Conclusion: On 1/12, we said after doubling in 2011, LIZ would double again in 2012. No change to our view. LIZ remains one of our top long ideas for 2012. Earnings came in light, but are misleading given better than expected top-line strength in addition to April-to-date comps that suggest underlying demand remains consistent if not accelerating at Kate Spade and Lucky. While corporate cost reductions are occurring at a more measured pace, we think slightly higher costs will be more than offset by stronger sales and brand related profitability.
Following this morning’s quick take on earnings, the two factors we expected to get more detail on the call were April-to-date comps and progress of corporate cost reduction efforts. We got some version of both the result of which is net positive.
First, in an effort to gauge the underlying demand at the brand level, April-to-date comps surprised to the upside at both Kate and Lucky. While specific detail wasn’t provided, Kate is running up “strong double-digit” and Lucky “up positive against very high levels a year ago.” In looking at March and April combined, it appears that underlying demand remains consistent if not accelerating at Kate Spade and Lucky. Given the continued level of demand, we are tweaking our revenue assumptions higher at both brands. Juicy is running down -10% in-line with expectations.
As for corporate cost reductions, the higher end of the prior range of $70-$75mm was confirmed. It sounds like new CFO George Carrara is trying to set realistic expectations; however, we’ve dialed back our assumptions here by $5mm as not to get ahead of what will essentially be 6-months of impact. Additionally, one of the only other deltas on the quarter came in the form of Bill McComb announcing that the recently hired co-COO of Juicy was returning to AlixPartners and to his prior role as a consultant. While my initial gut reaction is negative, the fact that Dave Bassuk can focus more on cost reduction efforts with George in this role than at Juicy alone is actually a more critical role at this time in the company’s evolution.
All in, while we are taking up our revenue assumptions modestly, we are keeping our F12 EBITDA estimates at $140mm and taking up our F13 EBITDA estimates to $215mm. The story is pressing forward and remains one of our top long ideas for 2012.
Casey Flavin
Director
Below are the Key Takeaways from the call this morning as well as commentary around the any changes to the forward looking commentary that was provided on the fourth quarter call headed into F12.
Note: Commentary below is from the LIZ Fourth quarter conference call, comments in red reflect any deltas on the margin following this morning’s Q1 update:
Full Year Guidance (provided on the prior quarter call relative to this morning’s update):
“We’re forecasting adjusted EBITDA of $125mm to $140mm” no change
Kate Spade: “we will again anniversary growth at kate spade, with comps this year projected to be in the teens, and 2012 total revenue growth to be expected to exceed 30%” no change
Lucky: “Lucky Brand, where we have planned comps to be around the 10%-plus mark” no change
Juicy: “Juicy Couture projected to deliver a flat comp in H1 and a 10%-plus comp in H2” no change
Corporate Cost Reductions: “a transformation in our corporate infrastructure to better and more cost-effectively serve our brand portfolio. We showed you back in November that the adjusted EBITDA of this group will be negative $70mm to negative $75mm in 2012” Narrowed to $75mm
“We’re working to get that number down to a range between minus $55mm to minus $60mm in 2013” no change
“longer-term goal of it costing between $45mm and $50mm of adjusted EBITDA per year” no change
Key Highlights from the Call:
Kate: +38% in Q1, April-to-date up strong double-digit
Lucky: +21%, April-to-date in line and up against high levels a year ago
Juicy: -4%, April-to-date -10%
Still forecasting strong trend in 2H
Leann very happy with accessories business for holiday 2012
All brands had margin expansion in Q1
Q&A:
Corporate Expenses:
- 2-yr of stair step down
- Said they would provide more detailed information re the corporate expense reductions next qtr, weren’t ready to disclose this qtr
- George sees a very clear path to $60mm in 2013
- $40-$45mm long-term still viable
George Biggest Opportunity:
- Most excited about corporate transformation opportunity – cost outs
Kate Store Openings:
- ~25 stores for Kate and Jack (20 for Kate and 5 for Jack)
- 35-40 next year, outlet has been surprisingly strong to upside
- Thinking about testing and learning about larger footprint stores
Kate:
- Wholesale opportunity - thinking about it very carefully
- Have great strategic partners
- "There is absolutely growth to be had," but don't want to repeat overpenetration that Juicy experienced
Lucky:
- Expect to be announcing children's licensee soon
- AUR, Traffic, Transaction, all up driving comps
Juicy Inventories:
- "our buys are hurting our ability to comp" because they are low
- Want to continue to AUR progress that they've been seeing
- NOT planning to take inventory in aggressively
- May deliveries are deeper, expect sales to pick up later 2Q and into 2H
Juicy Int'l Demand:
- Very strong up ~40% in Middle East
- Accessories comping up +9% while rest is down -10% in April
SG&A - Marketing Spend:
- Still planning to take marketing spend up across all 4 quarters
- In Q1, Juicy and Kate is where spend went up the most
- In Q1 the incremental impact is a high single-digit number
Adelington Design Group Margin 1x Margin Impact:
- Negative ~$1mm on ~$4mm in sales related to DKNY
