10. ADDITIONAL FINANCIAL INFORMATION
Condensed Consolidated Statements of Cash Flows Supplementary Disclosures
During the six months ended July 2, 2016 and July 4, 2015, net income tax payments were $1.2 million. During the six months ended July 2, 2016 and July 4, 2015, the Company made interest payments of $12.5 million and $8.6 million, respectively. The Company received interest payments of $9.4 million for the six months ended July 4, 2015, including outstanding interest and payment in kind under the Lucky Brand Note. As of July 2, 2016, January 2, 2016 and July 4, 2015, the Company accrued capital expenditures totaling $5.4 million, $8.1 million and $6.9 million, respectively.
Related Party Transactions
In the first quarter of 2015, the Company and Walton Brown, a subsidiary of The Lane Crawford Joyce Group (“LCJG”), formed two joint ventures focused on growing the Company’s business in Greater China. Following the formation of the joint ventures, both Kate Spade Hong Kong, Limited, a wholly-owned subsidiary of the Company, and Walton Brown each own 50.0% of the shares of KS China Co., Limited (“KSC”) and KS HMT Co., Limited (“KS HMT”), the holding company for the KATE SPADE businesses in Hong Kong, Macau and Taiwan.
With an equal partnership structure, the Company and Walton Brown actively manage the businesses together. The joint ventures each have an initial term of 10 years. To effectuate the new joint ventures, (i) the Company acquired a 60.0% interest in KSC (in which the Company already owned a 40.0% interest) from E-Land Fashion China Holdings Limited (“E-Land”), its former partner in China, for an aggregate payment of $36.0 million, comprised of $10.0 million to acquire E-Land’s interest in KSC and $26.0 million to terminate related contracts and (ii) the Company received a net $17.4 million from LCJG for their 50.0% interests in the joint ventures, subject to adjustments. As a result, the Company no longer consolidates the operations for the businesses in Hong Kong, Macau and Taiwan, which it acquired on February 5, 2014 and had net sales of approximately $6.4 million in 2015, through the transaction date. Upon closing of the KS HMT joint venture, $16.0 million of goodwill related to the KATE SPADE businesses in Hong Kong, Macau and Taiwan and $14.0 million of net assets of KS HMT were reclassified to Investment in unconsolidated subsidiaries, which was included in Other Assets on the accompanying Condensed Consolidated Balance Sheets. The Company concluded the carrying values of the assets and liabilities for Hong Kong, Macau and Taiwan approximated fair value, due in part to the recent acquisition of those territories from Globalluxe Kate Spade HK Limited. Accordingly, no gain or loss was recorded on the formation of KS HMT. The $26.0 million charge incurred in the first quarter of 2015 to terminate contracts associated with the KSC joint venture is recorded in SG&A on the accompanying Condensed Consolidated Statement of Operations.
The Company accounts for its investments in the joint ventures under the equity method of accounting. The Company’s equity in losses of its equity investees was $3.2 million and $2.8 million during the six months ended July 2, 2016 and July 4, 2015, respectively, and $2.0 million for the three months ended July 2, 2016 and July 4, 2015. During the third quarter of 2015, the Company and Walton Brown each loaned $5.0 million to KSC. During the first quarter of 2016, the Company and Walton Brown each made additional loans of $0.7 million to KSC and $5.8 million to KS HMT. As of July 2, 2016, January 2, 2016 and July 4, 2015, the Company recorded $33.8 million, $28.1 million and $24.6 million, respectively, related to its Investments in and advances to unconsolidated subsidiaries, which was included in Other assets on the accompanying Condensed Consolidated Balance Sheets.
11. SEGMENT REPORTING
The Company operates its kate spade new york and JACK SPADE brands through one operating segment in North America and three operating segments internationally: Japan, Asia (excluding Japan) and Europe. The Company’s Adelington Design Group reportable segment is also an operating segment. The three reportable segments described below represent the Company’s activities for which separate financial information is available and which is utilized on a regular basis by the Company’s CODM to evaluate performance and allocate resources. In identifying the Company’s reportable segments, the Company considers its management structure and the economic characteristics, products, customers, sales growth potential and long-term profitability of its operating segments. As such, the Company configured its operations into the following three reportable segments:
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·
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KATE SPADE North America
segment
– consists of the Company’s kate spade new york and JACK SPADE brands in North America.
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·
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KATE SPADE International segment
– consists of the Company’s kate spade new york and JACK SPADE brands in International markets (principally in
Japan, Asia (excluding Japan), Europe and Latin America
).
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Business Segments
We operate our kate spade new york and JACK SPADE brands through one operating segment in North America and three operating segments internationally: Japan,
Asia (excluding Japan)
and Europe. Our Adelington Design Group reportable segment is also an operating segment. The three reportable segments described below represent activities for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker (“CODM”) to evaluate performance and allocate resources. In identifying our reportable segments, we considered our management structure and the economic characteristics, products, customers, sales growth potential and long-term profitability of our operating segments.
As such, we configured our operations into the following three reportable segments:
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·
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KATE SPADE
North America
segment
– consists of our kate spade new york and JACK SPADE brands in North America.
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·
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KATE SPADE International segment
– consists of our kate spade new york and JACK SPADE brands in International markets (principally in
Japan,
Asia (excluding Japan)
, Europe and Latin America
).
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·
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Adelington Design Group segment
– consists of: (i) exclusive arrangements to supply jewelry for the LIZ CLAIBORNE and MONET brands and (ii) the licensed LIZWEAR and LIZ CLAIBORNE NEW YORK brands.
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We, as licensor, also license to third parties the right to produce and market products bearing certain Company-owned trademarks.
Market Environment
The industries in which we operate have historically been subject to cyclical variations, including recessions in the general economy. Our results are dependent on a number of factors impacting consumer spending, including, but not limited to, general economic and business conditions; consumer confidence; wages and employment levels; the housing market; levels of perceived and actual consumer wealth; consumer debt levels; availability of consumer credit; credit and interest rates; fluctuations in foreign currency exchange rates; fuel and energy costs; energy shortages; the performance of the financial equity and credit markets; tariffs and other trade barriers; taxes; general political conditions, both domestic and abroad; and the level of customer traffic within department stores, malls and other shopping and selling environments, including tourist dependent markets.
Macroeconomic challenges and uncertainty continue to dampen consumer spending; job growth remains inconsistent, with stagnating real wages in certain markets in which we operate; consumer retail traffic remains inconsistent and the retail environment remains promotional. Furthermore, economic conditions in international markets in which we operate, including Asia, the United Kingdom and the remainder of continental Europe, remain uncertain and volatile. Economic conditions outside of our markets may also have a negative impact on the markets in which we operate. We are focusing on initiatives that drive margin improvement and continue to grow the kate spade new york brand through product category and geographic expansion across our four category pillars: women’s, men’s, children’s and home.
Competitive Profile
We operate in global fashion markets that are intensely competitive and subject to, among other things, macroeconomic conditions and consumer demands, tastes and discretionary spending habits. As we anticipate that the global economic uncertainty will continue into the foreseeable future, we will continue to carefully manage liquidity and spending.
In summary, the measure of our success in the future will depend on our ability to continue to navigate through an uncertain macroeconomic environment with challenging market conditions, execute on our strategic vision, including attracting and retaining the management talent necessary for such execution, designing and delivering products that are acceptable to the marketplaces that we serve, sourcing the manufacture and distribution of our products on a competitive and efficient basis, and continuing to drive profitable growth. We have established the following operating and financial goals to further develop kate spade new york into a global lifestyle brand: (i) driving top line growth by opening kate spade new york retail
locations in North America; expanding product categories within our existing network as well as new channels, continuing e-commerce expansion and entering into local licenses to meet customer needs in Japan; focusing on our e-commerce site as a global flagship to influence purchases both online and in our retail stores; and expanding our presence in selected geographies through a partnered approach that requires little capital and is expected to be accretive to operating margins; (ii) driving quality of sale initiatives with continued moderation of promotions across channels and increased marketing that leverages customer relationship management capability and focuses on acquiring full price customers to support those efforts; (iii) delivering the world of kate spade new york to our customer seamlessly across channels through a channel agnostic approach, while using our e-commerce site as a global flagship, offering our broadest product assortment across our category pillars and improving delivery speed to our consumer through a buy anywhere, receive anywhere model; and (iv) increasing product accessibility and improving our speed-to-market capabilities through micro-assorting and localization at the store level, focusing on regional product, volume and climate to better assort by market taste and provide our consumer what she wants, when she wants it.
Reference is also made to the other economic, competitive, governmental and technological factors affecting our operations, markets, products, services and prices as set forth in this report, including, without limitation, under “Statement Regarding Forward
-
Looking Statements” and “Item 1A – Risk Factors” in this Form 10-Q and our 2015 Annual Report on Form 10-K.
Recent Developments and Operational Initiatives
In the fourth quarter of 2015, we launched kate spade new york e-commerce websites in Germany, Italy, Spain and the Netherlands. In the third quarter of 2015, we launched our e-commerce website in France.
In the second quarter of 2015, we signed a distribution agreement for our operations in Latin America, including in Brazil. As part of these actions, we closed our Company-operated stores in Brazil during the third quarter of 2015 and no longer operate directly in Brazil.
In the first quarter of 2015, we entered a global licensing agreement with Fossil Group, Inc. (“Fossil”) for the design, development and distribution of kate spade new york watches through 2025, with the first collection of watches designed, developed and distributed in collaboration with us to launch in 2016. Accordingly, we now earn royalty income under the agreement with Fossil and no longer sell watches through our wholesale channel.
In the first quarter of 2015 we:
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acquired the 60.0% interest in KS China Co., Limited (“KSC”) owned by E-Land Fashion China Holdings, Limited (“E-Land”) for $36.0 million, including a contract termination payment of $26.0 million; and
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·
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converted the reacquired businesses in Hong Kong, Macau and Taiwan and the KATE SPADE business in China into 50.0% owned joint ventures with Walton Brown, a subsidiary of The Lane Crawford Joyce Group (“LCJG”), a leading luxury retail, brand management and distribution company in Asia, and received a net $17.4 million from LCJG for their interests in the joint ventures, subject to adjustments.
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On January 29, 2015, we announced the discontinuation of KATE SPADE SATURDAY as a standalone business. We also announced a new business model for JACK SPADE to leverage the distribution network of its retail partners and expand its e-commerce platform. As part of these actions, substantially all of KATE SPADE SATURDAY’s Company-owned and three partnered store locations were closed by the end of the second quarter of 2015. We also closed JACK SPADE’s Company-owned stores by the end of the second quarter of 2015.
For a discussion of certain risks relating to our recent initiatives, see “Item 1A — Risk Factors” in the Annual Report on Form 10-K.
Discontinued Operations
The activities of our former Lucky Brand and Juicy Couture businesses have been segregated and reported as discontinued operations for all periods presented. The initiatives relating to the KATE SPADE SATURDAY business, the JACK SPADE Company-owned stores and our directly operated business in Brazil
did not represent a strategic shift in our operations and therefore were not reported as discontinued operations.
Overall Results for the Six Months Ended July 2, 2016
Net Sales
Net sales for the first half of 2016 were $594.1 million, an increase of $57.7 million or 10.8%, compared to 2015 net sales of $536.4 million.
The increase reflected an increase in net sales in our KATE SPADE North America segment, partially offset by reduced net sales in our KATE SPADE International segment and our Adelington Design Group segment. The increase in net sales compared to the first half of 2015 includes period-over-period decreases of (i) $24.1 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly operated business in Brazil and (ii) $6.4 million related to the conversion of the Hong Kong, Macau and Taiwan entities to a joint venture. The impact of changes in foreign currency exchange rates in our international businesses increased net sales by $2.6 million.
Gross Profit and Income (Loss) from Continuing Operations
Gross profit for the first half of 2016 was $360.2 million, an increase of $34.0 million compared to 2015, primarily due to increased net sales in our KATE SPADE North America segment. Our gross profit rate decreased from 60.8% in 2015 to 60.6% in 2016. The decrease was primarily driven by a decrease in gross profit rate in our KATE SPADE North America segment outlet stores. These decreases were partially offset by (i) the dilutive impact on the 2015 gross profit rate of the wind-down operations of KATE SPADE SATURDAY and JACK SPADE brick and mortar stores, which were substantially completed in the second quarter of 2015; (ii) an increase in gross profit rate related to our KATE SPADE North America specialty retail stores; and (iii) an increase in penetration of our KATE SPADE North America e-commerce operations.
We recorded income from continuing operations of $35.5 million in the first six months of 2016, as compared to a loss from continuing operations of $(44.3) million in 2015. The period-over-period change primarily reflected: (i) a decrease in Selling, general & administrative expenses (“SG&A”); (ii) an increase in gross profit; and (iii) the absence in 2016 of a loss on settlement of note receivable of $9.9 million that was recorded in 2015.
Balance Sheet
We ended the first six months of 2016 with a net debt position (total debt less cash and cash equivalents and marketable securities) of $87.5 million as compared to $166.0 million at the end of the first six months of 2015.
The $78.5 million decrease in our net debt primarily reflected: (i) the generation of $160.7 million of cash from continuing operating activities over the past 12 months; (ii) the funding of $
56.0
million of capital and in-store shop expenditures over the last 12 months; and (iii) the funding of aggregate loans of $11.5 million to the
KSC
and KS HMT Co., Limited (“
KS HMT”)
joint ventures.
RESULTS OF OPERATIONS
As discussed above, we present our results based on three reportable segments.
SIX MONTHS ENDED JULY 2, 2016 COMPARED TO SIX MONTHS ENDED JULY 4, 2015
The following table sets forth our operating results for the six months ended July 2, 2016 (comprised of 26 weeks) compared to the six months ended July 4, 2015 (comprised of 26 weeks):
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Six Months Ended
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Variance
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July 2, 2016
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July 4, 2015
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Dollars in millions
|
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(26 Weeks)
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(26 Weeks)
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$
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%
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|
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|
|
|
|
|
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Net Sales
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$
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594.1
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$
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536.4
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$
|
57.7
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10.8
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%
|
|
|
|
|
|
|
|
|
|
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|
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Gross Profit
|
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360.2
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|
326.2
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|
34.0
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|
|
10.4
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%
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|
|
|
|
|
|
|
|
|
|
|
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Selling, general & administrative expenses
|
|
|
308.4
|
|
|
345.8
|
|
|
37.4
|
|
|
10.8
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%
|
|
|
|
|
|
|
|
|
|
|
|
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Operating Income (Loss)
|
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51.8
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|
(19.6)
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71.4
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*
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Other expense, net
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(3.3)
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(3.2)
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(0.1)
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(3.8)
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%
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Loss on settlement of note receivable
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—
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(9.9)
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9.9
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*
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Interest expense, net
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(9.9)
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(8.7)
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(1.2)
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(14.1)
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%
|
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|
|
|
|
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Provision for income taxes
|
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3.1
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|
2.9
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(0.2)
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(3.0)
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%
|
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|
|
|
|
|
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|
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Income (Loss) from Continuing Operations
|
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35.5
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(44.3)
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79.8
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*
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Discontinued operations, net of income taxes
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2.9
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(2.4)
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5.3
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*
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Net Income (Loss)
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$
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38.4
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$
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(46.7)
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$
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85.1
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*
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*
Not meaningful.
Net Sales
Net sales for the first half of 2016 were $594.1 million, an increase of $57.7 million or 10.8%, compared to 2015 net sales of $536.4 million. The increase reflected an increase in net sales in our KATE SPADE North America segment, partially offset by reduced net sales in our KATE SPADE International segment and our Adelington Design Group segment. The increase in net sales compared to the first half of 2015 includes period-over-period decreases of (i) $24.1 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly operated business in Brazil and (ii) $6.4 million related to the conversion of the Hong Kong, Macau and Taiwan entities to a joint venture. The impact of changes in foreign currency exchange rates in our international businesses increased net sales by $2.6 million.
Including e-commerce net sales, kate spade new york comparable direct-to-consumer sales increased by 10.2% in the first six months of 2016; excluding e-commerce net sales, kate spade new york comparable direct-to-consumer sales increased by 3.9% in the first six months of 2016.
Net sales results for our segments are provided below:
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KATE SPADE North America
net sales
were $490.1 million, a 13.6% increase compared to 2015 net sales of $431.3 million, primarily reflecting increases across all channels of our kate spade new york brand. The increase in net sales compared to the first half of 2015 includes a period-over-period decrease of $12.8 million related to the KATE SPADE SATURDAY brand as we substantially completed the wind-down in the second quarter of 2015 and a decrease in our JACK SPADE brand due to the closure of our brick and mortar stores as we reposition the brand.
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We ended the first half of 2016 with 108 kate spade new york specialty retail stores and 65 outlet stores, reflecting the net addition of 11 kate spade new york specialty retail stores and 3 outlet stores over the last 12 months. Key operating metrics for our kate spade new york
North America retail operations included the following
:
— Average retail square footage in the first half of 2016 was approximately 387 thousand square feet, a 10.1% increase compared to 2015; and
— Sales productivity was $645 per average square foot for the first half of 2016, an increase of 1.2% compared to the first half of 2015, on a constant currency basis. Sales productivity was $640 for the first half of 2015, on a reported basis.
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KATE SPADE International
net sales were
$92.3
million, a 1.0% decrease compared to 2015 net sales of $
93.2
million, primarily driven by a $9.6 million decrease related to
the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar and our directly operated business in Brazil
and a $6.4 million decrease related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture
, partially offset by an increase in net sales in our Japan and Europe operations
.
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We ended the first half of 2016 with 25 kate spade new york specialty retail stores, 14 outlet stores and 55 concessions, reflecting the net addition over the last 12 months of 3 concession stores and 1 outlet store and the net reduction of 1 specialty retail store, including the closure of 7 specialty retail stores and 1 outlet store related to the wind-down of our directly operated business in Brazil. Key operating metrics for our kate spade new york
International
retail operations in Japan and Europe included the following:
— Average retail square footage, including concessions, in the first half of 2016 was approximately 84 thousand square feet, an 18.4% increase compared to 2015; and
— Sales productivity was $746 per average square foot in the first half of 2016, a decrease of 12.0% compared to the first half of 2015, on a constant currency basis. Sales productivity was $795 for the first half of 2015, on a reported basis.
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Adelington Design Group
net sales were $11.8 million for the first six months of 2016, a decrease of $0.2 million, or 1.5%, compared to 2015, primarily related to a $1.7 million decrease in the exited TRIFARI, TRINA TURK and Kensie brands and a $1.0 million decrease in our LIZWEAR brand, partially offset by a $2.5 million increase in the MONET and LIZ CLAIBORNE brands.
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Comparable direct-to-consumer net sales are calculated as follows:
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New stores become comparable after 14 full fiscal months of operations (on the first day of the 15th full fiscal month);
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Except in unusual circumstances, closing stores become non-comparable one full fiscal month prior to the scheduled closing date;
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·
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A remodeled store will be changed to non-comparable when there is a 20.0% or more increase/decrease in its selling square footage (effective at the start of the fiscal month when construction begins). The store becomes comparable again after 14 full fiscal months from the re-open date;
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·
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A store that relocates becomes non-comparable when the new location is materially different from the original location (in respect to selling square footage and/or traffic patterns);
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·
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Stores that are acquired are not comparable until they have been reflected in our results for a period of 12 months; and
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·
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E-commerce sales are comparable after 12 full fiscal months from the website launch date (on the first day of the 13th full month).
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We provide comparable direct-to-consumer net sales as a key operating metric because we consider it an important supplemental measure of performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry.
We evaluate sales productivity based on net sales per average square foot, which is defined as net sales divided by the average of beginning and end of period gross square feet and excludes e-commerce net sales.
Gross Profit
Gross profit for the first half of 2016 was $360.2 million, an increase of $34.0 million compared to 2015, primarily due to increased net sales in our KATE SPADE North America segment. Our gross profit rate decreased from 60.8% in 2015 to
60.6% in 2016. The decrease was primarily driven by a decrease in gross profit rate in our KATE SPADE North America segment outlet stores. These decreases were partially offset by (i) the dilutive impact on the 2015 gross profit rate of the wind-down operations of KATE SPADE SATURDAY and JACK SPADE brick and mortar stores, which were substantially completed in the second quarter of 2015; (ii) an increase in gross profit rate related to our KATE SPADE North America specialty retail stores; and (iii) an increase in penetration of our KATE SPADE North America e-commerce operations.
Expenses related to warehousing activities, including receiving, storing, picking, packing and general warehousing charges are included in SG&A; accordingly, our gross profit may not be directly comparable to others who may include these expenses as a component of cost of goods sold.
Selling, General & Administrative Expenses
SG&A decreased $37.4 million, or 10.8%, to $308.4 million in the first half of 2016 compared to the first half of 2015. The decrease in SG&A reflected the following:
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The absence of a $26.0 million charge incurred in 2015 to terminate contracts with our former joint venture partner in China;
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The absence of $26.0 million of expenses incurred in 2015 associated with our streamlining initiatives, brand-exiting activities and acquisition related costs;
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·
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A $6.7 million decrease in SG&A in our KATE SPADE International segment, including a reduction associated with the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture and the wind-down of our Company-owned stores in Brazil;
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·
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A $1.6 million decrease in SG&A in our Adelington Design Group segment; and
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·
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A $22.9 million increase in SG&A in our KATE SPADE North America segment, primarily related to direct-to-consumer expansion reflecting: (i) increased compensation related expenses; (ii) increased e-commerce fees; and (iii) increased rent and other store operating expenses.
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SG&A as a percentage of net sales was 51.9% in 2016, compared to 64.5% in 2015.
Operating Income (Loss)
Operating income for the
first half
of 2016 was $51.8 million (8.7% of net sales) compared to an operating loss of $(19.6) million ((3.7)% of net sales) in 2015.
Other Expense, Net
Other expense, net amounted to $3.3 million and $3.2 million in the six months ended July 2, 2016 and July 4, 2015, respectively, and consisted primarily of (i) equity in the losses of KSC and KS HMT of $3.2 million and $2.8 million, respectively, and (ii) foreign currency transaction gains and losses.
Loss on Settlement of Note Receivable
In the
first half of
2015, we recognized a $9.9 million loss related to the prepayment discount on the settlement of the Lucky Brand Note (see Note 2 of Notes to Condensed Consolidated Financial Statements).
Interest Expense, Net
Interest expense, net was $9.9 million for the six months ended
July 2, 2016
and $8.7 million for the six months ended
July 4, 2015
, primarily reflecting a net reduction of interest income of $1.7 million, driven by $2.1 million associated with the prepayment of the Lucky Brand Note in the
first quarter
of 2015.
Provision for Income Taxes
The income tax provision of $3.1 million and $2.9 million for the six months ended
July 2, 2016
and J
uly 4, 2015, respectively,
primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions.
Income (Loss) from Continuing Operations
Income from continuing operations in the
first half of
2016 was $35.5 million, or 6.0% of net sales compared to a loss from continuing operations of $(44.3) million in the first half of 2015, or (8.3)% of net sales. Earnings per share (“EPS”), Basic and Diluted from continuing operations was $0.28 in 2016 and $(0.35) in 2015.
Discontinued Operations, Net of Income Taxes
Income from discontinued operations in
the first half of
2016 was $2.9 million, reflecting a gain on disposal of discontinued operations of $1.5 million and income from discontinued operations of $1.4 million. Loss from discontinued operations in
the first half of 2015 was $(2.4) million, reflecting a loss on disposal of discontinued operations of $(1.5) million and a $(0.9) million loss from discontinued operations. EPS, Basic and Diluted from discontinued operations was $0.02 in 2016 and $(0.02) in 2015.
Net Income (Loss)
Net income in the first half of 2016 was $38.4 million compared to net loss of $(46.7) million in
the first half
of 2015.
EPS, Basic and Diluted was $0.30 in 2016 and $(0.37) in 2015.
Segment Adjusted EBITDA
Our Chief Executive Officer has been identified as the CODM. Our measure of segment profitability is Adjusted EBITDA of each reportable segment. Accordingly, the CODM evaluates performance and allocates resources based primarily on Segment Adjusted EBITDA. Segment Adjusted EBITDA excludes: (i) depreciation and amortization; (ii) charges due to streamlining initiatives, brand-exiting activities and acquisition related costs; (iii) losses on asset disposals and impairments; and (iv) the $26.0 million charge incurred in the first half of 2015 to terminate contracts with our former joint venture partner in China. The costs of all corporate departments that serve the respective segment are fully allocated. We do not allocate amounts reported below Operating income (loss) to our reportable segments, other than adjusted equity loss in our equity method investees. Our definition of Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Segment Adjusted EBITDA for our reportable segments is provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Variance
|
|
|
|
July 2, 2016
|
|
July 4, 2015
|
|
|
|
|
|
|
Dollars in thousands
|
|
(26 Weeks)
|
|
(26 Weeks)
|
|
$
|
|
%
|
|
Reportable Segments Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
KATE SPADE North America
|
|
$
|
71,980
|
|
$
|
55,853
|
|
$
|
16,127
|
|
28.9%
|
|
KATE SPADE International
(a)
|
|
|
12,590
|
|
|
8,422
|
|
|
4,168
|
|
49.5%
|
|
Adelington Design Group
|
|
|
3,107
|
|
|
1,601
|
|
|
1,506
|
|
94.1%
|
|
Total Reportable Segments Adjusted EBITDA
|
|
|
87,677
|
|
|
65,876
|
|
|
|
|
|
|
Depreciation and amortization, net
(b)
|
|
|
(22,157)
|
|
|
(22,418)
|
|
|
|
|
|
|
Charges due to streamlining initiatives
(c)
, brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net
|
|
|
(844)
|
|
|
(26,953)
|
|
|
|
|
|
|
Joint venture contract termination fee
|
|
|
—
|
|
|
(26,000)
|
|
|
|
|
|
|
Share-based compensation
(d)
|
|
|
(16,156)
|
|
|
(12,756)
|
|
|
|
|
|
|
Adjusted equity loss included in Reportable Segments Adjusted EBITDA
(e)
|
|
|
3,248
|
|
|
2,671
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
51,768
|
|
|
(19,580)
|
|
|
|
|
|
|
Other expense, net
(a)
|
|
|
(3,340)
|
|
|
(3,218)
|
|
|
|
|
|
|
Loss on settlement of note receivable
|
|
|
—
|
|
|
(9,873)
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(9,933)
|
|
|
(8,708)
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
3,020
|
|
|
2,931
|
|
|
|
|
|
|
Discontinued operations, net of income taxes
|
|
|
2,934
|
|
|
(2,370)
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
38,409
|
|
$
|
(46,680)
|
|
|
|
|
|
|
|
(a)
|
|
Amounts include equity in the adjusted losses of our equity method investees of $3.2 million and $2.7 million in 2016 and 2015, respectively.
|
|
(b)
|
|
Excludes amortization included in Interest expense, net.
|
|
(c)
|
|
See Note 8 of Notes to Condensed Consolidated Financial Statements for a discussion of streamlining charges.
|
|
(d)
|
|
Includes share-based compensation expense of $0.2 million in 2015 that was classified as restructuring.
|
|
(e)
|
|
Excludes $0.1 million of joint venture restructuring expense included in equity losses in the six months ended July 4, 2015.
|
A discussion of Segment Adjusted EBITDA of our reportable segments for the six months ended July 2, 2016 and July 4, 2015 follows:
|
·
|
|
KATE SPADE North America
Adjusted EBITDA for the first half of 2016 was $72.0 million (14.7% of net sales), compared to $55.9 million (12.9% of net sales) in 2015. The period-over-period increase reflected an increase in gross profit, as discussed above, partially offset by an increase in SG&A related to direct-to-consumer expansion, including an increase in payroll related expenses, e-commerce fees and rent and other store operating expenses.
|
|
·
|
|
KATE SPADE International
Adjusted EBITDA for the first half of 2016 was $12.6 million (13.6% of net sales), compared to $8.4 million (9.0% of net sales) in 2015. The period-over-period increase reflected a decrease in SG&A primarily associated with the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture and the wind-down of our Company-owned stores in Brazil and increased gross profit.
|
|
·
|
|
Adelington Design Group
Adjusted EBITDA for
the first half of
2016 was $3.1 million (26.4% of net sales), compared to Adjusted EBITDA of $1.6 million (13.4% of net sales) in 2015.
The increase in Adjusted EBITDA reflected reduced SG&A, partially offset by decreased gross profit.
|
THREE MONTHS ENDED JULY 2, 2016 COMPARED TO THREE MONTHS ENDED JULY 4, 2015
The following table sets forth our operating results for the three months ended July 2, 2016 (comprised of 13 weeks) compared to the three months ended July 4, 2015 (comprised of 13 weeks):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Variance
|
|
|
|
July 2, 2016
|
|
July 4, 2015
|
|
|
|
|
|
|
|
Dollars in millions
|
|
(13 Weeks)
|
|
(13 Weeks)
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
319.7
|
|
$
|
281.1
|
|
$
|
38.6
|
|
|
13.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
190.7
|
|
|
171.5
|
|
|
19.2
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses
|
|
|
156.6
|
|
|
154.0
|
|
|
(2.6)
|
|
|
(1.8)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
34.1
|
|
|
17.5
|
|
|
16.6
|
|
|
94.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
|
(3.1)
|
|
|
(1.8)
|
|
|
(1.3)
|
|
|
(69.6)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(4.9)
|
|
|
(5.3)
|
|
|
0.4
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1.5
|
|
|
1.1
|
|
|
(0.4)
|
|
|
(29.7)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations
|
|
|
24.6
|
|
|
9.3
|
|
|
15.3
|
|
|
165.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of income taxes
|
|
|
2.2
|
|
|
(0.8)
|
|
|
3.0
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
26.8
|
|
$
|
8.5
|
|
$
|
18.3
|
|
|
213.5
|
%
|
* Not meaningful.
Net Sales
Net sales for the second quarter of 2016 were $319.7 million, an increase of $38.6 million, or 13.7%, compared to the second quarter of 2015, reflecting
increases in net sales across all of our segments.
The increase in net sales compared to 2015 includes a quarter-over-quarter decrease of $8.4 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly operated business in Brazil.
The impact of changes in foreign currency exchange rates in our international businesses increased net sales by $2.4 million.
Comparable direct-to-consumer net sales for kate spade new york, including e-commerce, increased by 3.9% in the second quarter of 2016; excluding e-commerce net sales, comparable direct-to-consumer net sales increased by 1.1%.
KATE SPADE North America
net sales were $271.4 million for the second quarter of 2016, a 15.1% increase compared to 2015,
reflecting increases across all channels of our kate spade new york brand
. The increase in net sales
compared to the second quarter of 2015 includes a quarter-over-quarter decrease of
$3.9 million related to the KATE SPADE SATURDAY brand as we substantially completed the wind-down in the second quarter of 2015 and a decrease in our JACK SPADE brand due to the closure of our brick and mortar stores as we reposition the brand
. Key operating metrics for our kate spade new york North America retail operations included the following:
—
Average retail square footage in the second quarter of 2016 was approximately 391 thousand square feet, a 9.3% increase compared to 2015; and
—
Sales productivity was $374 per average square foot for the second quarter of 2016, a decrease of 0.9% compared to the second quarter of 2015, on a constant currency basis. Sales productivity was $378 for the second quarter of 2015, on a reported basis.
KATE SPADE International
net sales were $43.4 million for the second quarter of 2016, a 6.6% increase compared to 2015, primarily driven by an increase in net sales in our Japan and Europe operations. The increase in net sales compared to the second quarter of 2015 includes a quarter-over-quarter decrease of $4.5 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar and our directly operated business in Brazil. Key operating metrics for
our kate spade new york
International
retail operations in Japan and Europe included the following
:
—
Average retail square footage in the second quarter of 2016 was approximately 87 thousand square feet, a 22.1% increase compared to 2015; and
—
Sales productivity was $352 per average square foot for the second quarter of 2016, a decrease of 13.5% compared to the second quarter of 2015, on a constant currency basis. Sales productivity was $367 for the second quarter of 2015, on a reported basis.
Adelington Design Group
net sales were $4.9 million for the second quarter of 2016, an increase of $0.2 million, or 4.8%, compared to 2015,
primarily related to a $0.8 million increase in the MONET and LIZ CLAIBORNE brands, partially offset by a $0.6 million decrease in our LIZWEAR brand.
Gross Profit
Gross profit in the second quarter of 2016 was $190.7 million (59.7% of net sales), compared to $171.5 million (61.0% of net sales) in the second quarter of 2015. The increase in gross profit is primarily due to increased net sales in our KATE SPADE North America and KATE SPADE International segments.
The decrease in gross profit rate was primarily driven by (i) a decrease in gross profit rate in our KATE SPADE North America segment outlet stores and (ii) an increase in penetration of wholesale sales in our KATE SPADE North America segment. These decreases were partially offset by (i) an increase in gross profit rate related to our KATE SPADE North America specialty retail stores; and (ii) the dilutive impact on the 2015 gross profit rate of the wind-down operations of KATE SPADE SATURDAY and JACK SPADE brick and mortar stores, which were substantially completed in the second quarter of 2015
.
Selling, General & Administrative Expenses
SG&A increased $2.6 million, or 1.8%, to $156.6 million in the second quarter of 2016 compared to the second quarter of 2015. The increase in SG&A reflected the following:
An $11.7 million increase in SG&A in our KATE SPADE North America segment, primarily related to direct-to-consumer expansion reflecting: (i) increased compensation related expenses; (iii) increased rent and other store operating expenses
; and
(iii) increased e-commerce fees;
|
·
|
|
The absence of $7.5 million of expenses incurred in 2015 associated with our streamlining initiatives, brand-exiting activities and acquisition related costs;
|
|
·
|
|
A $0.9 million decrease in SG&A in our Adelington Design Group segment; and
|
|
·
|
|
A $0.7 million decrease in SG&A in our KATE SPADE International segment.
|
Operating Income
Operating income for the second quarter of 2016 was $34.1 million (10.7% of net sales) compared to $17.5 million (6.2% of net sales) in 2015.
Other Expense, Net
Other expense, net amounted to $3.1 million and $1.8 million in the three months ended July 2, 2016 and July 4, 2015, respectively. Other expense, net consisted primarily of: (i) equity in the losses of KSC and KS HMT of $2.0 million; and (ii) foreign currency transaction gains and losses.
Interest Expense, Net
Interest expense, net was $4.9 million for the three months ended July 2, 2016, as compared to $5.3 million for the three months ended July 4, 2015, primarily reflecting an increase of interest income of $0.2 million.
Provision for Income Taxes
The income tax provision of $1.5 million and $1.1 million for the three months ended July 2, 2016 and July 4, 2015, respectively, primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions.
Income from Continuing Operations
Income from continuing operations in the second quarter of 2016 was $24.6 million, or 7.7% of net sales, compared to $9.3 million in the second quarter of 2015, or 3.3% of net sales. EPS, Basic and Diluted from continuing operations was $0.19 in 2016 and $0.07 in 2015.
Discontinued Operations, Net of Income Taxes
Income from discontinued operations in the second quarter of 2016 was $2.2 million, reflecting a gain on disposal of discontinued operations of $0.3 million and income from discontinued operations of $1.9 million. Loss from discontinued operations in the second quarter of 2015 was $(0.8) million, reflecting a loss on disposal of discontinued operations of $(0.8) million. EPS, Basic and Diluted from discontinued operations was $0.02 in 2016 and flat in 2015.
Net Income
Net income in the second quarter of 2016 was $26.8 million, compared to $8.5 million in the second quarter of 2015. EPS, Basic and Diluted was $0.21 in 2016 and $0.07 in 2015.
Segment Adjusted EBITDA
Segment Adjusted EBITDA for our reportable segments are provided below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Variance
|
|
|
|
July 2, 2016
|
|
July 4, 2015
|
|
|
|
|
|
|
Dollars in thousands
|
|
(13 Weeks)
|
|
(13 Weeks)
|
|
$
|
|
%
|
|
Reportable Segments Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
KATE SPADE North America
|
|
$
|
47,393
|
|
$
|
37,781
|
|
$
|
9,612
|
|
25.4%
|
|
KATE SPADE International
(a)
|
|
|
4,053
|
|
|
3,433
|
|
|
620
|
|
18.1%
|
|
Adelington Design Group
|
|
|
922
|
|
|
(77)
|
|
|
999
|
|
*
|
|
Total Reportable Segments Adjusted EBITDA
|
|
|
52,368
|
|
|
41,137
|
|
|
|
|
|
|
Depreciation and amortization, net
(b)
|
|
|
(11,436)
|
|
|
(10,872)
|
|
|
|
|
|
|
Charges due to streamlining initiatives
(c)
, brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net
|
|
|
(638)
|
|
|
(7,899)
|
|
|
|
|
|
|
Share-based compensation
|
|
|
(8,246)
|
|
|
(6,753)
|
|
|
|
|
|
|
Adjusted equity loss included in Reportable Segments Adjusted EBITDA
(d)
|
|
|
2,007
|
|
|
1,933
|
|
|
|
|
|
|
Operating Income
|
|
|
34,055
|
|
|
17,546
|
|
|
|
|
|
|
Other expense, net
(a)
|
|
|
(3,093)
|
|
|
(1,823)
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(4,937)
|
|
|
(5,344)
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1,466
|
|
|
1,130
|
|
|
|
|
|
|
Discontinued operations, net of income taxes
|
|
|
2,214
|
|
|
(708)
|
|
|
|
|
|
|
Net Income
|
|
$
|
26,773
|
|
$
|
8,541
|
|
|
|
|
|
|
*
Not meaningful.
(a)
Amounts include equity in the adjusted losses of our equity method investees of $2.0 million and $1.9 million for the three months ended July 2, 2016 and July 4, 2015.
(b)
Excludes amortization included in Interest expense, net.
(c)
See Note 8 of Notes to Condensed Consolidated Financial Statements for a discussion of streamlining charges.
(d)
Excludes $0.1 million of joint venture restructuring expense included in equity losses in the three months ended July 4, 2015.
A discussion of Segment Adjusted EBITDA of our reportable segments for the three months ended July 2, 2016 and July 4, 2015 follows:
KATE SPADE North America
Adjusted EBITDA for the second quarter of 2016 was $47.4 million (17.5% of net sales), compared to $37.8 million (16.0% of net sales) in 2015. The period-over-period increase reflected an increase in gross profit, as discussed above, partially offset by an increase in SG&A related to direct-to-consumer expansion, including an increase in payroll related expenses, rent and other store operating expenses and increased e-commerce fees.
KATE SPADE International
Adjusted EBITDA for the second quarter of 2016 was $4.1 million (9.3% of net sales), compared to $3.4 million (8.4% of net sales) in 2015. The period-over-period increase primarily reflected reduced SG&A related to the wind-down of our Company-owned stores in Brazil and an increase in gross profit.
Adelington Design Group
Adjusted EBITDA for the second quarter of 2016 was $0.9 million (18.8% of net sales), and was flat ((1.6%) of net sales) in 2015. The increase in Adjusted EBITDA primarily reflected reduced SG&A.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements
Our primary ongoing cash requirements are to: (i) fund seasonal working capital needs (primarily accounts receivable and inventory); (ii) fund capital expenditures related to the opening and refurbishing of our specialty retail and outlet stores and normal maintenance activities; (iii) invest in our information systems; (iv) fund operational and contractual obligations, including remaining efforts associated with our streamlining initiatives; and (v) potentially repurchase or retire debt obligations.
Sources and Uses of Cash
Our historical sources of liquidity to fund ongoing cash requirements include cash flows from operations, cash and cash equivalents, as well as borrowings through our lines of credit.
Term Loan.
The outstanding balance of the term loans in an aggregate principal amount of $400.0 million maturing in April 2021, (collectively, the “Term Loan”) as provided under a term loan credit agreement that we entered into on April 10, 2014 (the “Term Loan Credit Agreement”) is required to be prepaid in an amount equal to 50.0% of our Excess Cash Flow (as defined in the Term Loan Credit Agreement) with respect to each fiscal year ending on or after January 2, 2016. The percentage of Excess Cash Flow that must be so applied is reduced to 25.0% if our consolidated net total debt ratio is less than 2.75 to 1.0 and to 0% if our consolidated net total debt ratio is less than 2.25 to 1.0. Lenders may elect not to accept mandatory prepayments. No such prepayment was required with respect to the fiscal year ended January 2, 2016.
ABL Facility.
Based on our forecast of borrowing availability under the
amended and restated revolving credit facility due May 2019 (as amended to date, the “ABL Facility”)
, we anticipate that cash flows from operations and the projected borrowing availability under our ABL Facility will be sufficient to fund our liquidity requirements for at least the next 12 months.
There can be no certainty that availability under the ABL Facility will be sufficient to fund our liquidity needs. Should we be unable to comply with the requirements in the ABL Facility, we would be unable to borrow under such agreement and any amounts outstanding would become immediately due and payable, unless we were able to secure a waiver or an amendment under the ABL Facility. Should we be unable to borrow under the ABL Facility, or if outstanding borrowings thereunder become immediately due and payable, our liquidity would be significantly impaired, which would have a material adverse effect on our business, financial condition and results of operations. In addition, an acceleration of amounts outstanding under the ABL Facility would likely cause cross-defaults under our other outstanding indebtedness, including the
Term Loan
.
The sufficiency and availability of our projected sources of liquidity may be adversely affected by a variety of factors, including, without limitation: (i) the level of our operating cash flows, which will be impacted by retailer and consumer acceptance of our products, general economic conditions and the level of consumer discretionary spending; (ii) the status of, and any adverse changes in, our credit ratings; (iii) our ability to maintain required levels of borrowing availability
under the ABL Facility and to comply with other covenants included in our debt and credit facilities; (iv) the financial wherewithal of our larger department store and specialty retail store customers; and (v) interest rate and exchange rate fluctuations.
Because of the continuing uncertainty and risks relating to future economic conditions, we may, from time to time, explore various initiatives to improve our liquidity, including issuance of debt securities, sales of various assets, additional cost reductions and other measures. In addition, where conditions permit, we may also, from time to time, seek to retire, exchange or purchase our outstanding debt in privately-negotiated transactions or otherwise. We may not be able to successfully complete any such actions.
Cash and Debt Balances.
We ended the first half of 2016 with
$306.5
million in cash and marketable securities, compared to $
231.4
million at the end of the first half of 2015 and with
$394.1
million of debt outstanding at the end of the first half of 2016, compared to
$397.5
million at the end of the first half of 2015
.
The $78.5 million decrease in our net debt primarily reflected: (i) the generation of $160.7 million of cash from continuing operating activities over the past 12 months; (ii) the funding of $56
.0
million of capital and in-store shop expenditures over the last 12 months; and (iii) the funding of aggregate loans of $11.5 million to the
KSC
and
KS HMT
joint ventures
.
Accounts Receivable
decreased $0.9 million, or 1.3%, at July 2, 2016 compared to July 4, 2015,
primarily due to
the impact of the wind-down of the KATE SPADE SATURDAY business and our Brazil operations. Accounts receivable decreased $32.4 million, or 33.5%, at July 2, 2016 compared to January 2, 2016, primarily reflecting the timing of wholesale shipments.
Inventories
increased $29.1 million, or 15.4% at
July 2, 2016 compared to July 4, 2015
, primarily due to an increase in kate spade new york inventory to support growth initiatives.
Inventories increased $25.6 million, or 13.3%, compared to January 2, 2016, primarily due to
an increase in kate spade new york inventory to support growth initiatives and timing of wholesale shipments.
Borrowings
under our ABL Facility peaked at
$8.0 million during the first half of 2015
. We had no outstanding borrowings under our ABL Facility at July 2, 2016 and July 4, 2015.
Net cash provided by operating activities
of our continuing operations was $49.9 million the first half of 2016, compared to $9.7 million in first half of 2015.
This $40.2 million period-over-period change was primarily due to increased earnings in 2016 compared to 2015 (excluding depreciation and amortization, foreign currency gains and losses, impairment charges and other non-cash items), partially offset by an increase in cash outflows related to working capital items
. The operating activities of our discontinued operations used $0.7 million and $10.1 million of cash in the six months ended July 2, 2016 and July 4, 2015, respectively.
Net cash (used in) provided by investing activities
of our continuing operations was $(36.1) million in the first half of 2016, compared to $55.9 million in the first half of 2015. Net cash used in investing activities in the six months ended July 2, 2016
primarily reflected: (i) the use of $26.0 million for capital and in-store shop expenditures
;
(ii) the use of $6.5 million for loans to the KSC and KS HMT joint ventures; and (iii) a purchase price adjustment payment of $2.4 million to LCJG.
Net cash provided by investing activities in the six months ended July 4, 2015
primarily reflected: (i) the receipt of net proceeds of $75.1 million from the settlement of the Lucky Brand Note in March 2015
;
(ii) the receipt of net proceeds of $19.9 million from LCJG for their interest in the joint ventures; (iii) the use of $30.3 million for capital and in-store shop expenditures; and (iv) the payment of $10.0 million to acquire E-Land’s 60.0% interest in KSC.
Net cash used in financing activities
was $3.7 million in the first half of 2016, compared to $6.7 million in the first half of 2015. The $3.0 million period-over-period change primarily reflected a decrease in proceeds from the exercise of stock options of $2.2 million and the absence of a net $6.0 million repayment of borrowings under our ABL Facility in the first half of 2015.
Commitments and Capital Expenditures
Pursuant to a buying/sourcing agency agreement, Li & Fung Limited (“Li & Fung”) acts as a global buying/sourcing agent. On March 24, 2015, we modified the existing arrangement in order to, among other things, transition the buying/sourcing activities for our accessories products to an in-house model, beginning with our Spring 2016 collection. The modifications included a reduction of the annual minimum value of inventory purchases and a change in the commission rates for certain products. We pay Li & Fung an agency commission based on the cost of our product purchases through Li & Fung. We
are obligated to use Li & Fung as our primary buying/sourcing agent for our ready-to-wear apparel products and we may use Li & Fung as a buying/sourcing agent with respect to our accessories products, with all such product purchases applying toward a minimum volume commitment of inventory purchases each year through the expiration of the term of the agreement on March 31, 2018. Our agreement with Li & Fung is not exclusive.
In connection with the disposition of the Lucky Brand business, LIZ CLAIBORNE Canada retail stores, the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico and certain Mexx Canada retail stores, an aggregate of 277 store leases were assigned to or assumed by third parties, for which we or certain of our subsidiaries remain secondarily liable for the remaining obligations on 113 such leases. As of July 2, 2016, the future aggregate payments under these leases amounted to $82.2 million and extended to various dates through 2025.
On December 3, 2014, Mexx Canada Company filed for bankruptcy protection from its creditors under Canadian bankruptcy laws. Although an inactive and insolvent subsidiary of ours may be secondarily liable under approximately 50 leases that were assigned to Mexx Canada Company in connection with the disposal of the Mexx business, we do not currently believe that these circumstances will require payments by us for liabilities under the leases. The amount of our potential liability, if any, with respect to these leases cannot be determined at this time.
Our 2016
capital expenditures are expected to be approximately $65.0 - $70.0 million, compared to $60.2 million in 2015. These expenditures primarily relate to our plan to open approximately 15 Company operated retail stores globally in 2016, net of approximately 7 store closures, the continued technological upgrading of our management information systems and costs associated with the refurbishment of selected specialty retail and outlet stores. We expect capital expenditures and working capital cash needs to be financed with available cash, cash provided by operating activities and our ABL Facility.
Debt consisted of the following:
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|
|
|
|
|
|
|
|
|
|
In thousands
|
|
July 2, 2016
|
|
January 2, 2016
|
|
July 4, 2015
|
|
Term Loan credit facility
(a)
|
|
$
|
386,179
|
|
$
|
388,667
|
|
$
|
389,097
|
|
ABL Facility
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital lease obligations
|
|
|
7,876
|
|
|
8,126
|
|
|
8,361
|
|
Total debt
|
|
$
|
394,055
|
|
$
|
396,793
|
|
$
|
397,458
|
|
|
(a)
|
|
The balance as of July 2, 2016, January 2, 2016 and July 4, 2015 included aggregate unamortized debt discount and deferred financing fees of $5.8 million, $6.3 million and $6.9 million, respectively.
|
For information regarding our debt and credit instruments, refer to Note 5 of Notes to Condensed Consolidated Financial Statements.
Availability under the ABL Facility is an amount equal to the lesser of $200.0 million and a borrowing base that is computed monthly and comprised of
our
eligible cash, accounts receivable and inventory. The ABL Facility also includes a swingline subfacility of $30.0 million, a multicurrency subfacility of $35.0 million and the option to expand the facility by up to $100.0 million under certain specified conditions. A portion of the facility provided under the ABL Facility of up to $125.0 million is available for the issuance of letters of credit, and standby letters of credit may not exceed $40.0 million in the aggregate.
As of July 2, 2016, availability under our ABL Facility was as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of
|
|
|
|
|
|
|
|
|
|
Total
|
|
Borrowing
|
|
Outstanding
|
|
Credit
|
|
Available
|
|
Excess
|
|
In thousands
|
|
Facility
(a)
|
|
Base
(a)
|
|
Borrowings
|
|
Issued
|
|
Capacity
|
|
Capacity
(b)
|
|
ABL Facility
(a)
|
|
$
|
200,000
|
|
$
|
277,102
|
|
$
|
—
|
|
$
|
10,512
|
|
$
|
189,488
|
|
$
|
169,488
|
|
|
(a)
|
|
Availability under the ABL Facility is the lesser of $200.0 million or a borrowing base that is computed monthly and comprised of eligible cash, accounts receivable and inventory.
|
|
(b)
|
|
Excess capacity represents available capacity reduced by the minimum required aggregate borrowing availability under the ABL Facility of $20.0 million.
|
Off-Balance Sheet Arrangements
As of July 2, 2016, we had not entered into any off-balance sheet arrangements.
Hedging Activities
Our operations are exposed to risks associated with fluctuations in foreign currency exchange rates. In order to reduce exposures related to changes in foreign currency exchange rates, we use forward contracts and options and may utilize foreign currency collars and swap contracts to hedge the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by our business in Japan.
As of July 2, 2016, we had forward contracts maturing through September 2017 to sell 2.1 billion yen for $19.2 million. We also had option contracts maturing through December 2016 to sell 1.3 billion yen for $11.6 million.
We use foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with intercompany loans. As of July 2, 2016, we had forward contracts to sell 5.1 billion yen for $49.0 million maturing
through September 2016. Transaction (losses) gains of $(6.2) million and $0.7 million related to these derivative instruments were reflected within Other expense, net for the six months ended July 2, 2016 and July 4, 2015, respectively
, and $(3.1) million and $1.1 million for the three months ended July 2, 2016 and July 4, 2015, respectively
.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed
Consolidated
Financial Statements. These estimates and assumptions also affect the reported amounts of revenues and expenses.
Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Our most
critical accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7, each included in our Annual Report on Form 10-K for the fiscal year ended January 2, 2016
.
There were no significant changes in our critical accounting policies during the six months ended July 2, 2016. In applying such policies, management must use some amounts that are based upon its informed judgments and best estimates. Due to the uncertainty inherent in these estimates, actual results could differ from estimates used in applying the critical accounting policies. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.
Estimates by their nature are based on judgments and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of our management. We evaluate our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions.
ACCOUNTING PRONOUNCEMENTS
For a discussion of recently adopted and recently issued accounting pronouncements, see Notes 1 and 14 of Notes to Condensed Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We finance our capital needs through available cash and cash equivalents, operating cash flows, letters of credit and our ABL Facility. Our floating rate Term Loan and ABL Facility expose us to market risk for changes in interest rates. Loans thereunder bear interest at rates that vary with changes in prevailing market rates.
We do not speculate on the future direction of interest rates. As of July 2, 2016, January 2, 2016 and July 4, 2015, our exposure to changing market rates related to our ABL Facility and the Term Loan credit facility was as follows:
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|
|
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|
|
|
Dollars in millions
|
|
July 2, 2016
|
|
January 2, 2016
|
|
July 4, 2015
|
|
ABL Facility
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Average interest rate
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan credit facility
|
|
$
|
392.0
|
|
$
|
395.0
|
|
$
|
396.0
|
|
Average interest rate
|
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
A ten percent change in the average rate would have minimal impact to interest expense during the three months ended July 2, 2016. The Term Loan interest is based on LIBOR (with a floor of 1.0%) plus 3.0% per annum; therefore a ten percent change in the average LIBOR rate would not impact interest expense, since the LIBOR rate was below the floor of 1.0% at July 2, 2016.
We transact business in multiple currencies, resulting in exposure to exchange rate fluctuations. We mitigate the risks associated with changes in foreign currency exchange rates through the use of foreign exchange forward contracts and options to hedge transactions denominated in foreign currencies. Gains and losses on contracts which hedge specific foreign currency denominated commitments are recognized in the period in which the underlying hedged item affects earnings.
As of July 2, 2016, we had forward contracts with net notional amounts of $68.2 million and option contracts of $11.6 million. Unrealized gains (losses) for outstanding foreign currency forward contracts and option contracts were $(2.8) million. A sensitivity analysis to changes in foreign currency exchange rates indicated that if the yen weakened by 10.0% against the US dollar, the fair value of these instruments would increase by $6.6 million at
July 2, 2016
. Conversely, if the yen strengthened by 10.0% against the US dollar, the fair value of these instruments would decrease by $7.9 million at
July 2, 2016
. Any resulting changes in the fair value of the instruments would be partially offset by changes in the underlying balance sheet positions. We do not hedge all transactions denominated in foreign currency.
We are exposed to credit related losses if the counterparties to our derivative instruments fail to perform their obligations. We systemically measure and assess such risk as it relates to the credit ratings of these counterparties, all of which currently have satisfactory credit ratings and therefore we do not expect to realize losses associated with counterparty default.
ITEM 4. CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer, evaluated our disclosure controls and procedures at the end of our second fiscal quarter. Our Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer concluded that, as of July 2, 2016, our disclosure controls and procedures were effective to ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified, and that information required to be filed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
July 2, 2016
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.