FNP: Focus

Takeaway: Getting closer to a sale of Juicy? Regardless of the decision, we think the team has focus. Only good can come from that.

Reuters just noted that FNP is exploring alternatives, including a sale, of Juicy Coture. It says that the company has been having discussions, but has not yet made a decision.

 

This is completely in-line with our thesis on the company, that Juicy has gotten to a point where disposing the asset and paying off debt will allow FNP to focus on its crown jewel – Kate Spade – which is one of the fastest-growing assets in retail. At the same time, it will have Lucky Brand to continue its role as the annuity in the portfolio to help fund Kate’s growth prospects.

 

It’s easy to get hung up on internalizing near-term growth and margin performance – a hundred million in revenue here or there, or margins plus or minus a point or two. That seems like a lot in a given reporting period.

 

But with Kate, the company is en route to adding another $1bn+ in revenue and doubling margins. Will COH or KORS double margins? Not when they’re sitting at 31% and 20%, respectively. In fact, we’d argue that COH and KORS margins will converge closer to 25% over the next 2-3 years.  Kate should get close as well from its current margin rate of around 12% (fully loaded).

 

Kate is doing it right. The company has been investing capital consistently back into building the operating platform to aggressively gain share. Some of that base investment tapers off as the company moves into adolescence. Our point is that in looking at what the company is capable of, think big. This is not about a few points of comp here or there.

 

We know that we sound like a broken record with our bull call on FNP. But quite frankly, it is a great story worthy of being a bull.

 

The company is hosting an analyst meeting for Kate Spade in 1Q where the growth opportunity should be more apparent to the investment community.

 

As for Juicy, we’re often asked “is it really worth anything?”, our answer is ‘definitely’. Think of all the times people chalked up certain consumer brands as being dead. It happened at FNP, actually, when the company owned Mexx – which was a far bigger dog than Juicy. We hate to pick a multiple out of the air in valuing assets, but does 0.5x sales sound in the ‘fair’ category? Sure, it's consistent with past transactions in retail. We wouldn’t be shocked by more. That suggests about $250mm, which could repay 65% of FNP’s debt.

 

(If the table below is tough to read, let us know and we'll send the file).  

 

FNP: Focus  - 1 31 2013 8 03 53 PM


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