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Takeaway: We're comfortable that things are still on track at $FNP to be a $20 stock.

We met recently with the top management team at FNP – which included our first introduction to new CFO George Carrera. Overall, we walked away with a high degree of confidence that this is a name that should continue to work despite doubling over the past year.

 

Here are our notes…

 

George Carrera (CFO) Introduction:

  • Impressive. Bringing more transparency and granularity to the forecasting and planning functions – something that was not the focus of prior CFO (who was all about getting much-needed deals done).
     
  • Comes across as much as a COO as he does a CFO, if not more. This actually makes sense at FNP, given that they have Bob Vill, who is SVP/Treasurer and could otherwise represent FNP as CFO both externally and internally (he was offered the job).
     
  • Providing key operational support to Leeann at Juicy. Bill McComb (CEO) and George are spending 80% of their time at Juicy Coture (not sure if this is good or bad).
     
  • Focused on SG&A allocation – initially at corporate where primary experience has been, but now shifting towards greater focus on brand level SG&A – particularly at Juicy where he is working to redeploy SG&A. This is not incremental investment, but reduction of some redundancies offsetting additional planning resources.
     
  • It’s nice to see the brand-level SG&A reallocation as long as 1) it does not come away from a capital base otherwise needed to grow sales and gain share, and 2) mitigating redundancies does not get in the way of FNP being able to easily shed one of its brands if the time and/or necessity presents itself.
  • During the 3-year time period Bill tried to sell Mexx, he met George during M&A process w Tommy Europe.
     
  • Was looking for someone that can play a bigger role in the corporation under the new strategy
  • What attracted GC to FNP:
    • Opportunity to make $
    • Int'l footprint - white space opportunity
    • SG&A - opportunity to leverage it given experience at Tommy where they had to revisit cost structure nearly 2x a year
    • Quality of team here much stronger than at Tommy, have invested in the right areas

Note: The SG&A element is the only potential negative point that came from our meeting. If executed properly, and if all three concepts thrive, it could be great, but if they implement too many shared services between the three distinct companies, it could take down the 'ease of disposal' factor should either Juicy or Lucky become un-savable. We’ll keep a close eye on this.

    • Corp SG&A at ~4% were considering a corporate ERP system, but have opted to spend on e-commerce instead = higher ROI
    • When asked about what he thinks will drive his stock price (keeping in mind that he has never been CFO of a publicly traded company) he noted – very quickly “Growth in profitability and beating expectations.” Not a perfect answer, but good enough for us to check the box.
       

E-commerce/Mobile:

  • New POS systems to enable mobile checkout and converging data sources and brands into one database to optimize e-commerce assets
  • Kate e-commerce accounts for over 20% of sales; Juicy and Lucky just under 10% suggests an aggregate e-commerce penetration of ~11% of total sales putting FNP in the top quartile of retailers. Goal is 30% for all brands.

Lucky:

  • Key hurdle remains store productivity of $650
  • Focus has been retail > wholesale > outlet > e-commerce > sourcing - currently at e-commerce as primary focus after securing and improving retail/whsl/outlet performance
  • Top/bottoms still very strong - accessories very strong on a smaller base as well as Vince Camuto FW license also doing very well
  • Men's has been strong, but key is reinvigoration of women's line
  • Next steps to growing business is int'l - have been getting increasing interest from brand partners to run business overseas - expect to ramp in 2013

Juicy:

  • Product is good, it's the merchandizing that's the issue
  • Addition of second level talent has been a key addition to the team
    • Tom Linko (CFO as of June) - had worked with George at Tommy before will oversee order management, merchandise planning and allocation, and real estate
    • Ann Bernstein (SVP Global Business and Strategy in April) leading financial planning, Juicy Int'l, licensing, retail, wholesale, and e-commerce
    • George has also stepped in as LeAnn's operational partner of sorts
    • There's a redeployment issue at Juicy no an incremental SG&A investment issue - the planning and allocating issues have become more visible
    • Dave DeMattei was starved for the data to better plan his business - George is taking that process to Juicy
    • The brand leaders have been very good at sharing best practices, but they are deeply brand loyal - therefore doesn't make sense to transfer talent from Kate or Lucky to help out at Juicy
    • Recouturing of Stores:
      • Not looking for drastic architectural changes - looking for new paint, rugs, some fixtures (like they did with Kate)
      • More of a touch up (only 2 rehauls where stores will need to be closed) than larger transformation along the magnitude of new store investment
      • Will impact 16 stores on top of 12 done already on 131 store base
      • Very light capital investment

Kate Spade:

  • Asia business - buys off U.S. product line
  • Growth in Japan driven primarily by comp, not as much by doors
  • Customer demo has broadened to women born in the 1980s - an incremental add'n to brand demand
  • Re distribution - think fragrance is a big opportunity - also watches at wholesale

Outlets:

  • Target is to have ~80% of product made for outlet (where Kate and Lucky are)
  • Juicy is a drag - need to design for outlet instead of shipping out of season product from specialty stores
  • Margin differential b/w full-price and outlet similar to peers

E-Commerce:

  • Kate e-commerce accounts for over 20% of sales; Juicy and Lucky just under 10% suggests an aggregate e-commerce penetration of ~11% of total sales putting FNP in the top quartile of retailers.
  • In the process of converging data sources and brand info into one database to leverage intell
  • Store presence/showroom is additive to drive traffic and interest in e-commerce

CapEx:

  • Incremental increase in F12 CapEx to $90mm from $75mm includes $5mm of transformative growth CapEx = high ROI investments (40%+)
    • 16 Juicy stores, add'l Lucky outlets, and NYC specialty Lucky store in Time Warner Center

Balance Sheet:

  • Turning inventory at an 'appropriate' rate (at benchmark or better)
  • Plan to improve inventory buys to further improve turns

Incentive Structure:

  • Based on profitability re 4-yr plan
  • Tweaking up the minimum thresholds internally