At Kenneth Cole, Marching Toward the Big Moment

The launch of the womenswear business could be pivotal for a much-loved stock, observers say.
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Earlier this year, Kenneth Cole, the photogenic CEO of

Kenneth Cole Productions

(KCP)

, appeared at a

Banc of America

consumer conference, casually perched on a stool as if he were doing a cabaret routine instead of answering questions from Wall Street suits.

He was there to lay out the company's plans for its new women's clothing line, which will show up in selected department stores this fall. It's only the latest step in the company's progression from shoe company to what it hopes will be a lifestyle brand along the lines of

Donna

,

Calvin

and

Ralph

. "It's about creating expectations and living up to them," Cole said, explaining his business philosophy.

He's got that right: His company has created some very high expectations on Wall Street. Kenneth Cole shares closed at 58 1/2 Friday, just off an all-time high, and have risen almost 30% this year after a 144% rise last year, even as most other apparel stocks have languished. Its shares now trade at more than 26 times projected 2000 earnings, compared with the

price-to-earnings ratios of about half that for its rivals.

At those lofty levels (especially in a higher interest-rate environment), investors will be paying a lot of attention to how Kenneth Cole's high-profile womenswear launch progresses. "He has to execute," says Josie Esquivel, an analyst with

Morgan Stanley Dean Witter

who rates the stock an outperform and whose firm hasn't done recent underwriting. If Cole doesn't, any number of beaten-down retailers and apparel-makers can predict what will happen.

Shoe Leather

So far, Kenneth Cole has had little trouble on the execution front. The company has gone from selling shoes out of a trailer parked in Manhattan, in 1982, to its current three-tiered array of shoe lines (

Unlisted.com

, aimed at teeny boppers, and midrange

Reaction

brand joined the original, pricier line), men's shoes, leather goods, watches and menswear, made under license. Edgy, clever ads highlight social issues near to Kenneth Cole's heart. Sales rose 36% last year to $310 million, while earnings per share advanced a toe-curling 48% to $1.78. Analysts surveyed by

First Call

expect EPS to advance 25% in the current year.

Hot Coles
Kenneth Cole shares' yearlong rally

Source: BigCharts

And now comes women's stuff, made by

Liz Claiborne

(LIZ)

under license. Its first Kenneth Cole New York fall line, full of contemporary but not overly trendy separates at less than designer prices, would appear to be smack in the middle of the zeitgeist.

In two articles over the last few weeks,

Women's Wear Daily

highlighted the declining popularity of status casual brands like

Tommy Hilfiger

(TOM)

and

CK Calvin Klein

, and the rise of the department store "modern zone," which will be stocked with new brands like

Levi's

Slates

,

Jones Apparel Group's

(JNY)

Nine West

and Kenneth Cole. If all goes well, Reaction womenswear will roll out in the spring of 2001, followed by Unlisted.com in the fall.

"It should be a home run," says Jennifer Black of

Black & Co.

, who rates licensee (and Kenneth Cole shareholder) Liz Claiborne a strong buy but has no rating on Kenneth Cole itself. "They know who their consumer is, and that segment of the market will be very excited about it."

Balls in the Air

There's the windup. But some skeptics wonder if it's possible to appeal to so many constituencies. They wonder if the company doesn't have too much on its plate.

"You can't be all things to all people," says one hedge fund manager who is short the stock. The short says it's hard to simultaneously promote a high-end line of shoes and maintain a fashion-forward image while Unlisted and Reaction shoes and purses are ubiquitous at discounters like

Marshalls

. (Kenneth Cole's CFO, Stanley Mayer, says the discounters, as well as the company's own outlets, serve a valuable purpose: getting rid of excess inventory. "We're not that good," he laughs.)

Candace Corlett, a partner with

WSL Marketing

, says that the company's brand positioning isn't ideal. "The good, better, best strategy you can do, but you must give equal weight to all three," she says. She cites

Gap

(GPS) - Get Report

, which has successfully created separate identities for its

Old Navy

and

Banana Republic

lines. "My jury's still out" on Kenneth Cole, she says.

The Fickle Pickle

Skeptics also observe how notoriously difficult the women's fashion business can be. Department stores love new lines and are happy to give them floor space in their growth phase. Then fickle customers decide they don't like a season's offerings, and goods pile up. Stores go back to the manufacturer and ask for markdown money. Just ask Tommy Hilfiger, the brand that could do no wrong -- until it warned of an earnings shortfall in January and its shares promptly unraveled at the seams. Its shares now trade at 70% off their 52-week highs. (Kenneth Cole's fell in sympathy, then recovered after the company preannounced stronger-than-expected earnings.)

No one is saying there are any signs at all of problems at Kenneth Cole. In fact, according to

WWD

, early reviews from the department store buyers are good. But at this price, things had better proceed exactly as planned.

"You're buying into the fact that this guy will continue to maintain advertising cachet and products," says a hedge fund manager who has looked into the stock, but has no position in it. "I can't tell you it's wrong to pay 26 times earnings for them, but there are a lot of other companies out there at 26 times for someone whose

risk tolerance isn't very high."