Kenneth Cole Loses Its Shine

Kenneth Cole's (NYSE: KCP  ) second-quarter results didn't make investors happy, and the company's latest figures weren't exactly a crowd-pleaser, either.

Excluding the $7 million benefit from a shift in orders last year, net sales declined 7.3% from the same period a year ago. The biggest hit came from its wholesale business, which dropped 12.5%. The consumer direct business came out flat overall, and there was a 1% drop in same-store sales at retail stores. Rounding out its revenue streams, there was a 2.2% increase in licensing.

CEO Kenneth Cole was none too pleased with the results, saying in the company's quarterly earnings conference call: "I assure you we are not satisfied, and we need to do much better." He went on to illuminate why there is reason for optimism.

One opportunity is expanding the company's international presence. Currently, international royalty revenue represents only 3% of the company's net income; this segment increased 22% in the latest period. We can expect to see Kenneth Cole explore this area further.

The company is also unveiling a new men's sportswear line that is getting good feedback so far. "I believe this will not only be a strong growth initiative, but also a very meaningful branding opportunity," Cole said.

The area where I see the greatest opportunity is in retail. We need look no further than the recent turnaround successes of Guess? (NYSE: GES  ) and Polo Ralph Lauren (NYSE: RL  ) to see how important a strong retail concept can be in driving top- and bottom-line growth. For that reason, I was excited to hear Cole reveal that a new prototype for a retail concept will be unveiled in the first quarter of 2008.

Finally, the company's online business is another growth opportunity. Based on industry standards, Cole believes its Internet enterprise should be at least three times more productive than it is now. Internet sales were up 29% in the quarter.

Kenneth Cole has obvious opportunities, but in my opinion, the real catalyst for growth will kick in when it begins rolling out its newest retail concept in 2008. Assuming consumers buy into the new concept, its retail business may be what unlocks value for all of its ventures.

I don't see any reason to rush into Kenneth Cole's stock at this time, but it does warrant further investigation, particularly in early 2008, when the new prototype stores are open for business.

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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.


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