Kate Spade & Company (KATE) made a host of announcements yesterday. These include its plans to discontinue Kate Spade Saturday as a standalone business, introducing a fresh business model for its Jack Spade business, formation of a joint venture (“JV”) with Walton Brown, announcement of preliminary results for full-year 2014 and initiation of an overall guidance for 2015.
Starting with Kate Spade Saturday, the company plans to absorb all successful elements of this business into its kate spade new york brand, simultaneously discontinuing the former’s operations as a stand-alone business. This will include the closure of Kate Spade Saturday’s 16 company-owned and 3 partnered store locations in the first half of 2015.
However, Kate Spade Saturday’s website will continue to function during this wrap up phase till its label is introduced into the kate spade new york brand. This move is likely to help the company maintain its focus on enhancing the kate spade new york brand and positioning it well for long-term growth.
Further, management intends to introduce a model for Jack Spade which will help the brand to utilize the distribution channels of its retail partners and further expand its eCommerce presence. This move, which targets to make Jack Spade a renowned lifestyle brand, will bring a transformation in its assortments that include tailored clothing, bags and sportswear among other items. Consequently, management plans to shut down 12 company owned stores of this brand during the first half of 2015.
Owing to these undertakings, Kate Spade anticipates spending $25-$30 million as cash restructuring expense connected to the termination or assignment of leases and other contracts. Alongside, the company expects incurring $7-$9 million as non-cash asset impairment expense.
Moving ahead, in an attempt to enhance its geographic presence, mainly China and improve margins, the company announced a JV with The Lane Crawford Joyce Group’s subsidiary Walton Brown. This collaboration will benefit both the companies by leveraging Kate Spade’s worldwide demand and Walton Brown’s expertise to build a network of stores in major cities, thus accelerating its business.
Coming to the company’s preliminary results for 2014, Kate Spade remains pleased with its sales performance, both domestic and international. Taking a detailed approach, the company anticipates sales growth of more than 40% year over year, coming in the range of $1,130- $1,140 million.
Further, on including the benefit of the 53rd week, Kate Spade envisions direct-to-consumer comparable sales (comps) to improve 26%, excluding which, a rise of 24% is expected. On including and excluding eCommerce, direct-to-consumer comps are projected to rise 23% and 22%, respectively.
Gross margin is expected to come below company’s previous guidance range. Adjusted EBITDA for the year is anticipated in the range of $145- $150 million.
Given this preliminary guidance, management remains confident of its solid brands and financials and believes that the company is well positioned to start 2015. Taking its cue, the company initiated optimistic guidance for 2015, wherein it expects net sales in the band of $1,200 – $1,275 million, a high single-digit rise in direct-to-consumer comps and adjusted EBITDA in the $185 – $200 million range.
Stocks That Warrant a Look
Kate Spade currently carries a Zacks Rank #4 (Sell). However, better-ranked stocks in the industry include Bebe Stores, Inc. (BEBE), Zumiez, Inc. (ZUMZ), each with a Zacks Rank #1 (Strong Buy) and American Eagle Outfitters, Inc. (AEO) with a Zacks Rank #2 (Buy).
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