Fifth & Pacific (NYSE:FNP) laid another egg Oct. 1, announcing that its adjusted EBITDA for 2012 will be less than expected due to poor sales at Juicy Couture. While laying an egg is commonly regarded as an act of a chicken, Fifth & Pacific, formerly known as Liz Claiborne, is acting more like a cat with nine lives. A half-decade into its turnaround, investors continue to buy what CEO Bill McComb's selling. When are people going to learn? This "one-step forward, two-steps back" melodrama isn't going to end well, no matter how McComb and company spin this.
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Two Out of Three Ain't Bad
That ought to be the name of Fifth & Pacific's next brand because it uses the phrase so often. McComb said this about the stumble: "... While two of the brands continue to perform well, as we now have visibility as to comparable sales and margins for the third quarter at Juicy Couture, we are not seeing the improved results we were forecasting for Juicy and are not expecting Juicy to achieve its forecast results in the fourth quarter." I don't think anyone who actually has set foot in a Juicy Couture store should be surprised by this announcement. I'm the last person to ask for fashion advice but I don't like their clothes and store designs.
You Were Warned
Let's take a look back at Juicy Couture's sales the past few quarters. In Fifth & Pacific's 2011 fourth quarter and year-end press release of Feb. 29, McComb said, "... Juicy Couture is showing very encouraging sales trends right now." This despite reporting negative store comps of 2% in February, 8% in January and 8% for the entire fourth quarter. Its net sales for the quarter decreased 15.4% and more importantly, operating margins dropped 800 basis points year-over-year to 4.8%. Its fourth quarter adjusted operating profit was only $1 million more than Lucky's, despite the fact its sales per square foot are 55% higher. Given these numbers, it's hard to understand the optimism of McComb's statement.
As I've already mentioned, Juicy Couture's January and February comps were negative as were March's at 3% for an overall decline of 4% from the first quarter of 2011. The adjusted operating loss was $11 million, $9 million worse than 2011. Are you starting to see a pattern? In the second quarter its direct-to-consumer comps were negative 9% with an adjusted operating loss of $24 million, 60% worse than a year earlier. This time Fifth & Pacific blamed the results on poor inventory management. How about not everyone wants to pay full-price for your clothes? So, what is McComb's latest mea culpa about Juicy? "Despite this obviously disappointing reduction in the current outlook for the Juicy brand, we expect that we will be able to achieve our long-term targets for the brand as we believe we have an appropriate plan to correct these merchandising-related issues." And I have some swampland to sell in Florida.
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Six Years of Value Destruction
If you bought Fifth & Pacific stock below $2 in November 2008 when it was at its all-time low, you've done well for yourself. There's no denying that. If you bought Oct. 16, 2006, the day Bill McComb was announced as CEO, however, you've lost 73% of your investment and that's after its stock's appreciated by 41% in each of the last three years. If not for Kate Spade, Fifth & Pacific would be the Titanic of the retail business. Interestingly, the deal to purchase Kate Spade was announced by Trudy Sullivan, the former president of Liz Claiborne, on Nov. 8, 2006, just two days after McComb took the reins. I believe it's safe to say this deal had been in the works long before he was even considered for the job.
Fifth & Pacific and Peers
|Company||Book Value Per Share - 2006||Book Value Per Share - TTM|
|Fifth & Pacific||$20.78||-$1.55|
|Ralph Lauren (NYSE:RL)||$22.48||$38.09|
|Ann Inc. (NYSE:ANN)||$14.62||$7.78|
|VF Corp. (NYSE:VFC)||$29.21||$41.17|
The Bottom Line
Fifth & Pacific's January guidance was for Juicy Couture to deliver at least $70 million in adjusted EBITDA. It's now $38 million on the high end. The cause for the downward revision is U.S. stores performing poorly, along with a reduction in its wholesale business. It knew as early as the third quarter of 2011, when its comps were negative by 8.3%, that Juicy's business wasn't so juicy.
Yet Bill McComb stated in the earnings release on November 9, "While Juicy Couture [October] comps of (13%) were below expectation, we remain excited about renewed growth, based upon early reviews of the new team's product, which is already in the pipeline and will ship in the first quarter of 2012." It's been almost a year and the new team hasn't made an iota of difference.
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Look, I understand that Kate Spade is the gem of the bunch and will likely be spun-off. I'm fine with that. But at what point do investors stop drinking the Kool-Aid? This is a company that has spent many years making excuse after excuse. Next we might find out that Lucky's not so lucky and Kate's dug herself into a hole. David Einhorn - please put an end to this nonsense.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.