After a Juicy Sell, Is Fifth & Pacific Worth More?

Anybody following Fifth & Pacific (NYSE: KATE  ) knows the stock trades based on the prospects of the fast-growing Kate Spade brand. Not surprisingly, the company recently unloaded the Juicy Couture brand to focus on further growing Kate Spade. The deal was for what appears to be a sizable discount, and Lucky Brands could be next. Will this streamlining of Fifth & Pacific into solely Kate Spade provide more value, or did management sell Juicy at a pittance to the detriment of long-term shareholders?

Back in 2012, the three brands had roughly equal sales, but the success of Kate Spade offered greater potential. Also, the recent success and valuation of Michael Kors (NYSE: KORS  ) and the past success of Coach (NYSE: COH  ) encouraged a focus on Kate Spade. At the same time, though, both Juicy Couture and Lucky Brands provided the potential for major turnarounds. Unfortunately, as 2013 has progressed, the secondary brands haven't developed back into winners, while Kate Spade continues to explode. In the latest quarter, Kate Spade generated $167 million in sales, far outpacing the $109 million of the second biggest brand, Lucky.

Even more important to the story was the lack of capital invested into Kate Spade over the past few years. By unloading the other brands for cash, Fifth & Pacific will suddenly have the cash to invest in the fast-growing brand.

Juicy deal details
In general, details on the sale of Juicy Couture were limited. In early October, Fifth & Pacific agreed to sell the intellectual property of Juicy Couture to Authentic Brands Group, or ABG, for $195 million in cash. The company also entered into a short-term licensing deal in order to continue selling inventory at existing stores for the holiday season and into 2014. Considering the company only sold the intellectual property and not the retail store operations, Fifth & Pacific must work with ABG to take over the stores and other divisions to minimize costs for shutting down the operations.

The ultimate costs to shut down Juicy will determine whether this deal actually helps shareholders. The reasons the deal became necessary were the continued weak results, highlighted by further EBITDA losses in the second quarter that were worse than the year before. Net sales declined 10.7% compared to last year, to $94 million. This sales drop drove the EBITDA loss to $4 million from a positive $3 million last year. The brand has 125 stores that need to end up in other arms, or Fifth & Pacific is going to be hit with a ton of charges.

Michael Kors impact
The rapid rise of Michael Kors to over $75 (following a successful IPO and initial trading around $25) naturally draws a ton of excitement around Kate Spade. Both brands focus heavily on bags and totes for the high-end, sophisticated woman with disposable income. Kors trades at nearly five times current sales, which is probably a key to dumping Juicy at all costs.

For the quarter ended in June, both Michael Kors and Kate Spade had comp sales increase 27%. Michael Kors reported revenue of $640 million, or roughly four times the Kate Spade sales. Michael Kors operated 328 stores at the end of June, and Kate Spade only had 124 stores.

While the comp sales for both retailers appear unsustainable, a good part of the gains can be traced to the weakness at Coach. The struggles at Coach appear to be a combination of boredom with the brand and a desire for fresh options. Analysts expect the luxury brand to show declining revenue for the holiday period. The general weakness in Coach has led Michael Kors to a slightly higher valuation, even though Coach still generates annual revenue of $5 billion, or $2 billion more than Michael Kors.

Capital needs
After huge store growth in the second quarter, Kate Spade still sits with half the square footage of the two brands Fifth & Pacific is attempting to unload. This is not very ideal, considering Kate Spade generates nearly double the revenue per square foot. At $1,167 in sales per square foot, it easily tops Juicy Couture's $647 per square foot.

The incredible part about the Kate Spade brand is that, excluding the Japan stores, the brand only had 44 specialty stores and 29 outlets at the end of Q2 2012. The company has aggressively added 22 specialty stores, 13 outlet stores and seven concessions, plus the Japan operations over the last 12 months. The average retail square footage increased 55% in the last year, yet the total global footprint is only 97 specialty retail stores, 42 outlet stores and 39 concessions (mostly in Japan).

Bottom line
At a valuation of nearly $3.4 billion, Fifth & Pacific is close to fairly valued, considering the lack of value obtained for Juicy Couture. Lucky Brands should garner a higher valuation, but at this point, the combined deals will hardly pay down the $400 million in outstanding debt. Based on the comparison to Michael Kors, Kate Spade as a stand-alone is probably fairly valued. But if the brand continues growing at 50% rates, the stock has plenty of upside for investors.

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