Kenneth Cole Productions (NYSE:KCP) is still plugging away at changing its branding and selling strategy, but things haven't gone exactly as planned. On top of the hiccups in the new selling strategy, the company encountered a distribution problem in the first quarter. But I'm getting ahead of myself.
The Fool by Numbers for Kenneth Cole Productions' first quarter ran last Friday, and the numbers are dismal. The only metrics that trended positively were the company's cash balance and some of its working capital items (accounts receivable and accounts payable). The company attributed its sales miss -- and in turn, its inventory and earnings miss -- to distribution problems with a new third-party warehouse. These problems are now resolved, and the second quarter should reflect the sales and earnings that were missing from the first quarter. The company doesn't expect any further hiccups.
However, things aren't yet going smoothly at Kenneth Cole. Its strategy to position its Reaction brand as the default brand for department stores in the Federated Department Stores (NYSE:FD) chain, and its Kenneth Cole New York brand as a higher-tier brand in its own stores and high-end department stores such as Nordstrom (NYSE:JWN), has hit some snags. Based on what the company had to say on its conference call, the Reaction part is going well, but the company believes it went a little too far, a little too fast, with price hikes for Kenneth Cole New York.
The strategy has created two different price points for the two brands, but left a hole in the middle. Taking a quick glance at the company's men's offerings, I was able to find Reaction shoes in the $50-to-$120 range and Kenneth Cole New York shoes from $160 to $250, but most of those shoes were $185 or more. The company's near-term plan to fill the gap is to roll out a few new Reaction models priced at $100 to $150 in its own stores. This goes against the original strategy of removing the Reaction brand from the main store, but given that customers aren't immediately responding to the higher price points of the Kenneth Cole New York brand, I think it makes sense to give customers what they're looking for, then continue trying to gradually shift them up the ladder.
Overall, I still like the company's strategy of positioning the Kenneth Cole New York brand as something to aspire to, as Coach (NYSE:COH) and Tiffany (NYSE:TIF) have done. Judging by the pricing Steven Madden (NASDAQ:SHOO) has for shoes on its website, it's positioned more as a competitor to the Reaction brand than the Kenneth Cole New York brand. It does look like it will take a little bit of patience for Kenneth Cole Productions to get everything sorted out, but that's not such a big deal, with the company's shares yielding 2.8% and priced for fairly low levels of growth.
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Nathan Parmelee owns shares in Kenneth Cole Productions, but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
