Kenneth Cole Looking Sharp Again

Kenneth Cole

(KCP)

said Monday the bulk of its troubles are behind it, giving investors more evidence that the apparel industry is recovering from last fall's swoon.

The company's stock jumped 21% after the fashion designer boosted earnings estimates, citing a stronger-than-expected pickup in wholesale business. But some observers remained cautious, noting that the company's retail business remains weak and that its estimates have fallen so sharply in recent months that Monday's reversal marks only incremental progress.

Kenneth Cole said earnings for the first half of 2002 will come in significantly higher than most people on Wall Street expected, mainly due to strength in its wholesale business. The announcement marks a quicker-than-expected rebound in the company's fortunes, which steadily deteriorated last year as the economy weakened, and follows similarly

good news from

Jones Apparel

(JNY)

and fellow trendy shoemaker

Skechers

(SKX) - Get Report

, both of which recently said earnings would top expectations.

Kenneth Cole shares jumped $4, or 21%, to $23.50. The stock was still well off its 52-week high of $34.05 reached last May.

"We believe, given our continued clean inventory position and the strong response to our product at the retail level that we are firmly on the road to recovering from the difficulties of the past year," said Kenneth Cole, the company's chairman and chief executive, in a statement.

In the release, New York-based Kenneth Cole said it expects earnings of 26 cents a share in the first quarter, which ended March 31. This compares with previous guidance of 16 cents to 18 cents a share, and a consensus estimate of 16 cents a share, according to Thomson Financial/First Call. For the second quarter, the company expects earnings of 14 cents to 16 cents a share, compared to prior guidance of 10 cents to 12 cents a share, and a consensus estimate of 12 cents a share.

"I thought there was upside potential in the numbers, but not that much upside," says Lee Backus, who covers the company for Buckingham Research. Backus raised his rating from buy to strong buy Monday. (His firm does not have an investment banking business.)

Backus says Kenneth Cole's announcement suggests that Wall Street was too bearish when the economy cratered last year, rather than a robust recovery in the apparel sector. "People brought their numbers down too much," he says. "Everyone was ultraconservative. Now it's not as bad as they thought."

Indeed, Backus' full-year earnings projection of $1.03 per share is still less than half of the $2.65 a share Wall Street expected last year before projections fell and Kenneth Cole issued an

earnings warning.

Indeed, Monday's preannouncement only raises the outlook to the levels Wall Street expected as recently as the fourth quarter of last year, says David Lamer, an analyst at Ferris Baker Watts. Lamer raised his rating Monday, but hardly endorses buying the stock at these levels. (He upped his rating from market underperform to market perform, and his firm doesn't have a banking relationship with the company.)

"Hopefully, the company is in some kind of recovery," he says. "But we are still being cautious on the shares."

While the company's wholesale business is improving, Lamer still expects same-store sales in Kenneth Cole retail shops to fall this year.

The company is scheduled to report first-quarter earnings on April 26.