Kate Spade (KATE): New corporate structure

By Timothy Lutts, Chief Analyst, Cabot Stock of the Month
‘From Cabot Wealth Advisory 3/17/14 Sign up for Cabot Wealth Advisory—it’s free!

I remember back in the 1990s when Kate Spade (the person) started as a New York designer and retailer of handbags. Since then, the company has grown into a global retail powerhouse, with more than 80 shops in the U.S. and more than 100 shops internationally. But what happened between that start and today is interesting.

In 2006, Liz Claiborne acquired Kate Spade for $124 million.

In 2007-2009, the Liz Claiborne business suffered horribly from a decision to make clothes for J.C. Penney (which caused its longtime partner Macy’s to slash orders). The Big Recession didn’t help, either.

From 2009 through 2011, parts of the beleaguered Liz Claiborne brand were gradually sold to J.C. Penney.

In 2012, what remained of Liz Claiborne Inc. was renamed Fifth & Pacific, focusing on three brands—Juicy Couture, Kate Spade and Lucky Brand Jeans.
In March 2013, Fifth & Pacific launched Kate Spade Saturday, a lower-priced “weekend” lineup targeted at younger women (who will eventually move up to the Kate Spade brand.)

In October 2013, Fifth & Pacific sold Juicy Couture to Authentic Brands Group for $195 million.

In February 2014, Fifth & Pacific sold Lucky Brands to private-equity firm Leonard Green & Partners for $225 million.

Finally, in February 2014, Fifth & Pacific was renamed Kate Spade and Company, with its only non-Spade brand being Adelington, a jewelry line that dates back to the J.C. Penney relationship.

The stock now trades as KATE, but if you pull up a chart, you’ll see a very long chart that encompasses the entire history of Liz Claiborne. It’s not pretty, particularly the big collapse in 2009.

And the multiple name changes over the years mean that investors as a whole don’t love this company. In fact, they barely know it! Shoppers, on the other hand, know very much what they like about Kate Spade, and they’d like to buy more of it.

So here’s my thesis.

Fashion goes in cycles. A decade ago, Coach (COH) was the big dog in accessories. It was a great investment—but those days are gone.

Today, Michael Kors (KORS) is king of the hill, showing no sign of fatigue. Of course, that’s how it is at the top; everyone loves you. But someday, KORS will peak and I’m betting that KATE will be the next fashion favorite of investors.

The financial numbers are promising. Kate Spade (the entire company) saw revenues grow 21% to $1.26 billion in 2013. The loss for the year was 15 cents. But the fourth quarter was strong, bringing a profit of 15 cents (vs. four cents last year). So now, with the company free of the distractions of the past few years, and looking to expand rapidly in Asia—particularly China—upside potential is very good. Analysts are looking for earnings of $0.28 in 2014 and $0.64 in 2015.

Also good, and not to be underestimated, is the potential for perception among investors to improve, as they get a clearer understanding of Kate Spade’s new corporate structure.

Lastly, but not least, the stock’s momentum is strong, too, telling me this process is already under way.

So, you could just jump in and buy KATE here, but a more prudent course would be to wait for a little basing action, which might take the stock back down to 34.

Even smarter would be to become a regular reader of my Cabot Stock of the Month, so you can get my latest thoughts every week on ALL the stocks I’m recommending today. (I’ll tell you when to sell, too, and someday, that will be really important!) Click here for more information.