Fifth & Pacific Companies Management Discusses Q2 2012 Results - Earnings Call Transcript

Fifth & Pacific Companies (FNP)

Q2 2012 Earnings Call

July 26, 2012 10:00 am ET

Executives

William L. McComb - Chief Executive Officer and Executive Director

George M. Carrara - Chief Financial Officer, Chief Operating Officer and Executive Vice President

Andrew C. Warren - Former Chief Financial Officer and Executive Vice President

Analysts

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Casey Flavin

Jennifer Black

Corinna L. Freedman - Wedbush Securities Inc., Research Division

Mary Ross Gilbert - Imperial Capital, LLC, Research Division

Jessica Schoen - Barclays Capital, Research Division

James Andrew Chartier - Monness, Crespi, Hardt & Co., Inc., Research Division

Robin S. Murchison - SunTrust Robinson Humphrey, Inc., Research Division

Carla Casella - JP Morgan Chase & Co, Research Division

Presentation

Operator

Good morning, everyone, and welcome to the Fifth & Pacific Companies, Inc. Second Quarter 2012 Conference Call hosted by Chief Executive Officer Bill McComb. [Operator Instructions] This call is being recorded and is copyrighted material. Therefore, please note that it cannot be recorded, transcribed or rebroadcasted without Fifth & Pacific's permission. Your participation implies compliance with these requirements. If you do not agree, simply drop off the line.

Please note that there will be a slide presentation accompanying the prepared remarks. The slides and earnings release can be accessed at www.fifthandpacific.com in the Investor Relations section. There are separate links to the slides for the webcast and phone participants.

Please note that statements made during this call that relate to the company's future performance and future events are forward-looking statements within the Private Securities Litigation Reform Act. These forward-looking statements are based on current expectations and are subject to the qualifications set out in this morning's press release, as well as in the company's 2011 annual report on Form 10-K previously filed with the SEC and in its second quarter 2012 Form 10-Q under the captions Item 1A, risk factors and statement regarding forward-looking statements, which is being filed with the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Also, please note that during this call and in the accompanying slides and press release, sales, gross profit, gross margins, SG&A, SG&A as a percentage of sales, operating income, operating margin, interest expense, net income or loss from continuing operations and EPS are presented on both a GAAP and a non-GAAP basis. EBITDA; adjusted EBITDA; adjusted EBITDA, excluding foreign currency gains and losses; adjusted EBITDA margin; and comparable adjusted EBITDA, excluding foreign currency gains and losses are non-GAAP measures that are also presented in the accompanying slides and press release.

The company presents EBITDA measures because it considers them important supplemental measures of its performance and believes they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in its industry. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release and slides captions. Reconciliation of non-GAAP financial information, which will be posted to the company's website at www.fifthandpacific.com in the Investor Relations section after this call. The company belief that the adjusted results for the second quarter and first half of the 2012 and 2011 represent a more meaningful presentation of its historical operations and financial performance since they provide period-to-period comparisons that are consistent and more easily understood.

Now I would like to turn the call over to your host, Mr. McComb. Please go ahead, sir.

William L. McComb

Good morning, and thank you for dialing in to hear our remarks for our second quarter 2012 earnings results, which we posted in our press release this morning. Joining me here on the call is George Carrara, our CFO and our Chief Operating Officer. During the call, I'll review the sales and operating results for the segments and I'll provide commentary on each brand's performance, and then George will walk you through some detailed P&L and balance sheet metrics that we routinely provide. And of course, we'll end the call with a Q&A session.

Overall, we're pleased with how the business performed during the second quarter. kate spade and Lucky Brand posted strong positive growth, both overall and on a comparable basis, with strong margin performance. You'll hear shortly how these brands are not only executing well, but also capitalizing on firmly established strength to achieve future growth. At Juicy Couture, we've seen positive reactions around the globe to the elevated image and product that we launched during the spring and summer seasons, but we have many operational challenges still to fix there, challenge which unnecessarily impeded performance and impaired our ability to present a cohesive new presentation during the past 2 quarters. We're making some progress on these issues, which I'll discuss in greater detail shortly, and we expect to see ongoing improvements sequentially as planning and allocation enhancements are realized along with product improvements in accessories, as well as assortment adjustments in apparel.

I'll also say right here at the outset that we believe the markets that we serve demographically and geographically are holding their own in terms of state of demand. I realized that there are widespread external concerns about Europe and even a slowdown in China. Our exposure to Continental Europe though is limited, and we are still nascent in China even with kate spade and Juicy Couture's presence there.

So here's how it shakes out in our forward-looking perspective. We expect kate spade and Lucky Brand to deliver ahead of plan. We expect Juicy Couture to come in below plan, and we expect that corporate costs will be right in line. Therefore, we are reiterating our adjusted EBITDA guidance of $125 million to $140 million for the 2012 fiscal and calendar year. And during the quarter, we made 2 very important announcements. First, in June, we completed $152 million add-on to the 10.5% senior secured notes due in 2019. The add-on was priced at 108 1/4 [ph]. The primary use of this add-on was to redeem the remaining 5% Euro Notes in July 2012 that were coming due in the summer of 2013 and to pay down $37 million in revolver borrowings that we had used to fund repurchases of the Euro Notes earlier in June of this year.

Second, we announced that we plan to use most of the remaining proceeds from the add-on to exercise a conditional call option on the kate spade Japan joint venture. This means we expect to acquire the remaining 51% of a very healthy and fast-growing business and integrate it into the global kate spade operation. This is a business with revenues of $71 million in the JV's last full fiscal year, which ended August 2011, and incremental low double-digit EBITDA, both of which after closing will be incrementally consolidated into kate spade's results in 2013. Really tremendous.

Let's now look a little deeper at the second quarter, starting here on Slide Page 3 with kate spade's performance. kate spade's direct-to consumer comp for the quarter was up 34%, showing continued and growing momentum through the quarter with strong sell-throughs, great margins and healthy growth in all of the channels. The brand has been redressing its outlet stores recently with strong results showing while sustaining momentum in both the full price and e-commerce channels and wholesale performances exceeded expectations.

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