There was a lot of noise embedded in LIZ’s Q4 results as expected, but the take away from the quarter is unequivocally net positive. We see weakness in the stock following these Q4 results as a buying opportunity for those who remained on the sidelines looking to get into the stock below $10. Here’s your chance.
Here are our thoughts on the quarter and LIZ story:
- For starters, headline Q4 revenues came in down -3%, but on an adjusted bases accounting for businesses sold or exited, revenues came in up +12%. Kate and Lucky came in in-line to above our expectations while the Partnered Brand business (now Adelington Design) and Juicy accounted for the $25mm difference equally.
- As expected, the additional brand disclosure provided improved clarity revealing among other things how profitable and meaningful Kate Spade is to the LIZ story. We expect the profitability of Kate to continue to ramp up to 16-17% operating margins over the next two years. Also revealed was that Lucky did indeed breakeven for the year. We expect margins to expand meaningfully to MSD this year as top-line strength continues.
- Additionally, we see the comp outlook by each brand to be conservative. The outlook for Juicy is in-line with our own. As we noted in Monday’s “LIZ Q4 Preview” note, we expect this turn at Juicy to be a gradual one, which is reflected in MSD comp growth for 2012. Lucky, on the other hand is starting off the year better than we expected as the women’s business continues to drive growth. We are taking our numbers up to a +11% comp from our prior +8% estimate.
- As for Kate, we think management is flat out sandbagging expectations – that’s fine actually. It does no good to set unrealistic expectations for the brand. Compared to management’s outlook for mid-teen comps and 30%+ revenues, we are modeling +20% comps and 40% revenue growth, which could in fact prove conservative.
- One of the few callouts from the call that differed from our expectations was the announcement that 35-40 stores will be added at Kate and Jack Spade alone ahead of the 20 stores we were modeling. This will adding an incremental $25mm to F13 revenues driving sustainable 35%-40% revenue growth over the next 3-years.
With gross margins expanding largely from brand mix and SG&A cost reductions coming in as planned we are shaking out $0.26 in EPS for F12 and $0.65 in F13 reflecting $145mm and $205mm in F12 and F13 EBITDA respectively. As we move through 2012, we think investors will start looking out to $1 in earnings power in three years (F14). That is NOT reflected in the stock at $10. Below is our updated sum-of-the-parts by brand. LIZ remains our top long and we think it doubles again this year.
