Kate Spade & Company Reports Third Quarter 2016 Results

Q2 2016

Net Store Openings

North America Owned Stores

Specialty

108

-

108

Outlet

65

2

67

Total North America Owned Stores

173

2

175

Average Square Feet (in '000s)

391

403

International Owned Stores

Specialty

25

-

25

Outlet

14

-

14

Concessions

55

(1)

54

Total International Owned Stores

94

(1)

93

Average Square Feet (in '000s)

87

87

Total Owned Store Count

267

1

268

Average Owned Square Feet (in '000s)

478

490

Partner Operated Stores

87

5

92

Greater China Joint Venture Stores

43

(1)

42

Total Partnered Store Count

130

4

134

Total Store Count

397

5

402

Total Licensee Operated Partnered Stores

29

-

29

Total Store Footprint

426

5

431

$1.370B - $1.400B

Adjusted EBITDA *

$242M - $260M

Diluted Earnings Per Share **

$0.63 - $0.70

DTC Comparable Sales Growth

high single-digit to low double-digit growth

Capital Expenditures

$65M - $70M

Planned Net New Store Openings (Company Owned & Partners)

~ 40 - 45

2015 Year End NOL Balance

$739M

*Adjusted EBITDA, as presented in the Company's 2016 guidance, excludes depreciation and amortization, losses on asset disposals and impairments, non-cash share-based compensation expense, income tax provision (benefit), interest expense, net and unrealized and certain realized foreign currency gains (losses).

** Diluted earnings per share estimated using a normalized tax rate of 40%.

Range

In millions, except per common share data

2016 Adjusted EBITDA *

$242

-

$260

Less: Share-based compensation, net **

33

-

34

  Depreciation and amortization, net

52

-

54

  Interest expense, net

21

-

21

Pretax income

136

-

151

  Provision for income taxes at 40% rate

54

-

60

Income from continuing operations

$82

-

$91

Diluted shares outstanding

130

130

Diluted EPS assuming 40% tax rate

$0.63

-

$0.70

* Adjusted EBITDA includes $(7 – 8) million in Other expense, net related to the Company's equity in the losses of its equity method investees.

** Included in SG&A, but excluded from Adjusted EBITDA.

KATE SPADE & COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(All amounts in thousands, except per common share data)

Three Months Ended

Three Months Ended

October 1, 2016

% of

October 3, 2015

% of

(13 Weeks)

Sales

(13 Weeks)

Sales

Net Sales

$

316,528

100.0

%

$

277,328

100.0

%

Cost of goods sold

128,600

40.6

%

107,514

38.8

%

Gross Profit

187,928

59.4

%

169,814

61.2

%

Selling, general & administrative expenses

150,826

47.7

%

157,497

56.8

%

Operating Income

37,102

11.7

%

12,317

4.4

%

Other expense, net

(2,735)

(0.9)

%

(1,560)

(0.6)

%

Interest expense, net

(4,920)

(1.6)

%

(5,274)

(1.9)

%

Income Before (Benefit) Provision for Income Taxes

29,447

9.3

%

5,483

2.0

%

(Benefit) provision for income taxes

(56)

—

973

0.4

%

Income from Continuing Operations

29,503

9.3

%

4,510

1.6

%

Discontinued operations, net of income taxes

123

(2,207)

Net Income

$

29,626

$

2,303

Earnings per Share:

Basic

Income from Continuing Operations

$

0.23

$

0.04

Net Income

$

0.23

$

0.02

Diluted

Income from Continuing Operations

$

0.23

$

0.04

Net Income

$

0.23

$

0.02

Weighted Average Shares, Basic

128,101

127,682

Weighted Average Shares, Diluted

129,451

128,118

KATE SPADE & COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(All amounts in thousands, except per common share data)

Nine Months Ended

Nine Months Ended

October 1, 2016

% of

October 3, 2015

% of

(39 Weeks)

Sales

(39 Weeks)

Sales

Net Sales

$

910,641

100.0

%

$

813,762

100.0

%

Cost of goods sold

362,526

39.8

%

317,743

39.0

%

Gross Profit

548,115

60.2

%

496,019

61.0

%

Selling, general & administrative expenses

459,245

50.4

%

503,282

61.8

%

Operating Income (Loss)

88,870

9.8

%

(7,263)

(0.9)

%

Other expense, net

(6,075)

(0.7)

%

(4,778)

(0.6)

%

Loss on settlement of note receivable

—

—

(9,873)

(1.2)

%

Interest expense, net

(14,853)

(1.6)

%

(13,982)

(1.7)

%

Income (Loss) Before Provision for Income Taxes

67,942

7.5

%

(35,896)

(4.4)

%

Provision for income taxes

2,964

0.3

%

3,904

0.5

%

Income (Loss) from Continuing Operations

64,978

7.1

%

(39,800)

(4.9)

%

Discontinued operations, net of income taxes

3,057

(4,577)

Net Income (Loss)

$

68,035

$

(44,377)

Earnings per Share:

Basic

Income (Loss) from Continuing Operations

$

0.51

$

(0.31)

Net Income (Loss)

$

0.53

$

(0.35)

Diluted

Income (Loss) from Continuing Operations

$

0.50

$

(0.31)

Net Income (Loss)

$

0.53

$

(0.35)

Weighted Average Shares, Basic

128,011

127,611

Weighted Average Shares, Diluted (a)

129,077

127,611

__________________________________

(a)       

Because the Company incurred a loss from continuing operations for the nine months ended October 3, 2015, all potentially dilutive shares are antidilutive. Accordingly, basic and diluted weighted average shares outstanding are equal for such period.

KATE SPADE & COMPANY

CONSOLIDATED BALANCE SHEETS

(All amounts in thousands)

October 1, 2016

October 3, 2015

Assets

Current Assets:

Cash and cash equivalents

$

308,101

$

219,659

Accounts receivable - trade, net

69,735

58,893

Inventories, net

262,622

248,407

Other current assets

36,588

35,524

Total current assets

677,046

562,483

Property and Equipment, Net

179,272

177,333

Goodwill

56,654

48,790

Intangibles, Net

86,851

87,204

Other Assets

51,128

41,491

Total Assets

$

1,050,951

$

917,301

Liabilities and Stockholders' Equity

Current Liabilities:

Short-term borrowings

$

3,628

$

3,609

Other current liabilities

240,104

279,159

Total current liabilities

243,732

282,768

Long-Term Debt

390,604

393,017

Other Non-Current Liabilities

71,484

68,100

Stockholders' Equity

345,131

173,416

Total Liabilities and Stockholders' Equity

$

1,050,951

$

917,301

KATE SPADE & COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(All amounts in thousands)

Nine Months Ended

October 1, 2016

October 3, 2015

(39 Weeks)

(39 Weeks)

Cash Flows from Operating Activities:

Net income (loss)

$

68,035

$

(44,377)

Adjustments to arrive at income (loss) from continuing operations

(3,057)

4,577

Income (loss) from continuing operations

64,978

(39,800)

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

Depreciation and amortization

36,404

36,837

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

2,043

8,631

Share-based compensation

22,228

19,440

Loss on settlement of note receivable

—

9,873

Foreign currency transaction (gains) losses, net

(5,936)

609

Equity losses of equity investees

5,974

4,111

Other, net

40

(248)

Changes in assets and liabilities:

Decrease in accounts receivable - trade, net

29,202

30,588

Increase in inventories, net

(65,467)

(98,924)

(Increase) decrease in other current and non-current assets

(4,215)

7,740

Increase in accounts payable

9,999

46,642

Decrease in accrued expenses and other non-current liabilities

(34,244)

(7,512)

Net change in income tax assets and liabilities

764

1,331

Net cash used in operating activities of discontinued operations

(1,302)

(10,845)

Net cash provided by operating activities

60,468

8,473

Cash Flows from Investing Activities:

Proceeds from sales of property and equipment

—

816

Purchases of property and equipment

(37,031)

(40,775)

Proceeds from sales of joint venture interests, net

(2,350)

19,874

Investments in and advances to equity investees

(6,500)

(5,000)

Payment for joint venture interest

—

(10,000)

Payments for in-store merchandise shops

(1,478)

(4,858)

Net proceeds from settlement of note receivable

—

75,128

Purchase of trademarks

(1,200)

—

Other, net

—

347

Net cash provided by investing activities of discontinued operations

—

668

Net cash (used in) provided by investing activities

(48,559)

36,200

Cash Flows from Financing Activities:

Proceeds from borrowings under revolving credit agreement

—

2,000

Repayment of borrowings under revolving credit agreement

—

(8,000)

Repayment of Term Loan

(3,000)

(3,000)

Principal payments under capital lease obligations

(380)

(339)

Proceeds from exercise of stock options

2,365

2,428

Payment of deferred financing fees

(835)

(1,159)

Net cash used in financing activities

(1,850)

(8,070)

Effect of Exchange Rate Changes on Cash and Cash Equivalents

191

(988)

Net Change in Cash and Cash Equivalents

10,250

35,615

Cash and Cash Equivalents at Beginning of Period

297,851

184,044

Cash and Cash Equivalents at End of Period

$

308,101

$

219,659

KATE SPADE & COMPANY

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION

(All amounts in thousands, except per common share data)

Three Months Ended

October 1, 2016

(13 Weeks)

Total Net Sales

$

316,528

KATE SPADE North America

259,734

KATE SPADE International

50,958

Adelington Design Group

5,836

Gross Profit

187,928

SG&A

150,826

Operating Income

$

37,102

Other expense, net

(2,735)

Interest expense, net

(4,920)

Benefit for income taxes

(56)

Income from Continuing Operations

$

29,503

Discontinued operations, net of income taxes

123

Net Income

$

29,626

Basic Earnings per Common Share from Continuing Operations

$

0.23

Diluted Earnings per Common Share from Continuing Operations

$

0.23

Reconciliation of Adjusted Income from Continuing Operations:

Net Income, per above

$

29,626

Less: discontinued operations, net of income taxes

(123)

Adjustment to provision for income taxes

(13,031)

Adjusted Income from Continuing Operations (a)

$

16,472

Adjusted Basic Earnings per Common Share from Continuing Operations

$

0.13

Adjusted Diluted Earnings per Common Share from Continuing Operations (b)

$

0.13

Reconciliation of Adjusted EBITDA:

Net Income, per above

$

29,626

Adjustments:

Depreciation and amortization, asset impairments and losses on asset disposals, net (c)

12,886

Share-based compensation

6,072

Foreign currency adjustments, net

584

Interest expense, net

4,920

Benefit for income taxes

56

Discontinued operations, net of income taxes

(123)

Adjusted EBITDA

$

53,909

Adjusted EBITDA

Reportable Segments Adjusted EBITDA (d):

KATE SPADE North America

$

46,958

KATE SPADE International (e)

5,287

Adelington Design Group

1,089

Other (f)

575

Adjusted EBITDA

$

53,909

Adjusted EBITDA Margin

KATE SPADE North America

18.1

%

KATE SPADE International (e)

10.4

%

Adelington Design Group

18.7

%

Kate Spade & Company

17.0

%

__________________________________

(a)        

Adjusted amount represents pretax income multiplied by a normalized tax rate of 40.0%, plus $0.1 million for interest and penalties on uncertain tax positions. The normalized tax rate was derived by reference to statutory tax rates in the regions in which the Company operates, without giving effect to the Company's valuation allowance or potential use of its net operating loss carryforwards.

(b)        

Adjusted diluted earnings per share for the three months ended October 1, 2016 are based on 129,451 shares outstanding.

(c)       

Excludes amortization included in Interest expense, net.

(d)        

Segment Adjusted EBITDA excludes (i) depreciation and amortization and (ii) losses on asset disposals and impairments. The costs of all corporate departments that serve the respective segment are fully allocated, other than non-cash share-based compensation expense. The Company does not allocate amounts reported below Operating income to its reportable segments, other than equity loss in its equity method investees. The Company's definition of Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

(e)        

Amounts include equity in the losses of equity method investees of $2,726.

(f)        

Amount is Other expense, net as shown above, net of foreign currency transaction adjustment of $584 and equity in the losses of equity method investees of $2,726.

KATE SPADE & COMPANY

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION

(All amounts in thousands, except per common share data)

Adjusted Results

Streamlining

Results of Wind-Down

(Excluding Wind-

Reported (a)

Initiatives (b)

Adjusted Results

Operations (c)

Down Operations) (d)

Three Months Ended October 3, 2015 (13 Weeks)

Total Net Sales

$

277,328

$

277,328

$

(2,058)

$

275,270

KATE SPADE North America

228,493

228,493

(187)

228,306

KATE SPADE International

42,870

42,870

(1,871)

40,999

Adelington Design Group

5,965

5,965

—

5,965

Gross Profit

169,814

169,814

(1,259)

168,555

SG&A

157,497

$

(6,684)

150,813

(1,230)

149,583

Operating Income

$

12,317

$

6,684

$

19,001

$

(29)

$

18,972

Other expense, net

(1,560)

443

(1,117)

(1,117)

Interest expense, net

(5,274)

(5,274)

(5,274)

Provision for income taxes (e)

973

4,137

5,110

(12)

5,098

Income from Continuing Operations

$

4,510

$

2,990

$

7,500

$

(17)

$

7,483

Discontinued operations, net of income taxes

(2,207)

Net Income

$

2,303

Basic Earnings per Common Share from Continuing Operations

$

0.04

$

0.06

$

0.06

Diluted Earnings per Common Share from Continuing Operations (f)

$

0.04

$

0.06

$

0.06

Reconciliation of Adjusted EBITDA:

Net Income, per above

$

2,303

Adjustments:

Other expense, net

1,560

Interest expense, net

5,274

Provision for income taxes

(973)

Discontinued operations, net of income taxes

2,207

Operating Income

$

12,317

$

6,684

$

19,001

$

(29)

$

18,972

Depreciation and amortization, asset impairments and losses on asset disposals, net (g)

11,974

(2)

11,972

Share-based compensation, net (h)

6,573

6,573

Other expense, net (i)

(1,087)

(1,087)

Adjusted EBITDA

$

36,461

$

(31)

$

36,430

Adjusted EBITDA

Reportable Segments Adjusted EBITDA (j):

KATE SPADE North America

$

30,713

$

52

$

30,765

KATE SPADE International (k)

4,793

116

4,909

Adelington Design Group

1,127

(199)

928

Other (l)

(172)

(172)

Adjusted EBITDA

$

36,461

$

(31)

$

36,430

Adjusted EBITDA Margin

KATE SPADE North America

13.4

%

13.5

%

KATE SPADE International (k)

11.2

%

12.0

%

Adelington Design Group

18.9

%

15.6

%

Kate Spade & Company

13.1

%

13.2

%

__________________________________

(a)        

Represents the results of Kate Spade & Company in accordance with accounting principles generally accepted in the US.

(b)        

Represents charges due to streamlining initiatives comprised of: (i) payroll, contract termination costs, asset write-downs and other costs of $7,030; and (ii) store closure, other brand-exiting and acquisition related credits of $(346).

(c)        

Represents adjustments to remove the adjusted results of KATE SPADE SATURDAY, JACK SPADE brick and mortar, Kate Spade Brazil and Adelington Design Group exiting brands (Trifari, Trina Turk and Kensie).

(d)        

Represents the adjusted results of the Company excluding the results of KATE SPADE SATURDAY, JACK SPADE brick and mortar, Kate Spade Brazil and Adelington Design Group exiting brands.  This is presented in order to provide adjusted results on a comparable basis to its 2016 results.

(e)        

Adjusted amounts represent adjusted pretax income multiplied by a normalized tax rate of 40.0%, plus $0.1 million for interest and penalties on uncertain tax positions. The normalized tax rate was derived by reference to statutory tax rates in the regions in which the Company operates, without giving effect to the Company's valuation allowance or potential use of its net operating loss carryforwards.

(f)        

Adjusted diluted earnings per share for the three months ended October 3, 2015 are based on 128,118 shares outstanding. 

(g)        

Excludes amortization included in Interest expense, net.

(h)        

Excludes $0.1 million of share-based compensation expense that was classified as restructuring.

(i)        

Amount is reported Other expense, net as shown above, net of foreign currency transaction adjustment of $30 and restructuring charges of $443 included in equity in the losses of equity method investees.

(j)        

Segment Adjusted EBITDA excludes: (i) depreciation and amortization; (ii) charges due to streamlining initiatives, brand-exiting activities and acquisition related costs; and (iii) losses on asset disposals and impairments. The costs of all corporate departments that serve the respective segment are fully allocated, other than non-cash share-based compensation expense. The Company does not allocate amounts reported below Operating income to its reportable segments, other than adjusted equity loss in its equity method investees. The Company's definition of Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

(k)        

Amounts include equity in the adjusted losses of equity method investees of $915.

(l)        

Amount is reported Other expense, net as shown above, net of foreign currency transaction adjustment of $30 and equity in the losses of equity method investees of $1,358.

KATE SPADE & COMPANY

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION

(All amounts in thousands, except per common share data)

Nine Months Ended

October 1, 2016

(39 Weeks)

Total Net Sales

$

910,641

KATE SPADE North America

749,789

KATE SPADE International

143,258

Adelington Design Group

17,594

Gross Profit

548,115

SG&A

459,245

Operating Income

$

88,870

Other expense, net

(6,075)

Interest expense, net

(14,853)

Provision for income taxes

2,964

Income from Continuing Operations

$

64,978

Discontinued operations, net of income taxes

3,057

Net Income

$

68,035

Basic Earnings per Common Share from Continuing Operations

$

0.51

Diluted Earnings per Common Share from Continuing Operations

$

0.50

Reconciliation of Adjusted Income from Continuing Operations:

Net Income, per above

$

68,035

Less: discontinued operations, net of income taxes

(3,057)

Adjustment to provision for income taxes

(26,907)

Adjusted Income from Continuing Operations (a)

$

38,071

Adjusted Basic Earnings per Common Share from Continuing Operations

$

0.30

Adjusted Diluted Earnings per Common Share from Continuing Operations (b)

$

0.29

Reconciliation of Adjusted EBITDA:

Net Income, per above

$

68,035

Adjustments:

Depreciation and amortization, asset impairments and losses on asset disposals, net (c)

35,887

Share-based compensation

22,228

Foreign currency adjustments, net

1,821

Interest expense, net

14,853

Provision for income taxes

(2,964)

Discontinued operations, net of income taxes

(3,057)

Adjusted EBITDA

$

142,731

Adjusted EBITDA

Reportable Segments Adjusted EBITDA (d):

KATE SPADE North America

$

118,938

KATE SPADE International (e)

17,877

Adelington Design Group

4,196

Other (f)

1,720

Adjusted EBITDA

$

142,731

Adjusted EBITDA Margin

KATE SPADE North America

15.9

%

KATE SPADE International (e)

12.5

%

Adelington Design Group

23.8

%

Kate Spade & Company

15.7

%

__________________________________

(a)        

Adjusted amount represents pretax income multiplied by a normalized tax rate of 40.0%, plus $0.3 million for interest and penalties on uncertain tax positions. The normalized tax rate was derived by reference to statutory tax rates in the regions in which the Company operates, without giving effect to the Company's valuation allowance or potential use of its net operating loss carryforwards.

(b)        

Adjusted diluted earnings per share for the nine months ended October 1, 2016 are based on 129,077 shares outstanding.

(c)        

Excludes amortization included in Interest expense, net.

(d)        

Segment Adjusted EBITDA excludes (i) depreciation and amortization and (ii) losses on asset disposals and impairments. The costs of all corporate departments that serve the respective segment are fully allocated, other than non-cash share-based compensation expense. The Company does not allocate amounts reported below Operating income to its reportable segments, other than equity loss in its equity method investees. The Company's definition of Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

(e)        

Amounts include equity in the losses of equity method investees of $5,974.

(f)        

Amount is Other expense, net as shown above, net of foreign currency transaction adjustment of $1,821 and equity in the losses of equity method investees of $5,974.

KATE SPADE & COMPANY

RECONCILIATION OF NON-GAAP FINANCIAL INFORMATION

(All amounts in thousands, except per common share data)

Streamlining

Adjusted Results

Initiatives and JV

Results of Wind-Down

(Excluding Wind-

Reported (a)

Termination Fee (b)

Adjusted Results

Operations (c)

Down Operations) (d)

Nine Months Ended October 3, 2015 (39 Weeks)

Total Net Sales

$

813,762

$

813,762

$

(26,156)

$

787,606

KATE SPADE North America

659,809

659,809

(12,980)

646,829

KATE SPADE International

136,056

136,056

(11,459)

124,597

Adelington Design Group

17,897

17,897

(1,717)

16,180

Gross Profit

496,019

496,019

(11,127)

484,892

SG&A

503,282

$

(58,744)

444,538

(14,807)

429,731

Operating (Loss) Income

$

(7,263)

$

58,744

$

51,481

$

3,680

$

55,161

Other expense, net

(4,778)

526

(4,252)

(4,252)

Loss on settlement of note receivable

(9,873)

9,873

—

—

Interest expense, net

(13,982)

(13,982)

(13,982)

Provision for income taxes (e)

3,904

9,603

13,507

1,472

14,979

(Loss) Income from Continuing Operations

$

(39,800)

$

59,540

$

19,740

$

2,208

$

21,948

Discontinued operations, net of income taxes

(4,577)

Net Loss

$

(44,377)

Basic Earnings per Common Share from Continuing Operations

$

(0.31)

$

0.15

$

0.17

Diluted Earnings per Common Share from Continuing Operations (f)

$

(0.31)

$

0.15

$

0.17

Reconciliation of Adjusted EBITDA:

Net Loss, per above

$

(44,377)

Adjustments:

Other expense, net

4,778

Loss on settlement of note receivable

9,873

Interest expense, net

13,982

Provision for income taxes

(3,904)

Discontinued operations, net of income taxes

4,577

Operating (Loss) Income

$

(7,263)

$

58,744

$

51,481

$

3,680

$

55,161

Depreciation and amortization, asset impairments and losses on asset disposals, net (g)

35,480

(550)

34,930

Share-based compensation, net (h)

19,134

19,134

Other expense, net (i)

(3,755)

(3,755)

Adjusted EBITDA

$

102,340

$

3,130

$

105,470

Adjusted EBITDA

Reportable Segments Adjusted EBITDA (j):

KATE SPADE North America

$

86,566

$

2,931

$

89,497

KATE SPADE International (k)

13,215

475

13,690

Adelington Design Group

2,728

(276)

2,452

Other (l)

(169)

(169)

Adjusted EBITDA

$

102,340

$

3,130

$

105,470

Adjusted EBITDA Margin

KATE SPADE North America

13.1

%

13.8

%

KATE SPADE International (k)

9.7

%

11.0

%

Adelington Design Group