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Takeaway: Tory Burch transaction underscores just how undervalued FNP is headed into ICR event.

The transaction in the private luxury brand Tory Burch – one of FNP’s closest comps – at year-end serves as the latest reminder of just how undervalued FNP is at current levels. We’ve written a fair amount about the favorable setup headed into ICR and our view hasn’t changed. Consider the following:

  • Tory Burch Transaction – a Valuation Reminder: The capital gains tax increase proved the final straw. After years of speculation, Chris Burch (Tory’s ex-husband) finally sold the majority of his ownership a 25% stake in the company for ~$813mm (he kept 3.3%) suggesting a $3.25Bn valuation for the brand. According to estimates on Burch's top-line, this would suggest a multiple north of 4x and ~3x 2012 and 2013 sales respectively. This lands right between FNP’s two public company peers with KORS at 5.5x and COH at 3.5x 2012 sales and at the low-end of 2013 multiples. FNP on the other hand trades at less than 2x 2013 Kate Spade sales alone (not including Lucky or Juicy Couture) – a 45% discount to the peer average.

For several reasons, Tory Burch is a better comp to Kate with both brands at an early stage in their life cycles. For starters, both concepts are closing in on 100 stores and generate ~20% of sales overseas. One of the key differences is profitability. Burch’s operating margin is reportedly similar to KORS in the mid 20s and below COH in the low 30s. However, Kate Spade margins are lower at ~11% including corporate expenses and ~15% without substantially below peer levels reflecting investments to grow the brand. Mind you, this is not because of any factor
aside from that Kate is simply investing in the areas that matter to fuel future growth. It could print 2x the current margin rate in a heartbeat, but then we’d have to question the sustainability of its growth trajectory. We don’t question that for a minute with Kate.

 

We’re modeling Kate Spade sales approaching $800mm in 2013 and exceeding $1Bn in 2014 and expect profitability to continue to move upward toward the 20% level over the next 2-3 years. Assuming a 3x multiple of next year’s sales for Kate Spade alone that would imply a valuation close to a $2.5Bn for the brand – over 50% higher than the entire value of FNP today.

  • Expected Pre-ICR Update: We expect the company to provide an updated brand outlook ahead of next week’s ICR conference (Jan 16th-17th) most likely later this week. While the recent hire of a CEO at Juicy reduces the likelihood of an early divestiture announcement, we expect the focus in Miami to be on the company’s commitment to materially accelerating square footage growth at Kate and Lucky (see our note “FNP: Juicing Kate” on 10/25), profitability growth (particularly at Kate), and the upcoming Kate Spade investor day likely in 1H 2013.

While we can easily get to $180mm in adjusted EBITDA in FY13, we wouldn’t be surprised to see the company come in a bit lower on its initial outlook in an effort to re-establish forecasting credibility. In fact, we’d prefer it. Recall at this time last year, the company lowered its outlook less than a quarter after resetting expectations on the sale of assets in October.

 

In addition, we wouldn’t be surprised to see a positive pre-announcement out of first-timer KORS as well into the event. Particularly in light of JWN highlighting handbag strength at the high-end over the holidays and based on how the company has managed expectations historically.

  • Hosting FNP Dinner Jan 16th: We will be hosting a dinner with the management (CEO Bill McComb, CFO/COO George Carrara, and SVP of Finance Bob Vill) on the night of Wednesday the 16th. Clients who are interested can contact .

 

FNP: Tory Burch Deal Reminds Us of Value - FNP TBurch Valn 2