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Why Juicy Couture Is Down On Its Luck

Andrew Marder
August 12, 2013

Let's be up front about the most important fact here: Fifth & Pacific's (NYSE: FNP) Juicy Couture brand hasn't found the bottom yet. Sales are still falling and margins are compressing, and the rate of decline doesn't seem to be slowing. That could mean that the brand is still a ways away from moving back in the right direction. Management is optimistic, but there's no reason investors should be giddy about this failing brand.

Sales continue to slide
Last week, Fifth & Pacific reported its second-quarter earnings and beat out market expectations. Overall, the company saw a 13.4% year-over-year increase in revenue, although its loss per share deepened to $0.12. The high points all came from Kate Spade and, to a lesser extent, Lucky Brand jeans. Kate had a 65% increase in total sales and a 27% increase in comparable sales, while Lucky had a 2% increase in comparable sales. Juicy's comparable sales fell 4% compared to last year.

That was an increase in the rate of decline, and in the first quarter of this year and the last of fiscal 2012, Juicy's comparable sales fell at a rate of just 2%, year over year. Management said that this fall was consistent with its expectations, and that the rate of decline in gross margin that the brand experienced was moderating.

Juicy's results did show some strength, as apparel sales were up slightly versus the previous year. The problem was that accessory sales more than offset apparel strength. The result of the up-and-down was that the company felt compelled to put a timeline in place. It said that by the fourth quarter, earnings before tax should show a noticeable improvement to the same period in 2012.

Walls yet to be climbed
Between now and then, Juicy still has a lot of work to do. The brand had a 442-basis-point drop in gross margin this quarter, but that was better than the 1,000-basis-point decline that the brand experienced in the first quarter. The challenge for Juicy isn't in the back office. Fifth & Pacific has strong inventory management, and a leadership team with plenty of retail experience. The real test is going to come from Juicy's ability to take on its competitors and expand its lineup.

Distribution is also going to be difficult, and one of Juicy's main partners has been J.C. Penney (NYSE: JCP). In the first quarter, management was excited about the change in leadership at the department store, hoping that the return of Mike Ullman might signal better weather ahead. In last week's call, Fifth & Pacific's CEO reiterated the hope that things would continue to revert to their previous form at J.C. Penney. He said, "[The] old recipe for success is back in place, maybe with a couple of improvements and some new flair."

That hasn't yet come through to the company's sales, though, and last quarter J.C. Penney announced a 16.6% drop in comparable sales, year over year.  The comment from Fifth & Pacific also came before the market had gotten wind of Bill Ackman's most recent push for another new CEO -- because his last pick worked out so well.

In addition to working out a better way of getting its products into the hands of customers, Juicy also needs to figure out what customers it really wants to have. The brand is developing a line called Juicy Sport for launch in 2014. The company hopes that the new product will be able to compete with lululemon athletica (NASDAQ: LULU).

To me, it seems like a crowded space to try to get into. Lululemon is still the leader in yogawear, but companies like Gap, Nike, and Under Armour are all pushing for a piece of the global pie. Even so, Lululemon has managed to grow comparable sales at a good clip, and last quarter they rose 7% year over year.<