For Fifth & Pacific (KATE), 2013 was a year of slimming down. This clothing designer signed contracts to sell off both the Juicy Couture brand and Lucky Brand jeans, which leaves the company with Kate Spade as its primary brand going forward. Kate Spade's known for designer handbags, so its lines compete with those from Coach (TPR -1.60%) and Michael Kors (CPRI -1.67%). The performance of Michael Kors shows that this market sector offers huge potential, although Fifth & Pacific will definitely face some tough competition in 2014.

Affordable luxury
These fashion companies sell products that serve as status symbols at a time when many clothing sellers have been posting weak results. Shoppers still want fancy handbags, but they also want good deals. Like Michael Kors, Kate Spade offers shoppers an upscale brand at a lower price point than what other luxury companies demand. This pricing strategy has worked well for both companies, and it also helps explain why Coach has been focusing on its outlet stores.

Recent performance
Fifth & Pacific's third-quarter results include the sales figures for Juicy Couture and Lucky Brand, which dragged down overall results for the fashion company. In total, Fifth & Pacific reported 18.1% quarter-over-quarter revenue growth. This is still a very respectable growth rate for the owner of Kate Spade, as the company did much better than Coach even if it couldn't catch up to Michael Kors. For comparison, the figures from Coach and Michael Kors were negative 0.9% and 38.9%, respectively. 

Break down Fifth & Pacific's results by brand, however, and a very different picture emerges. Juicy Couture's total sales actually fell by 9.1%, while Lucky Brand turned in a smaller gain of 7.3%. Both of these figures were substantially lower than Fifth & Pacific's overall sales growth rate. On the other hand, the fashion company's main brand, Kate Spade, posted total growth of 76.4%. Note that Kate Spade Japan contributed to this result, and a comparison that doesn't include this operation would show sales rising by 52%. 

Looking forward
Whether or not Kate Spade Japan is included, Kate Spade itself actually looks like it's growing faster than even Michael Kors at the moment. Without Juicy Couture and Lucky Brand holding the company back, it could start posting some very impressive growth numbers. Fifth & Pacific still owns the very weak Adelington Design Group segment, but with $13 million in sales, this segment is tiny in comparison to Kate Spade, which brought in $180 million. Nevertheless, Fifth & Pacific would still look better if it spun off the Adelington Design Group as well, which could be another catalyst going forward.

These deals should also help Fifth & Pacific fix up its balance sheet. Both Kors and Coach have excellent balance sheets, as Kors has no debt at all and Coach has about $1 million in debt versus around $855 million in cash. On the other hand, Fifth & Pacific reported $7 million in cash and $529 million in debt last quarter, and both its operating cash flow and its free cash flow were negative.

The receipt of $225 million for Lucky Brand and $195 million for Juicy Couture will definitely make Fifth & Pacific's balance sheet look better. The company also picked up another $51 million by ending the lease for its New York City-based Juicy Couture flagship store. Even after these deals are complete, though, Kors and Coach will still have better balance sheets than Fifth & Pacific.

Takeaway
These deals make a successful turnaround at Fifth & Pacific look much more likely. This fashion company got rid of two underperforming brands and the cash from these transactions will make its balance sheet look a lot better. Fifth & Pacific will be left with a hot product in a hot sector whose sales are growing faster than those of one of the current powerhouses of the market. Although Fifth & Pacific remains unprofitable for now, 2014 looks like it will be a much better year for this fashion company.