FNP’s is expected to take over ownership of its Japanese Kate Spade business later this year (Q4), which would add $1-$2 in value to one of our favorite longs near-term. While we expect the EPS impact to be a wash next year (+/- $0.02), it is likely to add $12-$17mm in EBITDA in F13 and up to $0.10 and $15mm-$30mm in EPS and EBITDA in F14. The bottom line is that we’ve never seen a higher-end brand take back control of its content and distribution and it not be a positive event – we expect this deal to be no different.
Consider the following:
- With 52 points of distribution, Japan’s store/door productivity is ~$1.4mm/store ahead of where we expect China is running and at nearly half Kate’s current store productivity.
- Given that sales are up ~20% despite the tsunami impact, we’d expect productivity and sales to continue growing at a double-digit rate and likely exceed that growth over the last 12-months as FNP continues to grow its store base.
- With $71mm in sales as of August ’11 and 20% growth, we assume Kate Spade Japan will generate revenues of ~$90mm by year end when the company expects to take sole ownership of the business.
- The profits from this business will shift from being recorded in the Other Income line to being incorporated into the P&L as it becomes wholly owned. With operating profit margins in the HSDs, we expect Kate Japan to add $12-$17mm of incremental EBITDA in F13 reflecting modest margin expansion and $15mm-$30mm in F14 as the company realizes further margin expansion by leveraging existing headcount and operations in Asia.
- COH has over 170 locations in Japan compared to Kate’s 52 suggesting a substantial runway for long-term growth. When COH took over control of its Japan business in 2001, it had 76 locations and $40mm in revenues. Today COH generates more than $700mm in revenues in the region. We think 20-25 locations over the next two years and $150mm in revenues by F14 is reasonable if not conservative for Kate.
- The incremental addition of Kate Japan will add ~6pts to revenue growth in F13 suggesting 23% total top-line growth in F13 on top of high-teens growth in F12 (pro forma).
All in, this notes offering pushes out the duration of FNP’s debt maturity six years while reducing P&L volatility with the elimination of existing Euro Notes and most importantly the company assumes control over the Kate Spade Japan business. While these deals often result in minimal financial impact in early years, we think the earnings impact will be neutral in Yr1, but the EBITDA contribution from Kate Spade which already accounts for over 50% of the total is worth $1-$2 in value immediately. FNP remains one of our top longs.