Just last week, I said that Fifth & Pacific (KATE) was a hold because of its inability to get its Juicy Couture line working correctly. I was also worried that its Lucky Brand Jeans line wasn't living up to its potential. As the company reported yesterday in its fourth-quarter earnings release, that's still largely the case. While investors lucked out on Fifth & Pacific's results, which beat expectations, they didn't show the signs of improvement that serious long-term shareholders were looking for.
In particular, the company still hasn't figured out how to let its winners run, while it fixes its slackers. It seems management just can't multitask effectively. Here's a rundown of the winners, the losers, and what the results mean for the next year at Fifth & Pacific.
Kate Spade soars
The company's strongest brand continued its sprint up the charts, with the Kate Spade line increasing revenue by 27%. That puts the year-end position for the brand up to more than $460 million, a 47% increase from the previous year. Kate Spade has benefited from an increase in locations over 2012, rising from about 80 to nearly 100 locations. The management team at Fifth & Pacific has been eager to grow the Kate Spade brand, and new stores are already in the works. In addition to those locations, the company is working on launching its second-tier Kate Spade offering, Kate Spade Saturday, aimed at up-and-coming fashion consumers, who have the desire to wear high-end brands but have limited capital.
Kate Spade is the clear winner at Fifth & Pacific, and while the company hasn't been able to re-create the success of the brand across all its lines, it's still off to a good start. Right now, Kate Spade is the reason to invest in Fifth & Pacific. If the company can turn the other brands around, or just break even a bit more consistently, Kate Spade can carry the weight of the whole thing. Watch for most of the investment for 2013 to be pumped into this brand, and for that investment to pay off.
Juicy Couture drags again
If Kate Spade is the company's MVP, Juicy Couture is its Mark Sanchez. Juicy was a fantastic brand a while back, but then it got old and dull. In a lot of ways, it reminds me of the problems that Deckers Outdoor has had with Uggs: Fashion changes even if brands don't. Juicy dropped sales by 2% last quarter, which should put the year-end decline at 6%. That fall comes on the heels of a 6.4% drop in 2011. In short, Juicy just can't get it together.
The problem is one of marketing and merchandising. Throughout 2012, Fifth & Pacific reiterated the poor position that Juicy's inventory management was in. That meant that the company missed out on sales because of lack a lack of product on the shelves in stores. In addition, Juicy is fighting the perception that it's the place you go to get those tracksuits and nothing else. Management has been working hard to address that problem, but it still sees that the brand is lagging behind in accessories and handbags, where most companies work to build their brand and presence.
From my point of view, the problem with Fifth & Pacific is that it's been working on these issues for at least three quarters now, with no end in sight. While there was a slight uptick in sales last spring, that increase wasn't sustained. To me that says "fluke," not "strategy." Juicy Couture desperately needs a strategy.
The 2013 outlook
Even with the poor results, Fifth & Pacific's stock price reaped an 11.5% gain yesterday. That alone should tell you how low expectations were. But the company is eternally hopeful, and its outlook for 2013 is no different. Some of that is well founded, and investors in other high-end fashion designers have reaped rewards. Michael Kors (CPRI -2.25%) had a stunning 2012, and its year-end announcement in February is undoubtedly going to add to its great run. Comparable sales last quarter were up 45%, with revenue up 74%.
Gap (GPS -0.87%) has also recently jumped in the game, acquiring Intermix, a high-end chain boutique that expands Gap's product range into thousand-dollar-item territory. That could be a boon for the company, which has been on a roll for the past 18 months or so. Fifth & Pacific was already up against Gap in the denim world, and now it has one more reason to keep a close eye on the yuppie retailer.
When it comes down to it, I'm reiterating my hold position for Fifth & Pacific. I think that there's plenty here to get excited about, but the argument for getting in now isn't compelling enough to me. I'd much rather put my cash behind Gap, which has a clear strategy and a fair valuation. While Kors also has a strategy, it's very, very expensive -- P/E-of-43 expensive. In summary, there's no reason to bail out on Fifth & Pacific, but management has yet to convince me that there's reason to buy in.
