Rumors surfaced Feb. 6 that New York-based Fifth & Pacific (NYSE: FNP ) has received potential buyer interest for Juicy Couture, Lucky Brand Jeans and Adelington Design Group. CEO Bill McComb has taken a company with 40 brands when he was hired in November 2006, and whittled it down to just four. If the rumors are true the company formerly known as Liz Claiborne could become Kate Spade Inc. Will this be the ultimate redemption for the one-time Johnson & Johnson executive? Not by a long shot. Here's why.
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Bill McComb's had six years and then some as CEO. In those 75 months, Fifth & Pacific's stock's achieved an annualized return of -12.8%. If you invested $10,000 in its stock on Nov. 6, 2006, when he was hired and held through the present, you would have around $5700 in your investment account. If on the other hand you put the same $10,000 in the SPDR S&P 600 Small Cap ETF (ARCA: SLY ), you would have $14,736 or more than three times the amount. McComb's record probably seems good to those who've bought its stock in recent years because it's working on its fifth consecutive year (up 38% through Feb. 12) of positive returns. While the sentiment is completely understandable, current investors are viewing the company through revisionist eyes. Many investors estimate that Fifth & Pacific's intrinsic value is around $30 a share. That suggests a market cap of $3.4 billion and an enterprise value of $3.8 billion. In January, the company provided 2013 guidance that includes EBITDA of $150 million. However, that $30 target would give Fifth & Pacific an enterprise value on it that's 25 times EBITDA. As the British would say - bollocks!
Fifth & Pacific and Peers - EV/EBITD
|Fifth & Pacific||25.0|
|Michael Kors (NYSE: KORS )||19.69|
|Lululemon (Nasdaq: LULU )||24.35|
|Coach (NYSE: COH )||7.6|
|Ralph Lauren (NYSE: RL )||11.3|
I used to believe that Lululemon (Nasdaq: LULU) was incredibly overvalued. Over time, I've learned to accept the fact that the lifestyle brand is in a league of its own; as such a nosebleed multiple is not unreasonable. I wouldn't pay it but that doesn't mean you shouldn't. January guidance suggested that the fourth quarter will be the first time in 42 months that same-store sales increase by less than double digits, leading some analysts to lower their rating on the stock. Given diminishing growth, it might be time to reevaluate its EV/EBITDA multiple. Paying $25 for $1 of EBITDA, whether we're talking about Michael Kors, Lululemon or Fifth & Pacific, is simply nonsensical. It's especially so for a company like FNP that has but one successful business. Investors carry on as if Juicy Couture and Lucky Brand Jeans have significant tangible value. They don't. Sure, someone will eventually buy them, but for far less than one might imagine. Consider Lucky Brand Jeans for a moment. Its 2012 adjusted EBITDA is expected to be $35 million on $461 million in revenue.
Fast Retailing (OTC: FRCOY), the world's third-largest specialty retailer by market cap, agreed to pay $300 million this past December for $80.1% of J Brand, a denim-maker with similar price points to Lucky. On a price-to-sales basis, Fast Retailing is paying about three times revenue. The same multiple for Lucky Brand translates to $1.4 billion. That's a nice thought. However, J Brand has an EBITDA margin of 31%, almost four times that of Lucky. Fifth & Pacific will be lucky (pardon the pun) to get more than $700 million; probably even less for Juicy Couture.
Kate Spade Valuation
This is the one investors - and Bill McComb - are counting on to bring Fifth & Pacific to the promised land. An appropriate comparison is Michael Kors, which trades at 7.3 times sales. Based on Kate Spade's 2012 estimated revenue of $462 million, and a similar multiple to Michael Kors, we're looking at a $3.4 billion valuation. Add approximately $100 million in net debt and you get a nice round enterprise value of $3.5 billion, 37 times its 2012 adjusted EBITDA and 25 times its 2013 adjusted EBITDA guidance. Michael Kors' fiscal 2013 is the end of March. Its present enterprise value is $12 billion dollars, which suggests a multiple of 18 times its estimated EBITDA of $685 million. This is a company almost four times the size of Kate Spade, and it's growing much faster in both its retail stores and at wholesale. Either Kors is overvalued (very doubtful given 41% same-store sales growth in North America) or Kate Spade is. Dialing back Kate Spade to 12 times 2012 EBITDA, you're looking at $1.2 billion.
Sum of the Parts
With Kate Spade the most valuable of its remaining properties at $1.2 billion, followed by Lucky Brand Jeans at $700 million, Juicy Couture at $600 million and Adelington Design Group at $200 million, the combined value of all four segments is $2.7 billion. Subtract $350 million in net debt and you get a market cap of $2.35 billion, which works out to $20.75 per share, not much more than its current stock price.
Bill McComb's Legacy
Since taking over from Paul Charron in 2006, the following has occurred under McComb's watch:
- 11,000 full-time employees (64% of the 17,000 when he signed on) have lost their jobs.
- It has achieved operating losses for six straight years between 2007 and 2012.
- Market cap has declined by 62% or $2.7 billion.
- It hired designer Isaac Mizrahi (of Target (NYSE: TGT) and MTV fame) to big fanfare. That flopped.
- Also hired designer Narciso Rodriguez. That too was an unmitigated disaster.
- Managed to run the founders of Lucky Brand and Juicy Couture out of the company.
- Sold legacy brand Liz Claiborne to J.C. Penney (NYSE: JCP) for $268 million.
- Ended a 30-year relationship with Macy's (NYSE: M).
- Received more than $30 million in compensation, despite never producing a profit.
- Sold-off or shut down more than 90% of its brands.
- Changed the name from an iconic one to the generic-sounding Fifth & Pacific.
The Bottom Line
Bill McComb entered the company with no experience in specialty retail, or any retail for that matter. He then proceeded to get rid of anyone who did understand the business, including the founders of both Lucky and Juicy Couture. On February 13, the company announced that Juicy Couture President LeAnn Nealz was leaving the company after a little more than two years in the position. It's a revolving door at Fifth & Pacific and the blame falls squarely on McComb. He's obviously too difficult to work for. Kate Spade is McComb's last chance. There's nothing left for him to hawk at this point. Frankly, I feel sorry for people who've bought into his never-ending turnaround plan. McComb's search for ultimate redemption will likely end in failure, much like his six-year stint as CEO. At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.