Kate Spade: Shopping for Value

02/04/2015 7:00 am EST

Focus: STOCKS

Our latest Focus Stock was formerly known as Fifth & Pacific Companies (until February 2014) and, prior to that, Liz Claiborne (until May 2012), recalls T. Amobi, S&P Capital IQ equity analyst in Standard & Poor's The Outlook.

Kate Spade (KATE), which carries S&P Capital IQ's highest Strong Buy investment recommendation, designs and markets premium-priced fashion accessories and related products for women and men under its family of namesake brands.

KATE's products are sold through wholly-owned specialty retail and outlet stores, select specialty retail, and upscale department stores.

By the end of the 2014 third quarter, the company operated 98 specialty retail stores and 57 outlet stores in North America, while the international unit operated 43 and 11, respectively, as well as 50 concessions.

The company divested its Juicy Couture and Lucky Brand businesses and sold the Liz Claiborne and Monet brands.

Conversely, during 2013 and early 2014, the company reacquired the existing Kate Spade businesses in Southeast Asia for $32 million and, earlier in 2012, acquired the 51% interest in Kate Spade Japan from its former joint venture partner for $41 million.

With the fourth quarter and full year 2014 earnings release expected in late February, we project a 13% decline in net sales for 2014, mainly due to some of the previously highlighted asset divestitures.

However, with ongoing retail expansion and conversions, we see net sales to rebounding nearly 28% in 2015, with continued strong gains in the Kate Spade North America and Kate Spade International segments.

We believe KATE is on track to achieve a seemingly ambitious target range of 18% to 20% in adjusted EBITDA margins by 2016.

With lower interest expense after a reduction in net debt on the proceeds from recent asset divestitures, we forecast 2015 EPS of $0.67, a significant improvement from projected EPS of $0.27 in 2014.

We believe the shares offer attractive upside at recent levels. Our 12-month target price is $36, which implies a price-to-sales ratio of 3.3X based on our 2015 estimates.

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