3 Specialty Retailers for 3 Different Portfolios

Fifth & Pacific Companies (NYSE: KATE  ) has rewarded shareholders quite handsomely with great gains on the stock market. In the past twelve months, the company's share price gained 160%, beating peers Coach (NYSE: COH  ) and Michael Kors (NYSE: KORS  ) . During the same time frame, Michael Kors jumped nearly 64%, while Coach had a sluggish share price performance, as it was up only 3.60%. Let's take a closer look to determine the attractiveness of Fifth & Pacific at its current trading price.

Ongoing turnaround at Fifth & Pacific to improve operating performance
Fifth & Pacific is the owner of retail-based premium brands Juicy Couture, Kate Spade, and Lucky Brand. Most of the company's adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, of $95 million or 54.2% of total adjusted EBITDA in 2012 came from the Kate Spade brand. In the past three years, the Kate Spade brand has enjoyed significant EBITDA growth. The Juicy Couture brand has experienced the opposite trend as it saw its EBITDA fall from $109 million in 2010 to only $24.5 million in 2012. 

At first, the company intended to turn around the Juicy Couture brand, but it was not very successful. Thus, it decided to sell the intellectual property of the Juicy Couture brand to Authentic Brands Group for $195 million. As a part of the deal, the company also entered a short-term license agreement with Authentic Brands Group to pay a $10 million guaranteed minimum royalty to Authentic Brands Group. 

Recently, Fifth & Pacific also divested Lucky Brand Jeans to private-equity firm Leonard Green & Partners for around $225 million, which represents over 7 times Lucky Brand's EBITDA. The payment will be around $140 million at closing, and $85 million to be paid in the form of three-year seller notes.  After this deal, Fifth & Pacific has become a mono-brand company, and it will spend all of its resources and efforts to grow its Kate Spade brand.

The decision to focus on the fast-growing Kate Spade brand is a good choice. In the third quarter, the brand enjoyed 76% sales growth as sales rose to $180 million, which includes $25 million in sales from Kate Spade Japan. Both comps for retail stores and direct-to-consumer sales experienced double-digit growth of 22% and 31%, respectively. 

Michael Kors' and Coach's growth initiatives
While Fifth & Pacific's stock price has been driven by its ongoing brand restructuring and business turnaround, Michael Kors' performance has been led by the double-digit growth of its operating results. In the second quarter of fiscal 2014, Michael Kors delivered 39% revenue growth as revenue rose to $740 million, while operating income increased by 40% to $221 million.

Michael Kors is expected to continue its high growth in the future because of its six key growth initiatives, which include expanding its retail footprint in North America, converting department store locations into branded shop-in-shops, maintaining superb growth in Europe, developing its business in Japan, and continuing to expand its retail presence in other areas of the Far East through regional licenses. 

Michael Kors grew its North American comparable-store sales by 21%, but Coach had a sluggish operating performance in this region. Looking forward, Coach targets Europe and Asia as its main sources of future growth. Coach expects to open around 70 wholesale stores and 10 retail stores in Europe during the current fiscal year. In Asia, Coach has focused on China. Coach estimates that its China revenue could reach $530 million by 2014, mainly due to double-digit comparable-store sales growth. 

My Foolish take
In the currently challenging retail environment, Michael Kors can be considered a star because of its extremely high double-digit growth. Coach could not compete with Michael Kors in the North American market, so it should really focus on the huge and growing Chinese market. Fifth & Pacific, on the other hand, can deliver a lot of value to its shareholders by spending all of its available resources on growing its Kate Spade brand.

While Fifth & Pacific could be a good turnaround stock, Michael Kors could fit well into fast-growth investors' portfolios. Among the three, Coach is the only stock that income investors will love with its juicy dividend yield of 2.40% and conservative payout ratio at 35%. 

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