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Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x                                  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended

October 3, 2015

or

o                                    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ................................................................................. to .................................................................................

 

Commission file number:   1-10689

 

KATE SPADE & COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware

 

 

13-2842791

(State or other jurisdiction of incorporation or
organization)

 

 

(I.R.S. Employer
Identification No.)

 

 

 

2 Park Avenue, New York, New York

 

 

10016

(Address of principal executive offices)

 

 

(Zip Code)

 

 

(212) 354-4900

 

 

(Registrant’s telephone number, including area code)

 

 

 

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x  Accelerated filer o  Non-accelerated filer o   Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x

 

The number of shares of the Company’s Common Stock, par value $1.00 per share, outstanding at October 23, 2015 was 127,694,546 shares.

 



Table of Contents

 

KATE SPADE & COMPANY

INDEX TO FORM 10-Q

October 3, 2015

(Unaudited)

 

 

 

 

PAGE
NUMBER

 

 

 

 

PART I -

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of October 3, 2015, January 3, 2015 and October 4, 2014

 

4

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Nine and Three Month Periods Ended October 3, 2015 and October 4, 2014

 

5

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Nine and Three Month Periods Ended October 3, 2015 and October 4, 2014

 

6

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended October 3, 2015 and October 4, 2014

 

7

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

8 – 29

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30 – 47

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

47

 

 

 

 

Item 4.

Controls and Procedures

 

47 – 48

 

 

 

 

PART II -

OTHER INFORMATION

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

48

 

 

 

 

Item 1A.

Risk Factors

 

48

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

48

 

 

 

 

Item 5.

Other Information

 

48

 

 

 

 

Item 6.

Exhibits

 

49

 

 

 

 

SIGNATURES

 

50

 



Table of Contents

 

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Statements contained in, or incorporated by reference into, this Form 10-Q, future filings by us with the Securities and Exchange Commission, our press releases, and oral statements made by, or with the approval of, our authorized personnel, that relate to our future performance or future events are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Such statements are indicated by words or phrases such as “intend,” “anticipate,” “plan,” “estimate,” “target,” “aim,” “forecast,” “project,” “expect,” “believe,” “we are optimistic that we can,” “current visibility indicates that we forecast,” “contemplation” or “currently envisions” and similar phrases.

 

Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not prove to be correct or we may not achieve the financial results, savings or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control, that could cause actual results to differ materially from those suggested by the forward-looking statements, including, without limitation:

 

·

our ability to successfully implement our long-term strategic plans;

·

general economic conditions in the United States, Canada, Asia, Europe and other parts of the world;

·

our exposure to currency fluctuations;

·

levels of consumer confidence, consumer spending and purchases of discretionary items, including fashion apparel and related products, such as ours;

·

changes in the cost of raw materials, occupancy, labor, advertising and transportation which could impact prices of our products;

·

our ability to expand into markets outside of the US, including our ability to promote brand awareness in our international markets, find suitable partners in certain of those markets and hire and retain key employees for those markets;

·

our ability to maintain targeted profit margins and levels of promotional activity;

·

our ability to optimize our product offerings, in order to anticipate and timely respond to constantly changing consumer demands and tastes and fashion trends, across multiple brands, product lines, shopping channels and geographies;

·

the impact of the highly competitive nature of the markets within which we operate, both within the US and abroad;

·

issues related to our current level of debt, including an inability to pursue certain business strategies because of the restrictive covenants in the agreements governing our debt and our potential inability to obtain the capital resources needed to operate and grow our business;

·

restrictions in the credit and capital markets, which would impair our ability to access additional sources of liquidity, if needed;

·

our ability to expand our retail footprint with profitable store locations;

·

our ability to implement operational improvements and realize economies of scale in finished product and raw material costs in connection with growth in our business;

·

our ability to expand into new product categories;

·

our ability to successfully implement our marketing initiatives;

·

our ability to complete the wind-down of our owned business in Brazil in a satisfactory manner and to manage the associated costs, including the impact on our relationships with our employees, vendors, distributors and landlords and unanticipated expenses and charges that may occur, such as litigation risk, including litigation regarding employment and workers’ compensation;

·

risks associated with the various businesses we have disposed, including compliance with our transition service requirements;

·

our dependence on a limited number of large US department store customers, and the risk of consolidations, restructurings, bankruptcies and other ownership changes in the retail industry and financial difficulties at our larger department store customers;

·

risks associated with decreased diversification of our business as a result of the reduction of our brand portfolio to the KATE SPADE and Adelington Design Group businesses;

·

risks associated with material disruptions in our information technology systems, both owned and licensed, and with our third party e-commerce platforms and operations;

·

risks associated with data security, including privacy breaches;

·

risks associated with credit card fraud and identity theft;

 



Table of Contents

 

·

our ability to attract and retain talented, highly qualified executives, and maintain satisfactory relationships with our employees;

·

our ability to adequately establish, defend and protect our trademarks and other proprietary rights;

·

our reliance on independent foreign manufacturers, including the risk of their failure to comply with safety standards or our policies regarding labor practices;

·

risks associated with having a buying/sourcing agreement which results in a single third party foreign buying/sourcing agent for a significant portion of our apparel products and transitioning buying/sourcing activities for our non-apparel products to an in-house model;

·

risks associated with our arrangement to operate our leased Ohio distribution facility with a third party operations and labor management company that provides distribution operations services, including risks related to increased operating expenses, systems capabilities and operating under a third party arrangement;

·

risks associated with severe weather, natural disasters, public health crises, war, terrorism or other catastrophic events;

·

a variety of legal, regulatory, political, labor and economic risks, including risks related to the importation and exportation of product, tariffs and other trade barriers;

·

our ability to adapt to and compete effectively in the current quota environment in which general quota has expired on apparel products, but political activity seeking to re-impose quota has been initiated or threatened;

·

risks associated with third party service providers, both domestic and overseas, including service providers in the area of e-commerce;

·

limitations on our ability to utilize all or a portion of our US deferred tax assets if we experience an “ownership change”; and

·

the outcome of current and future litigation and other proceedings in which we are involved.

 

The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. All subsequent written and oral forward-looking statements concerning the matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are qualified by these cautionary statements.

 

Forward-looking statements are based on current expectations only and are not guarantees of future performance, and are subject to certain risks, uncertainties and assumptions, including those described in “Item 1A – Risk Factors” in this report as well as in our 2014 Annual Report on Form 10-K. We may change our intentions, beliefs or expectations at any time and without notice, based upon any change in our assumptions or otherwise. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. In addition, some factors are beyond our control. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 



Table of Contents

 

4

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

KATE SPADE & COMPANY

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except share data)

 

(Unaudited)

 

 

 

October 3, 2015

 

January 3, 2015

 

October 4, 2014

 

Assets

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

219,659

 

 

$

184,044

 

 

$

123,334

 

 

Accounts receivable - trade, net

 

58,893

 

 

90,091

 

 

62,275

 

 

Inventories, net

 

248,407

 

 

158,241

 

 

220,725

 

 

Deferred income taxes

 

148

 

 

616

 

 

369

 

 

Other current assets

 

36,266

 

 

41,508

 

 

40,077

 

 

Total current assets

 

563,373

 

 

474,500

 

 

446,780

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and Equipment, Net

 

177,333

 

 

174,072

 

 

176,359

 

 

Goodwill

 

48,790

 

 

64,798

 

 

68,871

 

 

Intangibles, Net

 

87,204

 

 

90,327

 

 

92,689

 

 

Deferred Income Taxes

 

53

 

 

56

 

 

56

 

 

Note Receivable

 

--

 

 

88,976

 

 

87,853

 

 

Other Assets

 

45,535

 

 

33,609

 

 

33,038

 

 

Total Assets

 

$

922,288

 

 

$

926,338

 

 

$

905,646

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity
Current Liabilities:

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

$

4,499

 

 

$

10,459

 

 

$

7,446

 

 

Accounts payable

 

132,174

 

 

88,402

 

 

111,612

 

 

Accrued expenses

 

145,749

 

 

150,926

 

 

150,236

 

 

Income taxes payable

 

1,236

 

 

3,008

 

 

1,864

 

 

Total current liabilities

 

283,658

 

 

252,795

 

 

271,158

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

397,114

 

 

400,284

 

 

401,351

 

 

Other Non-Current Liabilities

 

49,998

 

 

56,465

 

 

145,650

 

 

Deferred Income Taxes

 

18,102

 

 

17,183

 

 

17,321

 

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, authorized shares – 50,000,000, issued shares – none

 

--

 

 

--

 

 

--

 

 

Common stock, $1.00 par value, authorized shares – 250,000,000, issued shares – 176,437,234

 

176,437

 

 

176,437

 

 

176,437

 

 

Capital in excess of par value

 

218,540

 

 

199,100

 

 

193,602

 

 

Retained earnings

 

1,096,896

 

 

1,145,643

 

 

1,021,668

 

 

Accumulated other comprehensive loss

 

(32,774

)

 

(29,986

)

 

(25,108

)

 

 

 

1,459,099

 

 

1,491,194

 

 

1,366,599

 

 

Common stock in treasury, at cost – 48,751,968, 49,065,798 and 49,327,555 shares

 

(1,285,683

)

 

(1,291,583

)

 

(1,296,433

)

 

Total stockholders’ equity

 

173,416

 

 

199,611

 

 

70,166

 

 

Total Liabilities and Stockholders’ Equity

 

$

922,288

 

 

$

926,338

 

 

$

905,646

 

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 



Table of Contents

 

5

 

KATE SPADE & COMPANY

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per common share data)

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

 

 

 

October 3,
2015
(39 Weeks)

 

 

 

October 4,
2014
(40 Weeks)

 

 

 

October 3,
2015
(13 Weeks)

 

 

 

October 4,
2014
(13 Weeks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

813,762

 

 

$

740,029

 

 

$

277,328

 

 

$

250,417

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

317,743

 

 

289,982

 

 

107,514

 

 

93,103

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

496,019

 

 

450,047

 

 

169,814

 

 

157,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative expenses

 

503,282

 

 

463,499

 

 

157,497

 

 

153,767

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (Loss) Income

 

(7,263

)

 

(13,452

)

 

12,317

 

 

3,547

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

(4,778

)

 

(1,717

)

 

(1,560

)

 

(1,805

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on settlement of note receivable

 

(9,873

)

 

--

 

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

--

 

 

(16,914

)

 

--

 

 

--

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(13,982

)

 

(18,185

)

 

(5,274

)

 

(2,189

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income Before Provision (Benefit) for Income Taxes

 

(35,896

)

 

(50,268

)

 

5,483

 

 

(447

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

3,904

 

 

(500

)

 

973

 

 

(3,070

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations

 

(39,800

)

 

(49,768

)

 

4,510

 

 

2,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of income taxes

 

(4,577

)

 

82,404

 

 

(2,207

)

 

(11,753

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income

 

$

(44,377

)

 

$

32,636

 

 

$

2,303

 

 

$

(9,130

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Earnings per Share, Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations

 

$

(0.31

)

 

$

(0.40

)

 

$

0.04

 

 

$

0.02

 

 

Net (Loss) Income

 

$

(0.35

)

 

$

0.26

 

 

$

0.02

 

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Earnings per Share, Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Income from Continuing Operations

 

$

(0.31

)

 

$

(0.40

)

 

$

0.04

 

 

$

0.02

 

 

Net (Loss) Income

 

$

(0.35

)

 

$

0.26

 

 

$

0.02

 

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares, Basic

 

127,611

 

 

125,972

 

 

127,682

 

 

126,971

 

 

Weighted Average Shares, Diluted

 

127,611

 

 

125,972

 

 

128,118

 

 

127,610

 

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 



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6

 

KATE SPADE & COMPANY

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

(In thousands)

 

(Unaudited)

 

 

 

Nine Months Ended

 

 

Three Months Ended

 

 

October 3,
2015

(39 Weeks)

 

 

October 4,
2014

(40 Weeks)

 

 

October 3,
2015

(13 Weeks)

 

 

October 4,
2014

(13 Weeks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income

 

$

(44,377

)

 

$

32,636

 

 

$

2,303

 

 

$

(9,130

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive (Loss) Income, Net of Income Taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative translation adjustment, net of income taxes of $0

 

(1,191

)

 

(3,927

)

 

1,023

 

 

(5,415

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedges, net of income taxes of $(884), $(185), $(480) and $264, respectively

 

(1,597

)

 

(302

)

 

(867

)

 

430

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (Loss) Income

 

$

(47,165

)

 

$

28,407

 

 

$

2,459

 

 

$

(14,115

)

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 



Table of Contents

 

7

 

KATE SPADE & COMPANY

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

(Unaudited)

 

 

Nine Months Ended

 

October 3, 2015
(39 Weeks)

 

October 4, 2014
(40 Weeks)

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(44,377

)

 

$

32,636

 

Adjustments to arrive at loss from continuing operations

 

 

4,577

 

 

 

(82,404

)

Loss from continuing operations

 

 

(39,800

)

 

 

(49,768

)

 

 

 

 

 

 

 

 

 

Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

36,837

 

 

 

39,240

 

Loss on asset disposals and impairments, including streamlining initiatives, net

 

 

8,631

 

 

 

2,653

 

Share-based compensation

 

 

19,440

 

 

 

31,772

 

Loss on settlement of note receivable

 

 

9,873

 

 

 

--

 

Loss on extinguishment of debt

 

 

--

 

 

 

16,914

 

Foreign currency losses, net

 

 

609

 

 

 

2,287

 

Other, net

 

 

3,863

 

 

 

1,358

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Decrease in accounts receivable – trade, net

 

 

30,588

 

 

 

2,324

 

Increase in inventories, net

 

 

(98,924

)

 

 

(82,144

)

Decrease (increase) in other current and non-current assets

 

 

7,740

 

 

 

(8,759

)

Increase in accounts payable

 

 

46,642

 

 

 

9,071

 

Decrease in accrued expenses and other non-current liabilities

 

 

(7,512

)

 

 

(22,522

)

Net change in income tax assets and liabilities

 

 

1,331

 

 

 

(174

)

Net cash used in operating activities of discontinued operations

 

 

(10,845

)

 

 

(17,823

)

Net cash provided by (used in) operating activities

 

 

8,473

 

 

 

(75,571

)

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Proceeds from sales of property and equipment

 

 

816

 

 

 

--

 

Purchases of property and equipment

 

 

(40,775

)

 

 

(67,534

)

Payments for purchases of businesses

 

 

--

 

 

 

(32,268

)

Proceeds from sales of joint venture interests, net

 

 

19,874

 

 

 

--

 

Payment for joint venture interest

 

 

(10,000

)

 

 

--

 

Payments for in-store merchandise shops

 

 

(4,858

)

 

 

(4,318

)

Net proceeds from settlement of note receivable

 

 

75,128

 

 

 

--

 

Investments in and advances to equity investees

 

 

(5,000

)

 

 

--

 

Other, net

 

 

347

 

 

 

(30

)

Net cash provided by investing activities of discontinued operations

 

 

668

 

 

 

137,922

 

Net cash provided by investing activities

 

 

36,200

 

 

 

33,772

 

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings under revolving credit agreement

 

 

2,000

 

 

 

5,063

 

Repayment of borrowings under revolving credit agreement

 

 

(8,000

)

 

 

(4,960

)

Principal payments under capital lease obligations

 

 

(339

)

 

 

(303

)

Proceeds from issuance of Term Loan

 

 

--

 

 

 

398,000

 

Repayment of Senior Notes

 

 

--

 

 

 

(390,693

)

Repayment of Term Loan

 

 

(3,000

)

 

 

(1,000

)

Proceeds from exercise of stock options

 

 

2,428

 

 

 

41,410

 

Payment of deferred financing fees

 

 

(1,159

)

 

 

(9,282

)

Net cash (used in) provided by financing activities

 

 

(8,070

)

 

 

38,235

 

 

 

 

 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

(988

)

 

 

(3,324

)

 

 

 

 

 

 

 

 

 

Net Change in Cash and Cash Equivalents

 

 

35,615

 

 

 

(6,888

)

Cash and Cash Equivalents at Beginning of Period

 

 

184,044

 

 

 

130,222

 

Cash and Cash Equivalents

 

$

219,659

 

 

$

123,334

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 



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8

 

KATE SPADE & COMPANY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unless otherwise noted, all amounts are in thousands, except per share amounts)

 

(Unaudited)

 

1.    BASIS OF PRESENTATION

 

The Condensed Consolidated Financial Statements of Kate Spade & Company and its wholly-owned and majority-owned subsidiaries (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that its disclosures are adequate to make the information presented not misleading. It is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2014 Annual Report on Form 10-K. Information presented as of January 3, 2015 is derived from audited financial statements.

 

The Company operates its kate spade new york and JACK SPADE brands through one operating segment in North America and four operating segments internationally: Japan, Asia (excluding Japan), Europe and Latin America. 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 chief operating decision maker (“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:

 

·                  KATE SPADE North America segment – consists of the Company’s kate spade new york and JACK SPADE brands in North America.

·      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).

·                  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.

 

In the second quarter of 2015, the Company entered into a new distribution agreement for its operations in Latin America, including in Brazil, which will leverage the network of its new distribution partner. As part of these actions, the Company completed the closure of its Company-operated stores during the third quarter of 2015 and no longer operates directly in Brazil. This initiative does not represent a strategic shift in the Company’s operations and therefore is not presented as discontinued operations.

 

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 $21.0 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 $34.0 million in 2014 and $6.4 million in 2015, through the transaction date (see Note 2 – Acquisition). The Company accounts for its investments

 



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9

 

in the joint ventures under the equity method of accounting (see Note 14 – Additional Financial Information). 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 subsidiary. 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 (“Globalluxe”). Accordingly, no gain or loss was recorded on formation of KS HMT. The $26.0 million charge to terminate contracts associated with the KSC joint venture is recorded in Selling, general & administrative expenses (“SG&A”) on the accompanying Condensed Consolidated Statement of Operations.

 

On January 29, 2015, the Company announced that it is focusing its business on kate spade new york. As part of this business model, the Company discontinued KATE SPADE SATURDAY as a standalone business. The Company 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. The Company also closed JACK SPADE’s Company-owned stores by the end of the second quarter of 2015. These initiatives do not represent a strategic shift in the Company’s operations and therefore are not reported as discontinued operations.

 

On February 3, 2014, the Company sold 100.0% of the capital stock of Lucky Brand Dungarees, Inc. (“Lucky Brand”) to LBD Acquisition Company, LLC (“LBD Acquisition”), a Delaware limited liability company and affiliate of Leonard Green & Partners, L.P., for an aggregate payment of $225.0 million, comprised of $140.0 million cash consideration and a three-year $85.0 million note (the “Lucky Brand Note”) issued by the successor of LBD Acquisition, Lucky Brand Dungarees, LLC (“Lucky Brand LLC”) at closing, subject to working capital and other adjustments. On March 4, 2015, the Company and Lucky Brand LLC entered into a transfer and settlement agreement (the “Lucky Brand Note Agreement”) to settle the Lucky Brand Note in full, prior to its maturity. Pursuant to the terms of the Lucky Brand Note Agreement, Lucky Brand LLC paid the Company $81.0 million to settle the principal balance of the Lucky Brand Note and related unpaid interest. Giving effect to the Lucky Brand Note Agreement, since the date of issuance, the Company collected aggregate principal and interest under the Lucky Brand Note of $89.0 million. The transactions contemplated by the Lucky Brand Note Agreement closed on March 4, 2015, and the Company recognized a $9.9 million loss on the settlement of the Lucky Brand Note in the first quarter of 2015.

 

On November 6, 2013, the Company completed the sale of its Juicy Couture brandname and related intellectual property assets (the “Juicy Couture IP”) to an affiliate of Authentic Brands Group (“ABG”) for a total purchase price of $195.0 million. An additional payment may be payable to the Company in an amount of up to $10.0 million if certain conditions regarding future performance are achieved. The Juicy Couture IP was licensed back to the Company until December 31, 2014 to accommodate the wind-down of operations. Juicy Couture paid guaranteed minimum royalties to ABG of $10.0 million during the term of the wind-down license. On March 29, 2014, the Company entered into an agreement to sell its Juicy Couture business in Europe to an operating partner of ABG for $8.6 million, subject to working capital adjustments. The transaction closed on April 7, 2014.

 

On November 19, 2013, the Company entered into an agreement to terminate the lease of the Juicy Couture flagship store on Fifth Avenue in New York City in exchange for $51.0 million. On May 15, 2014, the Company surrendered such premises to the landlord and received proceeds of $45.8 million (net of taxes and fees), in addition to $5.0 million previously received by the Company.

 

The activities of the Company’s former Lucky Brand and Juicy Couture businesses have been segregated and reported as discontinued operations for all periods presented.

 

Summarized financial data for the aforementioned brands that are classified as discontinued operations are provided in Note 3 – Discontinued Operations and Disposals.

 

In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the reported interim periods. Results of operations for interim periods are not necessarily indicative of results for the full year. Management has evaluated events or transactions that have occurred from the balance sheet date through the date the Company issued these financial statements.

 



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10

 

NATURE OF OPERATIONS

 

Kate Spade & Company is engaged primarily in the design and marketing of a broad range of accessories and apparel. The Company’s fiscal year ends on the Saturday closest to December 31. The 2015 fiscal year, ending January 2, 2016, reflects a 52-week period, resulting in a 13-week, three-month period and a 39-week, nine-month period for the third quarter. The 2014 fiscal year, ending January 3, 2015, reflects a 53-week period, resulting in a 13-week, three-month period and a 40-week, nine-month period for the third quarter.

 

PRINCIPLES OF CONSOLIDATION

 

The Condensed Consolidated Financial Statements include the accounts of the Company. All inter-company balances and transactions have been eliminated in consolidation.

 

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

 

The Company’s critical accounting policies are those that are most important to the portrayal of its financial condition and results of operations in conformity with US GAAP. These critical accounting policies are applied in a consistent manner throughout all periods presented. The Company’s critical accounting policies are summarized in Note 1 of Notes to Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended January 3, 2015.

 

The application of critical accounting policies requires that the Company make estimates and assumptions about future events and apply judgments that affect the reported amounts of revenues and expenses. Estimates by their nature are based on judgments and available information. Therefore, actual results could materially differ from those estimates under different assumptions and conditions. The Company continues to monitor the critical accounting policies to ensure proper application of current rules and regulations. During the third quarter of 2015, there were no significant changes in the critical accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2015.

 

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

 

On January 4, 2015, the first day of the Company’s 2015 fiscal year, the Company adopted new accounting guidance on the reporting of discontinued operations, which revised the threshold for a disposal to qualify as a discontinued operation and required new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation (see Note 3 – Discontinued Operations and Disposals).

 

 

2.    ACQUISITION

 

On February 5, 2014, the Company, through its Kate Spade, LLC and Kate Spade Hong Kong Ltd. subsidiaries, reacquired existing KATE SPADE businesses in Southeast Asia from Globalluxe for a purchase price of $32.3 million, including $2.3 million for working capital and other previously agreed adjustments. The Company’s distribution partner operates the KATE SPADE businesses in Singapore, Malaysia, Indonesia and Thailand through distribution agreements and funded approximately $1.5 million to Globalluxe to acquire operating assets in those regions. Globalluxe and its distribution partners operated six stores and one concession in Hong Kong, one concession in Taiwan, one store in Macau, two stores and one concession in Singapore, two stores in Malaysia, three stores and one concession in Indonesia, and two stores and six concessions in Thailand. Prior to the acquisition from Globalluxe, the Company maintained wholesale distribution to Globalluxe. Following the transaction, the Company maintains wholesale distribution to distributors who operate the businesses in Singapore, Malaysia, Indonesia and Thailand. From the date of the acquisition, the Company directly owned and operated the businesses in Hong Kong, Macau and Taiwan and continued to do so until the conversion of those businesses to a joint venture with Walton Brown in the first quarter of 2015.

 

The allocation of the purchase price to the assets acquired and liabilities assumed was based upon the estimated fair values at the date of acquisition. The excess of the purchase price over the net tangible and identifiable intangible assets was reflected as goodwill. Accordingly, the Company recorded $21.8 million of goodwill, which was reflected in the KATE SPADE International reportable segment until the businesses in Hong Kong, Macau and Taiwan were converted to the joint venture with Walton Brown, at which time $16.0 million of such goodwill was reclassified to Investment in unconsolidated subsidiary.

 



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11

 

The following table summarizes the estimated fair values of the assets acquired as of the acquisition date:

 

In thousands

 

 

 

Assets acquired:

 

 

 

Current assets

 

$

3,549

 

Property and equipment, net

 

1,267

 

Goodwill and intangibles, net (a)

 

26,592

 

Other assets

 

860

 

Total assets acquired

 

$

32,268

 

 


(a)              In the first quarter of 2015, $16.0 million of the goodwill related to the KATE SPADE businesses in Hong Kong, Macau and Taiwan was reclassified to Investment in unconsolidated subsidiary upon closing of the KS HMT joint venture with Walton Brown (see Note 1 – Basis of Presentation).

 

The following table presents details of the acquired intangible assets:

 

In thousands

 

Useful Life

 

Estimated Fair Value

 

Reacquired distribution rights

 

1.7 years

 

$

4,500

 

Retail customer list

 

3 years   

 

256

 

 

 

3.    DISCONTINUED OPERATIONS AND DISPOSALS

 

Discontinued Operations

The Company completed the sale of Lucky Brand in February of 2014 and substantially completed the wind-down operations of the Juicy Couture business in the second quarter of 2014.

 

The Company recorded pretax (charges) income of $(1.4) million and $131.0 million ($(1.4) million and $128.0 million, after tax) during the nine months ended October 3, 2015 and October 4, 2014, respectively, and $0.1 million and $(2.8) million ($0.1 million and $(5.8) million, after tax) during the three months ended October 3, 2015 and October 4, 2014, respectively, to reflect the estimated difference between the carrying value of the net assets disposed and their estimated fair value, less costs to dispose, including transaction costs.

 

Summarized results of discontinued operations are as follows:

 

 

 

Nine Months Ended

 

Three Months Ended

 

 

October 3,
2015
(39 Weeks)

 

October 4,
2014

(40 Weeks)

 

October 3,
2015

(13 Weeks)

 

October 4,
2014

(13 Weeks)

In thousands

 

 

 

 

 

 

 

 

 

Net sales

 

$

175

 

$

209,179

 

$

(12

)

$

521

 

 

 

 

 

 

 

 

 

 

 

Loss before (benefit) provision for income taxes

 

$

(3,468

)

$

(44,913

)

$

(2,680

)

$

(5,970

)

(Benefit) provision for income taxes

 

(269

)

656

 

(328

)

13

 

Loss from discontinued operations, net of income taxes

 

$

(3,199

)

$

(45,569

)

$

(2,352

)

$

(5,983

)

 

 

 

 

 

 

 

 

 

 

(Loss) gain on disposal of discontinued operations, net of income taxes

 

$

(1,378

)

$

127,973

 

$

145

 

$

(5,770

)

 

The Company recorded charges of $3.5 million and $25.4 million during the nine months ended October 3, 2015 and October 4, 2014, respectively, and $2.9 million and $0.3 million during the three months ended October 3, 2015 and October 4, 2014, respectively, related to its streamlining initiatives within Discontinued operations, net of income taxes.

 

Other

As discussed in Note 1 – Basis of Presentation, the Company completed substantially all of the closures of its KATE SPADE SATURDAY operations and JACK SPADE retail stores in the second quarter of 2015. Although such dispositions are individually significant, they do not represent a strategic shift in the Company’s operations and are

 



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12

 

not reflected as discontinued operations. The Company recorded pretax losses of $21.1 million and $20.4 million during the nine months ended October 3, 2015 and October 4, 2014, respectively, and $3.5 million and $6.2 million during the three months ended October 3, 2015 and October 4, 2014, respectively, related to the KATE SPADE SATURDAY and JACK SPADE retail stores that were substantially disposed in the second quarter of 2015.

 

 

4.    STOCKHOLDERS’ EQUITY

 

Activity for the nine months ended October 3, 2015 in the Capital in excess of par value, Retained earnings and Common stock in treasury, at cost accounts was as follows:

 

In thousands

 

Capital in Excess
of Par Value

 

Retained
Earnings

 

Common Stock
in Treasury,
at Cost

Balance as of January 3, 2015

 

$

199,100

 

$

1,145,643

 

$

(1,291,583

)

Net loss

 

--

 

(44,377

)

--

 

Exercise of stock options

 

--

 

(1,919

)

4,347

 

Restricted shares issued, net of cancellations and shares withheld for taxes

 

--

 

(2,451

)

1,553

 

Share-based compensation

 

19,440

 

--

 

--

 

Balance as of October 3, 2015

 

$

218,540

 

$

1,096,896

 

$

(1,285,683

)

 

Activity for the nine months ended October 4, 2014 in the Capital in excess of par value, Retained earnings and Common stock in treasury, at cost accounts was as follows:

 

In thousands

 

Capital in Excess
of Par Value

 

Retained
Earnings

 

Common Stock
in Treasury,
at Cost

Balance as of December 28, 2013

 

$

155,984

 

$

1,020,633

 

$

(1,364,657

)

Net income

 

--

 

32,636

 

--

 

Exercise of stock options

 

--

 

(22,430

)

 63,840

 

Restricted shares issued, net of cancellations and shares withheld for taxes

 

--

 

(9,171

)

 4,384

 

Share-based compensation

 

37,618

 

--

 

--

 

Balance as of October 4, 2014

 

$

193,602

 

$

1,021,668

 

$

(1,296,433

)

 

Accumulated other comprehensive (loss) income consisted of the following:

 

In thousands

 

October 3, 2015

 

January 3, 2015

 

October 4, 2014

 

Cumulative translation adjustment, net of income taxes of $0

 

$

(33,287

)

$

(32,096

)

$

(25,789

)

Unrealized gains on cash flow hedging derivatives, net of income taxes of $284, $1,168 and $417, respectively

 

513

 

2,110

 

681

 

Accumulated other comprehensive loss, net of income taxes

 

$

(32,774

)

$

(29,986

)

$

(25,108

)

 

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the nine months ended October 3, 2015:

 

In thousands

 

Cumulative
Translation
Adjustment

 

Unrealized Gains
(Losses) on Cash
Flow Hedging
Derivatives

 

Balance as of January 3, 2015

 

$

(32,096

)

$

2,110

 

Other comprehensive loss before reclassification

 

(1,191

)

(853

)

Amounts reclassified from accumulated other comprehensive income

 

--

 

(744

)

Net current-period other comprehensive loss

 

(1,191

)

(1,597

)

Balance as of October 3, 2015

 

$

(33,287

)

$

513

 

 



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13

 

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the nine months ended October 4, 2014:

 

In thousands

 

Cumulative
Translation
Adjustment

 

Unrealized Gains
(Losses) on Cash
Flow Hedging
Derivatives

 

Balance as of December 28, 2013

 

$

(21,862

)

$

983

 

Other comprehensive (loss) income before reclassification

 

(3,927

)

336

 

Amounts reclassified from accumulated other comprehensive income

 

--

 

(638

)

Net current-period other comprehensive loss

 

(3,927

)

(302

)

Balance as of October 4, 2014

 

$

(25,789

)

$

681

 

 

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the three months ended October 3, 2015:

 

In thousands

 

Cumulative
Translation
Adjustment

 

Unrealized Gains
(Losses) on Cash
Flow Hedging
Derivatives

 

Balance as of July 4, 2015

 

$

(34,310

)

$

1,380

 

Other comprehensive income (loss) before reclassification

 

1,023

 

(344

)

Amounts reclassified from accumulated other comprehensive income

 

--

 

(523

)

Net current-period other comprehensive income (loss)

 

1,023

 

(867

)

Balance as of October 3, 2015

 

$

(33,287

)

$

513

 

 

The following table presents the change in each component of Accumulated other comprehensive (loss) income, net of income taxes for the three months ended October 4, 2014:

 

In thousands

 

Cumulative
Translation
Adjustment

 

Unrealized Gains
(Losses) on Cash
Flow Hedging
Derivatives

 

Balance as of July 5, 2014

 

$

(20,374

)

$

251

 

Other comprehensive (loss) income before reclassification

 

(5,415

)

578

 

Amounts reclassified from accumulated other comprehensive income

 

--

 

(148

)

Net current-period other comprehensive (loss) income

 

(5,415

)

430

 

Balance as of October 4, 2014

 

$

(25,789

)

$

681

 

 

 

5.    INVENTORIES, NET

 

Inventories, net consisted of the following:

 

In thousands

 

October 3, 2015

 

January 3, 2015

 

October 4, 2014

 

Raw materials and work in process

 

$

254

 

$

538

 

$

622

 

Finished goods

 

248,153

 

157,703

 

220,103

 

Total inventories, net

 

$

248,407

 

$

158,241

 

$

220,725

 

 



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14

 

6.    PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consisted of the following:

 

In thousands

 

October 3, 2015

 

January 3, 2015

 

October 4, 2014

 

Land and buildings

 

$

9,300

 

$

9,300

 

$

9,300

 

Machinery and equipment

 

117,797

 

140,189

 

155,568

 

Furniture and fixtures

 

69,422

 

61,694

 

59,422

 

Leasehold improvements

 

120,553

 

122,029

 

124,521

 

 

 

317,072

 

333,212

 

348,811

 

Less: Accumulated depreciation and amortization

 

139,739

 

159,140

 

172,452

 

Total property and equipment, net

 

$

177,333

 

$

174,072

 

$

176,359

 

 

Depreciation and amortization expense on property and equipment for the nine months ended October 3, 2015 and October 4, 2014 was $27.0 million and $26.5 million, respectively, which included depreciation for property and equipment under capital leases of $0.6 million. Depreciation and amortization expense on property and equipment for the three months ended October 3, 2015 and October 4, 2014 was $9.3 million and $9.4 million, respectively, which included depreciation for property and equipment under capital leases of $0.2 million. Property and equipment under capital leases was $9.3 million as of October 3, 2015, January 3, 2015 and October 4, 2014.

 

 

7.     GOODWILL AND INTANGIBLES, NET

 

The following tables disclose the carrying value of all intangible assets:

 

In thousands

 

Weighted
Average
Amortization
Period

 

October 3, 2015

 

January 3, 2015

 

October 4, 2014

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets:

 

 

 

 

 

 

 

 

 

Gross carrying amount:

 

 

 

 

 

 

 

 

 

Owned trademarks (a)

 

--

 

$

467

 

$

467

 

$

2,000

 

Customer relationships

 

12 years

 

7,168

 

7,422

 

7,493

 

Merchandising rights

 

4 years

 

15,871

 

12,012

 

10,322

 

Reacquired rights

 

3 years

 

14,371

 

14,371

 

15,323

 

Other

 

4 years

 

2,322

 

2,322

 

2,322

 

Subtotal

 

 

 

40,199

 

36,594

 

37,460

 

Accumulated amortization:

 

 

 

 

 

 

 

 

 

Owned trademarks

 

 

 

(467

)

(467

)

(400

)

Customer relationships

 

 

 

(5,160

)

(4,769

)

(4,637

)

Merchandising rights

 

 

 

(5,885

)

(4,108

)

(3,716

)

Reacquired rights

 

 

 

(14,097

)

(9,604

)

(8,715

)

Other

 

 

 

(2,286

)

(2,219

)

(2,203

)

Subtotal

 

 

 

(27,895

)

(21,167

)

(19,671

)

Net:

 

 

 

 

 

 

 

 

 

Owned trademarks

 

 

 

--

 

--

 

1,600

 

Customer relationships

 

 

 

2,008

 

2,653

 

2,856

 

Merchandising rights

 

 

 

9,986

 

7,904

 

6,606

 

Reacquired rights

 

 

 

274

 

4,767

 

6,608

 

Other

 

 

 

36

 

103

 

119

 

Total amortized intangible assets, net

 

 

 

12,304

 

15,427

 

17,789

 

 

 

 

 

 

 

 

 

 

 

Unamortized intangible assets:

 

 

 

 

 

 

 

 

 

Owned trademarks

 

 

 

74,900

 

74,900

 

74,900

 

Total intangible assets

 

 

 

$

87,204

 

$

90,327

 

$

92,689

 

 

 

 

 

 

 

 

 

 

 

Goodwill (b) 

 

 

 

$

48,790

 

$

64,798

 

$

68,871

 


 



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15

 

(a)              The change in the balance reflected a non-cash impairment charge of $1.5 million related to the TRIFARI trademark recorded in the fourth quarter of 2014.

(b)              The decrease in the balance primarily reflected the reclassification of $16.0 million of the goodwill related to the KATE SPADE businesses in Hong Kong, Macau and Taiwan to Investment in unconsolidated subsidiary in the first quarter of 2015 upon closing of the joint venture with Walton Brown (see Note 1 – Basis of Presentation and Note 2 - Acquisition).

 

Amortization expense of intangible assets was $6.9 million and $6.5 million for the nine months ended October 3, 2015 and October 4, 2014, respectively, and $2.4 million and $1.9 million for the three months ended October 3, 2015 and October 4, 2014, respectively.

 

The estimated amortization expense for intangible assets for the next five fiscal years is as follows:

 

Fiscal Year

 

Amortization Expense

 

(In millions)

 

 

 

2015

 

$

8.0

 

2016

 

3.3

 

2017

 

3.0

 

2018

 

2.3

 

2019

 

0.8

 

 

The changes in carrying amount of goodwill for the nine months ended October 3, 2015 were as follows:

 

In thousands

 

KATE SPADE
International

 

Adelington
Design Group

 

Total

 

Balance as of January 3, 2015

 

$

63,483

 

$

1,315

 

$

64,798

 

Reclassification of goodwill to Investment in unconsolidated subsidiary (a)

 

(16,009

)

--

 

(16,009

)

Translation adjustment

 

138

 

(137

)

1

 

Balance as of October 3, 2015

 

$

47,612

 

$

1,178

 

$

48,790

 


(a)               Represents the reclassification of the goodwill related to the KATE SPADE businesses in Hong Kong, Macau and Taiwan to Investment in unconsolidated subsidiary in the first quarter of 2015 upon closing of the joint venture with Walton Brown (see Note 1 – Basis of Presentation and Note 2 – Acquisition).

 

The changes in carrying amount of goodwill for the nine months ended October 4, 2014 were as follows:

 

In thousands

 

KATE SPADE
International

 

Adelington
Design Group

 

Total

 

Balance as of December 28, 2013

 

$

47,664

 

$

1,447

 

$

49,111

 

Acquisition of existing KATE SPADE businesses in Southeast Asia

 

21,836

 

--

 

21,836

 

Translation adjustment

 

(2,006

)

(70

)

(2,076

)

Balance as of October 4, 2014

 

$

67,494

 

$

1,377

 

$

68,871

 

 

The Company completed its annual goodwill impairment tests as of the first day of the third quarter of 2015. No impairment was recognized as of that date.

 

 

8.    INCOME TAXES

 

During the third quarter of 2015 and 2014, the Company continued to record a full valuation allowance on deferred tax assets in most jurisdictions due to the combination of its history of pretax losses and its inability to carry back tax losses or credits.

 

The Company’s provision for income taxes for the nine and three months ended October 3, 2015 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. The Company’s benefit for income taxes for the nine and three months ended October 4, 2014 primarily represented an income tax benefit within continuing operations due to the recognition of tax expense within discontinued operations, partially offset by increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on

 



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operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions. During the nine and three months ended October 4, 2014, the Company recorded a tax charge of $3.0 million within discontinued operations related to the dispositions of the Lucky Brand business and Juicy Couture IP and recognized an income tax benefit of a corresponding amount within continuing operations as a result of an intra-period allocation.

 

The number of years with open tax audits varies depending upon the tax jurisdiction. The major tax jurisdictions include the US, Japan, United Kingdom and Canada. The Company is no longer subject to US Federal examination by the Internal Revenue Service (“IRS”) for the years before 2010 and, with a few exceptions, this applies to tax examinations by state authorities as well. Although the years before 2010 are considered to be closed, the IRS and other taxing authorities can also subject the Company’s net operating loss carryforwards to further review when such net operating loss carryforwards are utilized.

 

The Company expects a reduction in the liability for unrecognized tax benefits, inclusive of interest and penalties, by an amount between $0.9 million and $3.2 million within the next 12 months due to either settlement or the expiration of the statute of limitations. As of October 3, 2015, uncertain tax positions of $9.2 million exist, which would provide an effective rate impact in the future if subsequently recognized.

 

 

9.    DEBT AND LINES OF CREDIT

 

Long-term debt consisted of the following:

 

In thousands

 

October 3, 2015

 

January 3, 2015

 

October 4, 2014

 

Term Loan credit facility, due April 2021 (a)

 

$

393,368

 

$

396,158

 

$

397,106

 

Revolving credit facility

 

--

 

6,000

 

3,000

 

Capital lease obligations

 

8,245

 

8,585

 

8,691

 

Total debt

 

401,613

 

410,743

 

408,797

 

Less: Short-term borrowings (b)

 

4,499

 

10,459

 

7,446

 

Long-term debt

 

$

397,114

 

$

400,284

 

$

401,351

 


(a)              The balance as of October 3, 2015, January 3, 2015 and October 4, 2014 included an unamortized debt discount of $1.6 million, $1.8 million and $1.9 million, respectively.

(b)              At October 3, 2015, the balance consisted of $4.0 million of Term Loan amortization payments and obligations under capital leases. At January 3, 2015 and October 4, 2014, the balance consisted of $4.0 million of Term Loan amortization payments, outstanding borrowings under the Company’s amended and restated revolving credit facility (as amended to date, the “ABL Facility”) and obligations under capital leases.

 

Senior Notes

On April 14, 2014, the Company redeemed $37.2 million aggregate principal amount of its former 10.5% Senior Secured Notes due April 2019 (the “Senior Notes”) at a price equal to 103.0% of their aggregate principal amount, plus accrued interest using cash on hand. On May 12, 2014, the Company redeemed the remaining $334.8 million aggregate principal amount of the Senior Notes at a price equal to 105.25% of their aggregate principal amount, plus accrued interest, with the proceeds from the issuance of term loans in an aggregate principal amount of $400.0 million (collectively, the “Term Loan”). The Company recognized a $16.9 million loss on extinguishment of debt related to these transactions in the second quarter of 2014.

 

Term Loan

On April 10, 2014, the Company entered into a term loan credit agreement (the “Term Loan Credit Agreement”), which provides for the Term Loan in an aggregate principal amount of $400.0 million, maturing in April 2021. The Term Loan is subject to amortization payments of $1.0 million per quarter, which commenced on October 1, 2014, with the balance due at maturity. Interest on the outstanding principal amount of the Term Loan accrues at a rate equal to LIBOR (with a floor of 1.0%) plus 3.0% per annum, payable in cash. The Term Loan was funded on May 12, 2014, and the Company used $354.8 million of the net proceeds of $392.0 million from the Term Loan to redeem the Company’s remaining outstanding Senior Notes on May 12, 2014, as discussed above. The Term Loan and other obligations under the Term Loan Credit Agreement are guaranteed by certain of the Company’s restricted subsidiaries (the “Guarantors”), which include (i) all of the Company’s existing material domestic restricted subsidiaries, (ii) all future wholly owned restricted subsidiaries of the Company (other than foreign subsidiaries, CFCs, CFC holding companies and subsidiaries of any of the foregoing and certain immaterial subsidiaries) and (iii)

 



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all future non-wholly owned restricted subsidiaries of the Company that guarantee capital markets debt securities or term indebtedness of the Company or any Guarantor.

 

The Term Loan Credit Agreement permits the Company to incur, from time to time, additional incremental term loans under the Term Loan Credit Agreement (subject to obtaining commitments for such term loans) and other pari passu lien indebtedness, subject to an overall limit of $100.0 million plus such additional amount that would cause the Company’s consolidated net total secured debt ratio not to exceed 3.75 to 1.0 on a pro forma basis. Any such incremental term loans and other pari passu lien indebtedness are permitted to share in the collateral described below on a pari passu basis with the Term Loan. The Term Loan may be prepaid, at the Company’s option, in whole or in part, at any time at par plus accrued interest; provided that if the Term Loan is prepaid or refinanced in connection with a repricing transaction within six months after the initial borrowing, a 1.0% penalty is applicable.

 

Subject to certain permitted liens and other exclusions and exceptions, the Term Loan is secured (i) on a first-priority basis by a lien on the Company’s KATE SPADE trademarks and certain related rights owned by the Company and the Guarantors (the “Term Priority Collateral”) and (ii) by a second-priority security interest in the Company’s and the Guarantors’ other assets (the “ABL Priority Collateral” and together with the Term Priority Collateral, the “Collateral”), which secure the Company’s ABL Facility on a first-priority basis.

 

The Term Loan is required to be prepaid in an amount equal to 50.0% of the Company’s 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 the Company’s consolidated net total debt ratio is less than 2.75 to 1.0 and to 0% if the Company’s consolidated net total debt ratio is less than 2.25 to 1.0. Lenders may elect not to accept mandatory prepayments.

 

The Term Loan Credit Agreement limits the Company’s and restricted subsidiaries’ ability to, among other things, incur indebtedness, make dividend payments or other restricted payments, create liens, sell assets (including securities of the Company’s restricted subsidiaries), permit certain restrictions on dividends and transfers of assets by the Company’s restricted subsidiaries, enter into certain types of transactions with shareholders and affiliates and enter into mergers, consolidations or sales of all or substantially all of the Company’s assets, in each case subject to certain designated exceptions and qualifications. The Term Loan Credit Agreement also contains certain affirmative covenants and events of default that are customary for credit agreements governing term loans.

 

ABL Facility

In May 2014, the Company terminated its prior revolving credit agreement and completed a fourth amendment to and restatement of the ABL Facility, which extended the maturity date of the facility to May 2019. Availability under the ABL Facility shall be an amount equal to the lesser of $200.0 million and a borrowing base that is computed monthly and comprised of the Company’s 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 ABL Facility 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. The ABL Facility allows two borrowing options: one borrowing option with interest rates based on euro currency rates and a second borrowing option with interest rates based on the alternate base rate, as defined in the ABL Facility, with a spread based on the aggregate availability under the ABL Facility.

 

The ABL Facility is guaranteed by substantially all of the Company’s current domestic subsidiaries, certain of the Company’s future domestic subsidiaries and certain of the Company’s foreign subsidiaries. The ABL Facility is secured by a first-priority lien on substantially all of the assets of the Company and the other borrowers and guarantors (other than certain trademark collateral in which the lenders under the Term Loan Credit Agreement have a first-priority lien, which trademark collateral secures the obligations under the ABL Facility on a second-priority lien basis).

 

The ABL Facility limits the Company’s, and its restricted subsidiaries’ ability to, among other things, incur additional indebtedness, create liens, undergo certain fundamental changes, make investments, sell certain assets, enter into hedging transactions, make restricted payments and pay certain indebtedness, enter into transactions with affiliates, permit certain restrictions on dividends and transfers of assets by the Company’s restricted subsidiaries and enter into sale and leaseback transactions. These covenants are subject to important exceptions and qualifications, and many of the covenants are subject to an exception based on meeting the fixed charge coverage ratio and/or certain minimum availability tests. The ABL Facility also contains representations and warranties (some

 



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18

 

of which are brought down to the time of each borrowing made), affirmative covenants and events of default that are customary for asset-based revolving credit agreements.

 

In addition, the terms and conditions of the ABL Facility: (i) provide for a decrease in fees and interest rates compared to the Company’s previous asset-based revolving loan facility (including eurocurrency spreads of 1.50% to 2.00% over LIBOR, depending on the level of aggregate availability), (ii) require the Company to maintain pro forma compliance with a fixed charge coverage ratio of 1.0:1.0 on a trailing four-quarter basis if availability under the ABL Facility for three consecutive business days falls below the greater of $15.0 million and 10.0% of the lesser of the aggregate commitments and the borrowing base and (iii) require the Company to apply substantially all cash collections to reduce outstanding borrowings under the ABL Facility if availability under the ABL Facility for three consecutive business days falls below the greater of $20.0 million and 12.5% of the lesser of the aggregate commitments and the borrowing base.

 

The funds available under the ABL Facility may be used for working capital and for general corporate purposes. The Company currently believes that the financial institutions under the ABL Facility are able to fulfill their commitments, although such ability to fulfill commitments will depend on the financial condition of the Company’s lenders at the time of borrowing.

 

As of October 3, 2015, availability under the Company’s ABL Facility was as follows:

 

In thousands

 

Total
Facility
(a)

 

Borrowing
Base
(a)

 

Outstanding
Borrowings

 

Letters of
Credit Issued

 

Available
Capacity

 

Excess
Capacity
(b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revolving credit facility (a)

 

$

200,000 

 

$

274,412  

 

$

--      

 

$

10,686    

 

$

189,314  

 

$

169,314   

 


(a)              Availability under the ABL Facility is the lesser of $200.0 million or a borrowing base that is computed monthly and comprised of the Company’s 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.

 

Capital Lease Obligations

In the second quarter of 2013, the Company entered into a sale-leaseback agreement for its office building in North Bergen, NJ, which included a sale price of $8.7 million and total lease payments of $26.9 million over a 12-year lease term. The Company’s capital lease obligations of $8.2 million, $8.6 million and $8.7 million as of October 3, 2015, January 3, 2015 and October 4, 2014, respectively, included $0.5 million, $0.5 million and $0.4 million within Short-term borrowings on the accompanying Condensed Consolidated Balance Sheets.

 

 

10.     FAIR VALUE MEASUREMENTS

 

The Company utilizes the following three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value:

 

Level 1 –

Quoted market prices in active markets for identical assets or liabilities;

Level 2 –

Inputs other than Level 1 inputs that are either directly or indirectly observable; and

Level 3 –

Unobservable inputs developed using estimates and assumptions developed by the Company, which reflect those that a market participant would use.

 

The following table presents the financial assets and liabilities the Company measured at fair value on a recurring basis, based on the fair value hierarchy:

 

 

 

Level 2

 

In thousands

 

October 3, 2015

 

January 3, 2015

 

October 4, 2014

 

Financial Assets:

 

 

 

 

 

 

 

Derivatives

 

$

1,515

 

$

3,193

 

$

1,580

 

Financial Liabilities:

 

 

 

 

 

 

 

Derivatives

 

$

(160

)

$

--

 

$

--

 

 



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19

 

The fair values of the Company’s Level 2 derivative instruments were primarily based on observable forward exchange rates. Unobservable quantitative inputs used in the valuation of the Company’s derivative instruments included volatilities, discount rates and estimated credit losses.

 

The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2015, based on such fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

Total Losses

 

 

 

Net Carrying
Value as of

 

Fair Value Measured and Recorded
at Reporting Date Using:

 

Nine Months
Ended

 

Three Months
Ended

 

In thousands

 

October 3, 2015

 

Level 1

 

Level 2

 

Level 3

 

October 3, 2015

 

October 3, 2015

 

Property and equipment

 

$

--

 

$

--

 

$

--

 

$

--

 

$

4,180

 

$

--  

 

 

As a result of the Company’s decision to close all KATE SPADE SATURDAY retail operations and JACK SPADE retail stores and no longer directly operate its Company-owned stores in Brazil (see Note 12 – Streamlining Initiatives), the Company determined that a portion of the assets exceeded their fair values, resulting in impairment charges, which were recorded in SG&A on the accompanying Condensed Consolidated Statements of Operations.

 

The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2014, based on such fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

Total Losses

 

 

 

Net Carrying
Value as of

 

Fair Value Measured and Recorded
at Reporting Date Using:

 

Nine Months
Ended

 

Three Months
Ended

 

In thousands

 

October 4, 2014

 

Level 1

 

Level 2

 

Level 3

 

October 4, 2014

 

October 4, 2014

 

Property and equipment

 

$

110

 

$

--

 

$

--

 

$

--

 

$

336

 

$

--  

 

 

The fair values of the Company’s Level 3 Property and equipment are based on either a market approach or an income approach using the Company’s forecasted cash flows over the estimated useful lives of such assets, as appropriate.

 

The fair values and carrying values of the Company’s debt instruments are detailed as follows:

 

 

 

October 3, 2015

 

January 3, 2015

 

October 4, 2014

 

In thousands

 

Fair Value

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Term Loan credit facility, due April 2021(a)

 

$

391,178

 

$

393,368

 

$

384,786

 

$

396,158

 

$

388,776

 

$

397,106

 

Revolving credit facility (b)

 

--

 

--

 

6,000

 

6,000

 

3,000

 

3,000

 


(a)              Carrying values include unamortized debt discount.

(b)              Borrowings under the revolving credit facility bear interest based on market rate; accordingly its fair value approximates its carrying value.

 

The fair values of the Company’s debt instruments were estimated using market observable inputs, including quoted prices in active markets, market indices and interest rate measurements. Within the hierarchy of fair value measurements, these are Level 2 fair values. The fair values of cash and cash equivalents, receivables and accounts payable approximate their carrying values due to the short-term nature of these instruments.

 

As of January 3, 2015, the carrying amount of the Lucky Brand Note was $89.0 million, including initial principal of $85.0 million and accrued payment in kind of $4.0 million. In evaluating its fair value, the Company considered various facts and circumstances, including (i) known changes in market values of comparable instruments in active markets; (ii) the inability to transfer the Lucky Brand Note and the lack of an active market to do so; and (iii) entity specific factors related to the issuer of the Lucky Brand Note including the absence of any factors that would suggest that the counterparty may be unable to meet its obligations under the terms of the Lucky Brand Note. Based on those factors and the inherent subjectivity in evaluating fair value of the Lucky Brand Note and similar instruments, the Company concluded that providing a range of fair value was appropriate. The Company determined the range of fair value of the Lucky Brand Note, including accrued payment in kind, to be between $79.0 million and $89.0 million. The low end of such range was determined using two methods. The Company reviewed the average change in fair

 



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value of comparable instruments in active markets and also estimated an implied discount based on the non-transferrable nature of the Lucky Brand Note. The high end of the range considered entity specific circumstances and assumed Lucky Brand LLC would pay the Lucky Brand Note in full.

 

As of October 4, 2014, the estimated fair value of the Lucky Brand Note approximated its carrying value.

 

 

11.    COMMITMENTS AND CONTINGENCIES

 

Buying/Sourcing

Pursuant to a buying/sourcing agency agreement, Li & Fung Limited (“Li & Fung”) currently acts as a global buying/sourcing agent. The Company pays Li & Fung an agency commission based on the cost of product purchases using Li & Fung as its buying/sourcing agent. The Company is obligated to use Li & Fung as its buying/sourcing agent for a minimum value of apparel inventory purchases each year. In the first quarter of 2015, the Company amended its buying/sourcing agency agreement with Li & Fung, which included a reduction of the annual minimum value of inventory purchases and a change in the commission rates for certain products, with an initial term through March 31, 2018. The Company’s agreement with Li & Fung is not exclusive.

 

Leases

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 the Company or certain subsidiaries of the Company may remain secondarily liable for the remaining obligations on 140 such leases. As of October 3, 2015, the future aggregate payments under these leases amounted to $100.2 million and extended to various dates through 2025.

 

During the second quarter of 2013, the Company entered into a sale-leaseback agreement for its North Bergen, NJ office with a 12-year term and two five-year renewal options. This leaseback was classified as a capital lease and recorded at fair value. As of October 3, 2015, the estimated future minimum lease payments under the noncancelable capital lease were as follows:

 

In millions

 

 

 

2015

 

$

514

 

2016

 

2,089

 

2017

 

2,141

 

2018

 

2,194

 

2019

 

2,247

 

Thereafter

 

13,081

 

Total

 

22,266

 

Less: Amounts representing interest and executory costs

 

(14,021

)

Net present values

 

8,245

 

Less: Capital lease obligations included in short-term debt

 

(499

)

Long-term capital lease obligations

 

$

7,746

 

 

Other

The Company is a party to several pending legal proceedings and claims. Although the outcome of any such actions cannot be determined with certainty, management is of the opinion that the final outcome of any of these actions should not have a material adverse effect on the Company’s financial position, results of operations, liquidity or cash flows.

 

 

12.    STREAMLINING INITIATIVES

 

2015 Actions

In the second quarter of 2015, the Company announced that it signed a new distribution agreement for its operations in Latin America, including in Brazil, which will leverage the network of its new partner. As part of these actions, the Company completed the closure of its Company-operated stores during the third quarter of 2015 and no longer operates directly in Brazil. The Company recorded charges related to contract terminations, severance, non-cash asset impairment charges and other costs related to these actions.

 



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21

 

On January 29, 2015, the Company announced that it is focusing its business on kate spade new york. As part of this business model, the Company discontinued KATE SPADE SATURDAY as a standalone business. The Company 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, KATE SPADE SATURDAY’s Company-owned and three partnered store locations were substantially closed by the end of the second quarter of 2015. The Company also completed the closure of JACK SPADE’s Company-owned stores. These actions resulted in restructuring charges related to contract assignment and termination costs, severance and non-cash asset impairment charges and were substantially completed in the second quarter of 2015.

 

2014 Actions

In connection with the sale of the Juicy Couture IP and former Lucky Brand business, the Board of Directors of the Company approved various changes to its senior management, which resulted in charges related to severance in the first quarter of 2014. As discussed in Note 17 – Share-Based Compensation, the Company’s Compensation Committee approved the continued vesting of unvested options and restricted stock awards without any required service period or the accelerated vesting of such awards for former employees, including former executive officers. In addition, as a result of the reduction of office space in the Company’s former New York office, the Company recorded charges related to contract terminations and other charges in the first quarter of 2014.

 

For the nine and three months ended October 3, 2015 and October 4, 2014, expenses associated with the Company’s streamlining actions were primarily recorded in SG&A on the accompanying Condensed Consolidated Statements of Operations and impacted reportable segments and Other as follows:

 

 

 

Nine Months Ended

 

Three Months Ended

 

In thousands

 

October 3,
2015
(39 Weeks)

 

October 4,
2014
(40 Weeks)

 

October 3,
2015
(13 Weeks)

 

October 4,
2014
(13 Weeks)

 

KATE SPADE North America

 

$

17,603

 

$

3,178

 

$

4,343

 

$

23

 

KATE SPADE International

 

9,164

 

--

 

1,517

 

--

 

Adelington Design Group

 

1,835

 

222

 

(29

)

6

 

Other (a)

 

4,423

 

31,579

 

1,199

 

1,105

 

Total

 

$

33,025

 

$

34,979

 

$

7,030

 

$

1,134

 

 


(a)              Other consists of unallocated corporate restructuring costs and Juicy Couture and Lucky Brand restructuring charges principally related to distribution functions that are not directly attributable to Juicy Couture or Lucky Brand and therefore have not been included in discontinued operations.

 

A summary rollforward of the liability for streamlining initiatives is as follows:

 

In thousands

 

Payroll and
Related Costs

 

Contract
Termination
Costs

 

Asset
Write-Downs

 

Other Costs

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 3, 2015

 

$

2,080

 

$

987

 

$

--

 

$

6,830

 

$

9,897

 

2015 provision (a)

 

12,370

 

11,206

 

7,389

 

2,060

 

33,025

 

2015 asset write-downs

 

--

 

--

 

(7,389

)

--

 

(7,389

)

Translation difference

 

(7

)

--

 

--

 

(3

)

(10

)

2015 spending (a)

 

(9,959

)

(6,578

)

--

 

(4,423

)

(20,960

)

Balance at October 3, 2015 (b)

 

$

4,484

 

$

5,615

 

$

--

 

$

4,464

 

$

14,563

 

 


(a)              Payroll and related costs and spending include $0.3 million of non-cash share-based compensation expense.

(b)             The balance in other costs at October 3, 2015 includes $3.3 million for a withdrawal liability incurred in 2011 related to a multi-employer pension plan that the Company will pay through June 1, 2016.

 

For the nine months ended October 3, 2015, the Company recorded pretax charges totaling $33.0 million related to these initiatives. The Company expects to pay the remaining accrued streamlining costs in the next 12 months. For the nine months ended October 4, 2014, the Company recorded pretax charges of $35.0 million related to these initiatives, including $32.6 million of payroll and related costs, $1.3 million of contract termination costs, $0.9 million of asset write-downs and disposals and $0.2 million of other costs. Approximately $7.7 million and $18.2

 



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22

 

million of these charges were non-cash during the nine months ended October 3, 2015 and October 4, 2014, respectively.

 

 

13.    EARNINGS PER COMMON SHARE

 

The following table sets forth the computation of basic and diluted earnings per common share (“EPS”).

 

 

 

Nine Months Ended

 

Three Months Ended

 

In thousands

 

October 3,
2015
(39 Weeks)

 

October 4,
2014
(40 Weeks)

 

October 3,
2015
(13 Weeks)

 

October 4,
2014
(13 Weeks)

 

(Loss) income from continuing operations

 

$

(39,800

)

$

(49,768

)

$

4,510

 

$

2,623

 

(Loss) income from discontinued operations, net of income taxes

 

(4,577

)

82,404

 

(2,207

)

(11,753

)

Net (loss) income

 

$

(44,377

)

$

32,636

 

$

2,303

 

$

(9,130

)

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

127,611

 

125,972

 

127,682

 

126,971

 

Stock options and nonvested shares (a)

 

--

 

--

 

436

 

639

 

Diluted weighted average shares outstanding

 

127,611

 

125,972

 

128,118

 

127,610

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.31

)

$

(0.40

)

$

0.04

 

$

0.02

 

(Loss) income from discontinued operations

 

$

(0.04

)

$

0.66

 

$

(0.02

)

$

(0.09

)

Net (loss) income

 

$

(0.35

)

$

0.26

 

$

0.02

 

$

(0.07

)

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

$

(0.31

)

$

(0.40

)

$

0.04

 

$

0.02

 

(Loss) income from discontinued operations

 

$

(0.04

)

$

0.66

 

$

(0.02

)

$

(0.09

)

Net (loss) income

 

$

(0.35

)

$

0.26

 

$

0.02

 

$

(0.07

)

 


(a)             Because the Company incurred a loss from continuing operations for the nine months ended October 3, 2015 and October 4, 2014, approximately 0.9 million and 1.1 million outstanding stock options, respectively, and approximately 2.0 million and 1.7 million outstanding nonvested shares, respectively, were excluded from the computation of diluted loss per share.

 

 

14.    ADDITIONAL FINANCIAL INFORMATION

 

Condensed Consolidated Statements of Cash Flows Supplementary Disclosures

During the nine months ended October 3, 2015 and October 4, 2014, net income tax (payments) refunds were $(2.6) million and $0.3 million, respectively. The Company received interest payments of $9.4 million for the nine months ended October 3, 2015, including outstanding interest and payment in kind under the Lucky Brand Note. During the nine months ended October 3, 2015 and October 4, 2014, the Company made interest payments of $13.0 million and $29.9 million, respectively. As of October 3, 2015, January 3, 2015 and October 4, 2014, the Company accrued capital expenditures totaling $11.1 million, $9.8 million and $14.2 million, respectively.

 

On February 3, 2014, the Company received a three-year $85.0 million note issued by Lucky Brand LLC, which was reflected in Note Receivable on the accompanying Condensed Consolidated Balance Sheets prior to its redemption in the first quarter of 2015 (see Note 1 – Basis of Presentation).

 

During 2014, the Company made business acquisition payments of $32.3 million related to the reacquisition of the KATE SPADE businesses in Southeast Asia (see Note 2 – Acquisition).

 

Related Party Transactions

The Company’s equity in losses of its equity investees was $4.1 million and $1.4 million for the nine months ended October 3, 2015 and October 4, 2014, respectively, and $1.3 million and $1.2 million for the three months ended

 



Table of Contents

 

23

 

October 3, 2015 and October 4, 2014, respectively. During the third quarter of 2015, Kate Spade Hong Kong, Limited and Walton Brown each loaned $5.0 million to KSC. As of October 3, 2015, January 3, 2015 and October 4, 2014, the Company recorded $28.3 million, $9.2 million and $8.0 million, respectively, related to its investments in unconsolidated subsidiaries, which was included in Other assets on the accompanying Condensed Consolidated Balance Sheets.

 

 

15.    SEGMENT REPORTING

 

The Company operates its kate spade new york and JACK SPADE brands through one operating segment in North America and four operating segments internationally: Japan, Asia (excluding Japan), Europe and Latin America. 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:

 

·                  KATE SPADE North America segment – consists of the Company’s kate spade new york and JACK SPADE brands in North America.

·                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).

·                  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.

 

The Company’s Chief Executive Officer has been identified as the CODM. The Company’s 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 quarter of 2015 to terminate contracts with the Company’s former joint venture partner in China. The costs of all corporate departments that serve the respective segment are fully allocated. The Company does not allocate amounts reported below Operating income (loss) to its reportable segments, other than adjusted equity income (loss) in equity method investees. The Company’s definition of Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

 

The accounting policies of the Company’s reportable segments are the same as those described in Note 1 – Basis of Presentation. Sales are reported based on a destination basis. The Company, as licensor, also licenses to third parties the right to produce and market products bearing certain Company-owned trademarks.

 

Dollars in thousands

 

Net Sales

 

% to Total

 

Adjusted
EBITDA

 

% of Sales

 

Nine Months Ended October 3, 2015 (39 weeks)

 

 

 

 

 

 

 

 

 

KATE SPADE North America

 

$

659,809

 

81.1 

%

$

86,566

 

13.1 

%

KATE SPADE International

 

136,056

 

16.7 

%

13,215

 

9.7 

%

Adelington Design Group

 

17,897

 

2.2 

%

2,728

 

15.2 

%

Totals

 

$

813,762

 

100.0 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended October 4, 2014 (40 weeks)

 

 

 

 

 

 

 

 

 

KATE SPADE North America

 

$

565,021

 

76.4 

%

$

69,614

 

12.3 

%

KATE SPADE International

 

153,512

 

20.7 

%

81

 

0.1 

%

Adelington Design Group

 

21,496

 

2.9 

%

1,020

 

4.7 

%

Other (a)

 

--

 

-- 

%

(685

)

-- 

%

Totals

 

$

740,029

 

100.0 

%

 

 

 

 

 



Table of Contents

 

24

 

Dollars in thousands

 

Net Sales

 

% to Total

 

Adjusted
EBITDA

 

% of Sales

 

Three Months Ended October 3, 2015 (13 weeks)

 

 

 

 

 

 

 

 

 

KATE SPADE North America

 

$

228,493

 

82.4 

%

$

30,713

 

13.4

 %

KATE SPADE International

 

42,870

 

15.5 

%

4,793

 

11.2

 %

Adelington Design Group

 

5,965

 

2.1 

%

1,127

 

18.9

 %

Totals

 

$

277,328

 

100.0 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended October 4, 2014 (13 weeks)

 

 

 

 

 

 

 

 

 

KATE SPADE North America

 

$

192,886

 

77.0 

%

$

21,130

 

11.0

 %

KATE SPADE International

 

50,906

 

20.3 

%

(1,346

)

(2.6

)%

Adelington Design Group

 

6,625

 

2.7 

%

1,030

 

15.5

 %

Other (a)

 

--

 

-- 

%

(90

)

--

 %

Totals

 

$

250,417

 

100.0 

%

 

 

 

 

 


(a)          Other consists of expenses principally related to distribution functions that were included in Juicy Couture and Lucky Brand historical results, but are not directly attributable to those businesses and therefore have not been included in discontinued operations.

 

The following tables provide a reconciliation to (Loss) Income from Continuing Operations:

 

 

 

Nine Months Ended

 

Three Months Ended

 

In thousands

 

October 3,
2015
(39 Weeks)

 

October 4,
2014
(40 Weeks)

 

October 3,
2015
(13 Weeks)

 

October 4,
2014
(13 Weeks)

 

Reportable Segments Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

KATE SPADE North America

 

$

86,566

 

$

69,614

 

$

30,713

 

$

21,130

 

KATE SPADE International (a)

 

13,215

 

81

 

4,793

 

(1,346

)

Adelington Design Group

 

2,728

 

1,020

 

1,127

 

1,030

 

Other (b)

 

--

 

(685

)

--

 

(90

)

Total Reportable Segments Adjusted EBITDA

 

102,509

 

70,030

 

36,633

 

20,724

 

Depreciation and amortization, net (c)

 

(34,094

)

(34,033

)

(11,676

)

(11,752

)

Charges due to streamlining initiatives (d), brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net

 

(33,824

)

(19,035

)

(6,871

)

(870

)

Joint venture contract termination fee

 

(26,000

)

--

 

--

 

--

 

Share-based compensation (e)

 

(19,440

)

(31,772

)

(6,684

)

(5,740

)

Adjusted equity loss included in Reportable Segments Adjusted EBITDA (f)

 

3,586

 

1,358

 

915

 

1,185

 

Operating (Loss) Income

 

(7,263

)

(13,452

)

12,317

 

3,547

 

Other expense, net (a)

 

(4,778

)

(1,717

)

(1,560

)

(1,805

)

Loss on settlement of note receivable

 

(9,873

)

--

 

--

 

--

 

Loss on extinguishment of debt

 

--

 

(16,914

)

--

 

--

 

Interest expense, net

 

(13,982

)

(18,185

)

(5,274

)

(2,189

)

Provision (benefit) for income taxes

 

3,904

 

(500

)

973

 

(3,070

)

(Loss) Income from Continuing Operations

 

$

(39,800

)

$

(49,768

)

$

4,510

 

$

2,623

 

 


(a)          Amounts include equity in the adjusted losses of the Company’s equity method investees of $3.6 million and $1.4 million for the nine months ended October 3, 2015 and October 4, 2014, respectively and $0.9 million and $1.2 million for the three months ended October 3, 2015 and October 4, 2014, respectively.

(b)         Other consists of expenses principally related to distribution functions that were included in Juicy Couture and Lucky Brand historical results, but are not directly attributable to those businesses and therefore have not been included in discontinued operations.

(c)          Excludes amortization included in Interest expense, net.

(d)         See Note 12 – Streamlining Initiatives for a discussion of streamlining charges.

(e)         Includes share-based compensation expense of $0.3 million and $17.2 million in the nine months ended October 3, 2015 and October 4, 2014, respectively, and $0.1 million and $0.3 million in the three months ended October 3, 2015 and October 4, 2014, respectively, that was classified as restructuring.

 



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25

 

(f)           Excludes joint venture restructuring expense included in equity losses of $0.5 million in the nine months ended October 3, 2015 and $0.4 million in the three months ended October 3, 2015.

 

GEOGRAPHIC DATA:

 

Dollars in thousands

 

Net Sales

 

% to Total

 

Nine Months Ended October 3, 2015 (39 weeks)

 

 

 

 

 

Domestic

 

$

650,239

 

79.9%

 

International

 

163,523

 

20.1%

 

Totals

 

$

813,762

 

100.0%

 

 

 

 

 

 

 

Nine Months Ended October 4, 2014 (40 weeks)

 

 

 

 

 

Domestic

 

$

572,073

 

77.3%

 

International

 

167,956

 

22.7%

 

Totals

 

$

740,029

 

100.0%

 

 

 

 

 

 

 

Three Months Ended October 3, 2015 (13 weeks)

 

 

 

 

 

Domestic

 

$

223,058

 

80.4%

 

International

 

54,270

 

19.6%

 

Totals

 

$

277,328

 

100.0%

 

 

 

 

 

 

 

Three Months Ended October 4, 2014 (13 weeks)

 

 

 

 

 

Domestic

 

$

192,805

 

77.0%

 

International

 

57,612

 

23.0%

 

Totals

 

$

250,417

 

100.0%

 

 

There were no significant changes in segment assets during the nine months ended October 3, 2015.

 

 

16.    DERIVATIVE INSTRUMENTS

 

In order to reduce exposures related to changes in foreign currency exchange rates, the Company uses forward contracts and options and may utilize foreign currency collars and swap contracts for the purpose of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by its business in Japan. As of October 3, 2015, the Company had forward contracts maturing through June 2016 to sell 1.7 billion yen for $14.4 million. The Company also had option contracts maturing through December 2016 to sell 2.4 billion yen for $20.7 million.

 

The Company uses foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with intercompany loans. As of October 3, 2015, the Company had forward contracts to sell 4.0 billion yen for $33.3 million maturing through December 2015. Transaction (losses) gains of $(0.1) million and $1.3 million related to these derivative instruments were reflected within Other expense, net for the nine months ended October 3, 2015 and October 4, 2014, respectively, and $(0.8) million and $2.4 million for the three months ended October 3, 2015 and October 4, 2014, respectively. These transaction gains and losses were substantially offset by transaction gains and losses on the corresponding intercompany loans.

 



Table of Contents

 

26

 

The following table summarizes the fair value and presentation in the Condensed Consolidated Financial Statements for derivatives designated as hedging instruments and derivatives not designated as hedging instruments:

 

 

 

Foreign Currency Contracts Designated as Hedging Instruments

 

In thousands

 

Asset Derivatives

 

Liability Derivatives

 

Period

 

Balance Sheet
Location

 

Notional
Amount

 

Fair Value

 

Balance
Sheet Location

 

Notional
Amount

 

Fair Value

 

October 3, 2015

 

Other current assets

 

$

32,912

 

$     1,515

 

Accrued expenses

 

$

2,200

 

$        93

 

January 3, 2015

 

Other current assets

 

39,100

 

3,066

 

Accrued expenses

 

--

 

--

 

October 4, 2014

 

Other current assets

 

22,050

 

1,233

 

Accrued expenses

 

--

 

--

 

 

 

 

Foreign Currency Contracts Not Designated as Hedging Instruments

 

In thousands

 

Asset Derivatives

 

Liability Derivatives

 

Period

 

Balance Sheet
Location

 

Notional
Amount

 

Fair Value

 

Balance Sheet
Location

 

Notional
Amount

 

Fair Value

 

October 3, 2015

 

Other current assets

 

$

--

 

$            --

 

Accrued expenses

 

$

33,303

 

$        67

 

January 3, 2015

 

Other current assets

 

33,350

 

127

 

Accrued expenses

 

--

 

--

 

October 4, 2014

 

Other current assets

 

36,748

 

347

 

Accrued expenses

 

--

 

--

 

 

The following table summarizes the effect of foreign currency exchange contracts designated as hedging instruments on the Condensed Consolidated Financial Statements:

 

In thousands

 

Amount of Gain or

(Loss) Recognized

in Accumulated

OCI on Derivative

(Effective Portion)

 

Location of Gain or

(Loss) Reclassified

from Accumulated

OCI into Operations

(Effective and

Ineffective Portion)

 

Amount of Gain or

(Loss) Reclassified

from Accumulated

OCI into Operations

(Effective Portion)

 

Amount

Recognized in

Operations on

Derivative

(Ineffective

Portion)

 

Nine months ended October 3, 2015

 

$

(1,326

)

Cost of goods sold

 

$

1,156

 

$

--

 

Nine months ended October 4, 2014

 

541

 

Cost of goods sold

 

1,028

 

--

 

Three months ended October 3, 2015

 

(534

)

Cost of goods sold

 

813

 

--

 

Three months ended October 4, 2014

 

933

 

Cost of goods sold

 

239

 

--

 

 

 

17.    SHARE-BASED COMPENSATION

 

The Company recognizes the cost of all employee share-based awards on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures.

 

The Company issues stock options and restricted shares as well as shares with performance features to employees under share-based compensation plans. Stock options are issued at the current market price, have a three-year vesting period and a contractual term of 7-10 years.

 

Compensation expense for restricted shares, including shares with performance features, is measured at fair value on the date of grant based on the number of shares granted and the quoted market price of the Company’s common stock. Such value is recognized as expense over the vesting period of the award, net of estimated forfeitures.

 

Compensation expense for restricted share units with performance features and a market condition is measured at fair value, subject to the market condition on the date of grant and based on the number of shares expected to vest subject to the performance condition. Such value is recognized as expense over the vesting period of the award, net of estimated forfeitures.

 



Table of Contents

 

27

 

Compensation expense related to the Company’s share-based payment awards totaled $19.4 million, which included $0.3 million that was classified as restructuring, for the nine months ended October 3, 2015 and $6.6 million, which included $0.1 million that was classified as restructuring, for the three months ended October 3, 2015.

 

During 2014, the Company’s Compensation Committee approved the continued vesting of unvested options and restricted stock awards without any required service period or the accelerated vesting of such awards for former employees, including former executive officers, upon their separation from the Company. Compensation expense related to the Company’s share-based payment awards totaled $31.8 million, which included $17.2 million that was classified as restructuring, for the nine months ended October 4, 2014 and $5.8 million, which included $0.3 million that was classified as restructuring, for the three months ended October 4, 2014.

 

Stock Options

The Company grants stock options to certain domestic and international employees. These options are subject to transfer restrictions and risk of forfeiture until earned by continuing employment. Stock options are issued at the current market price and have a three-year vesting period and a contractual term of 7-10 years.

 

The Company utilizes the Binomial lattice pricing model to estimate the fair value of options granted. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates and to allow for actual exercise behavior of option holders.

 

 

 

 

Nine Months Ended

 

Valuation Assumptions:

 

 

October 3, 2015

 

Weighted-average fair value of options granted

 

 

$15.92

 

Historic volatility

 

 

   76.5%

 

Weighted-average volatility

 

 

   58.7%

 

Expected term (in years)

 

 

4.2

 

Dividend yield

 

 

     —

 

Risk-free rate

 

 

    1.9%

 

Expected annual forfeiture

 

 

   15.3%

 

 

Expected volatilities are based on a term structure of implied volatility, which assumes changes in volatility over the life of an option. The Company utilizes historical optionee behavioral data to estimate the option exercise and termination rates that are used in the valuation model. The expected term represents an estimate of the period of time options are expected to remain outstanding. The expected term provided in the above table represents an option weighted-average expected term based on the estimated behavior of distinct groups of employees who received options in 2015. The range of risk-free rates is based on a forward curve of interest rates at the time of option grant.

 

A summary of award activity under stock option plans as of October 3, 2015 and changes therein during the nine month period then ended are as follows:

 

 

Shares

Weighted
Average Exercise
Price

Weighted Average
Remaining
Contractual Term

Aggregate
Intrinsic Value
(In thousands)

Outstanding at January 3, 2015

 

1,030,969

 

 

$

11.25

 

 

3.9

 

 

$

21,613

 

Granted

 

174,458

 

 

 

34.29

 

 

 

 

 

 

 

 

Exercised

 

(233,000

)

 

 

10.42

 

 

 

 

 

 

5,659

 

Cancelled

 

(52,714

)

 

 

21.57

 

 

 

 

 

 

 

 

Outstanding at October 3, 2015

 

919,713

 

 

$

15.24

 

 

3.7

 

 

$

7,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested or expected to vest at October 3, 2015

 

880,523

 

 

$

14.44

 

 

3.6

 

 

$

7,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable at October 3, 2015

 

585,373

 

 

$

8.02

 

 

2.6

 

 

$

7,332

 

 

As of October 3, 2015, there were approximately 0.3 million nonvested stock options. The weighted average grant date fair value per award for nonvested stock options was $13.22.

 

As of October 3, 2015, there was $2.5 million of total unrecognized compensation cost related to nonvested stock options granted under the Company’s stock option plans. That expense is expected to be recognized over a weighted

 



Table of Contents

 

28

 

average period of 1.6 years. The total fair value of shares vested during the nine months ended October 3, 2015 and October 4, 2014 was $2.3 million and $3.2 million, respectively.

 

Restricted Stock

In 2015, the Company granted 105,245 market share units (“MSUs”) to a group of key executives with an aggregate grant date fair value of $4.6 million and which vest 50% on each of the second and third anniversaries of the grant date as part of an annual long-term incentive plan (“LTIP”). The MSUs earned will vary from 30% to 200% of the number of MSUs awarded depending on the actual performance of the Company’s stock price over the vesting periods.

 

The fair value for the MSUs granted was calculated using the Monte Carlo simulation model. For the nine months ended October 3, 2015, the following assumptions were used in determining fair value:

 

 

Nine Months Ended

Valuation Assumptions:

October 3, 2015

 

Weighted-average fair value

$43.35

 

Expected volatility

   43.2%

 

Dividend yield

  —

 

Risk-free rate

1.1 % to 1.7 %

 

Weighted-average expected annual forfeiture

5.0 %

 

 

The other portion of the LTIP consists of an award of 243,419 performance shares that vests on the third anniversary of the grant date. The number of performance shares earned will vary from zero to 200% of the number of awards granted depending on the Company’s Total Shareholder Return (“TSR”) relative to the TSR of the S&P Mid-Cap 400 Index as well as an earnings-based performance condition. The performance shares have a grant date fair value of $9.1 million that was calculated using a Monte Carlo simulation model. For the nine months ended October 3, 2015, the following assumptions were used in determining fair value:

 

 

Nine Months Ended

Valuation Assumptions:

October 3, 2015

 

Weighted-average fair value

$37.47

 

Expected volatility

   41.6%

 

Dividend yield

  —

 

Risk-free rate

    1.0 %

 

Weighted-average expected annual forfeiture

    4.1 %

 

 

A summary of award activity under restricted stock plans as of October 3, 2015 and changes therein during the nine month period then ended are as follows:

 

 

Shares

Weighted
Average Grant
Date Fair Value

 

Nonvested stock at January 3, 2015

 

1,719,574

 

 

$

45.39

 

Granted

 

557,984

 

 

 

37.28

 

Vested

 

(107,720

)

 

 

20.47

 

Cancelled

 

(199,509

)

 

 

45.57

 

Nonvested stock at October 3, 2015

 

1,970,329

 

 

$

44.44

 

 

 

 

 

 

 

 

 

Expected to vest as of October 3, 2015 (a)

 

1,768,101

 

 

$

44.66

 

 


(a)              Excludes the potential impact of the performance share multiplier, which will vary from 30% to 200% of the number of MSUs awarded depending on the actual performance of the Company’s stock price over the vesting periods and zero to 200% of the number of LTIP awards granted depending on the Company’s TSR relative to the TSR of the S&P Mid-Cap 400 Index.

 

As of October 3, 2015, there was $44.1 million of total unrecognized compensation cost related to non vested stock awards granted under restricted stock plans. That expense is expected to be recognized over a weighted average

 



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period of 2.2 years. The total fair value of shares vested during the nine month periods ended October 3, 2015 and October 4, 2014 was $2.2 million and $6.8 million, respectively.

 

 

18.    RECENT ACCOUNTING PRONOUNCEMENTS

 

In July 2015, new accounting guidance on accounting for inventory was issued, which requires entities to measure inventory at the lower of cost and net realizable value. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. The Company is currently evaluating the impact of the adoption of the new accounting guidance on its financial statements.

 

In April 2015, new accounting guidance was issued which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In addition, in August 2015, new accounting guidance was issued to clarify that an entity may elect to present debt issuance costs related to a line-of-credit arrangement as an asset, regardless of whether or not there are any outstanding borrowings on the line-of-credit arrangement. This guidance is effective for interim and annual periods beginning on or after December 15, 2015. The Company will reclassify the carrying value of its debt issuance costs related to the Term Loan from an asset to a liability upon adoption.

 

In January 2015, new accounting guidance was issued which removes the concept of extraordinary items from US GAAP. Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of an unusual nature and occurs infrequently. This separate presentation (and corresponding earnings per share impact) will no longer be allowed. This guidance is effective for interim and annual periods beginning on or after December 15, 2015. Early adoption is permitted. The adoption of the new guidance will not affect the Company’s financial position, results of operations or cash flows.

 

In May 2014, new accounting guidance on the accounting for revenue recognition was issued, which requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, this guidance was updated, which defers the effective date by one year and permits early adoption for interim and annual periods beginning on or after December 15, 2016. This guidance is effective for interim and annual periods beginning on or after December 15, 2017. The Company is continuing to evaluate the impact of the adoption of the guidance on its financial statements.

 



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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 four operating segments internationally: Japan, Asia (excluding Japan), Europe and Latin America. 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:

 

·                        KATE SPADE North America segment – consists of our kate spade new york and JACK SPADE brands in North America.

·                        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).

·                        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.

 

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.

 

Macroeconomic challenges and uncertainty continue to dampen consumer spending; job growth remains inconsistent, with stagnating real wages in certain markets in which we operate; unemployment levels remain high; consumer retail traffic remains inconsistent and the retail environment remains promotional. In addition, as economic conditions improve in certain real estate markets in which we operate, the landlord community is requiring higher rents and occupancy costs. Furthermore, economic conditions in international markets in which we operate, including Europe and Asia, remain uncertain and volatile. We continue to focus on the execution of our strategic plans and improvements in productivity, with a primary focus on operating cash flow generation, retail execution and product category and geographic expansion.

 

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 will concentrate our

 



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investments on initiatives to further develop kate spade new york into a global lifestyle brand. We have established the following operating and financial goals as we focus our efforts on two axes of growth – geographic expansion and product category expansion: (i) continuing to drive top line growth by expanding certain product categories, opening new retail locations in North America, Japan and Europe and launching additional e-commerce platforms in Europe; (ii) accelerating growth in Greater China through newly formed joint ventures that are expected to leverage the expertise of our new joint venture partner and the global demand for our products; (iii) maximizing licensing opportunities to expand product categories and grow margins; (iv) extending our use of capital efficient partnerships in selected geographies; (v) driving quality of sale initiatives with continued moderation of promotions across channels and increased marketing to support those efforts; and (vi) increasing investments in marketing that leverage Customer Relationship Management (“CRM”) capability and focus on acquiring new full price customers. Our quality of sale initiatives, while positive to our brand equity, and the impact of foreign currency are expected to continue to affect our results for the remainder of the year.

 

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 2014 Annual Report on Form 10-K.

 

Recent Developments and Operational Initiatives

 

In the second quarter of 2015, we signed a new distribution agreement for our operations in Latin America, including in Brazil, which will leverage the network of our new distribution partner. 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. 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 February 2014, we reacquired the existing KATE SPADE businesses in Southeast Asia from Globalluxe Kate Spade HK Limited (“Globalluxe”) for $32.3 million, and in the first quarter of 2015 we:

·                  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

·                  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 $21.0 million from LCJG for their interests in the joint ventures, subject to adjustments.

 

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.

 

In the fourth quarter of 2014, we launched the UK KATE SPADE e-commerce website. In the third quarter of 2015, we launched our e-commerce website in France.

 

On February 3, 2014, we completed the sale of 100.0% of the capital stock of Lucky Brand Dungarees, Inc. (“Lucky Brand”) to LBD Acquisition Company, LLC (“LBD Acquisition”), a Delaware limited liability company and affiliate of Leonard Green & Partners, L.P., for aggregate consideration of $225.0 million, comprised of $140.0 million cash consideration and a three-year $85.0 million Lucky Brand Note (the “Lucky Brand Note”) issued by the successor of LBD Acquisition, Lucky Brand Dungarees, LLC (“Lucky Brand LLC”) at closing, subject to working capital and other adjustments. On March 4, 2015, we and Lucky Brand LLC entered into a transfer and settlement agreement (the “Lucky Brand Note Agreement”) to settle the Lucky Brand Note in full, prior to its maturity. Pursuant to the terms of the Lucky Brand Note Agreement, Lucky Brand LLC paid us $81.0 million to settle the principal balance of the Lucky Brand Note and related unpaid interest and payment in kind. Giving effect to the Lucky Brand Note Agreement, since the date of issuance, we collected aggregate principal and interest under the Lucky Brand Note of $89.0 million. The transactions contemplated by the Lucky Brand Note Agreement closed on March 4, 2015.

 



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On November 6, 2013, we sold the Juicy Couture brandname and related intellectual property assets (the “Juicy Couture IP”) to an affiliate of Authentic Brands Group (“ABG”) for a total purchase price of $195.0 million (an additional payment may be payable to us in an amount of up to $10.0 million if certain conditions regarding future performance are achieved). The Juicy Couture IP was licensed back to us to accommodate the wind-down of operations, which was substantially completed in the second quarter of 2014. We paid guaranteed minimum royalties to ABG of $10.0 million during the term of the wind-down license. On April 7, 2014, we sold our Juicy Couture business in Europe to an operating partner of ABG for $8.6 million, subject to working capital adjustments.

 

On November 19, 2013, we entered into an agreement to terminate the lease of our Juicy Couture flagship store on Fifth Avenue in New York City in exchange for a $51.0 million payment. On May 15, 2014, we surrendered such premises to the landlord and received proceeds of $45.8 million (net of taxes and fees), in addition to $5.0 million previously received.

 

Debt and Liquidity Enhancements

In May 2014, we terminated our prior revolving credit agreement and completed a fourth amendment to and restatement of our revolving credit facility (as amended to date, the “ABL Facility”), which extended the maturity date of the facility to May 2019. Availability under the ABL Facility is in 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.

 

On April 10, 2014, we entered into a term loan credit agreement (the “Term Loan Credit Agreement”), which provides for term loans in an aggregate principal amount of $400.0 million (collectively, the “Term Loan”) maturing in April 2021. The Term Loan is subject to amortization payments of $1.0 million per quarter, which commenced on October 1, 2014, with the balance due at maturity. Interest on the outstanding principal amount of the Term Loan accrues at a rate equal to LIBOR (with a floor of 1.0%) plus 3.0% per annum, payable in cash. We drew on the Term Loan on May 12, 2014 and used $354.8 million of the net proceeds of $392.0 million to redeem all of our remaining outstanding 10.5% Senior Secured Notes due April 2019 (the “Senior Notes”). See “Financial Position, Liquidity and Capital Resources.”

 

On April 14, 2014, we redeemed $37.2 million aggregate principal amount of the Senior Notes at a price equal to 103.0% of their aggregate principal amount, plus accrued interest using cash on hand. On May 12, 2014, we redeemed the remaining $334.8 million aggregate principal amount of the Senior Notes at a price equal to 105.25% of their aggregate principal amount, plus accrued interest. No Senior Notes remain outstanding.

 

Our cost reduction efforts have included tighter controls surrounding discretionary spending and streamlining initiatives that have included rationalization of distribution centers and office space and staff reductions, including consolidation of certain support functions. We expect that our streamlining initiatives will provide long-term cost savings. We will also continue to closely manage spending, with 2015 capital expenditures expected to be approximately $75.0 million, compared to $100.0 million in 2014.

 

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 KATE SPADE SATURDAY, JACK SPADE and our kate spade new york retail stores in Brazil do not represent a strategic shift in our operations and therefore are not reported as discontinued operations.

 

Overall Results for the Nine Months Ended October 3, 2015

 

Net Sales

 

Net sales for the first nine months of 2015 were $813.8 million, an increase of $73.8 million or 10.0%, compared to 2014 net sales of $740.0 million. The increase in net sales compared to the first nine months of 2014 includes year-over-year decreases of: (i) $22.1 million from changes in foreign currency exchange rates; (ii) $17.9 million for the additional week in 2014, excluding the impact of wind-down operations; (iii) $17.6 million related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture; (iv) $14.4 million related to the wind-down

 



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operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly owned operations in Brazil; and (v) $10.0 million resulting from North America quality of sale initiatives.

 

Gross Profit and Loss from Continuing Operations

 

Gross profit for the first nine months of 2015 was $496.0 million, an increase of $46.0 million compared to 2014, primarily due to increased net sales in our KATE SPADE North America segment. Our gross profit rate increased from 60.8% in 2014 to 61.0% in 2015, and primarily reflected: (i) the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture; (ii) the impact of the 2014 liquidation of excess KATE SPADE SATURDAY launch year inventory; (iii) unusually low promotional activity in our outlet stores in the third quarter of 2014; and (iv) a change in mix due to accelerated outlet store openings in 2014, in order to capitalize on the one-time opportunity presented by the Juicy Couture real estate portfolio.

 

We recorded a loss from continuing operations of $39.8 million in the first nine months of 2015, as compared to a loss from continuing operations of $49.8 million in 2014. The year-over-year change primarily reflected: (i) an increase in gross profit; (ii) the absence of the loss on extinguishment of debt of $16.9 million in 2015; (iii) a decrease in Interest expense, net; (iv) an increase in Selling, general & administrative expenses (“SG&A”), including a $26.0 million charge to terminate contracts with our former joint venture partner in China; and (v) the loss on settlement of the Lucky Brand Note of $9.9 million.

 

Balance Sheet

 

We ended the first nine months of 2015 with a net debt position (total debt less cash and cash equivalents and marketable securities) of $182.0 million as compared to $285.5 million at the end of the first nine months of 2014. The $103.5 million decrease in our net debt primarily reflected: (i) the receipt of $75.1 million from Lucky Brand LLC to settle the Lucky Brand Note in March 2015; (ii) the receipt of a net $19.9 million from LCJG for their interests in the joint ventures; (iii) the funding of $73.7 million of capital and in-store shop expenditures over the last 12 months; and (iv) the payment of $10.0 million to acquire E-Land’s 60.0% interest in KSC. We also generated $121.6 million of cash from continuing operating activities over the past 12 months, which included a $26.0 million payment to terminate contracts with our former joint venture partner in China. The operating activities of our discontinued operations used $23.2 million of cash over the past 12 months.

 



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RESULTS OF OPERATIONS

 

As discussed above, we present our results based on three reportable segments.

 

NINE MONTHS ENDED OCTOBER 3, 2015 COMPARED TO NINE MONTHS ENDED OCTOBER 4, 2014

 

The following table sets forth our operating results for the nine months ended October 3, 2015 (comprised of 39 weeks) compared to the nine months ended October 4, 2014 (comprised of 40 weeks):

 

 

Nine Months Ended

Variance

Dollars in millions

October 3,

2015

(39 Weeks)

October 4,

2014

(40 Weeks)

$

%

 

 

 

 

 

Net Sales

 

$

813.8

 

 

$

740.0

 

 

$

73.8

 

 

 

10.0

 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

496.0

 

 

 

450.0

 

 

 

46.0

 

 

 

10.2

 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative expenses

 

 

503.3

 

 

 

463.5

 

 

 

(39.8

)

 

 

(8.6

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(7.3

)

 

 

(13.5

)

 

 

6.2

 

 

 

46.0

 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

 

(4.8

)

 

 

(1.7

)

 

 

(3.1

)

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on settlement of note receivable

 

 

(9.9

)

 

 

--

 

 

 

(9.9

)

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

--

 

 

 

(16.9

)

 

 

16.9

 

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(14.0

)

 

 

(18.2

)

 

 

4.2

 

 

 

23.1

 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

 

3.8

 

 

 

(0.5

)

 

 

(4.3

)

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from Continuing Operations

 

 

(39.8

)

 

 

(49.8

)

 

 

10.0

 

 

 

20.0

 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of income taxes

 

 

(4.6

)

 

 

82.4

 

 

 

(87.0

)

 

 

*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income

 

$

(44.4

)

 

$

32.6

 

 

$

(77.0

)

 

 

*

 

 


*   Not meaningful.

 

Net Sales

Net sales for the first nine months of 2015 were $813.8 million, an increase of $73.8 million, or 10.0%, compared to 2014 net sales of $740.0 million. The increase in net sales compared to the first nine months of 2014 includes year-over-year decreases of: (i) $22.1 million from changes in foreign currency exchange rates; (ii) $17.9 million for the additional week in 2014, excluding the impact of wind-down operations; (iii) $17.6 million related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture; (iv) $14.4 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly owned operations in Brazil; and (v) $10.0 million resulting from North America quality of sale initiatives. Excluding the additional week in 2014, kate spade new york comparable direct-to-consumer sales, including e-commerce, increased by 11.6% in the first nine months of 2015; excluding e-commerce net sales, kate spade new york comparable direct-to-consumer sales increased by 9.7% in the first nine months of 2015.

 



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Net sales results for our segments are provided below:

 

·                   KATE SPADE North America net sales were $659.8 million, a 16.8% increase compared to 2014 net sales of $565.0 million, primarily driven by increased direct-to-consumer sales in our kate spade new york brand. The increase in net sales compared to the first nine months of 2014 includes period-over-period decreases of: (i) $14.0 million for the additional week in 2014; (ii) $10.0 million resulting from quality of sale initiatives; (iii) $9.8 million in KATE SPADE SATURDAY 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; and (iv) $4.4 million from changes in foreign currency exchange rates.

 

We ended the first nine months of 2015 with 101 kate spade new york specialty retail stores and 63 outlet stores, reflecting a net addition of 17 kate spade new york specialty retail stores and 7 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 nine months of 2015 was approximately 357 thousand square feet, a 27.5% increase compared to 2014; and

           Sales productivity was $990 per average square foot for the first nine months of 2015, as compared to $964 for 2014 on a constant currency basis, excluding the impact of an additional week in 2014.

 

·                   KATE SPADE International net sales were $136.1 million, an 11.4% decrease compared to 2014 net sales of $153.5 million, and primarily reflected: (i) the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture as discussed above; (ii) a decrease of $17.7 million from changes in foreign currency exchange rates; (iii) a $3.9 million decrease for the additional week in 2014 and (iv) an increase in net sales to our international distributors.

 

We ended the first nine months of 2015 with 20 kate spade new york specialty retail stores, 52 concessions, and 13 outlet stores, reflecting a net addition over the last 12 months of 3 concessions and 3 outlet stores and a net reduction of 13 specialty retail stores, including the conversion of 6 specialty retail stores, 3 concessions and 1 outlet store totaling 11 thousand square feet in the Hong Kong, Macau and Taiwan territories to a joint venture. With the completion of the wind-down of our directly owned business in Brazil, we have owned and operated direct-to-consumer operations in Japan and Europe in our International segment. 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 nine months of 2015 was approximately 72 thousand square feet, an 18.2% increase compared to 2014; and

           Sales productivity was $1,176 per average square foot in the first nine months of 2015 and 2014 on a constant currency basis, excluding the impact of an additional week in 2014.

 

·                   Adelington Design Group net sales were $17.9 million for the first nine months of 2015, a decrease of $3.6 million, or 16.7%, compared to 2014, primarily related to a $5.2 million decrease in the exited TRIFARI, TRINA TURK and Kensie brands and a $2.5 million decrease in our LIZWEAR brand, partially offset by a $3.7 million increase in the MONET and LIZ CLAIBORNE brands.

 

Comparable direct-to-consumer net sales are calculated as follows:

·                  New stores become comparable after 14 full fiscal months of operations (on the first day of the 15th full fiscal month);

·                  Except in unusual circumstances, closing stores become non-comparable one full fiscal month prior to the scheduled closing date;

·                  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;

·                  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);

·                  Stores that are acquired are not comparable until they have been reflected in our results for a period of 12 months; and

·                  E-commerce sales are comparable after 12 full fiscal months from the website launch date (on the first day of the 13th full month).

 

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.

 



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Gross Profit

Gross profit for the first nine months of 2015 was $496.0 million, an increase of $46.0 million compared to 2014, primarily due to increased net sales in our KATE SPADE North America segment. Our gross profit rate increased from 60.8% in 2014 to 61.0% in 2015, and primarily reflected: (i) the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture; (ii) the impact of the 2014 liquidation of excess KATE SPADE SATURDAY launch year inventory; (iii) unusually low promotional activity in our outlet stores in the third quarter of 2014; and (iv) a change in mix due to accelerated outlet store openings in 2014, in order to capitalize on the one-time opportunity presented by the Juicy Couture real estate portfolio.

 

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 increased $39.8 million, or 8.6%, to $503.3 million in the first nine months of 2015 compared to the first nine months of 2014. The increase in SG&A reflected the following:

·

A $40.9 million increase in SG&A in our KATE SPADE North America segment, primarily related to direct-to-consumer expansion reflecting: (i) increased rent and other store operating expenses; and (ii) increased compensation related expenses;

·

A $26.0 million charge incurred in the first nine months of 2015 to terminate contracts with our former joint venture partner in China;

·

A $20.4 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 reflecting: (i) reduced concession fees; (ii) decreased rent and other store operating expenses; and (iii) lower advertising expenses;

·

A $3.9 million decrease in our Adelington Design Group segment; and

·

A $2.8 million decrease in expenses associated with our streamlining initiatives, brand-exiting activities and acquisition related costs.

 

Operating Loss

Operating loss for the first nine months of 2015 was $7.3 million ((0.9)% of net sales) compared to an operating loss of $13.5 million ((1.8)% of net sales) in 2014.

 

Other Expense, Net

Other expense, net amounted to $4.8 million and $1.7 million in the nine months ended October 3, 2015 and October 4, 2014, respectively and consisted primarily of (i) equity in the (losses) earnings of our equity investees; and (ii) foreign currency transaction gains and losses.

 

Loss on Settlement of Note Receivable

In the first nine months of 2015, we recognized a $9.9 million loss related to the prepayment discount on the settlement of the Lucky Brand Note, as discussed above.

 

Loss on Extinguishment of Debt

During the first nine months of 2014, we recorded a $16.9 million loss on the extinguishment of debt in connection with the redemption of the Senior Notes, which were refinanced with proceeds from the issuance of the Term Loan.

 

Interest Expense, Net

Interest expense, net was $14.0 million for the nine months ended October 3, 2015 and $18.2 million for the nine months ended October 4, 2014, primarily reflecting the absence of $13.5 million of interest expense in 2015 due to the refinancing of the Senior Notes in the second quarter of 2014 and a $2.3 million write-off of deferred financing fees in 2014 as a result of a reduction in the size of our ABL Facility, offset in part by a reduction of interest income of $6.0 million due to the repayment of the Lucky Brand Note in the first quarter of 2015 and additional interest expense of $5.7 million related to the Term Loan.

 

Provision (Benefit) for Income Taxes

The income tax provision of $3.8 million for the nine months ended October 3, 2015 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. The income tax benefit of $(0.5) million for the nine months ended October 4, 2014 primarily represented: (i) the recognition of an income tax benefit of $(3.0) million within continuing operations due to the recognition of a corresponding tax expense within discontinued

 



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operations; (ii) increases in deferred tax liabilities for indefinite-lived intangible assets; (iii) current tax on operations in certain jurisdictions; and (iv) an increase in the accrual for interest related to uncertain tax positions.

 

Loss from Continuing Operations

Loss from continuing operations in the first nine months of 2015 was $39.8 million, or (4.9)% of net sales compared to $49.8 million in the first nine months of 2014, or (6.7)% of net sales. Earnings per share, Basic and Diluted (“EPS”) from continuing operations was $(0.31) in 2015 and $(0.40) in 2014.

 

Discontinued Operations, Net of Income Taxes

Loss from discontinued operations in the first nine months of 2015 was $(4.6) million, reflecting a loss on disposal of discontinued operations of $(1.4) million and a $(3.2) million loss from discontinued operations. Income from discontinued operations in the first nine months of 2014 was $82.4 million, reflecting a gain on disposal of discontinued operations of $128.0 million and a $(45.6) million loss from discontinued operations. EPS from discontinued operations was $(0.04) in 2015 and $0.66 in 2014.

 

Net (Loss) Income

Net loss in the first nine months of 2015 was $(44.4) million compared to net income of $32.6 million in the first nine months of 2014. EPS was $(0.35) in 2015 and $0.26 in 2014.

 

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 nine months 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 income (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.

 

 

 

Nine Months Ended

 

Variance

 

Dollars in thousands

 

October 3,
2015

(39 Weeks)

 

October 4,
2014
(40 Weeks)

 

$

 

%

 

Reportable Segments Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

KATE SPADE North America

 

$

86,566

 

$

69,614

 

$

16,952

 

24.4%

 

KATE SPADE International (a)

 

13,215

 

81

 

13,134

 

*

 

Adelington Design Group

 

2,728

 

1,020

 

1,708

 

167.5%

 

Other (b)

 

--

 

(685

)

685

 

*

 

Total Reportable Segments Adjusted EBITDA

 

102,509

 

70,030

 

 

 

 

 

Depreciation and amortization, net (c)

 

(34,094

)

(34,033

)

 

 

 

 

Charges due to streamlining initiatives (d), brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net

 

(33,824

)

(19,035

)

 

 

 

 

Joint venture contract termination fee

 

(26,000

)

--

 

 

 

 

 

Share-based compensation (e)

 

(19,440

)

(31,772

)

 

 

 

 

Adjusted equity loss included in Reportable Segments Adjusted EBITDA (f)

 

3,586

 

1,358

 

 

 

 

 

Operating Loss

 

(7,263

)

(13,452

)

 

 

 

 

Other expense, net (a)

 

(4,778

)

(1,717

)

 

 

 

 

Loss on settlement of note receivable

 

(9,873

)

--

 

 

 

 

 

Loss on extinguishment of debt

 

--

 

(16,914

)

 

 

 

 

Interest expense, net

 

(13,982

)

(18,185

)

 

 

 

 

Provision (benefit) for income taxes

 

3,904

 

(500

)

 

 

 

 

Loss from Continuing Operations

 

$

(39,800

)

$

(49,768

)

 

 

 

 


 



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38

 

*     Not meaningful.

 

(a)    Amounts include equity in the adjusted losses of our equity method investees of $3.6 million and $1.4 million in 2015 and 2014, respectively.

(b)    Other consists of expenses principally related to distribution functions that were included in Juicy Couture and Lucky Brand historical results, but are not directly attributable to those businesses and therefore have not been included in discontinued operations.

(c)    Excludes amortization included in Interest expense, net.

(d)    See Note 12 of Notes to Condensed Consolidated Financial Statements for a discussion of streamlining charges.

(e)    Includes share-based compensation expense of $0.3 million and $17.2 million in 2015 and 2014, respectively, that was classified as restructuring.

(f)    Excludes joint venture restructuring expense included in equity losses of $0.5 million in the nine months ended October 3, 2015.

 

A discussion of Segment Adjusted EBITDA of our reportable segments for the nine months ended October 3, 2015 and October 4, 2014 follows:

 

·                   KATE SPADE North America Adjusted EBITDA for the first nine months of 2015 was $86.6 million (13.1% of net sales), compared to $69.6 million (12.3% of net sales) in 2014. 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 rent and other store operating expenses and payroll related expenses.

·                   KATE SPADE International Adjusted EBITDA for the first nine months of 2015 was $13.2 million (9.7% of net sales), compared to $0.1 million (0.1% of net sales) in 2014. The period-over-period increase reflected a decrease in SG&A related to reduced concession fees, decreased rent and other store operating expenses, including a reduction associated with the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture and lower advertising expenses, partially offset by a decrease in gross profit.

·                   Adelington Design Group Adjusted EBITDA for the first nine months of 2015 was $2.7 million (15.2% of net sales), and was $1.0 million (4.7% of net sales) in 2014. The increase in Adjusted EBITDA reflected reduced SG&A, partially offset by reduced gross profit.

 



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39

 

THREE MONTHS ENDED OCTOBER 3, 2015 COMPARED TO THREE MONTHS ENDED OCTOBER 4, 2014

 

The following table sets forth our operating results for the three months ended October 3, 2015 (comprised of 13 weeks) compared to the three months ended October 4, 2014 (comprised of 13 weeks):

 

 

 

Three Months Ended

 

Variance

 

Dollars in millions

 

October 3,
2015

(13 Weeks)

 

October 4,
2014

(13 Weeks)

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

277.4

 

$

250.4

 

$

27.0

 

10.7

  %

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

169.8

 

157.3

 

12.5

 

7.9

  %

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative expenses

 

157.5

 

153.8

 

(3.7

)

(2.4

) %

 

 

 

 

 

 

 

 

 

 

Operating Income

 

12.3

 

3.5

 

8.8

 

*

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

(1.6

)

(1.8

)

0.2

 

13.7

  %

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(5.3

)

(2.2

)

(3.1

)

*

 

 

 

 

 

 

 

 

 

 

 

Provision (benefit) for income taxes

 

0.9

 

(3.1

)

(4.0

)

*

 

 

 

 

 

 

 

 

 

 

 

Income from Continuing Operations

 

4.5

 

2.6

 

1.9

 

71.9

  %

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of income taxes

 

(2.2

)

(11.7

)

9.5

 

*

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

2.3

 

$

(9.1

)

$

11.4

 

*

 


 

*   Not meaningful.

 

Net Sales

Net sales for the third quarter of 2015 were $277.4 million, an increase of $27.0 million, or 10.7%, compared to the third quarter of 2014. The increase in net sales compared to 2014 includes period-over-period decreases of: (i) $10.9 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly operated business in Brazil; (ii) $8.6 million related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture; (iii) $8.2 million from changes in foreign currency exchange rates; and (iv) $2.4 million resulting from North America quality of sale initiatives. Comparable direct-to-consumer net sales for kate spade new york, including e-commerce, increased by 15.7% in the third quarter of 2015; excluding e-commerce net sales, comparable direct-to-consumer net sales increased by 10.7%.

 

·                   KATE SPADE North America net sales were $228.5 million for the third quarter of 2015, an 18.5% increase compared to 2014, primarily driven by an increase in direct-to-consumer sales in our kate spade new york brand. The increase in net sales compared to the third quarter of 2014 includes quarter-over-quarter decreases of: (i) $6.2 million resulting from the wind-down of the KATE SPADE SATURDAY business and closed JACK SPADE brick and mortar stores as we reposition the brand; (ii) $2.4 million resulting from quality of sale initiatives; and (iii) $2.3 million from changes in foreign currency exchange rates. Key operating metrics for our North America retail operations included the following:

           Average retail square footage in the third quarter of 2015 was approximately 367 thousand square feet, a 17.1% increase compared to 2014; and

           Sales productivity was $350 per average square foot for the third quarter of 2015 as compared to $334 for the third quarter of 2014 on a constant currency basis.

 



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40

 

·                   KATE SPADE International net sales were $42.9 million for the third quarter of 2015, a 15.8% decrease compared to 2014, primarily reflecting: (i) an $8.6 million decrease in net sales related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture; (ii) a decrease of $5.9 million from changes in foreign currency exchange rates; and (iii) a $2.4 million decrease 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 International retail operations in Japan and Europe included the following:

           Average retail square footage in the third quarter of 2015 was approximately 75 thousand square feet, an 18.4% increase compared to 2014; and

           Sales productivity was $381 per average square foot for the third quarter of 2015 as compared to $391 for the third quarter of 2014 on a constant currency basis.

 

·                   Adelington Design Group net sales were $6.0 million for the third quarter of 2015, a decrease of $0.7 million, or 10.0%, compared to 2014, primarily related to a $2.4 million decrease in the exited TRIFARI, TRINA TURK and Kensie brands, partially offset by a $1.5 million increase in the MONET and LIZ CLAIBORNE brands.

 

Gross Profit

Gross profit in the third quarter of 2015 was $169.8 million (61.2% of net sales), compared to $157.3 million (62.8% of net sales) in the third quarter of 2014. The increase in gross profit is primarily due to increased net sales in our KATE SPADE North America segment, partially offset by a decrease in net sales in our KATE SPADE International segment. The decrease in the gross profit rate primarily reflected: (i) unusually low promotional activity in our outlet stores in the third quarter of 2014; (ii) a change in mix due to accelerated outlet store openings in 2014, in order to capitalize on the one-time opportunity presented by the Juicy Couture real estate portfolio; and (iii) the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture.

 

Selling, General & Administrative Expenses

SG&A increased $3.7 million, or 2.4%, to $157.5 million in the third quarter of 2015 compared to the third quarter of 2014. The increase in SG&A reflected the following:

·                   A $9.6 million increase in SG&A in our KATE SPADE North America segment, primarily related to direct-to-consumer expansion reflecting increased rent and other store operating expenses;

·                   A $5.8 million increase in expenses associated with our streamlining initiatives, brand-exiting activities and acquisition related costs;

·                   A $10.3 million decrease in SG&A in our KATE SPADE International segment, primarily reflecting: (i) reduced concession fees; and (ii) decreased rent and other store operating expenses, including a reduction related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture; and

·                   A $1.4 million decrease in our Adelington Design Group segment.

 

Operating Income

Operating income for the third quarter of 2015 was $12.3 million (4.4% of net sales) compared to $3.5 million (1.4% of net sales) in 2014.

 

Other Expense, Net

Other expense, net amounted to $1.6 million and $1.8 million in the three months ended October 3, 2015 and October 4, 2014, respectively. Other expense, net consisted primarily of: (i) equity in the (losses) earnings of our equity method investees; and (ii) foreign currency transaction gains and losses.

 

Interest Expense, Net

Interest expense, net was $5.3 million for the three months ended October 3, 2015, as compared to $2.2 million for the three months ended October 4, 2014, primarily reflecting the absence of interest income on the Lucky Brand Note, which amounted to $3.0 million in the three months ended October 4, 2014.

 

Provision (Benefit) for Income Taxes

The income tax provision of $0.9 million for the three months ended October 3, 2015 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. The income tax benefit of $(3.1) million for the three months ended October 4, 2014 primarily represented: (i) the recognition of an income tax benefit of $(3.0) million within continuing operations due to the recognition of a corresponding tax expense within discontinued operations; (ii) increases in deferred tax liabilities for indefinite-lived intangible assets; (iii) current tax on operations in certain jurisdictions; and (iv) an increase in the accrual for interest related to uncertain tax positions.

 



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41

 

Income from Continuing Operations

Income from continuing operations in the third quarter of 2015 was $4.5 million, or 1.6% of net sales, compared to $2.6 million in the third quarter of 2014, or 1.0% of net sales. EPS from continuing operations was $0.04 in 2015 and $0.02 in 2014.

 

Discontinued Operations, Net of Income Taxes

Loss from discontinued operations in the third quarter of 2015 was $(2.2) million, reflecting a loss from discontinued operations of $(2.3) million and a gain on disposal of discontinued operations of $0.1 million. Loss from discontinued operations in the third quarter of 2014 was $(11.7) million, reflecting a loss on disposal of discontinued operations of $(5.7) million and a $(6.0) million loss from discontinued operations. EPS from discontinued operations was (0.02) in 2015 and $(0.09) in 2014.

 

Net Income (Loss)

Net income in the third quarter of 2015 was $2.3 million, compared to a net loss of $(9.1) million in the third quarter of 2014. EPS was $0.02 in 2015 and $(0.07) in 2014.

 

Segment Adjusted EBITDA

Segment Adjusted EBITDA for our reportable segments are provided below.

 

 

 

Three Months Ended

 

Variance

 

Dollars in thousands

 

October 3,
2015
(13 Weeks)

 

October 4,
2014
(13 Weeks)

 

$

 

%

 

Reportable Segments Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

KATE SPADE North America

 

$

30,713

 

$

21,130

 

$

9,583

 

45.4%

 

KATE SPADE International (a)

 

4,793

 

(1,346

)

6,139

 

*

 

Adelington Design Group

 

1,127

 

1,030

 

97

 

9.4%

 

Other (b)

 

--

 

(90

)

90

 

*

 

Total Reportable Segments Adjusted EBITDA

 

36,633

 

20,724

 

 

 

 

 

Depreciation and amortization, net (c)

 

(11,676

)

(11,752

)

 

 

 

 

Charges due to streamlining initiatives (d), brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net

 

(6,871

)

(870

)

 

 

 

 

Share-based compensation (e)

 

(6,684

)

(5,740

)

 

 

 

 

Adjusted equity loss included in Reportable Segments Adjusted EBITDA (f)

 

915

 

1,185

 

 

 

 

 

Operating Income

 

12,317

 

3,547

 

 

 

 

 

Other expense, net (a)

 

(1,560

)

(1,805

)

 

 

 

 

Interest expense, net

 

(5,274

)

(2,189

)

 

 

 

 

Provision (benefit) for income taxes

 

973

 

(3,070

)

 

 

 

 

Income from Continuing Operations

 

$

4,510

 

$

2,623

 

 

 

 

 


 

*

Not meaningful.

 

 

(a)

Amounts include equity in the adjusted losses of our equity method investees of $0.9 million and $1.2 million for the three months ended October 3, 2015 and October 4, 2014, respectively.

(b)

Other consists of expenses related principally to distribution functions that were included in Juicy Couture and Lucky Brand historical results, but are not directly attributable to those businesses and therefore have not been included in discontinued operations.

(c)

Excludes amortization included in Interest expense, net.

(d)

See Note 12 of Notes to Condensed Consolidated Financial Statements for a discussion of streamlining charges.

(e)

Includes share-based compensation expense of $0.1 million and $0.3 million in the three months ended October 3, 2015 and October 4, 2014, respectively, that was classified as restructuring.

(f)

Excludes joint venture restructuring expense included in equity losses of $0.4 million in the three months ended October 3, 2015.

 



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42

 

A discussion of Segment Adjusted EBITDA of our reportable segments for the three months ended October 3, 2015 and October 4, 2014 follows:

 

·                  KATE SPADE North America Adjusted EBITDA for the third quarter of 2015 was $30.7 million (13.4% of net sales), compared to $21.1 million (11.0% of net sales) in 2014. 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 rent and other store operating expenses.

·                  KATE SPADE International Adjusted EBITDA for the third quarter of 2015 was $4.8 million (11.2% of net sales), compared to $(1.3) million ((2.6)% of net sales) in 2014. The period-over-period increase reflected reduced SG&A related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture, partially offset by reduced gross profit.

·                  Adelington Design Group Adjusted EBITDA for the third quarter of 2015 was $1.1 million (18.9% of net sales), compared to Adjusted EBITDA of $1.0 million (15.5% of net sales) in 2014. The increase in Adjusted EBITDA reflected reduced SG&A, partially offset by decreased gross profit.

 

 

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) fund outstanding liabilities and remaining efforts associated with our streamlining initiatives, including contract termination costs, employee related costs and other costs associated with the wind-down of KATE SPADE SATURDAY, JACK SPADE retail stores and our directly owned business in Brazil; (iv) invest in our information systems; (v) fund operational and contractual obligations; and (vi) potentially repurchase or retire debt obligations. We expect that our streamlining initiatives will provide long-term cost savings.

 

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. On April 10, 2014, we entered into the Term Loan Credit Agreement, which provides for term loans in an aggregate principal amount of $400.0 million, maturing in April 2021. The Term Loan is subject to amortization payments of $1.0 million per quarter, which commenced on October 1, 2014, with the balance due at maturity. Interest on the outstanding principal amount of the Term Loan accrues at a rate equal to LIBOR (with a floor of 1.0%) plus 3.0% per annum, payable in cash. The Term Loan was funded on May 12, 2014, and we used $354.8 million of the net proceeds of $392.0 million from the Term Loan to redeem all of our remaining outstanding Senior Notes on May 12, 2014, as discussed above. The Term Loan and other obligations under the Term Loan Credit Agreement are guaranteed by certain of our restricted subsidiaries (the “Guarantors”), which include (i) all of our existing material domestic restricted subsidiaries, (ii) all of our future wholly owned restricted subsidiaries (other than foreign subsidiaries, CFCs, CFC holding companies and subsidiaries of any of the foregoing and certain immaterial subsidiaries) and (iii) all of our future non-wholly owned restricted subsidiaries that guarantee capital markets debt securities or term indebtedness of the Company or any Guarantor.

 

The Term Loan Credit Agreement permits us to incur, from time to time, additional incremental term loans under the Term Loan Credit Agreement (subject to obtaining commitments for such term loans) and other pari passu lien indebtedness, subject to an overall limit of $100.0 million plus such additional amount that would cause our consolidated net total secured debt ratio not to exceed 3.75 to 1.0 on a pro forma basis. Any such incremental term loans and other pari passu lien indebtedness are permitted to share in the collateral described below on a pari passu basis with the Term Loan. The Term Loan may be prepaid, at our option, in whole or in part, at any time at par plus accrued interest; provided that if the Term Loan is prepaid or refinanced in connection with a repricing transaction within six months after the initial borrowing, a 1.0% penalty is applicable.

 

Subject to certain permitted liens and other exclusions and exceptions, the Term Loan is secured (i) on a first-priority basis by a lien on our KATE SPADE trademarks and certain related rights owned by us and the Guarantors (the “Term Priority Collateral”) and (ii) by a second-priority security interest in our and the Guarantors’ other assets

 



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(the “ABL Priority Collateral” and together with the Term Priority Collateral, the “Collateral”), which secure our ABL Facility on a first-priority basis.

 

The Term Loan 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.

 

The Term Loan Credit Agreement limits our and our restricted subsidiaries’ ability to, among other things, incur indebtedness, make dividend payments or other restricted payments, create liens, sell assets (including securities of our restricted subsidiaries), permit certain restrictions on dividends and transfers of assets by our restricted subsidiaries, enter into certain types of transactions with shareholders and affiliates and enter into mergers, consolidations or sales of all or substantially all of our assets, in each case subject to certain designated exceptions and qualifications. The Term Loan Credit Agreement also contains certain affirmative covenants and events of default that are customary for credit agreements governing term loans.

 

ABL Facility. In May 2014, we terminated our prior revolving credit agreement and completed a fourth amendment to and restatement of the ABL Facility, which extended the maturity date of the facility to May 2019. Availability under the ABL Facility shall be in 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. The ABL Facility allows two borrowing options: one borrowing option with interest rates based on euro currency rates and a second borrowing option with interest rates based on the alternate base rate, as defined in the ABL Facility, with a spread based on the aggregate availability under the ABL Facility.

 

The ABL Facility is guaranteed by substantially all of our current domestic subsidiaries, certain of our future domestic subsidiaries and certain of our foreign subsidiaries. The ABL Facility is secured by a first-priority lien on substantially all of our assets and the assets of the other borrowers and guarantors (other than certain trademark collateral in which the lenders under the Term Loan Credit Agreement have a first-priority lien, which trademark collateral secures the obligations under the ABL Facility on a second-priority lien basis).

 

The ABL Facility limits our and our restricted subsidiaries’ ability to, among other things, incur additional indebtedness, create liens, undergo certain fundamental changes, make investments, sell certain assets, enter into hedging transactions, make restricted payments and pay certain indebtedness, enter into transactions with affiliates, permit certain restrictions on dividends and transfers of assets by our restricted subsidiaries and enter into sale and leaseback transactions. These covenants are subject to important exceptions and qualifications, and many of the covenants are subject to an exception based on meeting the fixed charge coverage ratio and/or certain minimum availability tests. The ABL Facility also contains representations and warranties (some of which are brought down to the time of each borrowing made), affirmative covenants and events of default that are customary for asset-based revolving credit agreements. In addition, the terms and conditions of the ABL Facility: (i) provide for a decrease in fees and interest rates compared to our previous asset-based revolving loan facility (including eurocurrency spreads of 1.50% to 2.00% over LIBOR, depending on the level of aggregate availability), (ii) require us to maintain pro forma compliance with a fixed charge coverage ratio of 1.0:1.0 on a trailing four-quarter basis if availability under the ABL Facility for three consecutive business days falls below the greater of $15.0 million and 10.0% of the lesser of the aggregate commitments and the borrowing base and (iii) require us to apply substantially all cash collections to reduce outstanding borrowings under the ABL Facility if availability under the ABL Facility for three consecutive business days falls below the greater of $20.0 million and 12.5% of the lesser of the aggregate commitments and the borrowing base.

 

Based on our forecast of borrowing availability under 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

 



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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 nine months of 2015 with $219.6 million in cash and marketable securities, compared to $123.3 million at the end of the first nine months of 2014 and with $401.6 million of debt outstanding at the end of the first nine months of 2015, compared to $408.8 million at the end of the first nine months of 2014. The $103.5 million decrease in our net debt primarily reflected: (i) the receipt of $75.1 million from Lucky Brand LLC to settle the Lucky Brand Note; (ii) the receipt of a net $19.9 million from LCJG for their interests in the joint ventures; (iii) the funding of $73.7 million of capital and in-store shop expenditures over the last 12 months; and (iv) the payment of $10.0 million to acquire E-Land’s 60.0% interest in KSC. We also generated $121.6 million of cash from continuing operating activities over the past 12 months, which included a $26.0 million payment to terminate contracts with our former joint venture partner in China. The operating activities of our discontinued operations used $23.2 million of cash over the past 12 months.

 

Accounts Receivable decreased $3.4 million, or 5.4%, at October 3, 2015 compared to October 4, 2014, primarily due to the wind-down of our directly owned operations in Brazil. Accounts receivable decreased $31.2 million, or 34.6%, at October 3, 2015 compared to January 3, 2015, primarily reflecting the timing of wholesale shipments.

 

Inventories increased $27.7 million, or 12.5% at October 3, 2015 compared to October 4, 2014, primarily due to an increase in kate spade new york inventory to support growth initiatives, partially offset by the impact of the wind-down of the KATE SPADE SATURDAY operations and JACK SPADE brick and mortar stores and the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture. Inventories increased $90.2 million, or 57.0%, at October 3, 2015 compared to January 3, 2015, primarily due to an increase in kate spade new york inventory to support growth initiatives and reflecting the timing of wholesale shipments, partially offset by the impact of the wind-down of the KATE SPADE SATURDAY operations and JACK SPADE brick and mortar stores and the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture.

 

Borrowings under our ABL Facility peaked at $8.0 million during the first nine months of 2015, compared to $5.1 million during the first nine months of 2014. We had no outstanding borrowings at October 3, 2015, compared to outstanding borrowings of $3.0 million at October 4, 2014.

 

Net cash provided by (used in) operating activities of our continuing operations was $19.3 million the first nine months of 2015, compared to $(57.7) million in 2014. This $77.0 million period-over-period change was primarily due to an $80.6 million increase in working capital items, partially offset by reduced earnings in 2015 compared to 2014 (excluding depreciation and amortization, foreign currency gains and losses, impairment charges and other non-cash items), including the $26.0 million fee we paid to our former joint venture partner in China. The operating activities of our discontinued operations used $10.8 million and $17.8 million of cash in the nine months ended October 3, 2015 and October 4, 2014, respectively.

 

Net cash provided by (used in) investing activities of our continuing operations was $35.5 million in the first nine months of 2015, compared to $(104.2) million in the first nine months of 2014. Net cash provided by investing

 



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activities in the nine months ended October 3, 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 $45.6 million for capital and in-store shop expenditures; (iv) the payment of $10.0 million to acquire E-Land’s 60.0% interest in KSC; and (v) the use of $5.0 million for investments in and advances to KSC, our equity investee. Net cash used in investing activities in the nine months ended October 4, 2014 primarily reflected the use of $71.9 million for capital and in-store shop expenditures and the payment of $32.3 million for the acquisition of the existing KATE SPADE businesses in Southeast Asia from Globalluxe. The investing activities of our discontinued operations provided $0.7 million and $137.9 million in the nine months ended October 3, 2015 and October 4, 2014, respectively.

 

Net cash (used in) provided by financing activities was $(8.1) million in the first nine months of 2015, compared to $38.2 million in the first nine months of 2014. The $46.3 million period-over-period change primarily reflected: (i) a decrease in proceeds from the exercise of stock options of $39.0 million; (ii) an $8.1 million reduction in payments for deferred financing fees; (iii) proceeds of $398.0 million from the issuance of the Term Loan in 2014; (iv) the use of $390.7 million for the redemption of the Senior Notes in 2014; and (v) an increase in net cash used by borrowing activities under our ABL Facility of $6.1 million.

 

Commitments and Capital Expenditures

Pursuant to a buying/sourcing agency agreement, Li & Fung Limited (“Li & Fung”) currently acts as a global buying/sourcing agent. We pay to Li & Fung an agency commission based on the cost of product purchases using Li & Fung as our buying/sourcing agent. We are obligated to use Li & Fung as our buying/sourcing agent for a minimum value of apparel inventory purchases each year. In the first quarter of 2015, we amended our buying/sourcing agency agreement with Li & Fung, which included a reduction of the annual minimum value of inventory purchases and a change in the commission rates for certain products, with an initial term through 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 may remain secondarily liable for the remaining obligations on 140 such leases. As of October 3, 2015, the future aggregate payments under these leases amounted to $100.2 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 60 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 2015 capital expenditures are expected to be approximately $75.0 million, compared to $100.0 million in 2014. These expenditures primarily relate to our plan to open approximately 20 retail stores globally in 2015, 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:

 

In thousands

 

October 3, 2015

 

January 3, 2015

 

October 4, 2014

Term Loan credit facility (a)

 

$

393,368

 

$

396,158

 

$

397,106

Revolving credit facility

 

--

 

6,000

 

3,000

Capital lease obligations

 

8,245

 

8,585

 

8,691

Total debt

 

$

401,613

 

$

410,743

 

$

408,797


(a)              The balance as of October 3, 2015, January 3, 2015 and October 4, 2014 included an unamortized debt discount of $1.6 million, $1.8 million and $1.9 million, respectively.

 

For information regarding our debt and credit instruments, refer to Note 9 of Notes to Condensed Consolidated Financial Statements.

 

Availability under the ABL Facility is 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

 



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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 October 3, 2015, availability under our ABL Facility was as follows:

 

In thousands

 

Total
Facility
(a)

 

Borrowing
Base
(a)

 

Outstanding
Borrowings

 

Letters of
Credit

Issued

 

Available
Capacity

 

Excess
Capacity
(b)

Revolving credit facility (a)

 

$200,000

 

$  274,412

 

$    --

 

$10,686

 

$189,314

 

$169,314

 


(a)               Availability under the ABL Facility is the lesser of $200.0 million or a borrowing base comprised primarily of our 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 October 3, 2015, 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 specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly of our business in Japan. As of October 3, 2015, we had forward contracts maturing through June 2016 to sell 1.7 billion yen for $14.4 million. We also had option contracts maturing through December 2016 to sell 2.4 billion yen for $20.7 million.

 

We use foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with intercompany loans. As of October 3, 2015, we had forward contracts to sell 4.0 billion yen for $33.3 million maturing through December 2015. Transaction (losses) gains related to these derivative instruments were $(0.1) million and $1.3 million for the nine months ended October 3, 2015 and October 4, 2014, respectively, and $(0.8) million and $2.4 million for the three months ended October 3, 2015 and October 4, 2014, respectively, and were reflected within Other expense, net. These transaction gains and losses were substantially offset by transaction gains and losses on the corresponding intercompany loans.

 

 

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 3, 2015. There were no significant changes in our critical accounting policies during the nine months ended October 3, 2015. 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.

 



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ACCOUNTING PRONOUNCEMENTS

 

For a discussion of recently adopted and recently issued accounting pronouncements, see Notes 1 and 18 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 October 3, 2015, January 3, 2015 and October 4, 2014, our exposure to changing market rates was as follows:

 

Dollars in millions

October 3, 2015

January 3, 2015

October 4, 2014

Revolving credit facility

$ --

 

$6

.0

$3

.0

Average interest rate

--

 

1

.68%

1

.69%

 

 

 

 

 

 

 

Term Loan credit facility

$395

.0

$398

.0

399

.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 October 3, 2015. 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 October 3, 2015.

 

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 October 3, 2015, we had forward contracts with net notional amounts of $47.7 million and option contracts with net notional amounts of $20.7 million. Unrealized gains (losses) for outstanding foreign currency forward and option contracts were $0.6 million. A sensitivity analysis to changes in foreign currency exchange rates indicated that if the yen weakened by 10% against the US dollar, the fair value of these instruments would increase by $6.0 million at October 3, 2015. Conversely, if the yen strengthened by 10% against the US dollar, the fair value of these instruments would decrease by $6.1 million at October 3, 2015. 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 third fiscal quarter. Our Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer concluded that, as of October 3, 2015, 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.

 



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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 October 3, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is a party to various pending legal proceedings and claims. Although the outcome of any such actions cannot be determined with certainty, management is of the opinion that the final outcome of any of these actions should not have a material adverse effect on the Company’s financial position, results of operations, liquidity or cash flows.

 

 

ITEM 1A. RISK FACTORS

 

You should carefully consider the risk factors included in our Annual Report on Form 10-K for the year ended January 3, 2015, in addition to other information included in this Quarterly Report on Form 10-Q, including under the section entitled, “Statement Regarding Forward-Looking Statements,” and in other documents we file with the SEC, in evaluating the Company and its business. If any of the risks occur, our business, financial condition, liquidity and results of operations could be materially adversely affected. We caution the reader that these risk factors may not be exhaustive. We operate in a continually changing business environment and new risks emerge from time to time. Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor or combination of factors may impact our business.

 

There have not been any material changes during the third quarter ended October 3, 2015 from the risk factors disclosed in our Annual Report on Form 10-K for the year ended January 3, 2015.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table summarizes information about purchases by the Company during the three months ended October 3, 2015 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

 

Period

Total Number
of Shares
Purchased
(In thousands)
(a)

 

Average Price
Paid Per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
(In thousands)

Maximum
Approximate
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
(In thousands)
(b)

 

July 5, 2015 – August 1, 2015

 

--

 

 

$

--

--

$

28,749

 

August 2, 2015 – September 5, 2015

 

--

 

 

 

--

--

 

28,749

 

September 6, 2015 – October 3, 2015

 

--

 

 

 

--

--

 

28,749

 

Total – 13 Weeks Ended October 3, 2015

 

--

 

 

$

--

--

$

28,749

 


(a)              Includes shares withheld to cover tax-withholding requirements relating to the vesting of restricted stock issued to employees pursuant to the Company’s shareholder-approved stock incentive plans.

(b)              The Company initially announced the authorization of a share buyback program in December 1989. Since its inception, the Company’s Board of Directors has authorized the purchase under the program of an aggregate of $2.275 billion of the Company’s stock. The ABL Facility currently restricts the Company’s ability to repurchase stock.

 

 

ITEM 5. OTHER INFORMATION

 

None.

 



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49

 

ITEM 6. EXHIBITS

 

 

31(a)

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

31(b)

Certification of President and Chief Operating Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

31(c)

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

32(a)*

Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

32(b)*

Certification of President and Chief Operating Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

32(c)*

Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

101.INS

XBRL Instance Document.

 

 

 

 

101.SCH

XBRL Taxonomy Extension Schema Document.

 

 

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

 

101.PRE

Taxonomy Extension Presentation Linkbase Document.

 

*            A signed original of the written statement required by Section 906 has been provided to the Company and will be retained by the Company and forwarded to the SEC or its staff upon request.

 



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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

DATE:                                                     November 5, 2015

 

 

 

 

KATE SPADE & COMPANY

 

 

 

 

 

 

 

 

By:

/s/ Thomas Linko

   By:

/s/ Michael Rinaldo

   By:

/s/ George M. Carrara

 

THOMAS LINKO

 

MICHAEL RINALDO

 

GEORGE M. CARRARA

 

Chief Financial Officer
(principal financial officer)

 

Corporate Controller and
Chief Accounting Officer
(principal accounting officer)

 

President and
Chief Operating Officer