This note was originally published April 03, 2013 at 11:45 in Retail
One of the usual ‘Juicy Coture is on the block’ stories just hit the tape regarding FNP, but the unusual component is that it had Lucky Brand attached to it as well.
While the market wants to see a sale of Juicy, we’d probably rather see FNP hang on to it for another quarter or two as we think that it’s in the process of bottoming, after which it will likely command a higher price.
Lucky, however, has better momentum right now around its product line than it has had in years as FNP parlays best practices learned from Kate over to Lucky (handbag line, brand extentions, etc..,).
Our best estimate is that Juicy will attract somewhere in the neighborhood of $200mm-$250mm (about 0.4x-0.5x sales). But for the company to let Lucky go at a point when momentum is building, we think that it would only do so at a premium valuation. 7x EBITDA implies around $150mm, which we think is the minimum Lucky would sell for.
We can speculate all day about the precise multiples that these two would sell for, but the truth is that only people involved in the transaction (which we’re not) should know. But what we can safely point out is that is that FNP ended the year with $325mm in net debt, and even if our estimates are high by 20%, the net proceeds of a deal would leave FNP debt free.
The company has already gone from being a debt-laden, low margin, low asset turning portfolio of bad brands to being one of the best growth stories in retail. Adding a debt-free element with the sale of its lowest-margin and lowest RNOA divisions only makes the story that much more attractive.
FNP has been our favorite name, and its still one of our top three. Despite the run, if you have a 12-month time horizon we'd resist the temptation to peel away today in the high teens.