Retailer Fifth & Pacific (KATE) has finally shed Lucky Brands, selling it to private equity firm Leonard Green & Partners for $225 million. This comes just months after losing dead weight Juicy Couture brand for $195 million cash to Authentic Brands Group. High flying, high-end Kate Spade is now the company's only major brand.  

With a newly sleek and chic Fifth & Pacific flush with cash, is it true you can never be too rich or too thin? Has all the good news been baked into this low-fat stock?

Before and after
Starting in 2006, CEO William McComb took a bloated Fifth & Pacific on a brand diet and shrunk it from 46 brands to three. Those are Kate Spade, comprising the namesake brand, Saturday, a tier-two Kate Spade line like Michael Kors' inexpensive line Michael, and Jack Spade menswear. McComb said then,"If any one of these three brands goes the way of Coach, we will have a win for our shareholders for decades." That winner has emerged in Kate Spade.

The second division is legacy Adelington Design Group, which has exclusive vendor relationships with J.C. Penney for Monet and Liz Claiborne jewelry. Adelington also licenses the Liz Claiborne New York brand to QVC. 

The Lucky and Juicy sales free the company to focus on Kate Spade. Kate Spade competes against Michael Kors Holdings (CPRI -3.04%), Polo Ralph Lauren, and Coach (TPR 1.50%). 

Fifth & Pacific is leaner, but still has a stubborn "five pounds" that it could lose. Adelington Design Group has been a drag on earnings with first half net sales of only $27.5 million, down 29.4% year over year. Meanwhile, Kate Spade's first half net sales rose an astounding 64.3% year over year to $307.8 million.

From makeover to takeover?
With only its New York chic Kate Spade lifestyle brand, the company's new-found allure is tempting as a takeover. Even before the company sloughed off Lucky Brand there was speculation the company is attractive to private equity or a rival. Wedbush analyst Corinna Freedman told Bloomberg, "There's a large swath of potential suitors."

Interestingly, most of the speculation centers around Coach. Coach could certainly use the boost as its stock has stalled with North American sales numbers flat to down. This would allow Coach to buy the growth that it desperately needs. If not, Coach risks losing market share as Kate Spade is much further along on ready to wear and menswear, both areas that Coach is just now entering.

All dressed up and everywhere to go!
Fifth & Pacific has grand plans for Kate Spade. It plans to open 130-170 more full price stores, including five to 10 flagships by 2016. Just as its rivals have strategic outlets (Coach with 189, Ralph Lauren with 143, and Michael Kors with 77 to Kate Spade's 31), the company plans to open another 50-60 outlets by 2016. It also  plans to expand its Saturday line. Saturday attracts a younger, digitally savvy customer, said CEO McComb.

Jack Spade menswear will also get the attention it deserves. Jack Spade is an independently-run subsidiary of Fifth & Pacific with 10 brick-and-mortar stores in the U.S. located in high-end shopping districts. It also has an e-commerce site and wholesale customers that include fine department stores like Nordstrom and 197 other specialty shops.

While struggling Mens Wearhouse and Jos. A. Bank decide who buys who, Jack Spade can take up the slack.  McComb said he believes that Jack Spade "can be a $100 million mens business with very high margins."    

Too rich a multiple and too thin a margin?
Fifth & Pacific seems expensive, with a forward earnings multiple at 76 and an EV/EBITDA at 72, but analysts predict an astounding 950% EPS growth over the next year. 

The company's thin trailing net profit margin of -3.30% and several quarters of negative EPS must be noted, but with Juicy and Lucky gone the EPS should soar. Factor in the rapid expansion of the Kate Spade brands into Japan and China, and analysts may be entirely right.

Compared to Michael Kors with its forward P/E of 23.71, Fifth & Pacific is pricey. Michael Kors also has no debt and enjoys a high trailing net profit margin of 19.90%. Since Michael Kors' IPO in 2011, the company has surprised the Street time and again with double digit beats. .

Pretty as a picture
Fifth & Pacific has been fashion forward and tech savvy with its Saturday and Kate Spade brands. In June, Saturday partnered with eBay for touch-screen shoppable picture windows in Manhattan. McComb said, "We created and pioneered the concept of an inventory-less, staff-less store. It was very cool."

Source: Fifth & Pacific

E-commerce has been a strong point for Kate Spade, growing 50% in 2012. Omni-channel is strong, too; a Kate Spade brick-and-mortar associate, cradling an iPad, can access the entire line of inventory and send customers home happy with free shipping included. This year the company has a "shoppable"  holiday video on its Kate Spade website. Shoppers can buy anything Kate Spade features in the video (except for the cat). The video also features a shopping bar at the bottom for viewers who don't want to scroll through the entire video.

Source: http://www.fifthandpacific.com/web/guest/video-library#

Rumble or tumble?
From 2006 to the present, Fifth & Pacific has certainly come a long way. It is more than ready to take on Coach or Michael Kors. More stores, its omni-channel and tech innovations, and a truly hot brand are the reasons that Fifth & Pacific is a beautiful buy for the long term.