outlet doors. In addition, we'll see new businesses launched like Lucky Kids, a further rollout of Lucky Plus and a relaunch of Lucky handbags, while buying off the first real round of Lucky International expansion.

Since the strength of our Lucky Brand business is rooted in denim, we'll grow this category accordingly through innovation in fit, fabrics and wash. We have plans to launch several new fits in both men's and women's denim in 2013.

On the fashion side, there's 3 key strategies to round out our offering, including infusing a modern edge into the brand; offering a broader range of fabrics, occasions, prints and colors; and embracing our heritage.

To further improve store productivity, we plan to expand categories like sweaters and outerwear, both of which are still underpenetrated in 2012. Accessories, as I said, is also expected to play a larger role in our growth next year. Currently, our penetration in accessories is less than 10% and through continued strength in jewelry, belts and new categories like shoes and tech, we believe we can increase this significantly next year.

As it relates to door growth in 2013, we plan to open a few new Lucky Brand specialty stores, but the real emphasis is on 12 to 15 new outlets as we capitalize on a model that is profitable and continuing to improve. We believe Lucky Brand has a real opportunity in e-commerce and in 2012, we've been laying the foundation for considerable improvements that we believe will help drive the growth of this business in 2013.

Some of these initiatives include a newly designed e-commerce website, which is expected to launch in the first half of 2013, as well as a deeper analysis of traffic, which has been leading the more aggressive and effective marketing campaigns on the web and new customer acquisition through both direct marketing and digital.

And as I mentioned earlier, we've seen a solid turnaround in our wholesale business as evidenced by retail margin and productivity improvements and we expect to grow with our key accounts as we move forward. We're excited about the potential we have within both the core wholesale business, as well as within the plus size and Canadian expansion opportunities that we initiated in the second half of 2012.

Our new kids licensee launches its wholesale line in department stores beginning in spring 2013. We're also expanding the kids' assortment within our existing specialty stores at that time as well, and we're reviewing the possibility of a fall kids catalog. Our new handbag licensee will launch its new line in department stores also beginning in fall of 2013.

We're very excited about international expansion at Lucky Brand and the opportunity we see going forward. Earlier this year, we began mapping out our international expansion plans and started to meet with potential partners, partners that raised their hands and came to us expressing their interest. Suffice to say, we're very pleased with the response that we've gotten so far and the excitement that we've seen for expansion opportunities outside the United States.

Sales at Juicy Couture, as you know, were down 6% for the quarter to $130 million. Direct-to-consumer comp sales were flat a year ago and on a store base, it was up 2 doors versus third quarter 2011. Comp sales per square foot for the last 12 months were $643. Month-to-date, October direct-to-consumer comp at Juicy is up mid-single-digits although margins are down significantly as we expected.

I spoke at great length on October 1 about our mission to turn this business. I know George has a few things to say as he's put a lot of efforts and time into the turnaround plan there, so I'll let George comment on Juicy specifically. I do think it's important to reiterate that during the third quarter, we saw 19% sales growth in international at Juicy. The International segment of the business is performing much better than the U.S. component. The fashions are well-liked, the brand is very strong and while we have the same call for improved handbags and accessories, the business has considerably more traction. The Regent Street and Westfield stores in London are good examples, as well as the Middle East and Asian territories.

Turning to the Adelington Design Group here on Slide Page 8, you can see we reported sales of $21 million for the quarter, which is down 26% due to the model change in its portfolio, where we go from a wholesale department store model to an exclusive partnership with JCPenney for Monet. With that brand level overview, let me turn the call now over to George Carrara to walk you through the financial summary. George?

George M. Carrara

Thanks, Bill, and good morning, all. Before we review the quarterly financials and 2012 outlook, I would like to give you an update on some of our key business initiatives.

First, Juicy. In connection with our Q2 release, we highlighted a handful of areas within Juicy requiring immediate remediation. In response, I spent a good deal of Q3 working with the Juicy management team with focus on merchandise planning and allocation, merchandising and business processes. Based upon compelling first half sell-throughs of Spring/Summer coded product, coupled with a more appropriate planned level of inventory, you'll recall that Bill and I were optimistic about Juicy's second half performance.

Unfortunately, once the transition to our new full floor sets was complete in August, sell-throughs began to significantly deteriorate relative to the first-half trend. An immediate analysis identified additional merchandising, pricing, planning and allocation issues which Bill shared with you in our prerelease call earlier this month. I've since been working intimately with the team to adjust the markdown cadence, redeploy allocations from underperforming to outperforming stores, accelerate floor sets to align with last year and reset our back half promotional calendar.

With these changes, we have seen an improvement in our gross margin trend relative to last year since July. And, although our DTC comp trend has also improved, our gross margin rate has declined approximately 700 basis points versus last year.

Many of you have inquired about the forecasting methodology employed to isolate our fourth quarter Juicy EBITDA range. I can tell you that we have taken great care in doing so. We performed the bottoms-up projection using actual sell-throughs by delivery and within pricing tiers for each delivery. We also validated this by using a top-down sensitivity, measuring the adjusted EBITDA impact of various gross margin outcomes based upon recent trends. This is how we established the $28 million to $38 million full year range for Juicy. And October performance falls within this range.

Let's also reiterate that in spite of the pullback in sell-throughs, we expect to end the year with an appropriate amount of inventory.

Now, in terms of spring 2013 and beyond. Our ability to make adjustments to the spring 2013 line based upon our learnings from fall '12 was limited. We did, however, ensure that buys on a unit basis were appropriate although our ability to rebalance the assortment was limited also by the calendar. We repriced the line for our U.S. stores to more appropriate levels and we built upon these changes in the summer 2013 collection. Additionally, we have developed a merchandising model that includes foundational heritage product and key fashion items that identify with the DNA of the brand but are commercial in that they will be bought and priced in a compelling way to appeal broadly to the Juicy customer.

Finally, in our top volume doors, we plan to merchandise a selection of more aspirational product. This line architecture is supported by analytics and is being completed as we speak. Accordingly, the Fall 2013 line should better reflect this architecture. And Holiday 2013 line development, which begins in a few weeks, should completely incorporate our learnings. So as you see, we expect sequential improvement with each season between now and Holiday 2013.

Knowing that these improvements will be phased in over time, we of course, had to take further immediate action to enhance the Juicy go-forward profitability. In this regard, we announced a global reorganization and international integration. In a bid to streamline business processes, we consolidated and eliminated over 20% of the brand's corporate headcount. Additionally, in the areas of outsized opportunities that Bill previously discussed, namely e-commerce, international and outlet, we are aggressively investing in talent and product initiatives. We expect that these actions will help mitigate the lag impact of our merchandise planning and pricing initiatives.

Item #2, the migration out of our owned and operated distribution center in Ohio. You'll recall that our rationale for this project was to convert an expensive and underutilized logistics model to an efficient and fully outsourced variable cost model. Our plan was to conclude this migration by the end of 2012. As we progress with the transition plan, we encountered some deficiencies in the business process capability and software within the new platform. Accordingly we, in concert with Lehman Fund Logistics, jointly determined to temporarily suspend the migration out of Ohio pending a resolution of the related issues. Further, we decided to migrate some of the volume back to Ohio in early September to help mitigate shipping risks during the holiday season. In the interim, we and LFL are working to rectify the issues and establish a revised plan and timeline. We will give you an update when we speak next at ICR in January.

Currently, you should know, we are turning merchandise on a fluid business as usual basis at the Ohio facility at LFL and within other third parties. As we said earlier this month, we expect to continue utilizing our Ohio DC into 2013. As discussed on October 1, we expect incur up to an additional $4 million of associated expense this year. We will update you in January on the expected expense impact for 2013.

So Juicy and our distribution center have taken a good chunk of my time during the quarter, but let me quickly highlight some other areas of importance. Here's a quick recap. International expansion. I have worked closely with the kate spade team on our planned acquisition of kate spade Japan. We have conducted due diligence and worked on an integration transition plan. We expect to complete this transaction in the fourth quarter.

In the context of Juicy, we are working to accelerate expansion in Asia where we have experienced double-digit growth and we're also working to manage through the macroeconomic issues in Europe.

E-commerce. We have incredible traction and results within this channel. In fact, our overall penetration is at the forefront of the fashion industry. This is an area of focus and growth within all 3 brands. We're in the midst of planning for web store enhancements in the first half of 2013, followed then by a sequential rollout within key international markets. This is instrumental to our longer-range plan and we will be aggressive based upon our success.

Information Technology. We have focused on compelling investments with higher ROIs and lower risk profiles. For example, we are currently piloting a new POS system with an all-store rollout planned to be complete in the back half of 2013. This POS system will contain numerous enhancements to better engage our customer, namely Mobile POS functionality. We have also initiated a project whereby we are streamlining, consolidating and integrating our legacy systems. Earlier this month, we integrated the retail and wholesale style management functions, which will eliminate duplication of effort and reduce error rates.

Corporate infrastructure. During Q3, we made significant process on the corporate realignment announced back in June. This is on target to be completed during Q4 and, as you know, will result in annualized savings of approximately $15 million. We will continue to seek opportunities to reduce costs in areas that don't drive profitability, including initiating steps to further consolidate space in our New York and New Jersey corporate headquarters, for example.

Operating leverage. This is a theme that is squarely on our radar. Bill and I have been working with the brand heads on this. You have also called this out. We are working hard on balancing this against our many growth initiatives. When we present our plans for 2013 in January, we will be prepared to discuss this in greater detail.

With that, let's now move onto the financials and our 2012 outlook. Slide 10. Slide 10 is our adjusted P&L summary for the third quarter. Adjusted net sales for Q3 were $365 million, up $23 million or 7% versus last year as compared to the comparable brands in 2011. As Bill explained, this increase was driven by strong sales at kate spade and Lucky Brand and partially offset by sales decreases at Juicy Couture and the Adelington Design Group.

Adjusted gross margin rate was up approximately 50 basis points to 55.7% versus the comparable adjusted gross margin last year. Both kate and Lucky continue to generate strong full price sell-throughs resulting in 320 and 200 basis point increases in gross margin, respectively, compared to last year. Both brands realized improvements in all channels were particularly noteworthy improvement in the Lucky wholesale segment. These increases were offset by Juicy where the overall gross margin rate decreased by nearly 400 basis points driven by a decrease of approximately 700 basis points in the direct-to-consumer segment as discussed earlier.

Adjusted SG&A was up $11 million for the quarter versus the comparable spend in the third quarter of 2011, a year-over-year increase of 6%. As a percentage of sales, SG&A decreased to 54.2% versus 54.6% last year, an improvement of 400 basis points. Adjusted EPS, excluding unrealized foreign exchange, was a negative $0.05, $0.04 better than our comparable result last year in spite of a decrease in adjusted EBITDA to $21 million from $23 million in Q3 2011. This results from offsetting decreases in depreciation and interest expense of approximately $6 million.

Flipping to Slide 11, our brand financial summary. This chart shows the breakdown of our adjusted EBITDA on sales by brand along with a view into our corporate overhead component as well as comparable results for the third quarter of 2011. For Lucky Brand and kate spade, adjusted EBITDA improved year-over-year as a result of increases in sales and margin, partially offset by SG&A investments.

Lucky realized positive operating leverage during the quarter, principally as a result of gross margin improvement. Regarding Lucky's expected Q4 performance, you will note a decline versus last year based upon our year-to-date reported adjusted EBITDA of $13 million compared to our guided Lucky Brand range of $32 million to $33 million. This is principally due to differences in the timing of recognizing reserve adjustments and certain corporately-controlled expense items year-over-year.

On a gross margin dollar basis, Lucky is forecasted to increase in the fourth quarter.

You will also note the adjusted EBITDA margin of kate spade is relatively flat in spite of the 36% increase in sales. These results from startup costs associated with kate spade Saturday and the dilutive effect of the Jack Spade brand expansion, which is progressing but has not yet achieved critical mass.

Again, we are focused on better leveraging SG&A while growing these brands in 2013.

Juicy Couture's adjusted EBITDA declined year-over-year with their decrease in sales and margins, while the reported sales decrease of Adelington Design Group, stemming from the transition of the Monet business to an exclusive model with JCPenney resulted in lower adjusted EBITDA versus last year.

Corporate adjusted EBITDA decreased to a negative $15 million for the quarter. As discussed in last quarter's earnings call, this reflects the quarterly phasing of our recent workforce reduction. Corporate costs remain in line, and we reiterate our 2012 corporate overhead target of negative $72 million to negative $70 million.

Now to Slide 12. Some selected balance sheet and cash flow data. Accounts receivable, down 15% to $127 million, primarily reflecting the impact of businesses exited and/or sold in 2011. We remain comfortable overall with the quality of our receivable balance. Inventory is down 4% to $246 million, also showing the impact of the sold and exited brands. In a subsequent slide, we will give you a view on inventory at the brand level.

Next, total net debt was $386 million as compared to $735 million at the end of Q3 2011. This principally results from the utilization of cash proceeds from asset sales during the trailing 12 months.

And finally, CapEx cash spend for the last 12 months was $74 million.

Slide 13. This page shows the progression over the past 5 quarters of our net debt position to $386 million. While our current position reflects the seasonal variance of working capital needs to run the business, we anticipate ending the year with a net debt position in the lower 300s. In spite of the reduction in our 2012 guided adjusted EBITDA range announced on October 1, we're comfortably turning inventory to cash at Juicy, and the availability on our ABL credit facility is on plan.

Now to Slide 14. Slide 14 provides some additional insight into our inventory levels. Total inventory was down 4% to $246 million. At Lucky Brand, inventory levels have decreased year-over-year despite the increase in sales as the team has exercised incredible focus on improving store productivity on leaner inventory.

Juicy's inventory has increased slightly versus third quarter a year ago. As discussed, inventory was too low in domestic Juicy specialty stores in the first half. While challenging margin performance has indicated much-needed improvements in merchandising and allocation, we believe that Juicy's third quarter inventory reflects a more appropriate level for the brand.

Kate spade continues to sensibly invest in inventory to keep pace with their rapid growth.

And finally, on Slide 15, 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 $100 million to $115 million, excluding impact from unrealized foreign currency gains or losses. We also note that the brand forecast adjusted EBITDA range has remained the same, as discussed in our October 1 announcement.

Incorporated within these ranges are fourth quarter direct-to-consumer comps for Juicy in the mid-single digits, Lucky in the mid-single-digits and kate in the mid-to-high 20s.

As Bill noted in his remarks, the DTC comp performance to-date in October is within our guided range. For corporate overhead, as discussed, we are still targeting $72 million to $70 million. Depreciation and amortization, $70 million to $75 million. CapEx is still targeted at approximately $90 million. We expect interest to be approximately $50 million for the year, including approximately $10 million of noncash interest. 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 114 million shares. This includes the weighted average effect of the June 2012 exchange of convertible notes.

Bill, back to you.

William L. McComb

Okay, let's now go ahead and open up the phone lines and we can field some of your questions.

Operator

[Operator Instructions] Your first question comes from the line of Jennifer Black of Jennifer Black & Associates.

Jennifer Black

I have a couple of questions. I wondered if you could talk about the Juicy outlets. Do you have a separate design time or is it just different fabrications? And then I know you stopped shipping full price to outlets, so I wondered what is actually flowing into the outlets. And then lastly, is your target over 50% accessories applicable to the Juicy outlet business? That's my first last question.

William L. McComb

What we said in the last 2 calls is this: Similar to the cadence of what I'll call turnaround patterns that we did, that we took on at kate and then subsequently at Lucky, we called out of that we were just now addressing our whole business model for outlet. First of all, I don't want to confuse you. We've always done a combination of design for outlet in addition to liquidation or deep markdown clearance of goods from our full price stores. We felt, just as we had with it both of the other businesses, that too much of the floor stock was coming from our full price stores. And there are lots of problems with that. Number one, the world knows that a markdown is a markdown is a markdown in any channel. Some of that is fine on the floor. A majority of that is not right. So the idea of our design for outlet product in any channel is that we're offering and providing current trend, current -- when I say current trend, reflecting current marketplace and what we're doing in our retail store: color, print, pattern and similar style and silhouette trends. And we're value-engineering it to be able to offer to consumer their kind of deep discount. But it's essentially theoretically -- it's the same -- it's Juicy. It's the same stuff you'd find in full price. So what we said that we were going to do was increase the amount of that. It does not have a separate design team, and we wouldn't necessarily want it to have a separate design team. It is the brand. It has a united merchandising -- it will have a united merchandising look and feel and footprint. The inefficiency of having our stores pack up and ship goods from full priced out, it was causing 2 things: a, it's expensive to do it; b, it causes a total distortion of the floor staff away from selling, which isn't right; and I guess, c, and more to the point, it was allowing us to not hit the markdown level that we needed to have to flow with the natural sell-through rate of the business. So look, the markdown rate right now is -- it's significant. I mean, we made -- we said in the remarks that October month-to-date comp is in that plus 5 to plus 7 range right now at Juicy. And that's great. But it's there because we are actually making sure that weekly sell-throughs are -- that the math of the weekly sell-throughs are adding up to George's goal of managing to a year-end inventory balance and end-of-season balance that's right on. And if you're packing goods up and shipping them to outlet, honestly, you don't end up necessarily doing that. And so while you may maximize gross margin rate in your specialty channel, it all comes out to the wash anyway in terms of the gross margin rate in outlet.

George M. Carrara

And of course, if you take goods off the floor, you lose some time. So looking forward at outlet, Jennifer, from a merchandising point of view, we plan on increasing broadening the assortment. So you should think about it in that manner. Also on an evolutionary basis, it's not something you can do overnight. So you'll see in spring '13 that starting to happen. And likewise, as I said in my comments, we'll be tightening up the assortment in specialty. So there'll be a convergence of the 2, not all the way to be connected, but certainly outlet needs to be broader and more fashion appropriate, whereas specialty needs to be a bit tighter.

William L. McComb

One other point that -- it's sort of germane to this conversation, it's a bit of a sidebar. One thing that I'm really encouraged by is how high the sell-through rate jumps at first markdown at Juicy. That actually says that the price value needs to be realigned a little bit, but the goods are -- they're actually highly valued by the customer. We didn't always see that in the middle of a turnaround of a brand. On some of the other initiatives and brands that we've turned around here, when we got it wrong, we got it wrong and it didn't even sell well from a sales rate perspective at the third markdown. This is actually -- we're actually seeing very healthy sell-through rates at that first markdown. So that leads George and I to actually feel pretty good about as we value-engineer it right and all of the merchandising needs that we talked about right that the chain will align with the sprockets here.

George M. Carrara

And that also gives us confidence in our outlook in terms of the levers that we have looking forward on the pricing. So we're finding, when we break price at a certain level, we are able to move product out at a very compelling sell-through rate.

William L. McComb

Okay. So that's a good, long answer to your question, Jennifer.

Jennifer Black

Yes, that's a long answer. You didn't answer, though, the target of 50% accessories [indiscernible].

William L. McComb

Oh, yes. No, it absolutely positively applies. That's a brand goal and absolutely. And it's -- the target is actually over 50%.

Jennifer Black

Okay, great. And my last -- my other questions are one, your response to the holiday, one, as far as the new fixturing goes, and then how is your search going for a Chief Merchant at Juicy? That's it.

William L. McComb

Well, I wouldn't say it's a Chief Merchant. We've talked about it as a Co-President, operating partner. It's going just fine. I won't elaborate on something like that on a conference call, but Leann and I are all over that. And what was the other?

George M. Carrara

Regarding new fixturing.

William L. McComb

Oh, look, I think it's best to say we are seeing a comp there that's plus 5 to plus 7. And that's with a markdown cadence that, like I said, is significant as impacted by those gross margins that George mentioned. But the fixtures are great. The fixtures are absolutely helping the term profile. So -- and by the way, again, I'm not going to sit here and parse out the effect of each of these things because they're kind of coming online and they're additive. We've taken the stores that are re-coutured, which are our best stores in terms of their highest traffic. We've given them better fixtures. We've just given them an unbelievable inventory allocation, and we're very happy with how the combination of those 3 or 4 things are impacting and how that differs from the rest of the fleet. So some nice green sprouts there.

Operator

Your next question comes from Mary Gilbert of Imperial Capital.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Just following up on Juicy, I wondered if you could discuss the performance of Juicy's International business, maybe quantify or qualify the significance of that business and the potential there. And then...

William L. McComb

I'm sorry. I thought I did that. We said that in the third quarter, the business was up 19%, and I gave you the sense that it's kind of -- we're seeing that evenly perform across the territories. This business has got a monstrously strong Middle East and Asian business. We're really happy with the Regent Street and Westfield store openings that we have. The London market, which is a direct market for us, is very strong. And Russia is up online in this last year, and it's had a very good start, too. I'm not sure, is that what you're looking for?

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Well, I guess I wanted something more quantified in some way that we can talk about the magnitude of this business.

George M. Carrara

From a magnitude perspective, I think it's fair to say that for the full year, the international footprint is in excess of $100 million or so.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay. And then what about -- can you characterize the profitability [indiscernible]?

William L. McComb

Look, it's a very healthy business so it has a very healthy EBITDA margin. But the problem when you get into something like that is then you have to start tearing up on how well you're allocating your fixed costs? The business, in the apples-to-oranges math that we do when we talk about international, you heard my comments on kate spade, where some of the sales to international affiliates are recorded as wholesale. We have direct territories like the stores in London, and those are retail. So it's apples oranges but in the apple to oranges, on a revenue basis, it's 20% of the business, and that business is up 19%. And what we aren't going to do, which you probably would like us to do, is to break out the profit margin. But we're not doing that.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay. And then when you say $100 million, that's largely sort of a wholesale number, right? So wouldn't that say that the retail number is larger [indiscernible]?

William L. McComb

Yes, it is. But we haven't gone through to actually make apples -- take the oranges and make them apples in terms of making that comparison. There's a whole theory. Sometimes we look at it and say, gosh, if we look at the whole business in terms of what the consumer sees and dollarize it into retail, but it's an inexact math and I know that my accounting people wouldn't want me doing that on a call like this. So I'm not going to stick to that. We look at it as a management tool because it's a big business. But in the same way that we also when we understand the size and power of the brand, we look at grossing up licensing dollars too, to understand that it's a billion-dollar brand at -- in terms of consumer footprint around the world.

George M. Carrara

For the quarter, it's important to point out that Juicy is up both rather significantly in Asia and the Middle East. And even in Europe, where of course, we all are aware of the environment, we're virtually flat for the quarter.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay. That's very helpful. And then also with regard to Juicy, with all the initiatives that you're working on, I'm trying to get an idea of the potential just in 2013. Could we see a year in terms of profitability or EBITDA similar to what we saw in 2011?

William L. McComb

We just -- we'll not make guidance comments for 2013 at a line item or a total basis. Just can't do it. You do the math, you're good at it.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay. And then finally, if you could talk about how the tracksuit business is doing, where that stands. That's always been sort of a core business. Is it up, is it down? How should we think about that?

William L. McComb

Well, here's what I would tell you all. I've had some people say, why don't you guys just make the whole store tracksuit and why don't you just "give in and go there"? The answer is because the consumer isn't there. It -- the tracksuit business is -- it's a core piece of what we have. I think we'll have it forever. There's a wonderful -- it's almost a souvenir kind of icon -- iconic kind of item. But the tracksuit as ready-to-wear has been on secular decline since its peak in 2008. And that's the reason that -- we're not just sitting around saying, gee, let's take the Juicy brand up into the highest categories of contemporary fashion. We're following the customer. We're following the people, the consumer that loves Juicy the most. There's no question, I have said that we were late to the game at keeping the brand culturally relevant by migrating product classifications and assortment mix with where that contemporary fashion girl goes. And so we will covet -- Leann has done some incredible things. I'm looking now at both spring and summer 2013. There she has done some really great things with the cut of the bottoms and the top as well. It's different. She's introduced fashion. There's no question that there's a woman that is buying it and wearing on Saturdays. But as a phenomenon, that has absolutely been going down. And that's the reason that it's important that we make the changes. And there's -- the health of the brand really correlates with how relevant our assortment mix is relative to the changes in that marketplace. We will never walk from it nor do we need to. But I would say that track as a market, as a category, okay, is on decline and has been since 2008. And that said, we have still a disproportionate share of that market, as Pink does at a much lower price point.

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Okay. And then finally, Saturday, can you talk about -- do you have like a separate mini-management team that's overseeing that business? [Indiscernible]

William L. McComb

Well, it's kate spade. It's the company kate spade, which means that Deborah Lloyd and Craig Leavitt are -- they're the top management in that business. But yes, there is an absolutely brilliant team, a brilliant team that's been working on it for 2 years and has been creating this and incubating this. And a call-out point that I'll make is, while I hear the drumbeats loud around "why aren't you leveraging your cost structure more and more and more?" One disclosure that you're seeing this week, Tuesday and Saturday, and now with this discussion, is we've been investing in Saturday and it is a -- you have to have incremental resources on that. Of course, it's leveraging the amazing supply chain and the team that we have there. But yes, there are merchants and designers and even some sourcing people that are dedicated to that, as well as a brilliant head executive that's a General Manager that is working it. And I'm happy to say look, I hear the drumbeats loudly on EBITDA margin expansion. But I will also tell you, we would not be sitting here with this business with the top line profile and growth rate profile that we have had I been much more focused on EBITDA margin expansion 2 years ago, even a year ago, even in 2012. And so I think that we've got the balance right. The beloved Michael Kors, which is an amazing success story, they placed one of the largest bets of all time on real estate and growth. And they didn't focus on their EBITDA margin at this comparable stage. We're focusing on it, but I think the importance of the Saturday initiative is that there are so many growth opportunities and avenues and we want to tap them. And this Saturday initiative is extremely well thought out and well crafted. So that's it, Mary.

Operator

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

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

I just want to dig in a little bit on the EBITDA margin for kate and some of the drivers of that 1 point decline. And just wondering what your expectations are for 2013 or for the next quarter, for 2013 and maybe your goals for longer-term. Secondly, if you can talk about the merchandise breakdown at Lucky and the difference between -- I mean, I'm sorry, at kate spade and the difference between that and the new brand, Saturday. What percentage of apparel versus accessories -- what's the differential between the 2 brands? Also...

William L. McComb

Well, George and I should split these. I want to throw the first comment out, which is, we haven't varied off of our goal. This is a platform, a business platform that will have an EBITDA margin well into the 20s, okay, and even in our total operating margin, in the high teens, low 20s. So keep that in mind. So now, George, why don't you make some comments? We're not going to give guidance on what our EBITDA margin goal is for next year, but why don't you comment on [indiscernible]?

George M. Carrara

Yes. With respect to Q3, Corinna, you could think about the margin deterioration in a way of about approximately 300 or so basis points. And it comes from the 2 factors that I've mentioned, okay, plus...

William L. McComb

Which are the investment in Saturday.

George M. Carrara

That's correct.

William L. McComb

And then explain -- offering the Jack Spade component that you mentioned.

George M. Carrara

Yes, and of course, Jack Spade. Jack Spade is a young business that we're continuing to nurture. So of course, with that, there's a dilutive impact on operating margin, no doubt. Additionally, the other 2 factors that I didn't mention in my remarks were the startup costs associated with China, which is an important investment for us and the transition to a new operating model for kate spade Japan, which Bill talked about and I spoke about as well. Those 3 -- those 4 factors combined represent approximately a 300-basis-point decline for the quarter.

William L. McComb

And on Jack Spade, I think, as a general comment, so that's a line item that has a very high growth rate. We're basically managing it for roughly breakeven from a profit perspective as we -- within the house of kate spade while we develop some level of critical mass. And I wouldn't say -- we clearly aren't there yet with 1 dozen stores. I think next year what Craig's plan is to pull the reins back of expansion. This year, we've added a lot of points of distribution. We're going to let its productivity build. That's a business that has a slow but steady and incredibly impressive build profile. It's a niche business. And so it -- the card file in the database management are what create the productivity profile in a store. And so I think in 2013, you won't see the rate become -- it'll be less dilutive but not quite. It certainly won't be accretive.

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

Right. So maybe you won't press the gap [indiscernible] rolling out more units until 2014?

William L. McComb

That's exactly right. But we're really happy that we've done what we've done with it and it's an important part of what we do. It -- I don't want to make a mistake that it -- and have you think that there's a big infrastructure separate for that. Like Saturday, it leverages the mother ship, but it does have its own dedicated GM and design and merchandising team. And we've taken on the fixed cost of building some stores. They're very productive stores. We're working on the margin on that line item.

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

And could you -- can you circle back to the merchandise breakdown of kate spade versus Saturday?

William L. McComb

It is roughly 1/3 accessories, 1/3 apparel and 1/3 home lifestyle.

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

And how -- and can you remind us what it is for kate spade, the original?

William L. McComb

Yes. Kate is -- I mean, you basically think about it as 70-30, that apparel is right now climbing between 20 and 25 and on its way to a max penetration target of around 30. And again, it's hard to do percentages because the home business is largely licensed for us at kate spade New York. And so you've got the apple-to-oranges phenomenon of doing the pieces of the pie. But we've basically said that apparel will max out in the 25% to 30% range, closer to 30% at kate spade New York, and that accessories is the clear dominant, it's the dominant force there at roughly 60%.

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

Okay. And just my final question is that your product vehicles [ph] for Lucky, you indicated you'd like grow those new initiatives. So I'm wondering if you have a number in mind for where you see that going?

William L. McComb

Well, we do. We call it "the stairway to heaven" internally, and I won't lay out -- because it gets to '13 and '14 guidance. But the words we use are a number over 600, and it really is in that 625 range. That really is the sweet spot. And of course, Dave has done -- and his team, they've done this amazing work on the top 50. You'll remember it from Investor Day and other comments that I've made in between, that Dave's team, when they came in, they're classic and very well-trained retailers. They said that they were going to make their top 50. They were going to do everything to make the top 50, the leaders of the pack, and they've done that and they're way over that range in the top 50. And so now obviously, the work is to cascade down what makes the top 50 work so well in other places. And in some cases, in specialty next year, we're not going to open a lot of specialty doors but we are going to do some relocations into malls, where we're getting out of some dark corners and onto a more mainstream profile. And the mall developers are really coming back to Lucky and appreciating what we're doing and they're asking us for that. So that will actually be a part of the prime there. But that is -- it is imperative 1, 2 and 3 at Lucky, that productivity enhancement. And they've got a lot of ideas of how to do that inside the store. We're very impressed. And I don't know if I said it on the call, but October's month-to-date comp is plus 5.

Operator

Your next question comes from the line of Jessica Schoen of Barclays.

Jessica Schoen - Barclays Capital, Research Division

I was wondering if -- with regard to the international expansion, if you could give some more color on the opportunity you see for Lucky, as well as any ideas about how you plan to further capitalize on the strong trends you're seeing internationally at Juicy?

William L. McComb

Yes. At Lucky Brand, I said this -- what was one of the most remarkable things earlier this year was all the inbound calls that the brand and I began to receive from important and high-quality affiliate partners in markets all around the world, Central and South America, Mexico, China very clearly, the Middle East, these are ones that we're actively working on right now. I said at the beginning of the year that I had a goal that we would open a store for Lucky Brand on Regent Street in London. London is the face to the Middle East and it's the face to Asia, just like Fifth Avenue in New York is. We only haven't done it because we haven't gotten the store that we want at the rent that we want. We're going to stay on that. So running and operating a direct store in London as a flagship, as a window to the world and building through affiliates in literally the markets that I just named, that's priority number 1. I would say overall, from an international perspective, we have a project internally that is being led by the kate spade team, which is to bring direct e-com fulfilled locally on the continent in Europe to the European customer in 2000 -- in the second half of 2013. And we would do that as a platform. All 3 of the brands will go there. And we believe that all 3 of the brands -- we know from 51, from what we're doing online in terms of fulfillment here, that there is a demand profile in Europe for all 3 of the brands. And then with regard to Juicy, probably the next big thing you'll hear us talk about this doubling down in an even bigger away with our partner, ImagineX, for the market in China. There's just tremendous momentum there. The brand has just got such an amazing appeal and we're wanting -- there are things that we can do in China that we might not even try to do here. Product categories that the Juicy name that just makes so much sense in where they may be more crowded and competitive here, but Juicy could be -- it could be a flagship category leader. So I would say that bullets 1, 2 and 3 on international for Juicy are China, China and Europe e-commerce kind of as it goes. And we're working with our partner in Brazil to strengthen that business. Mexico, the business is very good. And so I think that, that pretty much outlines it.

Jessica Schoen - Barclays Capital, Research Division

Okay, great. And then just -- can you comment if you've seen any changes at kate spade in the Wholesale business for the non-apparel versus what you were seeing last quarter? And any color on that.

William L. McComb

No, no change. All good. Green, green.

Operator

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

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

On Lucky, I think you called out that gross' should be up in 4Q. The rate of improvement over the gross has moderated, I think, as you've gotten your inventory levels in check. How do we think about the longer-term opportunity for gross margin at Lucky and how that cadence should play out?

William L. McComb

Well, George, you ought to comment on that. I think that they've -- I think that they're in nosebleed territory, to be honest with you. And I wouldn't want you to think -- what we care about is we scale to 625 to 650 in productivity. Other categories with more dilutive gross margin rates will go to play on it. So the math at $625 or $650 a square foot isn't going to have this exact profile. But there'll be more growth, more units per transaction.

George M. Carrara

More traffic, I think about it the same way. So I think we're at the high end of where we [indiscernible]. Of the actual rate, that's right.

William L. McComb

But the point, what I really respect that what Dave has done -- I mean Dave has done what very few retailers do and he did it on his own, which is to say that the good news is that we are a denim-based business. The bad news is that, that can create -- you can have a lot of inventory dollar in cash locked up into unproductive low-turn parts of the business. And they just have -- they have created such a radar where they are -- what they are investing in inventory is really matching what the customer demand profile looks like.

George M. Carrara

But looking forward, we do expect some additional gross margin expansion. If you look at our year and how gross margin has evolved...

William L. McComb

Yes, it's not over yet.

George M. Carrara

That's exactly right. So you can expect to see that on the go-forward.

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

Got you. While I know you don't want to address '13 guidance, I did want to ask a little bit some of the cost outs. I know that you continue to point to that continued opportunity longer-term, but you've had some, I guess, delays with things like distribution. How do we think about that $70 million to $72 million corporate overhead cost bucket and whether you're still on track to kind of see that step change that you had pointed to initially?

George M. Carrara

So the way I think about that, putting aside the transitional issues related to our Ohio distribution center, we're still on target to be in the low 60s for next year.

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

Got you. And final question, on kate spade Saturdays, I know that you had made the comment that it has more of a accessible price point. Will there be a different margin structure for that business and should you see any negative impact if that business is successful?

William L. McComb

Well, yes. Definitely. It's a different model. It's a faster turn. It's a slightly lower margin. It goes in line with the market structure. And -- but the good news is we think this is largely incremental. I mean, I've seen all the product. I can tell you that the overlap between the 2 brands -- I don't see this as a cannibalizing impact. And so this is additive. And it's a really -- it taps a great customer and a great market and it's complementary. But so, yes -- but you would see it as a high-growth opportunity. That said, the twist is, the twist here is that this -- we are not going to build out traditional store fleets for this. That's the twist. So that in Japan, the biggest phenomenon going on in the world of distribution in Japan are these department store -- it's not what we used to call shop-in-shops. They're these very small square footage, 400-square foot pads that retailers directly control. And they don't have big walls. And they're low fixed cost to operate. So in Japan, it makes a ton of sense because of what they call these fashion centers. It makes a ton of sense for us to have a physical footprint for the brand there. And while we will have a flagship strategy here for Saturday, this is going to be largely an e-commerce phenomenon. And so you have a channel margin advantage with that. But I wouldn't get hung up yet on is this going to dilute kate spade? This is a big good guy for this brand all over the world. And the important thing is, it's really -- I said it's conceived as a global concept. If -- more and more and more, I'm pushing these people to not do and think about everything from the view of New York and the malls in America. And when you go around the world and you look at Brazil and China and Japan, you can't help but, apart from what will be an amazing e-commerce opportunity, you can't help but see the opportunity for what you're seeing in Japan, these small square footage partnered via department store spaces for items like this. And the need for that accessible price point is more dramatic overseas than it is here. Wear your international hat when you're thinking about Saturday.

Operator

Your next question comes from Kate McShane of Citi Research.

Kate McShane - Citigroup Inc, Research Division

I just wondered if you could walk us through why this is the right time to be taking over the Japan JV with kate spade and what criteria you've looked at to make this decision. And will this still apply to your other international JVs going forward?

William L. McComb

Excellent question. It's what I'll call a transactional legal nuance. As many of our arrangements have, there were change of control provisions built in. Our partner, Sanyi [ph], merged with another company in Japan which triggered the change of control option, call option. And in looking at it, the character of the business, the size of the business, the maturity of it, the quality of the team and the growth prospects of the market, combined with this event that was third-party triggered, made us say this is a major value-creating opportunity for us. Add to the fact that there's a whole management team over there. This isn't -- we don't have to send red fire trucks and coast guard helicopters to make this happen. It -- we can -- overnight, we have a team that becomes ours. And to be honest with you, what a wonderful thing to have such as a professional management team in the Asia Pac Rim that we've worked so closely with that already has been so integrated boom over there. It helps us with our whole global operation. So it really is an incredible value-creating opportunity. But in all honesty, it was triggered by a call option which came available due to third-party change of control.

Kate McShane - Citigroup Inc, Research Division

Okay. That's helpful. And you had mentioned in your Lucky comments, Bill, that accessories is about 10% of Lucky's business at this time. And could you just remind us what accessory categories you're under-penetrated in? And with regards to categories you want to get into, like -- or extend further, like footwear, will that be licensed or something that FNP does itself?

William L. McComb

We have a footwear partnership with Vince Camuto who built the business in the last 3 years and it's over -- it's already over -- it's a $50 million retail business plus. And so -- I mean that's a huge barometer for us of success. And the feedback that we're getting from the customer, it is bringing people into the brand. And that's largely incremental distribution. It's in -- it's got a broad department store footprint. So we're really excited about it. We see that growing and growing and growing. And I think Vince Camuto's group would tell you they absolutely love the brand and see a lot of power in it. Jewelry in-store is probably our -- jewelry and belts are the -- yes, believe it or not, belts, are our biggest 2 in-store categories and we control those on our own. We do them on our own. On this call earlier, I made the remarks that -- I announced that we've entered into license arrangement for handbags. We had a good handbag business in 2007. And it kind of went away when that marketplace, the tier that we were in, in department stores collapsed pricing-wise in 2009 with the economic bubble. And we didn't really get that position back. This isn't a brand that will have 50% penetration. It's a denim-based brand. We're going to see lots and lots of growth in tops. But accessories do play an important role and as Lucky gets hipper and cooler as an actual badge brand, the opportunity in accessories will continue to grow as well as other licensed categories. So David is going to be bringing the handbags back into the store next year but I would say footwear, jewelry, belts, handbags are the bread-and-butter for the accessories.

Operator

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

Casey Flavin

Question for you, just back on Juicy, quickly. I realized you guys are fairly limited in terms of what you can [indiscernible]. It sounds like your initial markdown has actually sold through quite well.

William L. McComb

Yes, it has.

Casey Flavin

Can you just give some perspective on how much of this you expect to able to tackle in terms of the inventory and sort of the realignment there? How much do you expect to tackle by the end of the year and versus the first half? And then how much more of that do you expect to basically take care of in the very early part of first half?

William L. McComb

Well, it would be a mistake for you to conclude that the inventory is actually going to be a problem. I mean what you're seeing and hearing is an incredibly proactive and courageous management of markdown cadence to create flow. Flow is our friend, goods coming into the store through the back door, goods going out the front door. I look at it as a marketer. I'll give you my ten cents as a marketer. There is -- the number one thing happening in the Juicy store right now, if you talked to our associates or just go and stand, is customers say, "Wow. You're selling this? This is Juicy?" And there's whole brand reconsideration thing going on. In some ways, I look at the markdown dollars as marketing and promotion. It's inducing trial. It's bringing her in and it's getting the product in her hands. And the quality is great, the fit is great. The fabrications are -- they're incredible. And so we're actually really proud of these goods. This is not something that we have a brown paper bag on our head on. And so while I want the gross margin to get there, we're retraining the customer about the brand. And to that sense, this continuous flow and this inventory management, point number 1 from a balance sheet cash management perspective, George is all over this. And so what you see happening is, yes, from -- our merchants may say, "Oh my God, are we training the consumer to too much sale?" No. I don't -- I'm not worried about that. I -- the important thing is to flow it and to manage through, to manage -- each season, ought to -- it ought to clear itself and we shouldn't have an inventory hangover as we go into a new season. George, what are your thoughts?

George M. Carrara

Some points to add. You'll recall that last -- well, this year, in the first quarter, we entered the season too light on inventory. So looking forward, I think you could expect, Casey, that the mix of inventory sold in the fourth quarter versus the first quarter will be on a business-as-usual basis. So during the first quarter, we'll be getting rid of -- we'll be clearing through the normal fall and holiday product and then converting the floor over. So nothing -- no concerns in the way of inventory. We're being very proactive. We have weekly targets established, and we're breaking price as necessary to comply with those targets.

Casey Flavin

Okay. That's helpful perspective. So turning over to -- on the kate side of the business and a couple of your sort of newer initiatives, if you will. I guess just with kate Saturday -- and it's obviously more of a global concept. Curious, Bill, as you look at the business and this concept over the next 3 to 5 years, what -- it sounds like very clearly it's not going to be a physical presence here in the States; perhaps at wholesale, but I'll let you speak to that. But what do you think that, of the overall kate enterprise, Saturday may eventually represent as we look out over several years?

William L. McComb

That would be something that we'll talk to even if it needs to be qualitatively spoken to at an Investor Day that, I think, we're looking to do for kate spade. I think George and Bob and I are talking about getting investors together sometime in the first half of next year to do a deep dive on the kate business. And I could give you maybe a little more color there. I mean, we clearly have a strategic plan and a long-range plan financially in front of us, but I wouldn't want to speak to it right now. We're going to -- it's going to develop, it's going to be very interesting. It is in the wholesale opportunity, you should know. It's in -- it'll be a direct-to-consumer business only North America. And when we think about it in those department stores in Japan and Brazil, those are company-controlled retail spaces in fashion centers. So it's a DTC concept.

Casey Flavin

Got it. And then just lastly, and then this might be similar to a sort of answer. But on the Jack business, it sounds like you guys are going to be a little bit more conservative in terms of the store growth this next year. But overall, what is the sort of critical mass that you speak to from a store footprint perspective that you think might get that brand profitable?

William L. McComb

Well, look, it's not just the direct stores or the online business. It's also got a wholesale business, and that's a growing component of it, more so outside the United States. Look at and enjoy the really nice, very prestige wholesale presence here in the United States. I wouldn't put an order of magnitude on it. I mean, look, the larger it gets, the larger the order quantities are, the better the margins and possibly the sharper the price points on, say, the apparel side. But I wouldn't model it out here other than just to say, as George said, that there's -- we wanted to call out that, that's an investment line item. We're not -- this isn't something that we're pouring negative dollars into, but it's also not something that's contributing at the rate of kate spade in New York. George, did you want to...

George M. Carrara

Yes, we see it in the intermediate term that we'll begin getting operating leverage from Jack.

Operator

Your final question comes from Carla Casella of JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

I had a question on -- you had talked about this on last update call, about consumers showing some price resistance. And you were speaking specifically about Juicy, but I'm wondering what you're seeing right now in terms of any price resistance across any of your brands, given that the environment's been a bit choppy.

William L. McComb

We're not seeing it. I mean, unequivocally that was an isolated comment about the new Juicy and it wasn't even item-specific. It was as it relates to the whole line and the repositioning.

George M. Carrara

Agree. That gross margin rates at both kate and Lucky continue to outperform.

William L. McComb

Okay. Thank you, all, very much for dialing in and we'll be back at the end of the year. Take care.

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 Q3 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts