UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One) | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended January 2, 2016 | ||
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 (State or other jurisdiction of incorporation or organization) | 13-2842791 (I.R.S. Employer Identification Number) | |
2 Park Avenue, New York, New York (Address of principal executive offices) | 10016 (Zip Code) |
Registrant's telephone number, including area code: 212-354-4900
Securities registered pursuant to Section 12(b) of the Act:
Title of class | Name of each exchange on which registered | |
---|---|---|
Common Stock, par value $1.00 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the "Act"). Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 þ | 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 Act). Yes o No þ
Based upon the closing sale price on the New York Stock Exchange on July 2, 2015, the last business day of the registrant's most recently completed second fiscal quarter, which quarter ended July 4, 2015, the aggregate market value of the registrant's Common Stock, par value $1.00 per share, held by non-affiliates of the registrant on such date was approximately $2,717,450,000. For purposes of this calculation, only executive officers and directors are deemed to be the affiliates of the registrant.
Number of shares of the registrant's Common Stock, par value $1.00 per share, outstanding as of February 19, 2016: 128,107,176 shares.
Documents Incorporated by Reference:
Registrant's Proxy Statement relating to its Annual Meeting of Stockholders to be held on May 19, 2016-Part III.
TABLE OF CONTENTS
| | Page | ||
---|---|---|---|---|
PART I | ||||
Item 1 | Business | 6 | ||
Item 1A | Risk Factors | 17 | ||
Item 1B | Unresolved Staff Comments | 29 | ||
Item 2 | Properties | 29 | ||
Item 3 | Legal Proceedings | 30 | ||
Item 4 | Mine Safety Disclosures | 31 | ||
PART II | ||||
Item 5 | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 32 | ||
Item 6 | Selected Financial Data | 35 | ||
Item 7 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 36 | ||
Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 60 | ||
Item 8 | Financial Statements and Supplementary Data | 61 | ||
Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 61 | ||
Item 9A | Controls and Procedures | 61 | ||
Item 9B | Other Information | 61 | ||
PART III | ||||
Item 10 | Directors, Executive Officers and Corporate Governance | 62 | ||
Item 11 | Executive Compensation | 62 | ||
Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 62 | ||
Item 13 | Certain Relationships and Related Transactions, and Director Independence | 63 | ||
Item 14 | Principal Accounting Fees and Services | 63 | ||
PART IV | ||||
Item 15 | Exhibits and Financial Statement Schedules | 63 | ||
Signatures | 69 | |||
Index to Consolidated Financial Statements and Schedule | F-1 |
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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in, or incorporated by reference into, this Annual Report on Form 10-K, future filings by us with the Securities and Exchange Commission ("SEC"), 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, which could cause actual results to differ materially from those suggested by the forward-looking statements, including, without limitation:
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- our ability to successfully implement our long-term strategic plans;
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- general economic conditions in the United States, Asia, Europe, Canada and other parts of the world;
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- our exposure to currency fluctuations;
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- levels of consumer confidence, consumer spending and purchases of discretionary items, including fashion apparel and related products such as ours;
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- changes in the cost of raw materials, occupancy, labor, advertising and transportation which could impact prices of our products;
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- our ability to expand into markets outside of the United States, 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;
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- our ability to maintain targeted profit margins and levels of promotional activity;
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- our ability to optimize our product offerings in order to anticipate and timely respond to constantly changing consumer demands, tastes and fashion trends, across multiple brands, product lines, shopping channels and geographies;
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- the impact of the highly competitive nature of the markets within which we operate, both within the United States and abroad;
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- 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;
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- restrictions in the credit and capital markets, which would impair our ability to access additional sources of liquidity, if needed;
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- our ability to expand our retail footprint with profitable store locations;
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- 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;
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- our ability to expand into new product categories;
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- our ability to successfully implement our marketing initiatives;
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- our dependence on a limited number of large United States 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;
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- risks associated with material disruptions in our information technology systems, both owned and licensed, and with our third party e-commerce platforms and operations;
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- risks associated with data security, including privacy breaches;
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- risks associated with credit card fraud and identity theft;
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- our ability to attract and retain talented, highly qualified executives, and maintain satisfactory relationships with our employees;
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- our ability to adequately establish, defend and protect our trademarks and other proprietary rights;
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- our reliance on independent foreign manufacturers, including the risk of their failure to comply with legal requirements or our policies regarding applicable safety standards or labor practices;
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- 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;
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- 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 and operating under a third party arrangement;
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- risks associated with the various businesses we have disposed;
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- risks associated with severe weather, natural disasters, public health crises, war, terrorism or other catastrophic events;
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- 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;
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- 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;
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- risks associated with third party service providers, both domestic and overseas, including service providers in the area of e-commerce;
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- limitations on our ability to utilize all or a portion of our United States deferred tax assets if we experience an "ownership change"; and
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- 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 Annual Report on Form 10-K 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 this Annual Report on Form 10-K in "Item 1A — Risk Factors." 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,
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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.
WEBSITE ACCESS TO COMPANY REPORTS
Our investor website can currently be accessed atwww.katespadeandcompany.com under "Investor Relations." Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Proxy Statements, Registration Reports on Form S-3, Current Reports on Form 8-K, Specialized Disclosure Reports on Form SD and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our investor website under the caption "Financial Reports — SEC Filings" promptly after we electronically file such materials with, or furnish such materials to, the SEC. No information contained on any of our websites is intended to be included as part of, or incorporated by reference into, this Annual Report on Form 10-K. Information relating to corporate governance at our Company, including our Corporate Governance Guidelines, our Code of Ethics and Business Practices for all directors, officers, and employees, and information concerning our directors, Committees of the Board, including Committee charters, and transactions in Company securities by directors and executive officers, is available at our investor website under the captions "Corporate Governance" and "Financial Reports — SEC Filings." Paper copies of these filings and corporate governance documents are available to stockholders free of charge by written request to Investor Relations, Kate Spade & Company, 2 Park Avenue, New York, New York 10016. Documents filed with the SEC are also available on the SEC's website atwww.sec.gov.
We were incorporated in January 1976 under the laws of the State of Delaware. In this Annual Report on Form 10-K, unless the context requires otherwise, references to "our," "us," "we" and "the Company" mean Kate Spade & Company and its consolidated subsidiaries. Our fiscal year ends on the Saturday closest to January 1. All references to "2015" represent the 52 week fiscal year ended January 2, 2016. All references to "2014" represent the 53 week fiscal year ended January 3, 2015. All references to "2013" represent the 52 week fiscal year ended December 28, 2013.
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OVERVIEW AND NARRATIVE DESCRIPTION OF BUSINESS
General |
Kate Spade & Company operates principally under two global, multichannel lifestyle brands: kate spade new york and JACK SPADE. The Company's four category pillars — women's, men's, children's and home — span demographics, genders and geographies. In addition, the Adelington Design Group, a private brand jewelry design and development group, markets brands through department stores and serves J.C. Penney Corporation, Inc. ("JCPenney") via exclusive supplier agreements for the LIZ CLAIBORNE and MONET jewelry lines.
Business Segments |
We operate our kate spade new york and JACK SPADE brands through one operating segment in North America and three operating segments internationally: Japan, Asia (excluding Japan) and Europe. Our Adelington Design Group reportable segment is also an operating segment. The three reportable segments described below represent activities for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker to evaluate performance and allocate resources. In identifying our reportable segments, we considered our management structure and the economic characteristics, products, customers, sales growth potential and long-term profitability of our operating segments. As such, we configured our operations into the following three reportable segments:
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- KATE SPADE North America segment — consists of our kate spade new york and JACK SPADE brands in North America.
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- KATE SPADE International segment — consists of our kate spade new york and JACK SPADE brands in International markets (principally in Japan, Asia (excluding Japan), Europe and Latin America).
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- 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.
See Notes 1 and 18 of Notes to Consolidated Financial Statements and "Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations."
Recent Initiatives and Business Strategy |
During 2015, we continued to pursue transactions and initiatives with a focus on the long-term growth of the kate spade new york brand and we:
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- acquired the 60.0% interest in KS China Co., Limited ("KSC") owned by E-Land Fashion China Holdings, Limited ("E-Land") for $36.0 million, including a contract termination payment of $26.0 million;
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- converted the reacquired businesses in Hong Kong, Macau and Taiwan and the KATE SPADE business in China into 50.0% owned joint ventures with Walton Brown, a subsidiary of The Lane Crawford Joyce Group ("LCJG"), a leading luxury retail, brand management and distribution company in Asia, and received a net $19.7 million from LCJG for their interests in the joint ventures, subject to adjustments;
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- •
- entered a global licensing agreement with Fossil Group, Inc. ("Fossil") for the design, development and distribution of kate spade new york watches through 2025, with the first collection of watches designed, developed and distributed in collaboration with us to launch in 2016. Accordingly, we now earn royalty income under the agreement with Fossil and no longer sell watches through our wholesale channel;
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- signed a distribution agreement for our operations in Latin America, including in Brazil, which is designed to leverage the network of our 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;
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- discontinued KATE SPADE SATURDAY as a standalone business and announced a new business model for JACK SPADE to leverage the distribution network of its retail partners and expand its e-commerce platform;
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- enhanced efficiencies in our supply chain, including re-platforming our West Chester, OH distribution center (the "Ohio Facility") and began the migration of sourcing for our accessories categories from Li & Fung Limited ("Li & Fung") to an in house model;
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- launched new licensed categories, including a Yoga collaboration with Beyond Yoga, our kate spade new york kitchen houseware collection, and a new children's wear license in Japan, while expanding existing categories within children's, bridal and gifting; and
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- launched KATE SPADE e-commerce websites in France, Germany, Italy, Spain and the Netherlands.
We are focusing on initiatives that drive margin improvement and continue to grow the kate spade new york brand through product category and geographic expansion across our four category pillars: women's, men's, children's and home. We have established the following operating and financial goals around that framework to further develop kate spade new york into a global lifestyle brand:
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- driving top line growth by: (i) opening kate spade new york retail locations in North America; (ii) expanding product categories within our existing network as well as new channels, continuing e-commerce expansion and entering into local licenses to meet customer needs in Japan; (iii) focusing on our e-commerce site as a global flagship to influence purchases both online and in our retail stores; and (iv) expanding our presence in selected geographies through a partnered approach that requires little capital and is expected to be accretive to operating margins;
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- driving quality of sale initiatives with continued moderation of promotions across channels and increased marketing that leverages customer relationship management ("CRM") capability and focuses on acquiring full price customers to support those efforts;
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- delivering the world of kate spade new york to our customer seamlessly across channels through a channel-agnostic approach, while leveraging our e-commerce site as a global flagship, offering our broadest product assortment across our category pillars and improving delivery speed to our consumer through a buy anywhere, receive anywhere model;
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- increasing product accessibility and improving our speed-to-market capabilities through micro-assorting and localization at the store level, focusing on regional product, volume and climate to better assort by market taste and provide our consumer what she wants, when she wants it;
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- enhancing customer experience and engagement through storytelling, focusing on our "Guest Journey" initiative in our retail stores and streamlining the online checkout process;
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- driving product category expansion and growing margins through licensing partners for new categories; and
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- accelerating growth through existing joint ventures in China and Hong Kong, Macau and Taiwan.
Macroeconomic challenges and uncertainty continue to persist in the primary markets in which we operate. Therefore, we continue to focus on the careful execution of our strategic plans and seek opportunities to improve our productivity and profitability. We remain focused on driving operating cash flow generation, managing liquidity and the efficient use of working capital.
Our Brands |
kate spade new york
Our kate spade new york brand offers fashion products for women and children, as well as home products, under the kate spade new york trademark. The kate spade new york brand product line includes handbags, small leather goods, fashion accessories, jewelry, fragrances and apparel along with licensed products including footwear, swimwear, watches, children's wear, optics, tabletop products, legwear, electronics cases, furniture, bedding and stationery.
These products are sold primarily: (i) in the United States and Canada through wholly-owned specialty retail and outlet stores and select specialty retail and upscale department stores; (ii) through wholly-owned concession, specialty retail and outlet operations and licensed children's wear partner-operated stores in Japan; (iii) through wholly-owned specialty retail, outlet and concession stores and select upscale wholesale accounts in Europe; (iv) through our kate spade new york e-commerce websites; (v) through joint ventures in China and Hong Kong, Macau and Taiwan; and (vi) through a network of distributors in Latin America, Singapore, Malaysia, Indonesia, Philippines, India and Thailand.
JACK SPADE
Our JACK SPADE brand offers fashion products for men, including briefcases, travel bags, small leather goods, fashion accessories and apparel under the JACK SPADE trademark. JACK SPADE products are sold primarily: (i) via our JACK SPADE e-commerce website and (ii) through department stores.
ADELINGTON DESIGN GROUP
The operations within our Adelington Design Group segment consist principally of:
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- Exclusive supplier arrangements to provide JCPenney with LIZ CLAIBORNE and MONET branded jewelry;
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- A royalty-free license through December 2016 for the LIZ CLAIBORNE NEW YORK brand, which is sold exclusively at QVC, Inc. ("QVC"); and
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- LIZWEAR, women's apparel available through the club store channel.
SALES AND MARKETING
Domestic direct-to-consumer sales are made through our own specialty retail and outlet stores and e-commerce websites. Our domestic wholesale sales are made primarily to department store chains and specialty retail store customers. Wholesale sales are also made to international customers, military exchanges and to other channels of distribution.
In Japan, we distribute our products mainly through department store concessions, retail stores and e-commerce. In Asia (excluding Japan), we have wholesale distribution agreements in Singapore, Malaysia, Indonesia, Philippines, India and Thailand and joint ventures in China and Hong Kong, Macau and Taiwan. In Europe, direct-to-consumer sales are made through our own specialty retail and outlet stores, concession stores within department store locations and e-commerce. In Canada, direct-to-consumer sales are made through our own specialty retail, outlet stores and e-commerce. In other
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international markets, including the Middle East, Australia and Latin America, we operate principally through third party distributors, virtually all of which purchase products from us for re-sale at freestanding retail stores and dedicated department store shops they operate.
We continually monitor retail sales in order to directly assess consumer response to our products. During 2015, we continued our domestic in-store sales, marketing and merchandising programs designed to encourage multiple item regular price sales, build one-on-one relationships with consumers and maintain our merchandise presentation standards. These programs train sales associates on suggested selling techniques, product, merchandise presentation and client development strategies. Our kate spade new york retail stores reflect the distinct personality of the brand and accent our customers' interesting lives, offering a unique shopping experience and exclusive merchandise. We plan to use more targeted communication to customers and evolve the customer shopping experience via: (i) our improved CRM capabilities; (ii) our "Guest Journey" experience in our specialty retail stores; (iii) the use of our kate spade new york e-commerce site as a global flagship containing all merchandise collections; and (iv) the use of electronic clientele software-as-a-service platform to cultivate customer relationships, both in-store and online.
Specialty Retail Stores, Outlet Stores and Concessions:
We operate specialty retail stores under the kate spade new york trademark, consisting of retail stores within the US and outside the US (primarily in Japan, Europe and Canada). We also operate outlet stores under the kate spade new york trademark, consisting of outlet stores within the US and outside the US. Outside of North America (primarily in Japan and Europe), we operate concession stores in select retail stores, which are either owned or leased by a third party department store or specialty store retailer.
The following tables set forth select information, as of January 2, 2016, with respect to our kate spade new york specialty retail stores, outlet stores and concessions:
| Number of Stores | Approximate Average Store Size (Square Feet) | |||||
---|---|---|---|---|---|---|---|
US Specialty Retail Stores | 104 | 2,100 | |||||
Foreign Specialty Retail Stores | 22 | 1,300 | |||||
US Outlet Stores | 64 | 2,500 | |||||
Foreign Outlet Stores | 13 | 1,800 | |||||
Concessions | 52 | 500 |
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E-commerce:
Our products are sold on a number of branded websites. E-commerce continued to be an important business driver in 2015. The following table sets forth select information concerning our websites:
Website | Information Only | Information and Direct to Consumer Sales | |||||
---|---|---|---|---|---|---|---|
surprise.katespade.com | ü | ||||||
surplus.jackspade.com | ü | ||||||
www.jackspade.com | ü | ||||||
www.katespade.cn | ü | ||||||
www.katespade.co.uk | ü | ||||||
www.katespade.com | ü | ||||||
www.katespade.jp | ü | ||||||
www.katespadenewyork.fr | ü | ||||||
www.katespade.de | ü | ||||||
www.katespadenewyork.nl | ü | ||||||
www.katespade.es | ü | ||||||
www.katespade.it | ü | ||||||
www.katespadeandcompany.com(a) | ü | ||||||
www.worldofkatespade.com | ü |
- (a)
- This website offers investors information concerning the Company.
We continue to evolve our direct-to-consumer marketing and distribution activities by enhancing our omni-channel capabilities. Our goal is to create a seamless consumer buying experience across direct-to-consumer sub-channels by allowing fulfillment of e-commerce orders from substantially all retail stores and fulfillment of retail store sales with e-commerce inventory when the merchandise is not initially available in the respective sub-channel. Consumers also have the ability to place e-commerce orders through point of sale kiosks located within our retail stores. During 2015, we also continued our partnership with eBay Enterprise and mobile-enabled webstores using the DemandWare platform.
Wholesale:
No single customer accounted for more than 10.0% of net sales for 2015. Sales to our domestic and international department and specialty retail store customers are made primarily through our New York City showrooms.
Orders from our wholesale customers generally precede the related shipping periods by several months. Our largest customers discuss with us retail trends and their plans regarding their anticipated levels of total purchases of our products for future seasons. These discussions are intended to assist us in planning the production and timely delivery of our products.
We utilize in-stock reorder programs to enable customers to reorder certain items through electronic means for quick delivery, as discussed below in the section entitled "Buying/Sourcing." Many of our wholesale customers participate in our in-stock reorder programs through their own internal replenishment systems.
Licensing:
We license many of our products to third parties with expertise in certain specialized products and/or market segments, thereby extending each licensed brand's market presence. As of January 2, 2016, we had 25 license arrangements, pursuant to which third party licensees produce merchandise using Company-
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owned trademarks in accordance with designs furnished or approved by us, the present terms of which (not including renewal terms) expire at various dates through 2025. Our licenses cover a broad range of lifestyle product categories, including but not limited to, tech accessories, footwear, stationery and paper goods, hosiery, optics and sunglasses, watches, tabletop products, table linen products, children's wear, swimwear, cold weather accessories, loungewear and sleepwear, indoor and outdoor fabrics and wall coverings, furniture, rugs, lighting and bedding. Such licenses earn revenue based on a percentage of the licensee's sales of the licensed products against a guaranteed minimum royalty, which generally increases over the term of the agreement. Income from our licensing operations is included in net sales for the segment under which the license resides.
In November 2011, we sold the global trademark rights for the LIZ CLAIBORNE family of brands and the trademark rights in the US and Puerto Rico for the MONET brand to JCPenney. The LIZWEAR trademark is licensed back to us on a royalty-free basis through July 2020.
In October 2009, we also entered into a multi-year license agreement with QVC, granting rights (subject to pre-existing licenses) to certain trademarks and other intellectual property rights. QVC has the rights to use the LIZ CLAIBORNE NEW YORK brand with Isaac Mizrahi as creative director on any apparel, accessories, or home categories in the US and certain international markets. QVC merchandises and sources the product and we provide brand management oversight. The agreement provides for the payment to us of a royalty based on net sales of licensed products by QVC. QVC elected to terminate the agreement as of August 2016. We will continue to receive royalties as QVC winds down the business through December 31, 2016. Pursuant to the November 2011 sale transaction discussed above, our royalty-free license from JCPenney to continue to sublicense the LIZ CLAIBORNE NEW YORK trademark will expire simultaneously with the expiration of the QVC license as of December 31, 2016.
Marketing:
Marketing for our brands is focused on reinforcing brand relevance, increasing awareness, engaging consumers and guiding them to our retail stores and e-commerce sites. We use a variety of marketing strategies to enhance our brand equity and promote our brands. These initiatives include direct mail, in-store events and internet marketing, including the use of social media. We incurred expenses of $56.0 million, $56.9 million and $42.8 million for advertising, marketing and promotion for all brands in 2015, 2014 and 2013, respectively.
In 2015, we continued our in-store shop and fixture programs, which are designed to enhance the presentation of our products on department store selling floors generally through the use of proprietary fixturing, merchandise presentations and graphics. In-store shops operate under the kate spade new york and JACK SPADE brand names. In 2015, we installed an aggregate of 35 domestic and international in-store shops.
For further information concerning our domestic and international sales, see Note 18 of Notes to Consolidated Financial Statements.
BUYING/SOURCING
Pursuant to a buying/sourcing agency agreement, Li & Fung acts as the primary global apparel and accessories buying/sourcing agent, with the exception of our jewelry product lines. On March 24, 2015, we modified this arrangement in order to, among other things, transition our buying/sourcing activities for our accessories products to an in-house model, beginning with our Spring 2016 collection. We pay Li & Fung an agency commission based on the cost of our product purchases through Li & Fung. We are obligated to use Li & Fung as our primary buying/sourcing agent for our ready-to-wear apparel products and we may use Li & Fung as a buying/sourcing agent with respect to our accessories products, with all such product purchases applying toward a minimum volume commitment of inventory purchases each year through the expiration of the term of the agreement on March 31, 2018. Our agreement with Li & Fung is not exclusive.
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Products produced in Asia represent a substantial majority of our purchases. We also source product in the US and other regions. During 2015, approximately 91 suppliers located in 12 countries manufactured our products, with the largest finished goods supplier accounting for approximately 16.1% of the total of finished goods we purchased. Purchases from our suppliers are processed utilizing individual purchase orders specifying the price and quantity of the items to be produced.
Most of our products are purchased as completed product "packages" from our manufacturing contractors, where the contractor purchases all necessary raw materials and other product components, according to our specifications. When we do not purchase "packages", we obtain fabrics, trimmings and other raw materials in bulk from various foreign and domestic suppliers, which are delivered to our manufacturing contractors for use in our products. We do not have any long-term, formal arrangements with any supplier of raw materials. To date, we have experienced little difficulty in satisfying our raw material requirements and consider our sources of supply adequate.
We operate under substantial time constraints in producing each of our collections. In order to deliver, in a timely manner, merchandise that reflects our consumers' current tastes, we attempt to schedule a substantial portion of our materials and manufacturing commitments relatively late in the production cycle, thereby favoring suppliers able to make quick adjustments in response to changing production needs and in time to take advantage of favorable (cost effective) shipping alternatives. However, in order to secure necessary materials and to schedule production time at manufacturing facilities, we must make substantial advance commitments prior to the receipt of firm orders from customers for the items to be produced. These advance commitments may have lead times in excess of five months. We continue to seek to reduce the time required to move products from design to the customer.
If we misjudge our ability to sell our products, we could be faced with substantial outstanding fabric and/or manufacturing commitments, resulting in excess inventories. See "Item 1A — Risk Factors."
Our buying/sourcing arrangements with Li & Fung and with our foreign suppliers are subject to the risks of doing business abroad, including currency fluctuations and revaluations, restrictions on the transfer of funds, terrorist activities, pandemic disease and, in certain parts of the world, political, economic and currency instability. Our buying/sourcing arrangements with Li & Fung and with our foreign suppliers have not been materially affected by any such factors to date. However, due to the very substantial portion of our products that are produced abroad, any substantial disruption of our relationships with our foreign suppliers could adversely affect our operations. In addition, as Li & Fung is the buying/sourcing agent for a significant portion of our apparel products, we are subject to the risk of having to rebuild such buying/sourcing capacity or find another agent or agents to replace Li & Fung in the event the agreement with Li & Fung terminates, or if Li & Fung is unable to fulfill its obligations under the agreement.
In addition, as we rely on independent manufacturers, a manufacturer's failure to ship product to us in a timely manner, or to meet quality or safety standards, could cause us to miss delivery dates to our retail stores or our wholesale customers. Failure to make deliveries on time could cause our retail customers to expect more promotions and our wholesale customers to seek reduced prices, cancel orders or refuse deliveries, all of which could have a material adverse effect on us. We maintain internal staff responsible for overseeing product safety compliance, irrespective of our agency agreement with Li & Fung.
Additionally, we are a certified and validated member of the United States Customs and Border Protection's Customs-Trade Partnership Against Terrorism ("C-TPAT") program and expect all of our suppliers shipping to the United States to adhere to our C-TPAT requirements, including standards relating to facility security, procedural security, personnel security, cargo security and the overall protection of the supply chain. In the event a supplier does not comply with our C-TPAT requirements, or if we determine that the supplier will be unable to correct a deficiency, we may terminate our business relationship with the supplier.
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IMPORTS AND IMPORT RESTRICTIONS
Virtually all of our merchandise imported into the United States, Asia, Canada and Europe is subject to duties. The United States may unilaterally impose additional duties in response to a particular product being imported (from China or other countries) in such increased quantities as to cause (or threaten) serious damage to the relevant domestic industry (generally known as "anti-dumping" actions). Furthermore, additional duties, generally known as countervailing duties, can also be imposed by the US Government to offset subsidies provided by a foreign government to foreign manufacturers if the importation of such subsidized merchandise injures or threatens to injure a US industry. Legislative proposals have been put forward which, if adopted, would treat a manipulation by China of the value of its currency as actionable under the anti-dumping or countervailing duty laws.
We are also subject to other international trade agreements and regulations, such as the North American Free Trade Agreement, the Central American Free Trade Agreement and the Caribbean Basin Initiative and other "special trade programs." Each of the countries in which our products are sold has laws and regulations covering imports. Because the US and the other countries into which our products are imported and sold may, from time to time, impose new duties, tariffs, surcharges or other import controls or restrictions, including the imposition of "safeguard provisions," "safeguard duties," or adjust presently prevailing duty or tariff rates or levels on products being imported from other countries, we monitor import restrictions and opportunities. The sourcing of imported merchandise is also potentially subject to political developments in the countries of production. We strive to reduce our potential exposure to import related risks through, among other things, adjustments in product design and fabrication and shifts of production among countries and manufacturers.
In light of the fact that a substantial portion of our products is manufactured by foreign suppliers, the enactment of new legislation or the administration of current international trade regulations, executive action affecting trade agreements, or changes in buying/sourcing patterns or quota provisions, could adversely affect our operations. The implementation of any "safeguard provisions," "countervailing duties," any "anti-dumping" actions or any other actions impacting international trade could result in cost increases for certain categories of products and in disruption of the supply chain for certain product categories. See "Item 1A — Risk Factors."
Apparel and other products sold by us are also subject to regulation in the US and other countries by other governmental agencies, including, in the US, the Federal Trade Commission, the US Fish and Wildlife Service and the Consumer Products Safety Commission. These regulations relate principally to product labeling, content and safety requirements, licensing requirements and flammability testing. We believe that we are in substantial compliance with those regulations, as well as applicable federal, state, local, and foreign regulations relating to the discharge of materials hazardous to the environment. We do not estimate any significant capital expenditures for environmental control matters either in the current year or in the near future. Our licensed products, licensing partners and buying/sourcing agents are also subject to regulation. Our agreements require our licensing partners and buying/sourcing agents to operate in compliance with all laws and regulations and we are not aware of any violations which could reasonably be expected to have a material adverse effect on our business or financial position, results of operations, liquidity or cash flows.
Although we have not suffered any material inhibition from doing business in desirable markets in the past, we cannot assure that significant impediments will not arise in the future as we expand product offerings and introduce trademarks to new markets.
DISTRIBUTION
We distribute our products through leased facilities. On February 5, 2013, we entered into a contract with a third party facility operations and labor management company to provide distribution operations services at our Ohio Facility under a variable cost structure. In July 2013, we completed a sale-leaseback agreement
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for the Ohio Facility. We received net proceeds of $20.3 million, and we entered into a sale-leaseback arrangement with the buyer for a 10-year term.
BACKLOG
On February 5, 2016, our order book reflected unfilled customer orders for approximately $111.5 million of merchandise, as compared to approximately $98.8 million at February 6, 2015. These orders represent our order backlog. The amounts indicated include both confirmed and unconfirmed orders, which we believe, based on industry practice and our past experience, will be confirmed. We expect that substantially all such orders will be filled within the 2016 fiscal year. We note that the amount of order backlog at any given date is materially affected by a number of factors, including, among others, seasonality, the mix of product, the timing of the receipt and processing of customer orders and scheduling of the manufacture and shipping of the product, which in some instances is dependent on the desires of the customer. Accordingly, order book data should not be taken as providing meaningful period-to-period comparisons.
TRADEMARKS
The following table summarizes the principal trademarks we own and/or use in connection with our businesses and products:
Company Owned Trademarks
AXCESS | KATE SPADE SATURDAY | |
JACK SPADE | MARVELLA | |
KATE SPADE | MONET(a) | |
kate spade new york | TRIFARI |
Third Party Owned Trademarks
LIZ CLAIBORNE(b) | LIZWEAR(d) | |
LIZ CLAIBORNE NEW YORK(c)(d) | MONET(b)(e) |
- (a)
- International rights only.
- (b)
- The Company provides jewelry for these brands under exclusive supplier arrangements.
- (c)
- As discussed above, QVC is the exclusive specialty retailer for LIZ CLAIBORNE NEW YORK merchandise in the product categories covered by the QVC license agreement (which is subject to pre-existing license agreements) in the US.
- (d)
- Licensed to the Company by JCPenney on a royalty-free basis.
- (e)
- Domestic rights only.
In addition, we own and/or use many other logos and trademarks associated with the above mentioned trademarks. We have registered, or applied for registration of, a multitude of trademarks throughout the world, including those referenced above, for use on a variety of apparel and other products, including fashion accessories, home furnishings, fragrance and cosmetics, jewelry, watches, hosiery, optics and sunglasses, tech accessories, stationery and paper goods, tabletop products, table linen products, children's wear, swimwear, cold weather accessories, loungewear and sleepwear, indoor and outdoor fabrics and wall coverings and bedding, as well as for retail services. We regard our trademarks and other proprietary rights as valuable assets and believe that they have significant value in the marketing of our products. We vigorously protect our trademarks and other intellectual property rights against infringement on a worldwide basis.
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In general, trademarks remain valid and enforceable as long as the marks are used in connection with the related products and services and the required registration renewals are filed. We regard the license to use the trademarks and our other proprietary rights in and to the trademarks as valuable assets in marketing our products. As a result of the appeal of our brands, our products have from time to time been the object of counterfeiting. We have an established and aggressive enforcement program, which we believe has been generally effective in controlling the sale of counterfeit products in the US and in major markets abroad.
In markets outside of the US, our rights to some or all of our trademarks may not be clearly established. In the course of our international expansion, we have experienced conflicts with various third parties who have acquired ownership rights in certain trademarks, which would impede our use and registration of some of our principal trademarks. While such conflicts are common and may arise again from time to time as we continue our international expansion, we have generally successfully resolved such conflicts in the past through both legal action and negotiated settlements with third party owners of the conflicting marks. Although we have not in the past suffered any material restraints or restrictions on doing business in desirable markets or in new product categories, we cannot assure that significant impediments will not arise in the future as we expand product offerings and introduce new and additional brands, both in the US and in other markets.
COMPETITION
We are subject to intense competition as the apparel and accessories related product markets are highly competitive, both within the US and abroad. We compete with numerous retailers, designers and manufacturers of apparel and accessories, both domestic and foreign. We compete primarily on the basis of fashion, quality, customer service, price, brand prestige and recognition. Our ability to compete successfully depends upon a variety of factors, including, among other things, our ability to:
- •
- anticipate and respond to changing consumer demands in a timely manner;
- •
- develop quality and differentiated products that appeal to consumers;
- •
- appropriately price products;
- •
- establish and maintain favorable brand name and recognition;
- •
- maintain and grow market share;
- •
- establish and maintain acceptable relationships with our retail customers;
- •
- appropriately determine the size and identify the location of our retail stores and department store selling space;
- •
- provide appropriate service and support to retailers;
- •
- provide effective marketing support and brand promotion;
- •
- protect our intellectual property; and
- •
- optimize our retail and supply chain capabilities.
See "Item 1A — Risk Factors."
Our principal competitors for kate spade new york include Burberry, Coach, Marc by Marc Jacobs, Michael Kors, Ralph Lauren and Tory Burch.
EMPLOYEES
On January 2, 2016, we had approximately 3,600 full-time employees worldwide, as compared to approximately 3,500 full-time employees on January 3, 2015.
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We no longer have any union agreements; however, we continue to have an obligation to the National Retirement Fund due to our cessation of contributions to a multi-employer defined benefit pension fund pursuant to a collective bargaining agreement covering former union employees, which is regulated by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). We expect the final payment to be made in the second quarter of 2016. See Note 13 of Notes to Consolidated Financial Statements.
Our relations with our employees are satisfactory and to date we have not experienced any interruption of our operations due to employee issues.
CORPORATE SOCIAL RESPONSIBILITY
We are committed to responsible corporate citizenship and giving back to our communities through a variety of avenues. We have several programs in place that support this commitment.
Monitoring Global Working Conditions |
We are committed to taking the actions we believe are necessary to ensure that our products are made in contracted factories with fair and decent working conditions. We continue this commitment as we operate under our buying/sourcing arrangement with Li & Fung, collaborating with Li & Fung to develop mutually acceptable audit documents and processes, training the Li & Fung audit staff on our compliance program and communicating our standards to Li & Fung suppliers and their workers.
The major components of our compliance program are: (i) communicating our standards of engagement to workers, suppliers and associates; (ii) auditing and monitoring against those standards; (iii) providing workers with a confidential reporting channel; (iv) working with non-governmental organizations regarding issues impacting workers; and (v) working closely with factory management to develop sustainable compliance programs. Suppliers are required to post our standards of engagement in the workers' native language at all factories where our merchandise is being manufactured. The standards of engagement, along with detailed explanations of each standard, are included on our suppliers' websites. All new suppliers must acknowledge our standards and agree to our monitoring requirements.
We audit factories using both internal and independent monitors and look for ways to develop direct communication channels with workers to ensure that they are aware of their rights. More information about our monitoring program is available on our website.
As of January 2, 2016, we had approximately 86 active factories on our roster, of which 79 were audited by Li & Fung auditors, third party auditors and our internal compliance team. Additionally, there were 76 follow-up audits. In many cases, we rely on our agents' audit reports. As such, we continue to conduct shadow audits to confirm that audit protocols and findings are consistent.
We also contractually obligate all of our licensees to comply with and to assure that all of their affiliates, subcontractors, suppliers and distributors comply with our standards of engagement as well as all applicable laws. Our license agreements generally also provide that we have the right to inspect all facilities used by our licensees and their distributors, subcontractors, suppliers, agents and representatives to assure compliance with our standards.
We are aware that auditing only confirms compliance at the time of the audit, and we continue to look for ways to improve our monitoring program and work with suppliers to create sustainable compliance at their factories. Creating workers' awareness and establishing a channel of communication for reporting issues of non-compliance are two important strategies. We encourage all factories to establish internal grievance procedures and give workers the opportunity to report their concerns directly to the Company. This year we have provided supplier training covering best practices, social compliance requirements and review of our standards and policies.
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Philanthropic Programs |
We have a number of philanthropic programs that support the nonprofit sector in our major operating communities.
- •
- The Kate Spade & Company Foundation (the "Foundation"), established as the Liz Claiborne Foundation in 1981, is a separate nonprofit legal entity supporting nonprofit organizations working with women transforming communities. The Foundation supports programs in and around the New York City metropolitan area, where our primary offices are located, that offer training and increase access to tools that help women become economically empowered. The mission of the Foundation remains focused on women's economic empowerment.
- •
- For more than ten years, we have been committed to creating opportunities for our associates to volunteer and give back to nonprofit organizations in our major operating communities. In 2015, we continued to support our associate volunteering program to create opportunities that reflected our charitable strategies. Furthermore, we continue to create Company-wide events that complement our philanthropy supporting women's economic empowerment, including our On Purpose program.
- •
- On Purpose is our trade initiative through which we are teaching a group of women in Masoro, Rwanda to become an independent, sustainable and profitable supplier to Kate Spade & Company and other global fashion brands.
- •
- The Merchandise Donation Program provides direct charitable support to meet community needs and support the charitable interests of our associates. When available, we donate product to several types of organizations, including programs for women. In addition, every associate is afforded the opportunity of making one merchandise donation each year to the charitable organization of their choice.
- •
- The Matching Gift Program supports and encourages the charitable interests of our associates. Our flexible program matches associates' gifts at a rate of one-to-one in the areas of arts, health and safety, education, human services and the environment. Contributions to organizations where associates serve as voluntary board members are matched at a rate of two-to-one.
Environmental Initiatives |
We are committed to a long-term sustainable approach to caring for and safeguarding the environment. As such, we endeavor to balance environmental considerations and social responsibility with our business goals by evolving and implementing our corporate environmental policy, in addition to complying with environmental laws and regulations. Our current sustainability policy focuses on three major components — reducing waste, reusing and recycling — to help minimize our impact on the environment.
You should carefully consider the following risk factors, in addition to other information included in this Annual Report on Form 10-K and in other documents we file with the SEC, in evaluating us and our business. If any of the following 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.
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Our business strategy is centered on the kate spade new york brand. We cannot assure the successful implementation and results of our long-term strategic plans, including our ability to operate as a mono-brand based company.
Our ability to execute our long-term growth plan and achieve our projected results is subject to a variety of risks, including the following:
- •
- We are exposed to additional risk from lack of diversification that did not affect our prior multi-brand business strategy as significantly. Our business prospects and results of operations will depend substantially on our ability to successfully maintain and develop the brand image and brand equity of the kate spade new york brand.
- •
- The kate spade new york brand could be negatively affected by changes in consumer preferences, brand awareness and fashion trends, and any such changes or other adverse events could have a more significant impact on a single brand than a portfolio of multiple brands.
- •
- We may be unable to successfully acquire new full-price customers through our marketing and CRM initiatives.
- •
- We may not be able to maintain and improve our operating margins and control promotional activity.
- •
- We may not be able to achieve our revenue growth targets because of local, regional, national and worldwide macroeconomic factors that may reduce demand for our products.
- •
- We may be unable to grow our revenues through retail expansion because of risks associated with selecting suitable locations for stand-alone retail stores and appropriate department store locations.
- •
- We may not be able to expand internationally, including in Japan, Asia, Europe, Canada and Latin America because of local and regional risks associated with those markets, including currency risks, political climate and other similar risks. Our current joint ventures may not succeed in expanding our business in China, Hong Kong, Macau and Taiwan.
- •
- We may not be able to successfully introduce new product categories under the kate spade new york brand.
- •
- Our e-commerce expansion is subject to risks associated with a material disruption in our information technology systems and e-commerce operations, including in markets outside of the United States, any of which could significantly affect our ability to operate and substantially harm our e-commerce business.
We may not be successful in implementing our long-term growth plan, and our inability to successfully expand our retail business could have a material adverse effect on our business, financial condition, liquidity and results of operations.
General economic conditions in the United States, Asia, Europe, Canada and other parts of the world, including a continued weakening or instability of such economies, restricted credit markets and lower levels of consumer spending, can affect consumer confidence and consumer purchases of discretionary items, including fashion apparel and related products, such as ours.
Our results are dependent on a number of factors impacting consumer spending, both in the United States and abroad, including, but not limited to: (i) general economic and business conditions; (ii) consumer confidence; (iii) wages and current and expected employment levels; (iv) the housing market; (v) consumer debt levels; (vi) availability of consumer credit; (vii) credit and interest rates; (viii) fluctuations in foreign currency exchange rates; (ix) fuel and energy costs; (x) energy shortages; (xi) the performance of the financial, equity and credit markets; (xii) taxes; (xiii) general political conditions; and (xiv) the level of customer traffic within department stores, malls and other shopping and selling environments.
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Global economic conditions over the past few years have included significant recessionary pressures and declines or stagnation in employment levels, disposable income and actual and/or perceived wealth and declines in consumer confidence and economic growth. The current negative economic environment has been characterized by stagnation in consumer discretionary spending and has disproportionately affected retailers and sellers of consumer goods, particularly those whose goods represent discretionary purchases, including fashion apparel and related products such as ours. While the decline in consumer spending has recently moderated, these economic conditions could still lead to additional declines or stagnation in consumer spending over the foreseeable future and may have resulted in a resetting of consumer spending habits that makes it unlikely that such spending will return to prior levels for the foreseeable future. A number of our markets continue to suffer particularly severe downturns.
While we have seen intermittent signs of stabilization in North America, volatility persists in the European markets as well as in China and there are no assurances that the global economy will continue to recover. If the global economy continues to be weak or deteriorates further, there will likely be a negative effect on our revenues, operating margins and earnings across all of our segments. In particular, the Chinese economy is undergoing a transition from an investment and export-driven economy to one driven by internal consumption and has recently experienced instability that has been characterized by slowing growth rates and volatility in the commodities and stock markets. Concerns about the Chinese economy have had a significant impact on the global financial markets. As a result, the condition of the Chinese economy could have a negative impact on our business and growth prospects within China, greater Asia and worldwide.
Economic conditions have also led to a highly promotional environment and strong discounting pressure from both our wholesale and retail customers, which have had a negative effect on our revenues and profitability. This promotional environment may likely continue even after economic growth returns, as we expect that consumer spending trends are likely to remain at depressed levels for the foreseeable future. The domestic and international political situation also affects consumer confidence. The threat, outbreak or escalation of terrorism, military conflicts or other hostilities could lead to further decreases in consumer spending. The uncertain outlook in the global economy will likely continue to have a material adverse impact on our business, financial condition, liquidity and results of operations.
Fluctuations in the price, availability and quality of the fabrics or other raw materials used to manufacture our products, as well as the price for labor, marketing and transportation, could have a material adverse effect on our cost of sales or our ability to meet our customers' demands. The prices for such fabrics depend largely on the market prices for the raw materials used to produce them. Such factors may be exacerbated by legislation and regulations associated with global climate change. The price and availability of such raw materials may fluctuate significantly, depending on many factors. In the future, we may not be able to pass all or a portion of such higher prices on to our customers.
Our business and balance sheets are exposed to domestic and foreign currency fluctuations.
While we generally purchase our products in US dollars, we source most of our products overseas. As a result, the cost of these products may be affected by changes in the value of the relevant currencies, including currency devaluations. Changes in currency exchange rates may also affect the US dollar value of the foreign currency denominated prices at which our international businesses sell products. Our international sales, as well as our international businesses' inventory and accounts receivable levels, could be affected by currency fluctuations. In addition, with expected international expansion, we may increase our exposure to such fluctuations.
Although from time to time we hedge a portion of our exposures to changes in foreign currency exchange rates arising in the ordinary course of business, we cannot assure that foreign currency fluctuations will not have a material adverse impact on our business, financial condition, liquidity or results of operations.
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The success of our business depends on 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 apparel and accessories industries have historically been subject to rapidly changing consumer demands and tastes and fashion trends and to levels of discretionary spending, especially for fashion apparel and related products, which levels are currently weak. These industries are also subject to the difficulties encountered when trying to expand business to growing markets worldwide. We believe that our success is largely dependent on our ability to effectively anticipate, gauge and respond to changing consumer demands and tastes across multiple product lines, shopping channels and geographies, in the design, pricing, styling and production of our products and in the merchandising and pricing of products in our retail stores, and in the business model employed, and partners we select to work with, in new and growing markets worldwide. Our brands and products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to constant change. Also, we must maintain and enhance favorable brand recognition, which may be affected by consumer attitudes towards the desirability of fashion products bearing a "mega brand" label and which are widely available at a broad range of retail stores. Our success is also dependent on our ability to successfully extend our businesses into new territories and markets, such as Asia, Europe, Canada and Latin America.
We attempt to schedule a substantial portion of our materials and manufacturing commitments relatively late in the production cycle. However, in order to secure necessary materials and ensure availability of manufacturing facilities, we must make substantial advance commitments, which may be up to five months or longer, prior to the receipt of firm orders from customers for the items to be produced. We need to translate market trends into appropriate, saleable product offerings relatively far in advance, while minimizing excess inventory positions, and correctly balance the level of our fabric and/or merchandise commitments with actual customer orders.
We cannot assure that we will be able to continue to develop appealing styles and brands or successfully meet changing customer and consumer demands in the future. In addition, we cannot assure that any new products or brands that we introduce will be successfully received and supported by our wholesale customers or consumers. Our failure to gauge consumer needs and fashion trends and respond appropriately, or to appropriately forecast our ability to sell products, could adversely affect retail and consumer acceptance of our products and leave us with substantial outstanding fabric and/or manufacturing commitments, resulting in increases in unsold inventory or missed opportunities. If that occurs, we may need to employ markdowns or promotional sales to dispose of excess inventory, which may harm our business and results. At the same time, our focus on inventory management may result, from time to time, in our not having a sufficient supply of products to meet demand and may cause us to lose potential sales.
The markets in which we operate are highly competitive, both within the United States and abroad.
We face intense competitive challenges from other domestic and foreign fashion apparel and accessories producers and retailers. Competition is based on a number of factors, including the following:
- •
- anticipating and responding to changing consumer demands in a timely manner;
- •
- establishing and maintaining a favorable brand name and recognition;
- •
- product quality;
- •
- maintaining and growing market share;
- •
- exploiting markets outside of the United States, including growth markets such as Asia, Europe, Canada and Latin America;
- •
- developing quality and differentiated products that appeal to consumers;
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- •
- establishing and maintaining acceptable relationships with our retail customers;
- •
- pricing products appropriately;
- •
- providing appropriate service and support to retailers;
- •
- optimizing our retail and supply chain capabilities;
- •
- size and location of our retail stores and department store selling space; and
- •
- protecting our intellectual property.
In addition, some of our competitors may be significantly larger and more diversified than us and may have significantly greater financial, technological, manufacturing, sales, marketing and distribution resources than we do. Their diversification and/or greater capabilities in these areas may enable them to better withstand periodic downturns in the accessories, footwear and apparel industries, compete more effectively on the basis of price and production and/or more quickly develop new products. The general availability of manufacturing contractors and agents also allows new entrants easy access to the markets in which we compete, which may increase the number of our competitors and adversely affect our competitive position and our business.
Any increased competition, or our failure to adequately address these competitive factors, could result in reduced sales or prices, or both, which could have a material adverse effect on us. We also believe there is an increasing focus by the department stores to concentrate an increasing portion of their product assortments within their own private label products. These private label lines compete directly with our product lines and may receive prominent positioning on the retail floor by department stores. Finally, in the current economic environment, which is characterized by softening demand for discretionary items, such as apparel and related products, there has been a consistently increased level of promotional activity, both at our retail stores and at department stores, which has had an adverse effect on our revenues and profitability.
Our current level of debt could adversely affect our business, financial condition or results of operations and prevent us from fulfilling our debt-related obligations.
As of January 2, 2016, the total principal amount of our term loan credit facility due April 2021 (the "Term Loan Credit Agreement") was $395.0 million. Our current level of debt could have important consequences for the holders of our common stock, including: (i) making it more difficult for us to satisfy our obligations with respect to our debt or to our trade or other creditors; (ii) increasing our vulnerability to adverse economic or industry conditions; (iii) limiting our ability to obtain additional financing to fund capital expenditures and acquisitions, particularly when the availability of financing in the capital markets is limited; (iv) requiring a substantial portion of our cash flows from operations and the proceeds of any capital markets offerings for the payment of interest on our debt and reducing our ability to use our cash flows to fund working capital, capital expenditures, acquisitions and general corporate requirements; (v) limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and (vi) placing us at a competitive disadvantage relative to less leveraged competitors.
There is no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available to us through capital markets financings or under our amended and restated revolving credit facility (as amended to date, the "ABL Facility") or otherwise in an amount sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, on or before its maturity. We may be unable to refinance any of our indebtedness on commercially reasonable terms or at all. In addition, we may incur additional indebtedness in order to finance our operations or to repay existing indebtedness. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional debt or equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. We cannot assure you that any such actions, if necessary, could be effected on commercially reasonable terms or at all, or on terms that would be advantageous to our stockholders or on terms that would not require us to breach the terms and conditions of our existing or future debt agreements.
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Restrictive covenants in our ABL Facility and Term Loan Credit Agreement may restrict our ability to pursue our business strategies.
Our ABL Facility and Term Loan Credit Agreement limit our ability, and the terms of any future indebtedness may limit our ability, among other things, to:
- •
- incur or guarantee additional indebtedness;
- •
- make certain investments;
- •
- pay dividends or make distributions on our capital stock;
- •
- sell assets, including capital stock of restricted subsidiaries;
- •
- agree to restrictions on distributions, transfers or dividends affecting our restricted subsidiaries;
- •
- consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
- •
- enter into transactions with our affiliates;
- •
- incur liens; and
- •
- designate any of our subsidiaries as unrestricted subsidiaries.
In addition, our ABL Facility (i) provides 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) requires 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) requires 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 restrictions contained in the Term Loan Credit Agreement and our ABL Facility could also limit our ability to plan for or react to market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans.
We may require additional capital in the future and may not be able to secure adequate funds on terms acceptable to us.
Our primary ongoing cash requirements are to: (i) fund seasonal working capital needs (primarily accounts receivable and inventory); (ii) fund capital expenditures related to the opening and refurbishing of our specialty retail and outlet stores and normal maintenance activities; (iii) invest in our information systems; (iv) fund general operational and contractual obligations, including remaining efforts associated with our streamlining initiatives; and (v) potentially repurchase or retire debt obligations. The expansion and development of our business may also require significant capital, which we may be unable to obtain, to fund our capital expenditures and operating expenses, including working capital needs.
Our ABL Facility matures in May 2019. 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 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 eurocurrency rates and a second borrowing option with interest rates based on the alternate base
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rate, as defined in the ABL Facility, with a spread based on the aggregate availability under the ABL Facility.
During the next 12 months, we expect to meet our cash requirements with existing cash and cash equivalents, cash flow from operations and borrowings under our ABL Facility. We may fail to generate sufficient cash flow from such sources to meet our cash requirements. Further, our capital requirements may vary materially from those currently planned if, for example, our revenues do not reach expected levels or we have to incur unforeseen capital expenditures and make investments to maintain our competitive position. If this is the case, we may require additional financing sooner than anticipated or we may have to delay or abandon some or all of our development and expansion plans or otherwise forego market opportunities.
To a large extent, our cash flow generation ability is subject to general economic, financial, competitive, legislative and regulatory factors and other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations in an amount sufficient to enable us to fund our liquidity needs. As a result, we may need to refinance all or a portion of our indebtedness, on or before its maturity, or obtain additional equity or debt financing. We cannot assure you that we will be able to do so on commercially reasonable terms, if at all. Any inability to generate sufficient cash flow, refinance our indebtedness or incur additional indebtedness on commercially reasonable terms could adversely affect our financial condition and could cause us to be unable to service our debt and may delay or prevent the expansion of our business.
Our success will depend on our ability to successfully develop or acquire new product lines and enter new markets or product categories.
Product category expansion is an important part of our strategy, and therefore we have acquired or developed, and expect to continue to acquire or develop new product lines, enter new markets or product categories, including through licensing arrangements, and/or implement new business models. Such activities are accompanied by a variety of risks inherent in any such new business venture, including the following:
- •
- our ability to identify appropriate business development opportunities, including new product lines and new markets, including important growth markets such as Asia, Europe, Canada and Latin America;
- •
- new businesses, business models, product lines or market activities may require methods of operations, investments and marketing and financial strategies different from those employed in our other businesses, and may also involve buyers, store customers and/or competitors different from our historical buyers, store customers and competitors;
- •
- consumer acceptance of the new products or lines, and the impact on existing businesses given the new products or lines, including the pricing of such lines;
- •
- we may not be able to generate projected or satisfactory levels of sales, profits and/or return on investment for a new business or product line, and may also encounter unanticipated events and unknown or uncertain liabilities that could materially impact our business;
- •
- we may experience possible difficulties, delays and/or unanticipated costs in integrating the business, operations, personnel and/or systems of an acquired business and may also not be able to retain and appropriately motivate key personnel of an acquired business;
- •
- risks related to complying with different laws and regulations in new markets or applicable to new product lines;
23
- •
- we may not be able to maintain existing product licenses or enter into new licenses to enable us to launch new products and lines on favorable or acceptable terms and conditions; and
- •
- with respect to a business where we are not the brand owner, but instead act as an exclusive licensee or an exclusive supplier, such as the arrangements within our Adelington Design Group discussed above for the LIZ CLAIBORNE and MONET brands with respect to jewelry products, there are a number of inherent risks, including, without limitation, compliance with terms set forth in the applicable agreements, the level of orders placed by our business partners and the public perception and/or acceptance of our business partners, the brands or other product lines, which are not within our control.
Our wholesale business is dependent to a significant degree on sales to a limited number of large United States department store customers, and our business could suffer as a result of consolidations, restructurings, bankruptcies, other ownership changes in the retail industry and/or financial difficulties at our large department store customers.
Many major department store groups make centralized buying decisions. Accordingly, any material change in our relationship with any such group could have a material adverse effect on our operations. We expect that our largest customers will continue to account for a significant percentage of our wholesale sales.
Successfully managing our wholesale business with our continued partial dependence on sales to a limited number of large United States department store customers is subject to our ability to respond effectively to, among other things: (i) these customers' buying patterns, including their purchase and retail floor space commitments for apparel in general (compared with other product categories they sell) and our products specifically (compared with products offered by our competitors, including with respect to customer and consumer acceptance, pricing and new product introductions); (ii) these customers' strategic and operational initiatives, including their continued focus on further development of their "private label" products; (iii) these customers' desire to have us provide them with exclusive and/or differentiated designs and product mixes; (iv) these customers' requirements for vendor margin support; (v) any credit risks presented by these customers, especially given the significant proportion of our accounts receivable they represent; and (vi) the effect of any potential consolidation among these larger customers.
We do not enter into long-term agreements with any of our wholesale customers. Instead, we enter into a number of purchase order commitments with our customers for each of our lines every season. A decision by the controlling owner of a group of stores or any other significant customer, whether motivated by competitive conditions, financial difficulties and/or otherwise, to decrease or eliminate the amount of merchandise purchased from us or to change their manner of doing business with us could have a material adverse effect on our business, financial condition, liquidity and results of operations. As a result of the recent unfavorable economic environment, we have experienced a softening of demand from a number of wholesale customers, such as large department stores, that have been highly promotional and have aggressively marked down all of their merchandise, including our products. Any promotional pricing or discounting in response to softening demand may also have a negative effect on brand image and prestige, which may be difficult to counteract as the economy improves. Furthermore, this promotional activity may lead to requests from those customers for increased markdown allowances at the end of the season. Promotional activity at our wholesale customers will also often result in promotional activity at our retail stores, further eroding revenues and profitability.
When we sell to our wholesale customers, we extend credit based on an evaluation of each customer's financial condition, usually without requiring collateral. However, the financial difficulties of a customer could cause us to curtail or eliminate business with that customer but we may not be able to appropriately reduce the credit risk relating to our receivables from that customer. Our inability to collect on our trade accounts receivable from any of our largest customers could have a material adverse effect on our business, financial condition, liquidity and results of operations. Moreover, the difficult macroeconomic conditions
24
and uncertainties in the global credit markets could negatively impact our customers and consumers which, in turn, could have an adverse impact on our business, financial condition, liquidity and results of operations.
A material disruption in our information technology systems and e-commerce operations could adversely affect our business or results of operations.
We rely extensively on our information technology ("IT") systems to track inventory, manage our supply chain, record and process transactions, manage customer communications, summarize results and manage our business. The failure of our IT systems to operate properly or effectively, problems with transitioning to upgraded or replacement systems or difficulty in integrating new systems could adversely impact our business. In addition, our IT systems may be subject to damage and/or interruption from power outages, computer, network and telecommunications failures, computer viruses, hackers, security breaches and usage errors by our employees and harmful acts by our website visitors. If our IT systems are damaged or cease to function properly, we may have to make a significant investment to fix or replace them, and we may suffer loss of critical data (including customer data) and interruptions or delays in our operations in the interim. Any significant disruption in our IT systems could harm our reputation and credibility and could adversely affect our business, financial condition or results of operations.
Privacy breaches and liability for online content could negatively affect our reputation, credibility and business.
We rely on third party computer hardware, software and fulfillment operations for our e-commerce operations and for the various social media tools and websites we use as part of our marketing strategy. There is a growing concern over the security of personal information transmitted over the internet, consumer identity theft and user privacy. Despite the implementation of reasonable security measures by us and our third party providers, these sites and systems may be susceptible to electronic or physical computer break-ins and security breaches. Any perceived or actual unauthorized disclosure of personally-identifiable information regarding our customers or website visitors could harm our reputation and credibility, reduce our e-commerce and/or brick and mortar related net sales, impair our ability to attract website or retail store visitors and reduce our ability to attract and retain customers. Additionally, as the number of users of forums and social media features on our websites increases, we could be exposed to liability in connection with material posted on our websites by users and other third parties. Finally, we could incur significant costs in complying with the multitude of state, federal and foreign laws regarding unauthorized disclosure of personal information and, if we fail to implement appropriate safeguards or to detect and provide prompt notice of unauthorized access as required by some of these laws, we could be subject to potential claims for damages and other remedies.
We may be exposed to risks and costs associated with credit card fraud and identity theft.
A growing portion of our customer orders are placed through our e-commerce websites. In addition, a significant portion of our direct-to-consumer sales require us and other parties involved in processing transactions to collect and to securely transmit certain customer data, such as credit card information, over public networks. Third parties may have the ability to breach the security of customer transaction data. Although we take the security of our systems and the privacy of our customers' confidential information seriously, there can be no assurance that our security measures will effectively prevent others from obtaining unauthorized access to our information and our customers' information. Any security breach could cause consumers to lose confidence in the security of our website or stores and choose not to purchase from us. Any security breach could also expose us to risks of data loss, litigation and liability and could seriously disrupt our operations and harm our reputation, any of which could harm our business.
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We cannot assure that we can attract and retain talented, highly qualified executives, or maintain satisfactory relationships with our employees.
Our success depends, to a significant extent, both upon the continued services of our executive management team, as well as our ability to attract, hire, motivate and retain additional talented and highly qualified management in the future, including in the areas of design, merchandising, sales, supply chain, marketing, production and systems, as well as our ability to hire and train qualified retail management and associates. In addition, we will need to provide for the succession of senior management. The loss of key members of management and our failure to successfully plan for succession could disrupt our operations and our ability to successfully operate our business and execute our strategic plan.
Our business could suffer if we cannot adequately establish, defend and protect our trademarks and other proprietary rights.
We believe that our trademarks and other proprietary rights are critical to our success and competitive position. Accordingly, we devote substantial resources to the establishment and protection of our trademarks and anti-counterfeiting activities. Counterfeiting of our products, particularly our kate spade new york brand, continues, however, and in the course of our international expansion we have experienced conflicts with various third parties that have acquired or claimed ownership rights in some of our trademarks or otherwise have contested our rights to our trademarks. We have, in the past, resolved certain of these conflicts through both legal action and negotiated settlements, none of which, we believe, has had a material impact on our financial condition, liquidity or results of operations. However, the actions taken to establish and protect our trademarks and other proprietary rights might not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of their trademarks and proprietary rights. Moreover, in certain countries others may assert rights in, or ownership of, our trademarks and other proprietary rights or we may not be able to successfully resolve such conflicts, or resolving such conflicts may require us to make significant monetary payments. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. The loss of such trademarks and other proprietary rights, or the loss of the exclusive use of such trademarks and other proprietary rights, could have a material adverse effect on us. Any litigation regarding our trademarks or other proprietary rights could be time consuming and costly.
Our reliance on independent foreign manufacturers could cause delay and loss and damage our reputation and customer relationships. Also, there are risks associated with having a buying/sourcing agreement, which results in a single 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.
We do not own any product manufacturing facilities; all of our products are manufactured in accordance with our specifications through arrangements with independent suppliers. Products produced in Asia represent a substantial majority of our sales. We also source product in the United States and other regions from approximately 91 suppliers manufacturing our products. At the end of 2015, such suppliers were located in 12 countries, with the largest finished goods supplier at such time accounting for approximately 16.1% of the total of finished goods we purchased in 2015. A supplier's failure to manufacture and deliver products to us in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items. The failure to make timely deliveries may drive customers to cancel orders, refuse to accept deliveries or demand reduced prices, any of which could have a material adverse effect on us and our reputation in the marketplace. Also, a manufacturer's failure to comply with safety and content regulations and standards, including with respect to children's product and fashion jewelry, could result in substantial liability and damage to our reputation. While we provide our manufacturers with standards, and we employ independent testing for safety and content issues, we might not be able to prevent or detect all failures of our manufacturers to comply with such standards and regulations.
26
Additionally, we require our independent manufacturers (as well as our licensees) to operate in compliance with applicable laws and regulations. While we believe that our internal and vendor operating guidelines promote ethical business practices and our staff periodically visits and monitors the operations of our independent manufacturers, we do not control these manufacturers or their labor practices. The violation of labor or other laws by an independent manufacturer used by us (or any of our licensees), or the divergence of an independent manufacturer's (or licensee's) labor practices from those generally accepted as ethical in the United States, could interrupt, or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our business, financial condition, liquidity and results of operations.
On February 23, 2009, we entered into a long-term, buying/sourcing agency agreement with Li & Fung, pursuant to which Li & Fung acted as the primary global apparel and accessories buying/sourcing agent, with the exception of our jewelry product lines. On March 24, 2015, we modified this arrangement in order to, among other things, transition our buying/sourcing activities for our accessories products to an in-house model, beginning with our Spring 2016 collection. We pay to Li & Fung an agency commission based on the cost of our product purchases through Li & Fung. We are obligated to use Li & Fung as our primary buying/sourcing agent for our ready-to-wear apparel products and we may use Li & Fung as a buying/sourcing agent with respect to our accessories products, with all such product purchases applying toward a minimum volume commitment of inventory purchases each year through the expiration of the term of the agreement on March 31, 2018. Our agreement with Li & Fung is not exclusive.
Our arrangements with foreign suppliers and with our foreign buying/sourcing agents are subject generally to the risks of doing business abroad, including currency fluctuations and revaluations, restrictions on the transfer of funds, terrorist activities, labor disputes, pandemic disease and, in certain parts of the world, political, economic and currency instability. Our operations have not been materially affected by any such factors to date. However, due to the very substantial portion of our products that are produced abroad, any substantial disruption of our relationships with our foreign suppliers could adversely affect our operations. Moreover, difficult macroeconomic conditions and uncertainties in the global credit markets could negatively impact our suppliers, which in turn, could have an adverse impact on our business, financial position, liquidity and results of operations.
There are risks associated with our arrangement to continue to operate the Ohio distribution facility with a third party operations and labor management company that provides distribution operations services, including risks related to increased operating expenses and operating under a third party arrangement.
On February 5, 2013, we entered into a contract with a third party distribution center operations and labor management company to provide distribution operations services at the Ohio Facility. The third party distribution center operations company employs many of our prior employees, including union employees, at the Ohio Facility. There are a number of risks associated with continuing to operate the Ohio Facility, including increased operating expenses and risks related to the ability of the third party distribution center operations company to appropriately staff the Ohio Facility with both union and non-union employees on reasonable and appropriate terms. We also have limited ability to control our third party distribution center operations company, and such company may take actions with respect to its employees without our approval and may not maintain good relations with its employees and unions. Issues that arise in connection with the operation of our Ohio Facility could cause supply disruptions and other logistical issues and could therefore have a material, adverse effect on our business, financial condition, liquidity and results of operations.
There are risks associated with the various businesses we have disposed.
In connection with the disposition of the Lucky Brand business, LIZ CLAIBORNE Canada retail stores, the LIZ CLAIBORNE branded outlet stores in the United States and Puerto Rico and certain Mexx Canada retail stores, an aggregate of 277 store leases were assigned to third parties, for which we or certain
27
of our subsidiaries remain secondarily liable for the remaining obligations on 136 such leases. See "Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Position, Liquidity and Capital Resources — Commitments and Capital Expenditures," and Note 9 of Notes to Consolidated Financial Statements for more information.
Our international sourcing operations are subject to a variety of legal, regulatory, political, labor and economic risks, including risks relating to the importation and exportation of product.
We source most of our products outside the United States through arrangements with independent suppliers in 12 countries as of January 2, 2016. There are a number of risks associated with importing our products, including but not limited to the following:
- •
- the potential reimposition of quotas, which could limit the amount and type of goods that may be imported annually from a given country, in the context of a trade retaliatory case;
- •
- changes in social, political, legal and economic conditions, or labor unrest or terrorist acts that could result in the disruption of trade from the countries in which our manufacturers or suppliers are located;
- •
- the imposition of additional regulations, or the administration of existing regulations, relating to products which are imported, exported or otherwise distributed;
- •
- the imposition of additional duties, tariffs, taxes and other charges or other trade barriers on imports or exports;
- •
- risks of increased sourcing costs, including costs for materials and labor and such increases potentially resulting from the elimination of quota on apparel products;
- •
- our ability to adapt to and compete effectively in the current quota environment, in which general quota has expired on apparel products, resulting in changing in sourcing patterns and lowered barriers to entry, but political activities which could result in the reimposition of quotas or other restrictive measures have been initiated or threatened;
- •
- significant delays in the delivery of cargo due to security considerations;
- •
- the imposition of anti-dumping or countervailing duty proceedings resulting in the potential assessment of special anti-dumping or countervailing duties; and
- •
- the enactment of new legislation or the administration of current international trade regulations, or executive action affecting international textile agreements, including the United States reevaluation of the trading status of certain countries and/or retaliatory duties, quotas or other trade sanctions, which, if enacted, would increase the cost of products purchased from suppliers in such countries.
Any one of these or similar factors could have a material adverse effect on our business, financial condition, liquidity, results of operations and current business practices.
We face risks associated with operating in international markets.
Approximately 18.5% of our revenues were generated by operations outside the United States during the 2015 fiscal year. Our ability to operate and be successful in new international markets and to operate and maintain the current level of sales in our existing international markets, is subject to risks associated with international operations. These include complying with a variety of foreign laws and regulations, adapting to local customs and culture, unexpected changes in regulatory requirements, new tariffs or other barriers in some international markets, political instability and terrorist attacks, changes in diplomatic and trade relationships, currency risks and general economic conditions in specific countries and markets. Any one of these or similar factors could have a material adverse effect on our business, financial condition, liquidity, results of operations and current business practices.
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We rely on third parties to provide us with services in connection with the administration of certain aspects of our business.
We have entered into agreements with third party service providers, both domestic and overseas, to provide processing and administrative functions over a broad range of areas, and we may continue to do so in the future. These areas include finance and accounting, information technology, human resources, buying/sourcing, distribution functions, and e-commerce. Services provided by third parties could be interrupted as a result of many factors, including contract disputes. Any failure by third parties to provide us with these services on a timely basis or within our service level expectations and performance standards could result in a disruption of our operations and could have a material adverse effect on our business, financial condition, liquidity and results of operations. In addition, to the extent we are unable to maintain these arrangements, we would incur substantial costs, including costs associated with hiring new employees, in order to return these services in-house or to transition the services to other third parties.
Our ability to utilize all or a portion of our United States deferred tax assets may be limited significantly if we experience an "ownership change."
As of January 2, 2016, we had United States deferred tax assets of approximately $438.1 million, which include net operating loss ("NOL") carryforwards and other items which could be considered net unrealized built in losses ("NUBIL"). Among other factors, our ability to utilize our NOL and/or our NUBIL items to offset future taxable income may be limited significantly if we experience an "ownership change" as defined in section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). In general, an ownership change will occur if there is a cumulative increase in ownership of our stock by "5-percent shareholders" (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. The limitation arising from an "ownership change" under section 382 of the Code on our ability to utilize our United States deferred tax assets depends on the value of our stock at the time of the ownership change. We continue to monitor changes in our ownership and do not believe we had a change in control as of January 2, 2016. If all or a portion of our deferred tax assets are subject to limitation because we experience an ownership change, depending on the value of our stock at the time of the ownership change, our future cash flows could be adversely impacted due to increased tax liability. As of January 2, 2016, substantially all of the tax benefits of our United States deferred tax assets had been offset with a full valuation allowance that was recognized in our financial statements.
The outcome of current and future litigations and other proceedings in which we are involved may have a material adverse effect on our results of operations, liquidity or cash flows.
We are a party to several litigations and other proceedings and claims which, if determined unfavorably to us, could have a material adverse effect on our results of operations, liquidity or cash flows. We may in the future become party to other claims and legal actions which, either individually or in the aggregate, could have a material adverse effect on our results of operations, liquidity or cash flows. In addition, any of the current or possible future legal proceedings in which we may be involved could require significant management and financial resources, which could otherwise be devoted to the operation of our business.
Item 1B. Unresolved Staff Comments.
None.
Our distribution and administrative functions are conducted in leased facilities. We also lease space for our specialty retail and outlet stores. We believe that our existing facilities are well maintained, in good operating condition and are adequate for our present level of operations. We use unaffiliated third parties to provide distribution services to meet our distribution requirements.
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Our principal executive offices, as well as certain sales, merchandising and design staffs, are located at 2 Park Avenue, New York, NY, where we lease approximately 135,000 square feet. We also lease approximately 106,000 square feet in an office building in North Bergen, New Jersey, which houses operational staff.
The following table sets forth information with respect to our key leased properties:
Location(a) | Primary Use | Approximate Square Footage Occupied | ||||
---|---|---|---|---|---|---|
West Chester, OH(b) | Distribution Center | 601,000 | ||||
2 Park Avenue, New York, NY | Offices | 135,000 | ||||
North Bergen, NJ(c) | Offices | 106,000 |
- (a)
- We also lease showroom, warehouse and office space in various other domestic and international locations. We exited certain New York offices during 2014, for which we remain obligated under the respective leases.
- (b)
- During the third quarter of 2013, we sold the West Chester, OH facility for net proceeds of $20.3 million and entered into a sale-leaseback arrangement with the buyer for a 10-year term.
- (c)
- During the second quarter of 2013, we sold the North Bergen, NJ office for net proceeds of $8.7 million and entered into a sale-leaseback arrangement with the buyer for a 12-year term with two five-year renewal options.
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 (see Notes 1 and 9 of Notes to Consolidated Financial Statements).
Executive Officers of the Registrant.
Information as to the executive officers of the Company, as of January 2, 2016 is set forth below:
Name | Age | Position(s) | |||
---|---|---|---|---|---|
Craig A. Leavitt | 55 | Chief Executive Officer | |||
George M. Carrara | 47 | President and Chief Operating Officer | |||
Deborah J. Lloyd | 51 | Chief Creative Officer | |||
Thomas Linko | 43 | Senior Vice President — Chief Financial Officer | |||
William Higley | 56 | Senior Vice President — Human Resources | |||
Timothy F. Michno | 58 | Senior Vice President — General Counsel and Secretary | |||
Linda Yanussi | 54 | Senior Vice President — Global Operations and Chief Information Officer |
Executive officers serve at the discretion of the Board of Directors.
Mr. Leavitt joined the Company in April 2008 as Co-President and Chief Operating Officer of Kate Spade LLC and was named Chief Executive Officer of Kate Spade & Company in February 2014. Prior to joining the Company, he was President of Global Retail at Link Theory Holdings, where he had total responsibility for merchandising, operations, planning and allocation and real estate for the Theory and Helmut Lang retail businesses. Prior to that, Mr. Leavitt spent several years at Diesel, where he was most recently Executive Vice President of Sales and Retail. Previously, Mr. Leavitt spent 16 years at Polo Ralph Lauren, where he held positions of increasing responsibility, the last being Executive Vice President of Retail Concepts.
Mr. Carrara joined the Company in April 2012 as Executive Vice President, Chief Financial Officer and Chief Operating Officer and was promoted to his current role in February 2014. Prior to that, he had held
30
numerous finance positions at Tommy Hilfiger over the prior 12 years, including Chief Financial Officer for the Jeans division from 1999 to 2003; Chief Operating Officer and Chief Financial Officer of wholesale operations from 2003 to 2004; Executive Vice President of US Operations — Wholesale and Retail from 2004 to 2005 and Chief Operating Officer from 2006 to 2011.
Ms. Lloyd joined the Company in November 2007 as Chief Creative Officer. Prior to joining the Company, she was Executive Vice President of Design and Product Development at Banana Republic, where she was responsible for design for both the Women's and Men's businesses, including accessories and fragrance. Prior to that, Ms. Lloyd spent five years at Burberry, where she was instrumental in re-launching the Burberry Women's London Collection.
Mr. Linko joined the Company in July 2012 as Chief Financial Officer of the formerly owned Juicy Couture brand. In 2013, he was appointed Chief Operating Officer and, upon the sale of the Juicy Couture brandname and related intellectual property assets, led the wind-down of the business. Mr. Linko was named Chief Financial Officer of Kate Spade & Company in October 2014. Prior to joining the Company, he was Chief Financial Officer at Delta Galil, a global manufacturer and marketer of private label apparel products for men, women and children. In addition, Mr. Linko spent 12 years at Tommy Hilfiger, where he oversaw the financial operations as the Senior Vice President of Finance for Tommy Hilfiger North America.
Mr. Higley joined the Company in March 1995 as Benefits Manager and has held various positions within the Human Resources department. From 2005 until assuming his current position in January 2013, Mr. Higley served as the Vice President of Human Resources. In his present role, he oversees corporate Human Resources in the US and Asia, which includes Workplace Solutions, Payroll, HRIS, Compensation and Benefits and general HR support. Mr. Higley began his career working at Chase Manhattan Bank followed by small regional banks as well as The Bank of New York prior to joining the Company.
Mr. Michno joined the Company in October 2015 as Senior Vice President, General Counsel and oversees all legal matters for the Company. Prior to joining the Company, he served as the General Counsel and Secretary of Movado Group, Inc. since 1992. Before joining Movado Group, Inc., he was an associate at the New York firm of Chadbourne & Parke from 1988 to 1991, and served as a resident outside counsel to Fortune Brands, Inc. (formerly known as American Brands, Inc.), a consumer products company. He has practiced law since 1983.
Ms. Yanussi joined the Company in April 2012 as Vice President of Information Technology and assumed the position of Senior Vice President — Information Technology and Global Operations in January 2013. In December 2015, her title was changed to Senior Vice President — Global Operations and Chief Information Officer. Prior to joining the Company, she held various positions at Tommy Hilfiger over a period of eleven years, most recently as Senior Vice President of Operations and Logistics, North America for over four years and as Vice President of Operations prior to that.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
MARKET INFORMATION
Our common stock trades on the NYSE under the symbol KATE. The table below sets forth the high and low closing sale prices of our common stock for the periods indicated.
Fiscal Period | High | Low | |||||
---|---|---|---|---|---|---|---|
2015: | |||||||
1st Quarter | $ | 35.30 | $ | 26.42 | |||
2nd Quarter | 34.38 | 21.47 | |||||
3rd Quarter | 23.37 | 17.04 | |||||
4th Quarter | 21.82 | 17.16 | |||||
2014: | |||||||
1st Quarter | $ | 40.15 | $ | 27.56 | |||
2nd Quarter | 39.20 | 31.69 | |||||
3rd Quarter | 40.45 | 25.95 | |||||
4th Quarter | 32.21 | 24.64 |
HOLDERS
On February 19, 2016, the closing sale price of our common stock was $17.01. As of February 19, 2016, the approximate number of record holders of common stock was 3,248.
DIVIDENDS
We did not pay any dividends during 2015 or 2014.
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PERFORMANCE GRAPH
Comparison of Cumulative Five Year Return
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Kate Spade & Company | $ | 100.00 | $ | 120.53 | $ | 169.41 | $ | 442.88 | $ | 449.86 | $ | 248.18 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| S&P SmallCap 600 | 100.00 | 101.02 | 117.51 | 166.05 | 175.61 | 172.14 | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| S&P MidCap 400 | 100.00 | 98.27 | 115.84 | 154.64 | 169.75 | 166.05 | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| New Benchmarking Group(a) | 100.00 | 96.32 | 113.24 | 124.88 | 117.41 | 108.32 | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Prior Benchmarking Group(b) | 100.00 | 94.94 | 129.75 | 163.48 | 166.03 | 139.29 | |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
- (a)
- The New Benchmarking Group consisted of Columbia Sportswear Company.; Express, Inc.; G III Apparel Group, Ltd.; Guess?, Inc.; J. Crew Group, Inc.; lululemon athletica inc.; Steve Madden, Ltd.; Tumi Holdings Inc.; Vera Bradley, Inc.; and Vince Holding Corp.
- (b)
- The Prior Benchmarking Group consisted of Ann, Inc.; Express, Inc.; Guess?, Inc.; J. Crew Group, Inc.; lululemon athletica inc.; Michael Kors Holdings Limited; Tumi Holdings Inc.; Under Armour, Inc.; Urban Outfitters, Inc.; Vera Bradley, Inc.; and Vince Holding Corp.
The line graph above compares the cumulative total stockholder return on the Company's Common Stock over a 5-year period with the return on (i) the Standard & Poor's SmallCap 600 Stock Index ("S&P SmallCap 600"); (ii) the Standard & Poor's MidCap 400 Stock Index ("S&P MidCap 400") (which the Company's shares became a part of on March 21, 2014); and (iii) two indices comprised of: (a) the previously designated compensation peer group (the "Prior Benchmarking Group") designated by the Board's Compensation Committee in consultation with its compensation consultants, against which executive compensation practices of the Company were compared and (b) the new compensation peer group (the "New Benchmarking Group") designated for the Company's 2015 fiscal year by the Board's Compensation Committee in consultation with its compensation consultants, which reflects a total of three additions to and four deletions from the Prior Benchmarking Group. We have historically constructed our
33
compensation benchmarking group based on companies with comparable products, revenue composition and size. We believe that the New Benchmarking Group provides a more meaningful comparison in terms of comparable products, revenue composition and size.
In accordance with SEC disclosure rules, the measurements are indexed to a value of $100 at December 31, 2010 (the last trading day before the beginning of our 2011 fiscal year) and assume that all dividends were reinvested.
ISSUER PURCHASES OF EQUITY SECURITIES
The following table summarizes information about our purchases during the quarter ended January 2, 2016, of equity securities that are registered by the Company pursuant to Section 12 of the Securities Exchange Act of 1934:
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) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
October 4, 2015 — October 31, 2015 | — | $ | — | — | $ | 28,749 | |||||||
November 1, 2015 — December 5, 2015 | — | — | — | 28,749 | |||||||||
December 6, 2015 — January 2, 2016 | — | — | — | 28,749 | |||||||||
| | | | | | | | | | | | | |
Total — 13 Weeks Ended January 2, 2016 | — | $ | — | — | $ | 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.
34
Item 6. Selected Financial Data.
The following table sets forth certain information regarding our results of operations and financial position and is qualified in its entirety by the Consolidated Financial Statements and notes thereto, which appear elsewhere herein.
(Amounts in thousands, except per common share data) | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Net sales | $ | 1,242,720 | $ | 1,138,603 | $ | 803,371 | $ | 544,765 | $ | 569,820 | ||||||
Gross profit | 754,107 | 680,271 | 496,590 | 339,932 | 309,983 | |||||||||||
Operating income (loss) | 66,398 | 33,472 | 20,215 | (36,022 | ) | (140,335 | ) | |||||||||
Income (loss) from continuing operations(a)(b) | 21,708 | 76,726 | (32,165 | ) | (52,687 | ) | 101,144 | |||||||||
Net income (loss)(b) | 17,087 | 159,160 | 72,995 | (74,505 | ) | (171,687 | ) | |||||||||
Working capital | 354,538 | 221,705 | 206,473 | 36,407 | 124,772 | |||||||||||
Total assets | 980,361 | 926,338 | 977,511 | 902,523 | 950,004 | |||||||||||
Total debt | 401,557 | 410,743 | 394,201 | 406,294 | 446,315 | |||||||||||
Total stockholders' equity (deficit) | 245,221 | 199,611 | (32,482 | ) | (126,930 | ) | (108,986 | ) | ||||||||
Per common share data: | ||||||||||||||||
Basic | ||||||||||||||||
Income (loss) from continuing operations | 0.17 | 0.61 | (0.27 | ) | (0.48 | ) | 1.07 | |||||||||
Net income (loss) | 0.13 | 1.26 | 0.60 | (0.68 | ) | (1.81 | ) | |||||||||
Diluted | ||||||||||||||||
Income (loss) from continuing operations | 0.17 | 0.60 | (0.27 | ) | (0.48 | ) | 0.91 | |||||||||
Net income (loss) | 0.13 | 1.25 | 0.60 | (0.68 | ) | (1.35 | ) | |||||||||
Weighted average shares outstanding, basic | 127,634 | 126,264 | 121,057 | 109,292 | 94,664 | |||||||||||
Weighted average shares outstanding, diluted(c) | 128,222 | 127,019 | 121,057 | 109,292 | 120,692 |
- (a)
- During 2015, 2014 and 2013, we recorded pretax charges of $35.4 million, $42.0 million and $10.6 million, respectively, related to our streamlining initiatives, which are discussed in Note 13 of Notes to Consolidated Financial Statements.
During 2015, we recorded a pretax charge of $26.0 million to terminate contracts with our former joint venture partner in China.
During 2013, we recorded a pretax non-cash impairment charge of $6.1 million related to our former investment in the Mexx business.
During 2014 and 2013, we recorded pretax non-cash impairment charges of $1.5 million and $3.3 million, respectively, in our Adelington Design Group segment related to the TRIFARI trademark.
During 2012, we recorded a pretax gain of $40.1 million related to the acquisition of the remaining 51.0% interest in Kate Spade Japan Co., Ltd.
During 2011, we recorded a pretax gain of $287.0 million related to the sales of: (i) the global trademark rights for the Liz Claiborne family of brands; (ii) the trademark rights in the US and Puerto Rico for MONET; (iii) the Dana Buchman trademark; and (iv) the trademark rights related to our former Curve brand and selected other smaller fragrance brands.
- (b)
- During 2014, we recorded a net benefit of $87.4 million resulting from the reversal of reserves for uncertain tax positions due to the expiration of the related statutes of limitations.
- (c)
- Because we incurred losses from continuing operations in 2013 and 2012, outstanding stock options, nonvested shares and potentially dilutive shares issuable upon conversion of the Convertible Notes are antidilutive. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Business Segments |
We operate our kate spade new york and JACK SPADE brands through one operating segment in North America and three operating segments internationally: Japan, Asia (excluding Japan) and Europe. Our Adelington Design Group reportable segment is also an operating segment. The three reportable segments described below represent activities for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker ("CODM") to evaluate performance and allocate resources. In identifying our reportable segments, we considered our management structure and the economic characteristics, products, customers, sales growth potential and long-term profitability of our operating segments. As such, we configured our operations into the following three reportable segments:
- •
- 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. Furthermore, economic conditions in international markets in which we operate, including Europe and Asia, remain uncertain and volatile. Economic conditions outside of our markets may also have a negative impact on the markets in which we operate. We are focusing on initiatives that drive margin improvement and continue to grow the kate spade new york brand through product category and geographic expansion across our four category pillars: women's, men's, children's and home.
Competitive Profile |
We operate in global fashion markets that are intensely competitive and subject to, among other things, macroeconomic conditions and consumer demands, tastes and discretionary spending habits. As we anticipate that the global economic uncertainty will continue into the foreseeable future, we will continue to carefully manage liquidity and spending.
36
In summary, the measure of our success in the future will depend on our ability to continue to navigate through an uncertain macroeconomic environment with challenging market conditions, execute on our strategic vision, including attracting and retaining the management talent necessary for such execution, designing and delivering products that are acceptable to the marketplaces that we serve, sourcing the manufacture and distribution of our products on a competitive and efficient basis, and continuing to drive profitable growth. We have established the following operating and financial goals to further develop kate spade new york into a global lifestyle brand: (i) driving top line growth by opening kate spade new york retail locations in North America; expanding product categories within our existing network as well as new channels, continuing e-commerce expansion and entering into local licenses to meet customer needs in Japan; focusing on our e-commerce site as a global flagship to influence purchases both online and in our retail stores; and expanding our presence in selected geographies through a partnered approach that requires little capital and is expected to be accretive to operating margins; (ii) driving quality of sale initiatives with continued moderation of promotions across channels and increased marketing that leverages customer relationship management ("CRM") capability and focuses on acquiring full price customers to support those efforts; (iii) delivering the world of kate spade new york to our customer seamlessly across channels through a channel agnostic approach, while using our e-commerce site as a global flagship, offering our broadest product assortment across our category pillars and improving delivery speed to our consumer through a buy anywhere, receive anywhere model; and (iv) increasing product accessibility and improving our speed-to-market capabilities through micro-assorting and localization at the store level, focusing on regional product, volume and climate to better assort by market taste and provide our consumer what she wants, when she wants it.
Reference is also made to the other economic, competitive, governmental and technological factors affecting our operations, markets, products, services and prices as set forth in this report, including, without limitation, under "Statement Regarding Forward-Looking Statements" and "Item 1A — Risk Factors" in this Annual Report on Form 10-K.
Recent Developments and Operational Initiatives |
In the second quarter of 2015, we signed a distribution agreement for our operations in Latin America, including in Brazil, which leverages the network of our 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. ("Fossil") for the design, development and distribution of kate spade new york watches through 2025, with the first collection of watches designed, developed and distributed in collaboration with us to launch in 2016. Accordingly, we now earn royalty income under the agreement with Fossil and no longer sell watches through our wholesale channel.
In the first quarter of 2015 we:
- •
- 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 a net $19.7 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
37
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 2015, we launched kate spade new york e-commerce websites in Germany, Italy, Spain and the Netherlands. In the third quarter of 2015, we launched our e-commerce website in France.
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.
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. 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.
For a discussion of certain risks relating to our recent initiatives, see "Item 1A — Risk Factors" in this Annual Report on Form 10-K.
Discontinued Operations |
The activities of our former Lucky Brand and Juicy Couture businesses have been segregated and reported as discontinued operations for all periods presented. The initiatives relating to the KATE SPADE SATURDAY business, the JACK SPADE Company-owned stores and our directly operated business in Brazil do not represent a strategic shift in our operations and therefore are not reported as discontinued operations.
2015 Overall Results |
Our 2015 results reflected:
- •
- Net sales growth in our KATE SPADE North America segment primarily driven by increased kate spade new york direct-to-consumer sales;
38
- •
- Reduced net sales in our KATE SPADE International segment, primarily reflecting the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture and the impact of changes in foreign currency exchange rates;
- •
- The impact of the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly owned operations in Brazil; and
- •
- Reduced net sales and gross profit in our Adelington Design Group segment, primarily related to the exited TRIFARI, TRINA TURK and Kensie brands.
During 2015, we recorded the following pretax items:
- •
- Expenses associated with our streamlining initiatives of $35.4 million;
- •
- A $26.0 million charge to terminate contracts with our former joint venture partner in China;
- •
- A $9.9 million loss related to the prepayment discount on the settlement of the Lucky Brand Note; and
- •
- A $4.0 million write-off of the cumulative translation adjustment of our subsidiary in Brazil due to its substantial liquidation in 2015.
Our 2014 results reflected:
- •
- Net sales growth in our KATE SPADE North America segment;
- •
- Net sales growth in our KATE SPADE International segment, reflecting increases across all geographies in the segment and $26.3 million of incremental net sales from the 2014 acquisition of the KATE SPADE businesses in Southeast Asia; and
- •
- Reduced net sales and gross profit in our Adelington Design Group segment, primarily related to the LIZWEAR, LIZ CLAIBORNE NEW YORK and private label jewelry businesses.
During 2014, we recorded the following pretax items:
- •
- Expenses associated with our streamlining initiatives of $42.0 million;
- •
- A $16.9 million loss on the extinguishment of debt in connection with the redemption of the 10.5% Senior Secured Notes due April 2019 (the "Senior Notes"), which were refinanced with proceeds from the issuance of term loans in an aggregate principal amount of $400.0 million maturing in April 2021 (collectively, the "Term Loan") as provided under a term loan credit agreement that we entered into on April 10, 2014 (the "Term Loan Credit Agreement");
- •
- Additional inventory charges of $7.9 million as a result of our decision to exit KATE SPADE SATURDAY as a standalone business and close our JACK SPADE retail stores; and
- •
- A non-cash impairment charge of $1.5 million in our Adelington Design Group segment related to our trademark for the TRIFARI brand.
Net Sales
Net sales in 2015 were $1.243 billion, an increase of $104.1 million or 9.1%, compared to 2014 net sales of $1.139 billion. The increase in net sales compared to 2014 includes year-over-year decreases of: (i) $33.6 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly owned operations in Brazil; (ii) $28.2 million related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture; (iii) $26.8 million from changes in foreign currency exchange rates; and (iv) $17.9 million for the additional week in 2014, excluding the impact of wind-down operations. These were partially offset by an increase of $2.5 million resulting from outperformance in our kate spade new york e-commerce flash sale website in North America.
39
Gross Profit and Income from Continuing Operations
Gross profit in 2015 was $754.1 million, an increase of $73.8 million compared to 2014, primarily due to increased net sales in our KATE SPADE North America segment. Our gross profit rate increased from 59.7% in 2014 to 60.7% in 2015, which primarily reflected: (i) inventory charges recorded in 2014 of $7.9 million as a result of our decision to exit KATE SPADE SATURDAY as a standalone business and close our JACK SPADE brick and mortar stores; and (ii) the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture. These were partially offset by 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 income from continuing operations of $21.7 million in 2015, as compared to $76.7 million in 2014. Income from continuing operations in 2014 included an income tax benefit of $84.3 million, which reflected a net $87.4 million reduction in the reserve for uncertain tax positions due to the expiration of the related statutes of limitations. The year-over-year change also reflected: (i) an increase in gross profit; (ii) the absence of the loss on extinguishment of debt of $16.9 million in 2015; (iii) an increase in Selling, general & administrative expenses ("SG&A") in 2015, including a $26.0 million charge to terminate contracts with our former joint venture partner in China; (iv) the loss on settlement of the Lucky Brand Note of $9.9 million; and (v) a $7.1 million increase in Other expense, net.
Balance Sheet
We ended 2015 with a net debt position (total debt less cash and cash equivalents and marketable securities) of $103.7 million as compared to $226.7 million at year-end 2014. The $123.0 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 $17.6 million from LCJG for their interests in the joint ventures; (iii) the funding of $60.2 million of capital and in-store shop expenditures in 2015; and (iv) the payment of $10.0 million to acquire E-Land's 60.0% interest in KSC. We also generated $120.5 million of cash from continuing operating activities over the past 12 months, which included the impact of a $26.0 million payment to terminate contracts with our former joint venture partner in China. The operating activities of our discontinued operations used $15.0 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.
2015 vs. 2014 |
The following table sets forth our operating results for the year ended January 2, 2016 (52 weeks), compared to the year ended January 3, 2015 (53 weeks):
| Fiscal Years Ended | | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Variance | ||||||||||||
| January 2, 2016 | January 3, 2015 | |||||||||||
Dollars in millions | $ | % | |||||||||||
Net Sales | $ | 1,242.7 | $ | 1,138.6 | $ | 104.1 | 9.1 | % | |||||
Gross Profit | 754.1 | 680.3 | 73.8 | 10.9 | % | ||||||||
Selling, general & administrative expenses | 687.7 | 645.3 | (42.4 | ) | (6.6 | )% | |||||||
Impairment of intangible asset | — | 1.5 | 1.5 | * | |||||||||
| | | | | | | | | | | | | |
Operating Income | 66.4 | 33.5 | 32.9 | 98.4 | % | ||||||||
Other expense, net | (11.1 | ) | (4.0 | ) | (7.1 | ) | * | ||||||
Loss on settlement of note receivable | (9.9 | ) | — | (9.9 | ) | * | |||||||
Loss on extinguishment of debt | — | (16.9 | ) | 16.9 | * | ||||||||
Interest expense, net | (19.2 | ) | (20.2 | ) | 1.0 | 5.1 | % | ||||||
Provision (benefit) for income taxes | 4.5 | (84.3 | ) | (88.8 | ) | * | |||||||
| | | | | | | | | | | | | |
Income from Continuing Operations | 21.7 | 76.7 | (55.0 | ) | (71.7 | )% | |||||||
Discontinued operations, net of income taxes | (4.6 | ) | 82.5 | (87.1 | ) | * | |||||||
| | | | | | | | | | | | | |
Net Income | $ | 17.1 | $ | 159.2 | $ | (142.1 | ) | (89.3 | )% | ||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
- *
- Not meaningful.
Net Sales |
Net sales for 2015 were $1.243 billion, an increase of $104.1 million, or 9.1%, compared to 2014 net sales of $1.139 billion. The increase in net sales compared to 2014 includes year-over-year decreases of: (i) $33.6 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our directly owned operations in Brazil; (ii) $28.2 million related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture; (iii) $26.8 million from changes in foreign currency exchange rates; and (iv) $17.9 million for the additional week in 2014, excluding the impact of wind-down operations. These were partially offset by an increase of $2.5 million resulting from outperformance in our kate spade new york e-commerce flash sale website in North America. Excluding the additional week in 2014, kate spade new york comparable direct-to-consumer sales, including e-commerce, increased by 12.6% in 2015; excluding e-commerce net sales, kate spade new york comparable direct-to-consumer sales increased by 9.4% in 2015.
Net sales results for our segments are provided below:
- •
- KATE SPADE North America net sales were $1.031 billion, a 15.6% increase compared to 2014 net sales of $891.8 million, primarily driven by increased direct-to-consumer and wholesale net sales in our kate spade new york brand. The increase in net sales compared to 2014 includes year-over-year decreases of: (i) $23.3 million in the KATE SPADE SATURDAY brand as we substantially completed the wind-down in the second quarter of 2015 and a decrease in our JACK SPADE brand due to the closure of our brick and mortar stores as we reposition the brand; (ii) $14.0 million for the additional week in 2014; and (iii) $6.9 million from changes in foreign currency exchange rates. These were partially offset by an increase of $2.5 million resulting from outperformance in our kate spade new york e-commerce flash sale website.
41
We ended 2015 with 104 kate spade new york specialty retail stores and 64 outlet stores, reflecting a net addition of 11 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 2015 was approximately 362 thousand square feet, a 22.7% increase compared to 2014; and
- –
- Sales productivity was $1,496 per average square foot in 2015, as compared to $1,457 in 2014 on a constant currency basis, excluding the impact of an additional week in 2014.
- •
- KATE SPADE International net sales were $188.2 million, an 11.9% decrease compared to 2014 net sales of $213.6 million, which primarily reflected: (i) a $28.2 million decrease related to the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture, as discussed above; (ii) a decrease of $19.9 million from changes in foreign currency exchange rates; (iii) a $3.9 million decrease for the additional week in 2014; (iv) a decrease of $2.6 million related to the wind-down operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar and our directly operated business in Brazil; and (v) an increase in net sales to our international distributors.
We ended 2015 with 22 kate spade new york specialty retail stores, 52 concessions, and 13 outlet stores, reflecting a net reduction over the last 12 months of 10 specialty retail stores and one outlet store, 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 2015 was approximately 73 thousand square feet, a 16.6% increase compared to 2014; and
- –
- Sales productivity was $1,634 per average square foot in 2015, compared to $1,618 in 2014 on a constant currency basis, excluding the impact of an additional week in 2014.
- •
- Adelington Design Group net sales were $23.4 million for 2015, a decrease of $9.8 million, or 29.5%, compared to 2014, primarily related to a $7.6 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 $0.3 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).
42
We evaluate sales productivity based on net sales per average square foot, which is defined as net sales divided by the average of beginning and end of period gross square feet and excludes e-commerce net sales.
Gross Profit |
Gross profit in 2015 was $754.1 million, an increase of $73.8 million compared to 2014, primarily due to increased net sales in our KATE SPADE North America segment. Our gross profit rate increased from 59.7% in 2014 to 60.7% in 2015, which primarily reflected: (i) inventory charges recorded in 2014 of $7.9 million as a result of our decision to exit KATE SPADE SATURDAY as a standalone business and JACK SPADE brick and mortar stores; and (ii) the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture. These were partially offset by 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 $42.4 million, or 6.6%, to $687.7 million in 2015 compared to 2014. The change in SG&A reflected the following:
- •
- A $62.5 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 2015 to terminate contracts with our former joint venture partner in China;
- •
- A $33.0 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) decreased rent and other store operating expenses; (ii) lower advertising expenses; and (iii) reduced concession fees;
- •
- An $8.3 million decrease in our Adelington Design Group segment; and
- •
- A $4.8 million decrease in expenses associated with our streamlining initiatives, brand-exiting activities and acquisition related costs.
Impairment of Intangible Asset |
In 2014, we recorded a non-cash impairment charge of $1.5 million in our Adelington Design Group segment related to our trademark for the TRIFARI brand.
Operating Income |
Operating income for 2015 was $66.4 million (5.3% of net sales), compared to $33.5 million (2.9% of net sales) in 2014.
Other Expense, Net |
Other expense, net amounted to $11.1 million in 2015 and $4.0 million in 2014. Other expense, net consisted primarily of (i) equity in the losses of KSC and KS HMT of $6.7 million in 2015 and $2.6 million in 2014, respectively; (ii) a $4.0 million write-off of the cumulative translation adjustment of our subsidiary in Brazil due to its substantial liquidation in 2015; and (iii) foreign currency transaction gains and losses.
43
Loss on Settlement of Note Receivable |
In 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 |
In 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 $19.2 million in 2015, as compared to $20.2 million in 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 $9.2 million due to the repayment of the Lucky Brand Note in the first quarter of 2015 and additional interest expense of $5.6 million related to the Term Loan.
Provision (Benefit) for Income Taxes |
The income tax provision of $4.5 million in 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 $(84.3) million in 2014 primarily represented refunds from certain tax jurisdictions, partially offset by 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. In addition to those items, the 2014 benefit for income taxes included a net $87.4 million reduction in the reserve for uncertain tax positions, resulting from the expiration of the related statutes of limitations. We did not record income tax benefits for substantially all losses incurred during 2015 and 2014, as it is not more likely than not that we will utilize such benefits due to the combination of our history of pretax losses and our ability to carry forward or carry back tax losses or credits.
Income from Continuing Operations |
Income from continuing operations in 2015 was $21.7 million, or 1.7% of net sales, compared to $76.7 million in 2014, or 6.7% of net sales. Earnings per share ("EPS"), basic from continuing operations was $0.17 in 2015 and $0.61 in 2014. EPS, diluted from continuing operations was $0.17 in 2015 and $0.60 in 2014.
Discontinued Operations, Net of Income Taxes |
Loss from discontinued operations in 2015 was $(4.6) million, reflecting a loss on disposal of discontinued operations of $(1.5) million and a $(3.1) million loss from discontinued operations. Income from discontinued operations in 2014 was $82.5 million, reflecting a gain on disposal of discontinued operations of $130.0 million and a $(47.5) million loss from discontinued operations. EPS, basic from discontinued operations was $(0.04) in 2015 and $0.65 in 2014. EPS, diluted from discontinued operations was $(0.04) in 2015 and $0.65 in 2014.
Net Income |
Net income in 2015 was $17.1 million, compared to $159.2 million in 2014. EPS, basic was $0.13 in 2015 and $1.26 in 2014. EPS, diluted was $0.13 in 2015 and $1.25 in 2014.
44
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 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 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.
| Fiscal Years Ended | | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Variance | ||||||||||||
| January 2, 2016 | January 3, 2015 | |||||||||||
Dollars in thousands | $ | % | |||||||||||
Reportable Segments Adjusted EBITDA: | |||||||||||||
KATE SPADE North America | $ | 177,593 | $ | 143,009 | $ | 34,584 | 24.2 | % | |||||
KATE SPADE International(a) | 17,697 | 810 | 16,887 | * | |||||||||
Adelington Design Group | 4,523 | 4,092 | 431 | 10.5 | % | ||||||||
Other(b) | — | (940 | ) | 940 | * | ||||||||
| | | | | | | | | | | | | |
Total Reportable Segments Adjusted EBITDA | 199,813 | 146,971 | |||||||||||
Depreciation and amortization, net(c) | (46,311 | ) | (48,441 | ) | |||||||||
Charges due to streamlining initiatives(d), brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net | (40,399 | ) | (30,371 | ) | |||||||||
Joint venture contract termination fee | (26,000 | ) | — | ||||||||||
Share-based compensation(e) | (25,577 | ) | (37,270 | ) | |||||||||
Adjusted equity loss included in Reportable Segments Adjusted EBITDA(f) | 4,872 | 2,583 | |||||||||||
| | | | | | | | | | | | | |
Operating Income | 66,398 | 33,472 | |||||||||||
Other expense, net(a) | (11,137 | ) | (4,033 | ) | |||||||||
Loss on settlement of note receivable | (9,873 | ) | — | ||||||||||
Loss on extinguishment of debt | — | (16,914 | ) | ||||||||||
Interest expense, net | (19,152 | ) | (20,178 | ) | |||||||||
Provision (benefit) for income taxes | 4,528 | (84,379 | ) | ||||||||||
| | | | | | | | | | | | | |
Income from Continuing Operations | $ | 21,708 | $ | 76,726 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
- *
- Not meaningful.
- (a)
- Amounts include equity in the adjusted losses of our equity method investee of $4.9 million and $2.6 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 13 of Notes to Consolidated Financial Statements for a discussion of streamlining charges.
- (e)
- Includes share-based compensation expense of $0.3 million and $17.3 million in 2015 and 2014, respectively, that was classified as restructuring.
- (f)
- Excludes joint venture restructuring expense included in equity losses of $1.8 million in 2015.
45
A discussion of Segment Adjusted EBITDA of our reportable segments for the years ended January 2, 2016 and January 3, 2015 follows:
- •
- KATE SPADE North America Adjusted EBITDA for 2015 was $177.6 million (17.2% of net sales), compared to $143.0 million (16.0% of net sales) in 2014. The year-over-year 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 increased compensation related expenses.
- •
- KATE SPADE International Adjusted EBITDA for 2015 was $17.7 million (9.4% of net sales), compared to $0.8 million (0.4% of net sales) in 2014. The year-over-year increase reflected: (i) the closure of our Company-owned stores in Brazil; (ii) an increase in gross profit related to international distribution agreements; and (iii) a decrease in SG&A. The increase in the adjusted EBITDA margin from 0.4% in 2014 to 9.4% in 2015 primarily related to an increase in the gross profit rate, primarily driven by the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture and increased sales to our international distributors.
- •
- Adelington Design Group Adjusted EBITDA for 2015 was $4.5 million (19.3% of net sales), compared to Adjusted EBITDA of $4.1 million (12.3% of net sales) in 2014. The increase in Adjusted EBITDA reflected decreased SG&A, partially offset by reduced gross profit.
2014 vs. 2013 |
The following table sets forth our operating results for the year ended January 3, 2015 (53 weeks), compared to the year ended December 28, 2013 (52 weeks):
| Fiscal Years Ended | | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Variance | ||||||||||||
| January 3, 2015 | December 28, 2013 | |||||||||||
Dollars in millions | $ | % | |||||||||||
Net Sales | $ | 1,138.6 | $ | 803.4 | $ | 335.2 | 41.7 | % | |||||
Gross Profit | 680.3 | 496.6 | 183.7 | 37.0 | % | ||||||||
Selling, general & administrative expenses | 645.3 | 473.1 | (172.2 | ) | (36.4 | )% | |||||||
Impairment of intangible assets | 1.5 | 3.3 | 1.8 | 53.5 | % | ||||||||
| | | | | | | | | | | | | |
Operating Income | 33.5 | 20.2 | 13.3 | 65.6 | % | ||||||||
Other expense, net | (4.0 | ) | (2.1 | ) | (1.9 | ) | (95.6 | )% | |||||
Impairment of cost investment | — | (6.1 | ) | 6.1 | * | ||||||||
Loss on extinguishment of debt | (16.9 | ) | (1.7 | ) | (15.2 | ) | * | ||||||
Interest expense, net | (20.2 | ) | (47.1 | ) | 26.9 | 57.1 | % | ||||||
Benefit for income taxes | (84.3 | ) | (4.6 | ) | 79.7 | * | |||||||
| | | | | | | | | | | | | |
Income (Loss) from Continuing Operations | 76.7 | (32.2 | ) | 108.9 | * | ||||||||
Discontinued operations, net of income taxes | 82.5 | 105.2 | (22.7 | ) | (21.6 | )% | |||||||
| | | | | | | | | | | | | |
Net Income | $ | 159.2 | $ | 73.0 | $ | 86.2 | * | ||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
- *
- Not meaningful.
Net Sales |
Net sales for 2014 were $1.139 billion, an increase of $335.2 million or 41.7%, as compared to 2013 net sales of $803.4 million. Excluding the additional week in 2014, comparable direct-to-consumer net sales, including e-commerce, increased by 24.4% in the 2014; excluding e-commerce net sales, comparable direct-to-consumer net sales increased by 21.6%. Including the additional week in 2014, comparable direct-to-consumer net sales, including e-commerce, increased by 25.9% in 2014; excluding e-commerce net sales, comparable direct-to-consumer net sales increased by 23.1%.
46
Net sales results for our segments are provided below:
- •
- KATE SPADE North America net sales were $891.8 million, a 49.2% increase compared to 2013.
- We ended 2014 with 108 specialty retail stores and 58 outlet stores, reflecting the net addition over the last 12 months of 20 specialty retail stores and 16 outlet stores. Key operating metrics for our North America retail operations included the following:
- –
- Average retail square footage in 2014 was approximately 315 thousand square feet, a 42.9% increase compared to 2013; and
- –
- Sales productivity was $1,437 per average square foot in 2014, as compared to $1,234 for 2013.
- The store counts at the end of 2014 included 15 specialty retail stores and 1 outlet store for KATE SPADE SATURDAY and JACK SPADE with average retail square footage in 2014 of 20 thousand square feet.
- •
- KATE SPADE International net sales were $213.6 million, a 46.9% increase compared to 2013, reflecting increases across all geographies in the segment. Net sales included $23.1 million of incremental net sales from the acquisition of the KATE SPADE businesses in Southeast Asia.
- We ended 2014 with 42 specialty retail stores, 15 outlet stores and 54 concessions, reflecting the net addition over the last 12 months of 6 specialty retail stores, 5 outlet stores and 9 concessions and the acquisition of 6 specialty retail stores, 2 concessions and 1 outlet store. Key operating metrics for our International retail operations included the following:
- –
- Average retail square footage, including concessions, in 2014 was approximately 94 thousand square feet, a 34.4% increase compared to 2013; and
- –
- Sales productivity was $1,711 per average square foot in 2014, as compared to $1,536 for 2013.
- The store counts at the end of 2014 included 16 specialty retail stores, 5 concessions and 2 outlets for KATE SPADE SATURDAY, JACK SPADE and Hong Kong, Macau and Taiwan with average retail square footage in 2014 of 22 thousand square feet.
- •
- Adelington Design Group net sales were $33.3 million, a decrease of $27.0 million, or 44.8%, compared to 2013, reflecting the following:
- –
- An $8.2 million decrease related to the LIZWEAR brand;
- –
- An $8.2 million decrease related to the LIZ CLAIBORNE and MONET brands;
- –
- A net $7.4 million decrease related to the LIZ CLAIBORNE NEW YORK and private label jewelry businesses; and
- –
- A $3.2 million decrease primarily related to the expiration of our former Dana Buchman brand supplier agreement in October 2013.
Gross Profit |
Gross profit in 2014 was $680.3 million (59.7% of net sales), compared to $496.6 million (61.8% of net sales) in 2013. The increase in gross profit was primarily due to increased net sales in our KATE SPADE North America and KATE SPADE International segments, partially offset by decreased net sales in our Adelington Design Group segment. Our gross profit rate decreased from 61.8% in 2013 to 59.7% in 2014, primarily reflecting: (i) additional inventory charges of $7.9 million in 2014 as a result of our decision to exit KATE SPADE SATURDAY as a standalone business and close our JACK SPADE retail stores; (ii) a more promotional retail environment; (iii) a change in mix in our KATE SPADE North America segment related to accelerating outlet store openings in order to capitalize on the one-time opportunity presented
47
by the Juicy Couture real estate portfolio; (iv) foreign currency pressure on our operations in Japan; and (v) the impact of off-price sales associated with the liquidation of excess KATE SPADE SATURDAY launch year inventory.
Selling, General & Administrative Expenses |
SG&A increased $172.2 million, or 36.4%, to $645.3 million in 2014 compared to 2013. The change in SG&A reflected the following:
- •
- A $106.4 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; (ii) increased compensation related expenses; and (iii) increased e-commerce fees and advertising expenses;
- •
- A $49.1 million increase in SG&A in our KATE SPADE International segment, primarily related to direct-to-consumer expansion, reflecting: (i) increased rent, concession fees and other store operating expenses; (ii) increased compensation related expenses; and (iii) increased advertising expenses. The increase also included incremental SG&A associated with the KATE SPADE businesses in Southeast Asia;
- •
- A $26.6 million increase in expenses associated with our streamlining initiatives, brand-exiting activities and acquisition related costs;
- •
- A $5.9 million decrease associated with reduced costs at our Adelington Design Group segment; and
- •
- A $4.0 million decrease in expenses related principally to distribution functions that were included in the Juicy Couture and Lucky Brand historical results, but are not directly attributable to Juicy Couture or Lucky Brand and therefore, have not been included in discontinued operations.
SG&A as a percentage of net sales was 56.7% in 2014, compared to 58.9% in 2013.
Impairment of Intangible Assets |
In 2014 and 2013, we recorded non-cash impairment charges of $1.5 million and $3.3 million, respectively, in our Adelington Design Group segment related to our trademark for the TRIFARI brand.
Operating Income |
Operating income for 2014 was $33.5 million (2.9% of net sales), compared to $20.2 million (2.5% of net sales) in 2013.
Other Expense, Net |
Other expense, net amounted to $4.0 million in 2014 and $2.1 million in 2013. Other expense, net consisted primarily of (i) foreign currency transaction gains and losses and (ii) equity in the losses of KSC.
Impairment of Cost Investment |
In 2013, we recorded a $6.1 million impairment charge related to our former investment in the Mexx business.
48
Loss on Extinguishment of Debt |
In 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. In 2013, we recorded a $1.7 million loss on the extinguishment of debt in connection with the conversion of $19.9 million of our 6.0% Convertible Senior Notes due June 2014 (the "Convertible Notes") into 5.6 million shares of our common stock.
Interest Expense, Net |
Interest expense, net was $20.2 million in 2014, as compared to $47.1 million in 2013, primarily reflecting (i) a net decrease of $13.0 million in interest expense due to the refinancing of the Senior Notes with the net proceeds from the Term Loan in the second quarter of 2014; (ii) the recognition of $11.3 million of interest income in 2014 related to the Lucky Brand Note; (iii) a decrease of $3.1 million related to reduced borrowings under the ABL Facility and the extinguishment of the Convertible Notes; and (iv) 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.
Benefit for Income Taxes |
In 2014 and 2013, we recorded a benefit for income taxes of $84.3 million and $4.6 million, respectively. The income tax benefits reflected refunds from certain tax jurisdictions, partially offset by 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. In addition to those items, the 2014 benefit for income taxes included a net $87.4 million reduction in the reserve for uncertain tax positions, resulting from the expiration of the related statutes of limitations. We did not record income tax benefits for substantially all losses incurred during 2014 and 2013, as it is not more likely than not that we will utilize such benefits due to the combination of our history of pretax losses and our ability to carry forward or carry back tax losses or credits.
Income (Loss) from Continuing Operations |
Income (loss) from continuing operations in 2014 was $76.7 million, or 6.7% of net sales, compared to $(32.2) million in 2013, or (4.0)% of net sales. EPS, basic from continuing operations was $0.61 in 2014 and $(0.27) in 2013. EPS, diluted from continuing operations was $0.60 in 2014 and $(0.27) in 2013.
Discontinued Operations, Net of Income Taxes |
Income from discontinued operations in 2014 was $82.5 million, reflecting a gain on disposal of discontinued operations of $130.0 million and a $(47.5) million loss from discontinued operations. Income from discontinued operations in 2013 was $105.2 million, reflecting a gain on disposal of discontinued operations of $143.4 million and a $(38.2) million loss from discontinued operations. EPS, basic and diluted, from discontinued operations was $0.65 in 2014 and $0.87 in 2013.
Net Income |
Net income in 2014 was $159.2 million, compared to $73.0 million in 2013. EPS, basic was $1.26 in 2014 and 0.60 in 2013. EPS, diluted was $1.25 in 2014 and $0.60 in 2013.
49
Segment Adjusted EBITDA |
Segment Adjusted EBITDA for our reportable segments is provided below.
| Fiscal Years Ended | | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Variance | ||||||||||||
| January 3, 2015 | December 28, 2013 | |||||||||||
Dollars in thousands | $ | % | |||||||||||
Reportable Segments Adjusted EBITDA: | |||||||||||||
KATE SPADE North America | $ | 143,009 | $ | 70,250 | $ | 72,759 | 103.6 | % | |||||
KATE SPADE International(a) | 810 | (815 | ) | 1,625 | * | ||||||||
Adelington Design Group | 4,092 | 12,008 | (7,916 | ) | (65.9 | )% | |||||||
Other(b) | (940 | ) | (4,334 | ) | 3,394 | 78.3 | % | ||||||
| | | | | | | | | | | | | |
Total Reportable Segments Adjusted EBITDA | 146,971 | 77,109 | |||||||||||
Depreciation and amortization, net(c) | (48,441 | ) | (35,088 | ) | |||||||||
Charges due to streamlining initiatives(d), brand-exiting activities, acquisition related costs, impairment of intangible assets and loss on asset disposals and impairments, net | (30,371 | ) | (15,716 | ) | |||||||||
Share-based compensation(e) | (37,270 | ) | (7,269 | ) | |||||||||
Equity loss included in Reportable Segments Adjusted EBITDA | 2,583 | 1,179 | |||||||||||
| | | | | | | | | | | | | |
Operating Income | 33,472 | 20,215 | |||||||||||
Other expense, net(a) | (4,033 | ) | (2,062 | ) | |||||||||
Impairment of cost investment | — | (6,109 | ) | ||||||||||
Loss on extinguishment of debt | (16,914 | ) | (1,707 | ) | |||||||||
Interest expense, net | (20,178 | ) | (47,065 | ) | |||||||||
Benefit for income taxes | (84,379 | ) | (4,563 | ) | |||||||||
| | | | | | | | | | | | | |
Income (Loss) from Continuing Operations | $ | 76,726 | $ | (32,165 | ) | ||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
- *
- Not meaningful.
- (a)
- Amounts include equity in the losses of our equity method investee of $2.6 million and $1.2 million in 2014 and 2013, 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 13 of Notes to Consolidated Financial Statements for a discussion of streamlining charges.
- (e)
- Includes share-based compensation expense of $17.3 million and $2.8 million in 2014 and 2013, respectively, that was classified as restructuring.
A discussion of Segment Adjusted EBITDA of our reportable segments for the years ended January 3, 2015 and December 28, 2013 follows:
- •
- KATE SPADE North America Adjusted EBITDA for 2014 was $143.0 million (16.0% of net sales), compared to $70.3 million (11.8% of net sales) in 2013. 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, payroll related expenses, e-commerce fees and advertising expenses.
- •
- KATE SPADE International Adjusted EBITDA for 2014 was $0.8 million (0.4% of net sales), compared to $(0.8) million ((0.6)% of net sales) in 2013. 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, concession fees and other store operating expenses, payroll related expenses and advertising expenses. KATE SPADE International
50
- •
- Adelington Design Group Adjusted EBITDA for 2014 was $4.1 million (12.3% of net sales), compared to Adjusted EBITDA of $12.0 million (19.9% of net sales) in 2013. The decrease in Adjusted EBITDA reflected decreased gross profit, partially offset by reduced SG&A.
Adjusted EBITDA in 2014 included $2.8 million of incremental Adjusted EBITDA from the acquisition of the KATE SPADE businesses in Southeast Asia.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements |
Our primary ongoing cash requirements are to: (i) fund seasonal working capital needs (primarily accounts receivable and inventory); (ii) fund capital expenditures related to the opening and refurbishing of our specialty retail and outlet stores and normal maintenance activities; (iii) invest in our information systems; (iv) fund operational and contractual obligations, including remaining efforts associated with our streamlining initiatives; and (v) potentially repurchase or retire debt obligations.
Sources and Uses of Cash |
Our historical sources of liquidity to fund ongoing cash requirements include cash flows from operations, cash and cash equivalents, as well as borrowings through our lines of credit.
Term Loan. 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 (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.
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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 such agreement and any amounts outstanding would become immediately due and payable,
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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 2015 with $297.9 million in cash and cash equivalents, compared to $184.0 million at the end of 2014 and with $401.6 million of debt outstanding, compared to $410.7 million at the end of 2014. The $123.0 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 $17.6 million from LCJG for their interests in the joint ventures; (iii) the funding of $60.2 million of capital and in-store shop expenditures in 2015; and (iv) the payment of $10.0 million to acquire E-Land's 60.0% interest in KSC. We also generated $120.5 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 $15.0 million of cash over the past 12 months.
Accounts Receivable increased $6.8 million, or 7.5%, at year-end 2015 compared to year-end 2014, primarily reflecting: (i) an increase in kate spade new york wholesale accounts receivable, including international distributors; and (ii) the conversion of the Hong Kong, Macau and Taiwan territories to a joint venture, partially offset by the impact of the wind-down of the KATE SPADE SATURDAY business and Brazil operations.
Inventories increased $33.6 million, or 21.3% at year-end 2015 compared to year-end 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.
Borrowings under our ABL Facility peaked at $8.0 million during 2015, compared to a peak of $6.0 million in 2014. We had no outstanding borrowings under our ABL Facility at January 2, 2016, compared to $6.0 million at January 3, 2015.
Net cash provided by operating activities of our continuing operations was $120.5 million in 2015, compared to $44.6 million in 2014. This $75.9 million year-over-year change was primarily due to a decrease in cash outflows related to working capital and increased earnings in 2015 compared to 2014 (excluding depreciation and amortization, foreign currency gains and losses, impairment charges, a reduction in the reserve for uncertain tax positions and other non-cash items). The operating activities of our discontinued operations used $15.0 million and $30.2 million of cash in the fiscal years ended January 2, 2016 and January 3, 2015, respectively.
Net cash provided by (used in) investing activities of our continuing operations was $18.6 million in 2015, compared to $(134.6) million in 2014. Net cash provided by investing activities in 2015 primarily reflected:
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(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 $17.6 million from LCJG for their interest in the joint ventures; (iii) the use of $60.2 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. Net cash used in investing activities in 2014 reflected: (i) the use of $100.0 million for capital and in-store shop expenditures; (ii) the payment of $32.3 million for the acquisition of the existing KATE SPADE business in Southeast Asia from Globalluxe Kate Spade HK Limited; and (iii) the use of $2.4 million for investments in and advances to KSC. The investing activities of our discontinued operations provided $0.6 million and $137.8 million during the fiscal years ended January 2, 2016 and January 3, 2015, respectively.
Net cash (used in) provided by financing activities was $(8.5) million in 2015, compared to $40.6 million in 2014. The $49.1 million year-over-year change primarily reflected: (i) a decrease in proceeds from the exercise of stock options of $39.5 million; (ii) an $8.2 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 $9.5 million.
Commitments and Capital Expenditures |
Pursuant to a buying/sourcing agency agreement, Li & Fung acts as the primary global apparel and accessories buying/sourcing agent, with the exception of our jewelry product lines. On March 24, 2015, we modified this arrangement in order to, among other things, transition our buying/sourcing activities for our accessories products to an in-house model, beginning with our Spring 2016 collection. We pay Li & Fung an agency commission based on the cost of our product purchases through Li & Fung. We are obligated to use Li & Fung as our primary buying/sourcing agent for our ready-to-wear apparel products and we may use Li & Fung as a buying/sourcing agent with respect to our accessories products, with all such product purchases applying toward a minimum volume commitment of inventory purchases each year through the expiration of the term of the agreement on March 31, 2018. Our agreement with Li & Fung is not exclusive.
In connection with the disposition of the Lucky Brand business, LIZ CLAIBORNE Canada retail stores, the LIZ CLAIBORNE branded outlet stores in the US and Puerto Rico and certain Mexx Canada retail stores, an aggregate of 277 store leases were assigned to third parties, for which we or certain of our subsidiaries remain secondarily liable for the remaining obligations on 136 such leases. As of January 2, 2016, the future aggregate payments under these leases amounted to $92.1 million and extended to various dates through 2025.
On December 3, 2014, Mexx Canada Company filed for bankruptcy protection from its creditors under Canadian bankruptcy laws. Although an inactive and insolvent subsidiary of ours may be secondarily liable under approximately 50 leases that were assigned to Mexx Canada Company in connection with the disposal of the Mexx business, we do not currently believe that these circumstances will require payments by us for liabilities under the leases. The amount of our potential liability, if any, with respect to these leases cannot be determined at this time.
Our 2016 capital expenditures are expected to be approximately $65.0 – $70.0 million, compared to $60.2 million in 2015. These expenditures primarily relate to our plan to open approximately 15 Company operated retail stores globally in 2016, net of approximately 7 store closures, the continued technological upgrading of our management information systems and costs associated with the refurbishment of selected specialty retail and outlet stores. We expect capital expenditures and working capital cash needs to be financed with available cash, cash provided by operating activities and our ABL Facility.
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The following table summarizes as of January 2, 2016 our contractual cash obligations by future period (see Notes 1, 9 and 10 of Notes to Consolidated Financial Statements):
| Payments Due by Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual cash obligations * | Less than 1 year | 1-3 years | 4-5 years | After 5 years | Total | |||||||||||
(In millions) | | | | | | |||||||||||
Operating lease commitments | $ | 61.7 | $ | 120.8 | $ | 108.5 | $ | 172.9 | $ | 463.9 | ||||||
Capital lease obligations | 2.1 | 4.3 | 4.6 | 10.8 | 21.8 | |||||||||||
Inventory purchase commitments | 107.5 | — | — | — | 107.5 | |||||||||||
Term Loan | 4.0 | 8.0 | 8.0 | 375.0 | 395.0 | |||||||||||
Interest on Term Loan(a) | 16.1 | 31.3 | 30.8 | 8.0 | 86.2 | |||||||||||
Pension withdrawal liability | 2.2 | — | — | — | 2.2 | |||||||||||
| | | | | | | | | | | | | | | | |
Total | $ | 193.6 | $ | 164.4 | $ | 151.9 | $ | 566.7 | $ | 1,076.6 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
- *
- The table above does not include any amounts for assigned leases and amounts recorded for uncertain tax positions. We cannot estimate the amounts or timing of payments related to uncertain tax positions.
- (a)
- Interest is calculated at 4.0% per annum.
Debt consisted of the following:
In thousands | January 2, 2016 | January 3, 2015 | |||||
---|---|---|---|---|---|---|---|
Term Loan credit facility(a) | 393,431 | 396,158 | |||||
ABL Facility | — | 6,000 | |||||
Capital lease obligations | 8,126 | 8,585 | |||||
| | | | | | | |
Total debt | $ | 401,557 | $ | 410,743 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
- (a)
- The balance as of January 2, 2016 and January 3, 2015 included an unamortized debt discount of $1.6 million and $1.8 million, respectively.
For information regarding our debt and credit instruments, refer to Note 10 of Notes to Consolidated Financial Statements.
Availability under the ABL Facility is an amount equal to the lesser of $200.0 million and a borrowing base that is computed monthly and comprised of our eligible cash, accounts receivable and inventory. The ABL Facility also includes a swingline subfacility of $30.0 million, a multicurrency subfacility of $35.0 million and the option to expand the facility by up to $100.0 million under certain specified conditions. A portion of the facility provided under the ABL Facility of up to $125.0 million is available for the issuance of letters of credit, and standby letters of credit may not exceed $40.0 million in the aggregate.
As of January 2, 2016, 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) | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ABL Facility(a) | $ | 200,000 | $ | 290,969 | $ | — | $ | 10,512 | $ | 189,488 | $ | 169,488 |
- (a)
- Availability under the ABL Facility is the lesser of $200.0 million or a borrowing base that is computed monthly and comprised of eligible cash, accounts receivable and inventory.
- (b)
- Excess capacity represents available capacity reduced by the minimum required aggregate borrowing availability under the ABL Facility of $20.0 million.
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Off-Balance Sheet Arrangements |
We have 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 KATE SPADE business in Japan. As of January 2, 2016, we had forward contracts maturing through June 2016 to sell 689.5 million yen for $5.9 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 January 2, 2016, we had forward contracts to sell 5.1 billion yen for $42.2 million maturing through March 2016. Transaction gains (losses) for the year ended January 2, 2016 were not significant. Transaction gains of $4.5 million and $8.5 million related to these derivative instruments for the years ended January 3, 2015 and December 28, 2013, respectively, were reflected within Other expense, net.
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 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, discussed below, pertain to revenue recognition, income taxes, accounts receivable — trade, inventories, intangible assets, goodwill, accrued expenses and share-based compensation. 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.
For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends as well as an evaluation of economic conditions and the financial positions of our customers. For inventory, we review the aging and salability of our inventory and estimate the amount of inventory that we will not be able to sell in the normal course of business. This distressed inventory is written down to the expected recovery value to be realized through off-price channels. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected. We utilize various valuation methods to determine the fair value of acquired tangible and intangible assets. For inventory, the method uses the expected selling prices of finished goods. Intangible assets acquired are valued using a discounted cash flow model. Should any of the assumptions used in these projections differ significantly
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from actual results, material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts. For accrued expenses related to items such as employee insurance, workers' compensation and similar items, accruals are assessed based on outstanding obligations, claims experience and statistical trends; should these trends change significantly, actual results would likely be impacted. Changes in such estimates, based on more accurate information, may affect amounts reported in future periods. We are not aware of any reasonably likely events or circumstances that would result in different amounts being reported that would materially affect our financial condition or results of operations.
Revenue Recognition
Revenue is recognized from our direct-to-consumer, wholesale and licensing operations. Retail store and e-commerce revenues are recognized net of estimated returns at the time of sale to consumers. Sales tax collected from customers is excluded from revenue. Proceeds received from the sale of gift cards are recorded as a liability and recognized as sales when redeemed by the holder. The Company does not recognize revenue for estimated gift card breakage. Revenue within our wholesale operations is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of returns, discounts and allowances. Returns and allowances require pre-approval from management. Discounts are based on trade terms. Estimates for end-of-season allowances are based on historical trends, seasonal results, an evaluation of current economic conditions and retailer performance. We review and refine these estimates on a monthly basis based on current experience, trends and retailer performance. Our historical estimates of these costs have not differed materially from actual results. Licensing revenues are recorded based upon contractually guaranteed minimum levels and adjusted as actual sales data is received from licensees.
Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as measured by enacted tax rates that are expected to be in effect in the periods when the deferred tax assets and liabilities are expected to be realized or settled. We also assess the likelihood of the realization of deferred tax assets and adjust the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe it more likely than not that all or a portion of the deferred tax assets will not be realized. We consider many factors when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Significant judgment is required in determining the worldwide provision for income taxes. Changes in estimates may create volatility in our effective tax rate in future periods for various reasons, including changes in tax laws or rates, changes in forecasted amounts and mix of pretax income (loss), settlements with various tax authorities, either favorable or unfavorable, the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates. In the ordinary course of a global business, the ultimate tax outcome is uncertain for many transactions. It is our policy to recognize the impact of an uncertain income tax position on our income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50.0% likelihood of being sustained. The tax provisions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments to those provisions. We record interest expense and penalties payable to relevant tax authorities as income tax expense.
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Accounts Receivable — Trade, Net
In the normal course of business, we extend credit to customers that satisfy pre-defined credit criteria. Accounts receivable — trade, net, as shown on the Consolidated Balance Sheets, is net of allowances and anticipated discounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectibility based on an evaluation of historical and anticipated trends, the financial condition of our customers and an evaluation of the impact of economic conditions. An allowance for discounts is based on those discounts relating to open invoices where trade discounts have been extended to customers. Costs associated with potential returns of products as well as allowable customer markdowns and operational charge backs, net of expected recoveries, are included as a reduction to sales and are part of the provision for allowances included in Accounts receivable — trade, net. These provisions result from seasonal negotiations with our customers as well as historical deduction trends, net of expected recoveries, and the evaluation of current market conditions. Should circumstances change or economic or distribution channel conditions deteriorate significantly, we may need to increase our provisions. Our historical estimates of these costs have not differed materially from actual results.
Inventories, Net
Inventories for seasonal, replenishment and on-going merchandise are recorded at the lower of actual average cost or market value. We continually evaluate the composition of our inventories by assessing slow-turning, ongoing product as well as prior seasons' fashion product. Market value of distressed inventory is estimated based on historical sales trends for this category of inventory of our individual product lines, the impact of market trends and economic conditions and the value of current orders in-house relating to the future sales of this type of inventory. Estimates may differ from actual results due to quantity, quality and mix of products in inventory, consumer and retailer preferences and market conditions. We review our inventory position on a monthly basis and adjust our estimates based on revised projections and current market conditions. If economic conditions worsen, we incorrectly anticipate trends or unexpected events occur, our estimates could be proven overly optimistic and required adjustments could materially adversely affect future results of operations. Our historical estimates of these costs and our provisions have not differed materially from actual results.
Intangibles, Net
Intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually. Our annual impairment test is performed as of the first day of the third fiscal quarter.
We assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that an indefinite-lived intangible asset is not impaired, then we are not required to take further action. However, if we conclude otherwise, then we are required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.
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The recoverability of the carrying values of all intangible assets with finite lives is re-evaluated when events or changes in circumstances indicate an asset's value may be impaired. Impairment testing is based on a review of forecasted operating cash flows. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to our Consolidated Statement of Income.
Intangible assets with finite lives are amortized over their respective lives to their estimated residual values. Trademarks with finite lives are amortized over their estimated useful lives. Merchandising rights are amortized over a period of 3 to 4 years. Customer relationships are amortized assuming gradual attrition over periods ranging from 12 to 14 years.
As a result of the impairment analysis performed in connection with our purchased trademarks with indefinite lives, no impairment charges were recorded during 2015.
In 2014, we recorded a non-cash impairment charge of $1.5 million to reduce the carrying value of the TRIFARI trademark to zero, due to the expected exit of the brand. In 2013, we recorded a non-cash impairment charge of $3.3 million which reflected the difference in the estimated fair value and carrying value of the TRIFARI trademark (see Note 11 of Notes to Consolidated Financial Statements).
Goodwill
Goodwill is not amortized but rather tested for impairment at least annually. Our annual impairment test is performed as of the first day of the third fiscal quarter.
We assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that goodwill is impaired. If, after assessing the totality of events and circumstances, we conclude that it is not more likely than not that goodwill is impaired, then we are not required to take further action. However, if we conclude otherwise, then we are required to determine the fair value of goodwill and perform the quantitative impairment test by comparing the fair value and carrying amount of the related reporting unit. A two-step impairment test is then performed on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. We determine the fair value of our reporting units using the market approach, as is typically used for companies providing products where the value of such a company is more dependent on the ability to generate earnings than the value of the assets used in the production process. Under this approach, we estimate fair value based on market multiples of earnings for comparable companies. We also use discounted future cash flow analyses to corroborate these fair value estimates. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired, and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step in order to determine the implied fair value of the reporting unit's goodwill and compare it to the carrying value of the reporting unit's goodwill. The activities in the second step include valuing the tangible and intangible assets of the impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit's goodwill based upon the residual of the summed identified tangible and intangible assets.
As a result of the impairment analysis performed in connection with our goodwill, no impairment charges were recorded during 2015, 2014 or 2013.
During 2014, we recorded additional goodwill as a result of the reacquisition of the KATE SPADE business in Southeast Asia (see Note 2 of Notes to Consolidated Financial Statements); 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 subsidiaries upon closing of the joint venture with Walton Brown, as discussed above.
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Accrued Expenses
Accrued expenses for employee insurance, workers' compensation, contracted advertising and other outstanding obligations are assessed based on claims experience and statistical trends, open contractual obligations and estimates based on projections and current requirements. If these trends change significantly, then actual results would likely be impacted.
Share-Based Compensation
We recognize compensation expense based on the fair value of employee share-based awards, including stock options, restricted stock and restricted stock with performance features that impact vesting, net of estimated forfeitures. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. Determining the fair value of shares with market conditions at the grant date requires judgment, including the weighting of historical and estimated implied volatility of the Company's stock price and where appropriate, a market index. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.
Inflation
The rate of inflation over the past few years has not had a significant impact on our sales or profitability.
ACCOUNTING PRONOUNCEMENTS
For a discussion of recently adopted and recent accounting pronouncements, see Notes 1 and 21 of Notes to Consolidated Financial Statements.
ITEM 7A. 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 January 2, 2016 and January 3, 2015, our exposure to changing market rates related to our ABL Facility and the Term Loan credit facility was as follows:
Dollars in millions | January 2, 2016 | January 3, 2015 | |||||
---|---|---|---|---|---|---|---|
ABL Facility | $ | — | $ | 6.0 | |||
Average interest rate | — | 1.68 | % | ||||
Term loan credit facility | $ | 395.0 | $ | 398.0 | |||
Average interest rate | 4.00 | % | 4.00 | % |
A ten percent change in the average rate would have a minimal impact to interest expense during the year ended January 2, 2016. The Term Loan interest is based on LIBOR (with a floor of 1.0%) plus 3.0% per annum; therefore a ten percent change in the average LIBOR rate would not impact interest expense, since the LIBOR rate was below the floor of 1.0% at January 2, 2016.
As of January 2, 2016, we had forward contracts with net notional amounts of $48.1 million and option contracts of $20.7 million. Unrealized gains (losses) for outstanding foreign currency forward contracts and option contracts were $(0.5) million. A sensitivity analysis to changes in foreign currency exchange rates indicated that if the yen weakened by 10.0% against the US dollar, the fair value of these instruments would increase by $6.2 million at January 2, 2016. Conversely, if the yen strengthened by 10.0% against the
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US dollar, the fair value of these instruments would decrease by $6.2 million at January 2, 2016. Any resulting changes in the fair value of the instruments would be partially offset by changes in the underlying balance sheet positions. We do not hedge all transactions denominated in foreign currency.
We are exposed to credit related losses if the counterparties to our derivative instruments fail to perform their obligations. We systemically measure and assess such risk as it relates to the credit ratings of these counterparties, all of which currently have satisfactory credit ratings and therefore we do not expect to realize losses associated with counterparty default.
Item 8. Financial Statements and Supplementary Data.
See the "Index to Consolidated Financial Statements and Schedule" appearing at the end of this Annual Report on Form 10-K for information required under this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. 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 each of our fiscal quarters. Our Chief Executive Officer, President and Chief Operating Officer and Chief Financial Officer concluded that, as of January 2, 2016, our disclosure controls and procedures were effective to ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified, and that information required to be filed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended January 2, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
See "Index to Consolidated Financial Statements and Schedule" appearing at the end of this Annual Report on Form 10-K for Management's Report on Internal Control Over Financial Reporting.
None.
61
Item 10. Directors, Executive Officers and Corporate Governance.
With respect to our Executive Officers, see "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K.
Information regarding Section 16(a) compliance, the Audit Committee (including membership and Audit Committee Financial Experts but excluding the "Audit Committee Report"), our code of ethics and background of our Directors appearing under the captions "Section 16(a) Beneficial Ownership Reporting Compliance," "Corporate Governance," "Additional Information-Company Code of Ethics and Business Practices" and "Election of Directors" in our Proxy Statement for the 2016 Annual Meeting of Shareholders (the "2016 Proxy Statement") is hereby incorporated by reference.
Item 11. Executive Compensation.
Information called for by this Item 11 is incorporated by reference to the information set forth under the headings "Compensation Discussion and Analysis" and "Executive Compensation" (other than the Board Compensation Committee Report) in the 2016 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
EQUITY COMPENSATION
The following table summarizes information about the stockholder approved Kate Spade & Company Outside Directors' 1991 Stock Ownership Plan (the "Outside Directors' Plan"); Fifth & Pacific Companies, Inc. 1992 Stock Incentive Plan; Fifth & Pacific Companies, Inc. 2000 Stock Incentive Plan (the "2000 Plan"); Fifth & Pacific Companies, Inc. 2002 Stock Incentive Plan (the "2002 Plan"); Fifth & Pacific Companies, Inc. 2005 Stock Incentive Plan (the "2005 Plan"); Fifth & Pacific Companies, Inc. 2011 Stock Incentive Plan (the "2011 Plan"); and Fifth & Pacific Companies, Inc. 2013 Stock Incentive Plan (the "2013 Plan"), which together comprise all of our existing equity compensation plans, as of January 2, 2016. In January 2006, we adopted the Fifth & Pacific Companies, Inc. Outside Directors' Deferral Plan, which amended and restated the Outside Directors' Plan by eliminating equity grants under the Outside Directors' Plan, including the annual grant of shares of Common Stock. The last grant under the Outside Directors' Plan was made on January 10, 2006. All subsequent Director stock grants have been made under the remaining shareholder approved plans.
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column) | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Equity Compensation Plans Approved by Stockholders | 1,552,132 | (a) | $ | 15.35 | (b) | 7,623,334 | (c) | |||
Equity Compensation Plans Not Approved by Stockholders | — | N/A | — | |||||||
| | | | | | | | | | |
Total | 1,552,132 | (a) | $ | 15.35 | (b) | 7,623,334 | (c) | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
- (a)
- Includes 646,249 shares of Common Stock issuable under the 2002, 2005, 2011 and 2013 Plans pursuant to participants' elections thereunder to defer certain director compensation. Excluded from the above table are 1,924,250 restricted share units including shares with market conditions impacting the quantity of shares vesting.
62
- (b)
- Shares of Common Stock issuable under the 2002, 2005, 2011 and 2013 Plans pursuant to participants' election thereunder to defer certain director compensation were not included in calculating the Weighted Average Exercise Price.
- (c)
- In addition to options, warrants and rights, the 2000 Plan, the 2002 Plan, the 2005 Plan, the 2011 Plan and the 2013 Plan authorize the issuance of restricted stock, unrestricted stock and performance stock. Each of the 2000 and the 2002 Plans contains a sub-limit on the aggregate number of shares of restricted Common Stock, which may be issued; the sub-limit under the 2000 Plan is set at 1,000,000 shares and the sub-limit under the 2002 Plan is set at 1,800,000 shares. The 2005 Plan contains an aggregate 2,000,000 shares sub-limit on the number of shares of restricted stock, restricted stock units, unrestricted stock and performance shares that may be awarded. The 2011 Plan contains an aggregate 1,500,000 shares sub-limit on the number of shares of restricted stock, restricted stock units, unrestricted stock and performance shares that may be awarded. For purposes of computing the number of shares available for grant, awards other than stock options and stock appreciation rights will be counted against the 2011 Plan maximum in a 1.6-to-1.0 ratio.
Security ownership information of certain beneficial owners and management as called for by this Item 12 is incorporated by reference to the information set forth under the heading "Security Ownership of Certain Beneficial Owners and Management" in the 2016 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information called for by this Item 13 is incorporated by reference to the information set forth under the headings "Certain Relationships and Related Transactions" in the 2016 Proxy Statement.
Item 14. Principal Accounting Fees and Services.
Information called for by this Item 14 is incorporated by reference to the information set forth under the heading "Ratification of the Appointment of the Independent Registered Public Accounting Firm" in the 2016 Proxy Statement.
Item 15. Exhibits and Financial Statement Schedules.
(a) | 1. Financial Statements | Refer to Index to Consolidated Financial Statements on Page F-1 | |||
(a) | 2. Schedule | ||||
SCHEDULE II — Valuation and Qualifying Accounts | F-52 |
NOTE: Schedules other than those referred to above and parent company financial statements have been omitted as inapplicable or not required under the instructions contained in Regulation S-X or the information is included elsewhere in the financial statements or the notes thereto.
63
(a) | 3. Exhibits |
Exhibit No. | Description | |||
---|---|---|---|---|
2(a) | — | Merger Agreement, dated as of September 1, 2011, by and among Registrant and Liz Claiborne Foreign Holdings, Inc. and Gores Malibu Holdings (Luxembourg) S.a.r.l., EuCo B.V. (incorporated herein by reference to Exhibit 2.1 to Registrant's Current Report on Form 8-K dated September 6, 2011). | ||
2(b) | — | Asset Purchase Agreement, dated as of September 1, 2011, by and among Registrant and Liz Claiborne Canada Inc. and Gores Malibu Holdings (Luxembourg) S.a.r.l., 3256890 Nova Scotia Limited (incorporated herein by reference to Exhibit 2.2 to Registrant's Current Report on Form 8-K dated September 6, 2011). | ||
3(a) | — | Restated Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3(a) to Registrant's Current Report on Form 8-K dated May 28, 2009). | ||
3(b) | — | Amendment to the Restated Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3(a) to Registrant's Current Report on Form 8-K dated June 3, 2010). | ||
3(c) | — | Amendment to the Restated Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K dated May 18, 2012). | ||
3(d) | — | Amendment to the Restated Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3(a) and to Registrant's Current Report on Form 8-K dated May 17, 2013). | ||
3(e) | — | Amendment to the Restated Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3(a) and to Registrant's Current Report on Form 8-K dated May 22, 2015). | ||
3(f) | — | By-Laws of Registrant, as amended through May 27, 2010 (incorporated herein by reference to Exhibit 3(b) to Registrant's Current Report on Form 8-K dated June 3, 2010). | ||
3(g) | — | Amendment to By-Laws of Registrant (incorporated herein by reference to Exhibit 3(b) to Registrant's Current Report on Form 8-K dated May 17, 2013). | ||
3(h) | — | Amendment to By-Laws of Registrant (incorporated herein by reference to Exhibit 3(b) to Registrant's Current Report on Form 8-K dated May 22, 2015). | ||
3(i) | — | Amendment to Articles of Incorporation of Registrant (incorporated herein by reference to Exhibit 3.1 to Registrant's Current Report on Form 8-K dated March 3, 2014). | ||
4(a) | — | Specimen certificate for Registrant's Common Stock, par value $1.00 per share (incorporated herein by reference to Exhibit 4(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 26, 1992). | ||
10(a)*+ | — | Description of Kate Spade & Company 2015 Employee Incentive Plan (Cash). | ||
10(b)+ | — | The Kate Spade & Company 401(k) Savings and Profit Sharing Plan, as amended and restated (incorporated herein by reference to Exhibit 10(g) to Registrant's 2002 Annual Report). | ||
10(b)(i)+ | — | First Amendment to the Kate Spade & Company 401(k) Savings and Profit Sharing Plan (incorporated herein by reference to Exhibit 10(e)(i) to the 2003 Annual Report). | ||
10(b)(ii)+ | — | Second Amendment to the Kate Spade & Company 401(k) Savings and Profit Sharing Plan (incorporated herein by reference to Exhibit 10(e)(ii) to the 2003 Annual Report). | ||
10(b)(iii)+ | — | Third Amendment to the Kate Spade & Company 401(k) Savings and Profit Sharing Plan (incorporated herein by reference to Exhibit 10(e)(iii) to the 2003 Annual Report). | ||
10(b)(iv)+ | — | Trust Agreement (the "401(k) Trust Agreement") dated as of October 1, 2003 between Registrant and Fidelity Management Trust Company (incorporated herein by reference to Exhibit 10(e)(iv) to the 2003 Annual Report). |
64
Exhibit No. | Description | |||
---|---|---|---|---|
10(b)(v)+ | — | First Amendment to the 401(k) Trust Agreement (incorporated herein by reference to Exhibit 10(e)(v) to Registrant's Annual Report on Form 10-K for the fiscal year ended January 1, 2005 (the "2004 Annual Report"). | ||
10(b)(vi)+ | — | Second Amendment to the 401(k) Trust Agreement (incorporated herein by reference to Exhibit 10(e)(vi) to the 2004 Annual Report). | ||
10(c)+ | — | Liz Claiborne, Inc. Amended and Restated Outside Directors' 1991 Stock Ownership Plan (the "Outside Directors' 1991 Plan") (incorporated herein by reference to Exhibit 10(m) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 1995). | ||
10(c)(i)+ | — | Amendment to the Outside Directors' 1991 Plan, effective as of December 18, 2003 (incorporated herein by reference to Exhibit 10(f)(i) to the 2003 Annual Report). | ||
10(c)(ii)+ | — | Form of Option Agreement under the Outside Directors' 1991 Plan (incorporated herein by reference to Exhibit 10(m)(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 28, 1996). | ||
10(c)(iii)+ | — | Liz Claiborne, Inc. Outside Directors' Deferral Plan (incorporated herein by reference to Exhibit 10(f)(iii) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (the "2005 Annual Report). | ||
10(d)+ | — | Liz Claiborne, Inc. 2000 Stock Incentive Plan (the "2000 Plan") (incorporated herein by reference to Exhibit 4(e) to Registrant's Form S-8 dated as of January 25, 2001). | ||
10(d)(i)+ | — | Amendment No. 1 to the 2000 Plan (incorporated herein by reference to Exhibit 10(h)(i) to the 2003 Annual Report). | ||
10(d)(ii)+ | — | Form of Option Grant Certificate under the 2000 Plan (incorporated herein by reference to Exhibit 10(z)(i) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 30, 2000 (the "2000 Annual Report") ). | ||
10(d)(iii) | — | Form of Special Retention Award Agreement under the Company's 2011 Stock Incentive Plan (incorporated herein by reference to Exhibit 99.2 to Registrant's Current Report on Form 8-K dated June 17, 2011) | ||
10(e)+ | — | Liz Claiborne, Inc. 2002 Stock Incentive Plan (the "2002 Plan") (incorporated herein by reference to Exhibit 10(y)(i) to Registrant's Quarterly Report on Form 10-Q for the period ended June 29, 2002 (the "2nd Quarter 2002 10-Q")). | ||
10(e)(i)+ | — | Amendment No. 1 to the 2002 Plan (incorporated herein by reference to Exhibit 10(y)(iii) to the 2nd Quarter 2002 10-Q). | ||
10(e)(ii)+ | — | Amendment No. 2 to the 2002 Plan (incorporated herein by reference to Exhibit 10(i)(ii) to the 2003 Annual Report). | ||
10(e)(iii)+ | — | Amendment No. 3 to the 2002 Plan (incorporated herein by reference to Exhibit 10(i)(iii) to the 2003 Annual Report). | ||
10(e)(iv)+ | — | Form of Option Grant Certificate under the 2002 Plan (incorporated herein by reference to Exhibit 10(y)(ii) to the 2nd Quarter 2002 10-Q). | ||
10(f)+ | — | Description of Supplemental Life Insurance Plans (incorporated herein by reference to Exhibit 10(q) to the 2000 Annual Report). | ||
10(g)+ | — | Liz Claiborne, Inc. Supplemental Executive Retirement Plan effective as of January 1, 2002, constituting an amendment, restatement and consolidation of the Liz Claiborne, Inc. Supplemental Executive Retirement Plan and the Liz Claiborne, Inc. Bonus Deferral Plan (incorporated herein by reference to Exhibit 10(t)(i) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 29, 2001). | ||
10(g)(i)+ | — | Liz Claiborne, Inc. 2005 Supplemental Executive Retirement Plan effective as of January 1, 2005, including amendments through December 31, 2008 (incorporated herein by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated December 31, 2008). | ||
10(g)(ii)+ | — | Trust Agreement, dated as of January 1, 2002, between Registrant and Wilmington Trust Company (incorporated herein by reference to Exhibit 10(t)(i) to the 2002 Annual Report). |
65
Exhibit No. | Description | |||
---|---|---|---|---|
10(h)+ | — | Liz Claiborne Inc. 2005 Stock Incentive Plan (the "2005 Plan") (incorporated herein by reference to Exhibit 10.1(b) to Registrant's Current Report on Form 8-K dated May 26, 2005). | ||
10(h)(i)+ | — | Amendment No. 1 to the 2005 Plan (incorporated herein by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated July 12, 2005). | ||
10(h)(ii)+ | — | Form of Restricted Stock Grant Certificate under the 2005 Plan (incorporated herein by reference to Exhibit 10(a) to Registrant's Quarterly Report on Form 10-Q for the period ended April 2, 2005). | ||
10(h)(iii)+ | — | Form of Option Grant Confirmation under the 2005 Plan (incorporated herein by reference to Exhibit 99.2 to Registrant's Current Report on Form 8-K dated December 4, 2008). | ||
10(i)+ | — | Liz Claiborne Inc. 2011 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated May 23, 2011 which incorporates by reference Exhibit A to Definitive Proxy Statement for the 2011 Annual Meeting of the Registrant, filing April 7, 2011). | ||
10(i)(i) | — | Form of Restricted Stock Unit Grant Certificate under the 2011 Plan (incorporated herein by reference to Exhibit 10.47 to Registrant's Form S-4 dated January 18, 2013). | ||
10(i)(ii) | — | Form of Option Grant Certificate under the 2011 Plan (incorporated herein by reference to Exhibit 10.46 to Registrant's Form S-4 dated January 18, 2013). | ||
10(j) | — | Fifth & Pacific Companies, Inc. 2013 Incentive Plan (the "2013 Plan") (incorporated herein by reference to Appendix B to Definitive Proxy Statement for the 2013 Annual Meeting of the Registrant filed April 3, 2013). | ||
10(j)(i) | — | Form of 2014 Market Share Unit Award Notice of Grant under the 2013 Plan (incorporated herein by reference to Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the period ended April 5, 2014 (the "1st Quarter 2014 10-Q"). | ||
10(j)(ii) | — | Form of 2014 Performance Share Award Notice of Grant under the 2013 Plan (incorporated herein by reference to Exhibit 10.4 to the 1st Quarter 2014 10-Q). | ||
10(j)(iii) | — | Form of Staking Market Share Unit Award Grant Certificate under the 2013 Plan (incorporated herein by reference to Exhibit 10.5 to the 1st Quarter 2014 10-Q). | ||
10(j)(iv) | — | Form of Market Share Unit Award Notice of Grant under the 2013 Plan (incorporated herein by reference to Exhibit 10(j)(iv) to Registrant's Annual Report on Form 10-K for the year ended January 3, 2015 (the "2014 Annual Report") ). | ||
10(j)(v) | — | Form of Option Grant Certificate under the 2013 Plan (incorporated herein by reference to Exhibit 10(j)(v) to Registrant's 2014 Annual Report). | ||
10(j)(vi) | — | Form of 2015 Performance Share Award Notice of Grant under the 2013 Plan (incorporated herein by reference to Exhibit 10(j)(vi) to the Registrant's 2014 Annual Report). | ||
10(j)(vii)* | — | Form of Performance Share Award Notice of Grant under the 2013 Plan. | ||
10(j)(viii)* | — | Form of Restricted Stock Unit Grant Confirmation under the 2013 Plan. | ||
10(k)(i)+ | — | 2010 Section 162(m) Long Term Performance Plan (incorporated herein by reference to Exhibit D to Definitive Proxy Statement filed April 13, 2010). | ||
10(k)(ii)+ | — | Kate Spade & Company Section 162(m) Annual Incentive Plan (incorporated herein by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K filed May 22, 2015). | ||
10(l)+ | — | Form of 2012 Executive Severance Agreement (incorporated herein by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated April 3, 2012). | ||
10(l)(i)+* | — | Form of Executive Severance Agreement. | ||
10(m) | — | Severance Benefit Agreement, by and between Registrant and William L. McComb, dated July 14, 2009 (incorporated herein by reference to Exhibit 10.4 to Registrant's Current Report on Form 8-K dated July 15, 2009). |
66
Exhibit No. | Description | |||
---|---|---|---|---|
10(n) | — | Executive Termination Benefits Agreement, by and between Registrant and William L. McComb, dated as of July 14, 2009 (incorporated herein by reference to Exhibit 10.3 to Registrant's Current Report on Form 8-K dated July 15, 2009). | ||
10(o) | — | Employment Agreement by and between Registrant and Craig Leavitt, dated January 7, 2014 (incorporated herein by reference to Exhibit 10(o) to the 2013 Annual Report). | ||
10(p) | — | Employment Agreement by and between Registrant and Deborah Lloyd, dated January 7, 2014 (incorporated herein by reference to Exhibit 10(p) to the 2013 Annual Report). | ||
10(q) | — | Purchase Agreement, dated October 12, 2011, between Registrant, J.C. Penney Corporation, Inc. and J.C. Penney Company, Inc. (incorporated herein by reference to Exhibit 10(y) to Registrant's Annual Report on Form 10-K for the year ended December 31, 2011). | ||
10(s) | — | Term Credit Agreement dated as of April 10, 2014 among Kate Spade & Company, as Borrower, the Lenders and Bank of America, N.A., as Administrative Agent for the Lenders, JPMorgan Chase Bank, N.A., as Syndication Agent, Suntrust Bank and Wells Fargo Bank National Association, as Co-Documentation Agents and Bank of America, N.A., JPMorgan Securities, LLC, as Joint Bookrunners and Joint Lead Arrangers (incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed for the period ended April 5, 2014). | ||
10(t) | — | Credit Agreement, dated May 16, 2014, among Kate Spade & Company, Kate Spade UK Limited, and Kate Spade Canada Inc., as borrowers, the guarantors party thereto, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and US Collateral Agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Collateral Agent, J.P. Morgan Europe Limited, as European Administrative Agent and European Collateral Agent, Bank of America, N.A., as Syndication Agent, Wells Fargo Bank, N.A. and SunTrust Bank, as Documentation Agents (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed for the period ended July 5, 2014). | ||
10(u) | — | Purchase Agreement, dated as of October 7, 2013, by and among ABG-Juicy LLC, as Buyer, Fifth & Pacific Companies, Inc., as Seller, and Juicy Couture, Inc. (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed for the period ended September 28, 2013). | ||
10(v) | — | Amendment Agreement, dated as of November 6, 2013, by and among ABG-Juicy LLC, Fifth & Pacific Companies, Inc., and Juicy Couture, Inc. (incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q filed for the period ended September 28, 2013). | ||
10(v)(i) | — | Purchase Agreement, dated as of December 10, 2013, by and among LBD Acquisition Company, LLC, as Buyer, Fifth & Pacific Companies, Inc., as Seller, and Lucky Brand Dungarees, Inc. (incorporated herein by reference to Registrant's Current Report on Form 8-K filed December 10, 2013). | ||
10(v)(ii) | — | Secured Note, dated February 3, 2014 and due February 1, 2017, by and between LBD Acquisition Company, LLC, as payor, and Fifth & Pacific Companies, Inc., as payee (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q filed for the period ended April 5, 2014). | ||
21* | — | List of Registrant's Subsidiaries. | ||
23* | — | Consent of Independent Registered Public Accounting Firm. | ||
31(a)* | — | Rule 13a-14(a) Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31(b)* | — | Rule 13a-14(a) Certification of President and Chief Operating Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. |
67
Exhibit No. | Description | |||
---|---|---|---|---|
31(c)* | — | Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32(a)*# | — | Certification of Chief Executive Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32(b)*# | — | Certification of President and Chief Operating Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32(c)*# | — | Certification of Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. | ||
99* | — | Undertakings. | ||
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. |
- +
- Compensation plan or arrangement required to be noted as provided in Item 14(a)(3).
- *
- Filed herewith.
- D
- Certain portions of this exhibit have been omitted in connection with the grant of confidential treatment therefore.
- #
- A signed original of this written statement required by Section 906 has been provided by the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
68
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on March 1, 2016.
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 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on March 1, 2016.
Signature | Title | |
---|---|---|
/s/ Craig A. Leavitt Craig A. Leavitt | Chief Executive Officer and Director (principal executive officer) | |
/s/ Lawrence Benjamin Lawrence Benjamin | Director | |
/s/ Raul J. Fernandez Raul J. Fernandez | Director | |
/s/ Kenneth B. Gilman Kenneth B. Gilman | Director | |
/s/ Nancy J. Karch Nancy J. Karch | Director and Chairman of the Board | |
/s/ Kenneth P. Kopelman Kenneth P. Kopelman | Director | |
/s/ Deborah Lloyd Deborah Lloyd | Director | |
/s/ Douglas Mack Douglas Mack | Director | |
/s/ Jan Singer Jan Singer | Director | |
/s/ Doreen A. Toben Doreen A. Toben | Director |
69
KATE SPADE & COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
| Page Number | |
---|---|---|
MANAGEMENT'S REPORTS AND REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2 to F-4 | |
FINANCIAL STATEMENTS | ||
Consolidated Balance Sheets as of January 2, 2016 and January 3, 2015 | F-5 | |
Consolidated Statements of Income for the Three Fiscal Years Ended January 2, 2016 | F-6 | |
Consolidated Statements of Comprehensive Income for the Three Fiscal Years Ended January 2, 2016 | F-7 | |
Consolidated Statements of Retained Earnings, Accumulated Comprehensive Loss and Changes in Capital Accounts for the Three Fiscal Years Ended January 2, 2016 | F-8 | |
Consolidated Statements of Cash Flows for the Three Fiscal Years Ended January 2, 2016 | F-9 | |
Notes to Consolidated Financial Statements | F-10 to F-51 | |
SCHEDULE II — Valuation and Qualifying Accounts | F-52 |
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Securities and Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company's system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Management has evaluated the effectiveness of the Company's internal control over financial reporting as of January 2, 2016 based upon criteria for effective internal control over financial reporting described inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in 2013. Based on our evaluation, management determined that the Company's internal control over financial reporting was effective as of January 2, 2016 based on the criteria inInternal Control — Integrated Framework issued by COSO.
The Company's internal control over financial reporting as of January 2, 2016 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their attestation report which appears herein.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Kate Spade & Company is responsible for the preparation, objectivity and integrity of the consolidated financial statements and other information contained in this Annual Report. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include some amounts that are based on management's informed judgments and best estimates.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited these consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and has expressed herein their unqualified opinion on those financial statements.
The Audit Committee of the Board of Directors, which oversees all of the Company's financial reporting process on behalf of the Board of Directors, consists solely of independent directors, meets with the independent registered public accounting firm, internal auditors and management periodically to review their respective activities and the discharge of their respective responsibilities. Both the independent registered public accounting firm and the internal auditors have unrestricted access to the Audit Committee, with or without management, to discuss the scope and results of their audits and any recommendations regarding the system of internal controls.
March 1, 2016
/s/ Craig A. Leavitt Craig A. Leavitt | /s/ George M. Carrara George M. Carrara | /s/ Thomas Linko Thomas Linko | ||
Chief Executive Officer | President and Chief Operating Officer | Chief Financial Officer |
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kate Spade & Company
We have audited the internal control over financial reporting of Kate Spade & Company (the "Company") as of January 2, 2016, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2016, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 2, 2016 of the Company and our report dated March 1, 2016 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 1, 2016
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Kate Spade & Company
We have audited the accompanying consolidated balance sheets of Kate Spade & Company (the "Company") as of January 2, 2016 and January 3, 2015, and the related consolidated statements of income, statements of comprehensive income, statements of retained earnings, accumulated other comprehensive loss and changes in capital accounts, and cash flows for each of the three fiscal years in the period ended January 2, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Kate Spade & Company as of January 2, 2016 and January 3, 2015, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 2, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of January 2, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 1, 2016
F-4
Kate Spade & Company
CONSOLIDATED BALANCE SHEETS
In thousands, except share data | January 2, 2016 | January 3, 2015 | |||||
---|---|---|---|---|---|---|---|
Assets | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | 297,851 | $ | 184,044 | |||
Accounts receivable — trade, net | 96,850 | 90,091 | |||||
Inventories, net | 191,879 | 158,241 | |||||
Deferred income taxes | 1,855 | 616 | |||||
Other current assets | 33,279 | 41,508 | |||||
| | | | | | | |
Total current assets | 621,714 | 474,500 | |||||
Property and Equipment, Net | 173,963 | 174,072 | |||||
Goodwill | 48,730 | 64,798 | |||||
Intangibles, Net | 86,288 | 90,327 | |||||
Deferred Income Taxes | 1,241 | 56 | |||||
Note Receivable | — | 88,976 | |||||
Other Assets | 48,425 | 33,609 | |||||
| | | | | | | |
Total Assets | $ | 980,361 | $ | 926,338 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Liabilities and Stockholders' Equity | |||||||
Current Liabilities: | |||||||
Short-term borrowings | $ | 4,514 | $ | 10,459 | |||
Accounts payable | 109,327 | 88,402 | |||||
Accrued expenses | 151,680 | 150,926 | |||||
Income taxes payable | 1,655 | 3,008 | |||||
| | | | | | | |
Total current liabilities | 267,176 | 252,795 | |||||
Long-Term Debt | 397,043 | 400,284 | |||||
Other Non-Current Liabilities | 52,021 | 56,465 | |||||
Deferred Income Taxes | 18,900 | 17,183 | |||||
Commitments and Contingencies (Note 9) | |||||||
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 | |||||
Capital in excess of par value | 224,677 | 199,100 | |||||
Retained earnings | 1,155,838 | 1,145,643 | |||||
Accumulated other comprehensive loss | (30,041 | ) | (29,986 | ) | |||
| | | | | | | |
1,526,911 | 1,491,194 | ||||||
Common stock in treasury, at cost — 48,544,175 and 49,065,798 shares | (1,281,690 | ) | (1,291,583 | ) | |||
| | | | | | | |
Total stockholders' equity | 245,221 | 199,611 | |||||
| | | | | | | |
Total Liabilities and Stockholders' Equity | $ | 980,361 | $ | 926,338 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-5
Kate Spade & Company
CONSOLIDATED STATEMENTS OF INCOME
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands, except per common share data | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Net Sales | $ | 1,242,720 | $ | 1,138,603 | $ | 803,371 | ||||
Cost of goods sold | 488,613 | 458,332 | 306,781 | |||||||
| | | | | | | | | | |
Gross Profit | 754,107 | 680,271 | 496,590 | |||||||
Selling, general & administrative expenses | 687,709 | 645,266 | 473,075 | |||||||
Impairment of intangible assets | — | 1,533 | 3,300 | |||||||
| | | | | | | | | | |
Operating Income | 66,398 | 33,472 | 20,215 | |||||||
Other expense, net | (11,137 | ) | (4,033 | ) | (2,062 | ) | ||||
Loss on settlement of note receivable | (9,873 | ) | — | — | ||||||
Impairment of cost investment | — | — | (6,109 | ) | ||||||
Loss on extinguishment of debt | — | (16,914 | ) | (1,707 | ) | |||||
Interest expense, net | (19,152 | ) | (20,178 | ) | (47,065 | ) | ||||
| | | | | | | | | | |
Income (Loss) Before Provision (Benefit) for Income Taxes | 26,236 | (7,653 | ) | (36,728 | ) | |||||
Provision (benefit) for income taxes | 4,528 | (84,379 | ) | (4,563 | ) | |||||
| | | | | | | | | | |
Income (Loss) from Continuing Operations | 21,708 | 76,726 | (32,165 | ) | ||||||
Discontinued operations, net of income taxes | (4,621 | ) | 82,434 | 105,160 | ||||||
| | | | | | | | | | |
Net Income | $ | 17,087 | $ | 159,160 | $ | 72,995 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Earnings per Share, Basic: | ||||||||||
Income (Loss) from Continuing Operations | $ | 0.17 | $ | 0.61 | $ | (0.27 | ) | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Net Income | $ | 0.13 | $ | 1.26 | $ | 0.60 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Earnings per Share, Diluted: | ||||||||||
Income (Loss) from Continuing Operations | $ | 0.17 | $ | 0.60 | $ | (0.27 | ) | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Net Income | $ | 0.13 | $ | 1.25 | $ | 0.60 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Weighted Average Shares, Basic | 127,634 | 126,264 | 121,057 | |||||||
Weighted Average Shares, Diluted | 128,222 | 127,019 | 121,057 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-6
Kate Spade & Company
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Net Income | $ | 17,087 | $ | 159,160 | $ | 72,995 | ||||
Other Comprehensive Income (Loss), Net of Income Taxes: | ||||||||||
Cumulative translation adjustment, net of income taxes of $0 | (1,966 | ) | (10,234 | ) | (11,788 | ) | ||||
Write-off of translation adjustment in connection with liquidation of foreign subsidiaries | 4,008 | — | — | |||||||
Change in fair value of cash flow hedging derivatives, net of income taxes of $(1,160), $566 and $602, respectively | (2,097 | ) | 1,127 | 983 | ||||||
| | | | | | | | | | |
Comprehensive Income | $ | 17,032 | $ | 150,053 | $ | 62,190 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-7
Kate Spade & Company
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, ACCUMULATED OTHER COMPREHENSIVE LOSS AND
CHANGES IN CAPITAL ACCOUNTS
| Common Stock | | | | Treasury Shares | | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Accumulated Other Comprehensive Loss | | |||||||||||||||||||||
In thousands, except share data | Number of Shares | Amount | Capital in Excess of Par Value | Retained Earnings | Number of Shares | Amount | Total | ||||||||||||||||||
BALANCE, DECEMBER 29, 2012 | 176,437,234 | $ | 176,437 | $ | 147,018 | $ | 1,071,551 | $ | (10,074 | ) | 59,851,190 | $ | (1,511,862 | ) | $ | (126,930 | ) | ||||||||
Net income | — | — | — | 72,995 | — | — | — | 72,995 | |||||||||||||||||
Other comprehensive loss, net of income taxes | — | — | — | — | (10,805 | ) | — | — | (10,805 | ) | |||||||||||||||
Exercise of stock options | — | — | — | (5,959 | ) | — | (544,200 | ) | 10,782 | 4,823 | |||||||||||||||
Restricted shares issued, net of cancellations and shares withheld for taxes | — | — | — | (5,724 | ) | — | (171,577 | ) | 3,422 | (2,302 | ) | ||||||||||||||
Amortization — share-based compensation | — | — | 9,618 | — | — | — | — | 9,618 | |||||||||||||||||
Exchanges of Convertible Senior Notes, net | — | — | (652 | ) | (112,230 | ) | — | (5,634,179 | ) | 133,001 | 20,119 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, DECEMBER 28, 2013 | 176,437,234 | 176,437 | 155,984 | 1,020,633 | (20,879 | ) | 53,501,234 | (1,364,657 | ) | (32,482 | ) | ||||||||||||||
Net income | — | — | — | 159,160 | — | — | — | 159,160 | |||||||||||||||||
Other comprehensive loss, net of income taxes | — | — | — | — | (9,107 | ) | — | — | (9,107 | ) | |||||||||||||||
Exercise of stock options | — | — | — | (23,266 | ) | — | (4,010,331 | ) | 65,215 | 41,949 | |||||||||||||||
Restricted shares issued, net of cancellations and shares withheld for taxes | — | — | — | (10,884 | ) | — | (425,105 | ) | 7,859 | (3,025 | ) | ||||||||||||||
Amortization — share-based compensation | — | — | 43,116 | — | — | — | — | 43,116 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, JANUARY 3, 2015 | 176,437,234 | 176,437 | 199,100 | 1,145,643 | (29,986 | ) | 49,065,798 | (1,291,583 | ) | 199,611 | |||||||||||||||
Net income | — | — | — | 17,087 | — | — | — | 17,087 | |||||||||||||||||
Other comprehensive loss, net of income taxes | — | — | — | — | (55 | ) | — | — | (55 | ) | |||||||||||||||
Exercise of stock options | — | — | — | (2,109 | ) | — | (244,780 | ) | 4,573 | 2,464 | |||||||||||||||
Restricted shares issued, net of cancellations and shares withheld for taxes | — | — | — | (4,783 | ) | — | (276,843 | ) | 5,320 | 537 | |||||||||||||||
Amortization — share-based compensation | — | — | 25,577 | — | — | — | — | 25,577 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, JANUARY 2, 2016 | 176,437,234 | $ | 176,437 | $ | 224,677 | $ | 1,155,838 | $ | (30,041 | ) | 48,544,175 | $ | (1,281,690 | ) | $ | 245,221 | |||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-8
Kate Spade & Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Cash Flows from Operating Activities: | ||||||||||
Net income | $ | 17,087 | $ | 159,160 | $ | 72,995 | ||||
Adjustments to arrive at income (loss) from continuing operations | 4,621 | (82,434 | ) | (105,160 | ) | |||||
| | | | | | | | | | |
Income (loss) from continuing operations | 21,708 | 76,726 | (32,165 | ) | ||||||
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities: | ||||||||||
Depreciation and amortization | 49,937 | 54,438 | 38,780 | |||||||
Impairment of intangible assets | — | 1,533 | 3,300 | |||||||
Loss on asset disposals and impairments, including streamlining initiatives, net | 13,600 | 13,063 | 8,110 | |||||||
Deferred income taxes | 474 | (350 | ) | (3,665 | ) | |||||
Share-based compensation | 25,577 | 37,270 | 7,269 | |||||||
Loss on settlement of note receivable | 9,873 | — | — | |||||||
Loss on extinguishment of debt | — | 16,914 | 1,707 | |||||||
Foreign currency transaction losses, net | 4,845 | 6,535 | 9,656 | |||||||
Equity losses of equity investees | 6,694 | 2,583 | 1,179 | |||||||
Other, net | (281 | ) | (13 | ) | 71 | |||||
Changes in assets and liabilities: | ||||||||||
Increase in accounts receivable — trade, net | (7,540 | ) | (27,643 | ) | (1,167 | ) | ||||
Increase in inventories, net | (42,540 | ) | (21,903 | ) | (47,115 | ) | ||||
Decrease (increase) in other current and non-current assets | 5,597 | (12,840 | ) | (8,753 | ) | |||||
Increase (decrease) in accounts payable | 23,911 | (9,681 | ) | 21,695 | ||||||
Increase (decrease) in accrued expenses and other non-current liabilities | 7,773 | (9,006 | ) | (34,337 | ) | |||||
Increase (decrease) in income taxes payable | 912 | (83,062 | ) | 2,243 | ||||||
Net cash (used in) provided by operating activities of discontinued operations | (14,964 | ) | (30,200 | ) | 9,161 | |||||
| | | | | | | | | | |
Net cash provided by (used in) operating activities | 105,576 | 14,364 | (24,031 | ) | ||||||
| | | | | | | | | | |
Cash Flows from Investing Activities: | ||||||||||
Proceeds from sales of property and equipment | 816 | — | 20,264 | |||||||
Purchases of property and equipment | (55,084 | ) | (93,609 | ) | (65,130 | ) | ||||
Net proceeds from disposition | — | — | 4,000 | |||||||
Payments for purchases of businesses | — | (32,268 | ) | — | ||||||
Proceeds from sales of joint venture interests, net | 17,621 | — | — | |||||||
Payment for joint venture interest | (10,000 | ) | — | — | ||||||
Payments for in-store merchandise shops | (5,123 | ) | (6,344 | ) | (2,461 | ) | ||||
Net proceeds from settlement of note receivable | 75,128 | — | — | |||||||
Investments in and advances to equity investees | (5,000 | ) | (2,400 | ) | (5,500 | ) | ||||
Other, net | 276 | 17 | (363 | ) | ||||||
Net cash provided by investing activities of discontinued operations | 634 | 137,759 | 143,306 | |||||||
| | | | | | | | | | |
Net cash provided by investing activities | 19,268 | 3,155 | 94,116 | |||||||
| | | | | | | | | | |
Cash Flows from Financing Activities: | ||||||||||
Proceeds from borrowings under revolving credit agreement | 2,000 | 8,411 | 650,553 | |||||||
Repayment of borrowings under revolving credit agreement | (8,000 | ) | (4,960 | ) | (647,706 | ) | ||||
Proceeds from issuance of Term Loan | — | 398,000 | — | |||||||
Repayment of Senior Notes | — | (390,693 | ) | — | ||||||
Repayment of Term Loan | (3,000 | ) | (2,000 | ) | — | |||||
Proceeds from capital lease | — | — | 8,673 | |||||||
Principal payments under capital lease obligations | (459 | ) | (410 | ) | (4,651 | ) | ||||
Proceeds from exercise of stock options | 2,464 | 41,949 | 4,823 | |||||||
Payment of deferred financing fees | (1,473 | ) | (9,712 | ) | (5,597 | ) | ||||
| | | | | | | | | | |
Net cash (used in) provided by financing activities | (8,468 | ) | 40,585 | 6,095 | ||||||
| | | | | | | | | | |
Effect of Exchange Rate Changes on Cash and Cash Equivalents | (2,569 | ) | (4,282 | ) | (5,197 | ) | ||||
Net Change in Cash and Cash Equivalents | 113,807 | 53,822 | 70,983 | |||||||
Cash and Cash Equivalents at Beginning of Year | 184,044 | 130,222 | 59,402 | |||||||
| | | | | | | | | | |
Cash and Cash Equivalents at End of Year | 297,851 | 184,044 | 130,385 | |||||||
Less: Cash and Cash Equivalents Held for Sale | — | — | 163 | |||||||
| | | | | | | | | | |
Cash and Cash Equivalents | $ | 297,851 | $ | 184,044 | $ | 130,222 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
F-9
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Kate Spade & Company and its wholly-owned and majority-owned subsidiaries (the "Company") are engaged primarily in the design and marketing of a broad range of accessories and apparel. The Company operates its kate spade new york and JACK SPADE brands through one operating segment in North America and three operating segments internationally: Japan, Asia (excluding Japan) and Europe. The Company's Adelington Design Group reportable segment is also an operating segment. The three reportable segments described below represent the Company's activities for which separate financial information is available and which is utilized on a regular basis by the Company's 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 distribution agreement for its operations in Latin America, including in Brazil, which leverages the network of its distribution partner. As part of these actions, the Company completed the closure of its Company-operated stores during the third quarter 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 a net $19.7 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 in the joint ventures under the equity method of accounting (see Note 17 — Additional Financial Information). Upon closing of the KS HMT joint venture, $16.0 million of goodwill related to the KATE SPADE businesses in
F-10
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Hong Kong, Macau and Taiwan and $14.0 million of net assets of KS HMT were reclassified to Investment in unconsolidated subsidiaries, which was included in Other assets on the accompanying Consolidated Balance Sheets. The Company concluded the carrying values of the assets and liabilities for Hong Kong, Macau and Taiwan approximated fair value, due in part to the recent acquisition of those territories from Globalluxe Kate Spade HK Limited ("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 Consolidated Statement of Income.
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 did not represent a strategic shift in the Company's operations and therefore were 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. The Juicy Couture IP was licensed back to the Company until December 31, 2014 to accommodate the wind-down of operations. The Company's subsidiary, Juicy Couture, Inc., 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.
F-11
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summarized financial data for the aforementioned brands that are classified as discontinued operations are provided in Note 3 — Discontinued Operations and Disposals.
PRINCIPLES OF CONSOLIDATION
The 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 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 Consolidated Financial Statements. These estimates and assumptions also 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.
Critical accounting policies are those that are most important to the portrayal of the Company's 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. The Company's most critical accounting policies, discussed below, pertain to revenue recognition, income taxes, accounts receivable — trade, inventories, intangible assets, goodwill, accrued expenses and share-based compensation. 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.
Revenue Recognition |
The Company recognizes revenue from its direct-to-consumer, wholesale and licensing operations. Retail store and e-commerce revenues are recognized net of estimated returns at the time of sale to consumers. Sales tax collected from customers is excluded from revenue. Proceeds received from the sale of gift cards are recorded as a liability and recognized as sales when redeemed by the holder. The Company does not recognize revenue for estimated gift card breakage. Revenue within the Company's wholesale operations is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of returns, discounts and allowances. Returns and allowances require pre-approval from management. Discounts are based on trade terms. Estimates for end-of-season allowances are based on historical trends, seasonal results, an evaluation of current economic conditions and retailer performance. The Company reviews and refines these estimates on a monthly basis based on current experience, trends and retailer performance. The Company's historical estimates of these costs have not differed materially from actual results. Licensing revenues, which amounted to $26.2 million, $16.2 million and $17.8 million during 2015, 2014 and 2013, respectively, are recorded based upon contractually guaranteed minimum levels and adjusted as actual sales data is received from licensees.
Income Taxes |
Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
F-12
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
respective tax bases, as measured by enacted tax rates that are expected to be in effect in the periods when the deferred tax assets and liabilities are expected to be realized or settled. The Company also assesses the likelihood of the realization of deferred tax assets and adjusts the carrying amount of these deferred tax assets by a valuation allowance to the extent the Company believes it more likely than not that all or a portion of the deferred tax assets will not be realized. Many factors are considered when assessing the likelihood of future realization of deferred tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods available and other relevant factors. Changes in the required valuation allowance are recorded in income in the period such determination is made. Significant judgment is required in determining the worldwide provision for income taxes. Changes in estimates may create volatility in the Company's effective tax rate in future periods for various reasons including changes in tax laws or rates, changes in forecasted amounts and mix of pretax income (loss), settlements with various tax authorities, either favorable or unfavorable, the expiration of the statute of limitations on some tax positions and obtaining new information about particular tax positions that may cause management to change its estimates. In the ordinary course of a global business, the ultimate tax outcome is uncertain for many transactions. It is the Company's policy to recognize the impact of an uncertain income tax position on its income tax return at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50.0% likelihood of being sustained. The tax provisions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments to those provisions. The Company records interest expense and penalties payable to relevant tax authorities as income tax expense.
Accounts Receivable — Trade, Net |
In the normal course of business, the Company extends credit to customers that satisfy pre-defined credit criteria. Accounts receivable — trade, net, as shown on the Consolidated Balance Sheets, is net of allowances and anticipated discounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectibility based on an evaluation of historical and anticipated trends, the financial condition of the Company's customers and an evaluation of the impact of economic conditions. An allowance for discounts is based on those discounts relating to open invoices where trade discounts have been extended to customers. Costs associated with potential returns of products as well as allowable customer markdowns and operational charge backs, net of expected recoveries, are included as a reduction to sales and are part of the provision for allowances included in Accounts receivable — trade, net. These provisions result from seasonal negotiations with the Company's customers as well as historical deduction trends, net of expected recoveries, and the evaluation of current market conditions. The Company's historical estimates of these costs have not differed materially from actual results.
Inventories, Net |
Inventories for seasonal, replenishment and on-going merchandise are recorded at the lower of actual average cost or market value. The Company continually evaluates the composition of its inventories by assessing slow-turning, ongoing product as well as prior seasons' fashion product. Market value of distressed inventory is estimated based on historical sales trends for this category of inventory of the Company's individual product lines, the impact of market trends and economic conditions and the value of current orders in-house relating to the future sales of this type of inventory. Estimates may differ from actual results due to quantity, quality and mix of products in inventory, consumer and retailer preferences
F-13
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and market conditions. The Company's historical estimates of these costs and its provisions have not differed materially from actual results.
Intangibles, Net |
Intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually. The Company's annual impairment test is performed as of the first day of the third fiscal quarter.
The Company assesses qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that an indefinite-lived intangible asset is not impaired, then the Company is not required to take further action. However, if the Company concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The Company estimates the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. The Company recognizes an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.
The recoverability of the carrying values of all intangible assets with finite lives is re-evaluated when events or changes in circumstances indicate an asset's value may be impaired. Impairment testing is based on a review of forecasted operating cash flows. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to the Consolidated Statement of Income.
Intangible assets with finite lives are amortized over their respective lives to their estimated residual values. Trademarks with finite lives are amortized over their estimated useful lives. Intangible merchandising rights are amortized over a period of 3 to 4 years. Customer relationships are amortized assuming gradual attrition over periods ranging from 12 to 14 years.
As a result of the impairment analysis performed in connection with the Company's purchased trademarks with indefinite lives, no impairment charges were recorded during 2015.
In the fourth quarter of 2014 and the third quarter of 2013, the Company recorded non-cash impairment charges of $1.5 million and $3.3 million, respectively, which reflected the difference in the estimated fair value and carrying value of the TRIFARI trademark (see Note 11 — Fair Value Measurements).
Goodwill |
Goodwill is not amortized but rather tested for impairment at least annually. The Company's annual impairment test is performed as of the first day of the third fiscal quarter.
The Company assesses qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that goodwill is impaired. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that goodwill is impaired, then the Company is not required to take further action. However, if the Company concludes otherwise,
F-14
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
then it is required to determine the fair value of goodwill and perform the quantitative impairment test by comparing the fair value and carrying amount of the related reporting unit. A two-step impairment test is then performed on goodwill. In the first step, the Company compares the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the market approach, as is typically used for companies providing products where the value of such a company is more dependent on the ability to generate earnings than the value of the assets used in the production process. Under this approach, the Company estimates fair value based on market multiples of earnings for comparable companies. The Company also uses discounted future cash flow analyses to corroborate these fair value estimates. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired, and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit's goodwill and compare it to the carrying value of the reporting unit's goodwill. The activities in the second step include valuing the tangible and intangible assets of the impaired reporting unit based on their fair value and determining the fair value of the impaired reporting unit's goodwill based upon the residual of the summed identified tangible and intangible assets.
As a result of the impairment analysis performed in connection with the Company's goodwill, no impairment charges were recorded during 2015, 2014 or 2013.
During 2014, the Company recorded additional goodwill as a result of the reacquisition of the KATE SPADE business in Southeast Asia; 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 subsidiaries upon closing of the joint venture with Walton Brown, as discussed above.
Accrued Expenses |
Accrued expenses for employee insurance, workers' compensation, contracted advertising and other outstanding obligations are assessed based on claims experience and statistical trends, open contractual obligations and estimates based on projections and current requirements. If these trends change significantly, then actual results would likely be impacted.
Share-Based Compensation |
The Company recognizes compensation expense based on the fair value of employee share-based awards, including stock options, restricted stock and restricted stock with performance features that impact vesting, net of estimated forfeitures. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. Determining the fair value of shares with market conditions at the grant date requires judgment, including the weighting of historical and estimated implied volatility of the Company's stock price and where appropriate, a market index. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Fair Value Measurements
The Company applies the relevant accounting guidance on fair value measurements to (i) all financial instruments that are being measured and reported on a fair value basis; (ii) non-financial assets and liabilities measured and reported at fair value on a non-recurring basis; and (iii) disclosures of fair value of certain financial assets and liabilities.
F-15
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following fair value hierarchy is used in selecting inputs for those instruments measured at fair value that distinguishes between assumptions based on market data (observable) and the Company's assumptions (unobservable inputs). The hierarchy consists of three levels.
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 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.
Fair value measurement for the Company's assets assumes the highest and best use (the use that generates the highest returns individually or as a group) for the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. This applies even if the intended use of the asset by the Company is different.
Fair value measurement for the Company's liabilities assumes that the liability is transferred to a market participant at the measurement date and that the nonperformance risk relating to the liability is the same before and after the transaction. Nonperformance risk refers to the risk that the obligation will not be fulfilled and includes the Company's own credit risk.
The Company does not apply fair value measurement to any instruments not required to be measured at fair value on a recurring basis.
Cash and Cash Equivalents |
All highly liquid investments with an original maturity of three months or less at the date of purchase are classified as cash equivalents.
Property and Equipment, Net |
Property and equipment is stated at cost less accumulated depreciation and amortization. Machinery and equipment and furniture and fixtures are depreciated using the straight-line method over their estimated useful lives of three to seven years. Leasehold improvements are depreciated over the shorter of the remaining lease term or the estimated useful lives of the assets. Costs for maintenance and repairs are expensed as incurred. Leased property meeting certain capital lease criteria is capitalized and the present value of the related lease payments is recorded as a liability. Capitalized leased assets are reflected as a component of Land and building and the related amortization is recorded on the straight-line method over the shorter of the estimated useful life of the asset or the lease term. The Company recognizes a liability for the fair value of an asset retirement obligation ("ARO") if the fair value can be reasonably estimated. The Company's ARO's are primarily associated with the removal and disposal of leasehold improvements at the end of a lease term when the Company is contractually obligated to restore a facility to a condition specified in the lease agreement. Amortization of ARO's is recorded on a straight-line basis over the lease term.
The Company capitalizes the costs of software developed or obtained for internal use. Capitalization of software developed or obtained for internal use commences during the development phase of the project. The Company amortizes software developed or obtained for internal use on a straight-line basis over five years, when such software is substantially ready for use.
F-16
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company evaluates the recoverability of property and equipment if circumstances indicate an impairment may have occurred. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows to be generated from such assets, on an undiscounted basis. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of the impaired assets is reduced to fair value through a charge to the Company's Consolidated Statement of Income.
The Company recorded pretax charges of $8.6 million, $10.4 million and $1.5 million in 2015, 2014 and 2013, respectively, to reduce the carrying values of certain property and equipment to their estimated fair values, which was recorded in SG&A on the accompanying Consolidated Statement of Income (see Note 11 — Fair Value Measurements).
Operating Leases |
The Company leases office space, retail stores and distribution facilities. Many of these operating leases provide for tenant improvement allowances, rent increases and/or contingent rent provisions. Rental expense is recognized on a straight-line basis commencing with the possession date of the property, which is the earlier of the lease commencement date or the date when the Company takes possession of the property. Certain store leases include contingent rents that are based on a percentage of retail sales over stated thresholds. Tenant allowances are amortized on a straight-line basis over the life of the lease as a reduction of rent expense and are included in SG&A.
The Company leases retail stores under leases with terms that are typically five or ten years. The Company amortizes rental abatements, construction allowances and other rental concessions classified as deferred rent on a straight-line basis over the initial term of the lease. The initial lease term can include one renewal under limited circumstances if the renewal is reasonably assured, based on consideration of all of the following factors: (i) a written renewal at the Company's option or an automatic renewal; (ii) there is no minimum sales requirement that could impair the Company's ability to renew; (iii) failure to renew would subject the Company to a substantial penalty; and (iv) there is an established history of renewals in the format or location.
Derivative Instruments |
The Company's derivative instruments are recorded in the Consolidated Balance Sheets as either an asset or liability and measured at their fair value. The changes in a derivative's fair value are recognized either currently in earnings or Accumulated other comprehensive loss, depending on whether the derivative qualifies for hedge accounting treatment. The Company tests each derivative for effectiveness at inception of each hedge and at the end of each reporting period.
The Company uses foreign currency forward contracts, collars, options and swap contracts for the purpose of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases by Kate Spade Japan Co., Ltd. ("KSJ"), a wholly-owned subsidiary. These instruments are designated as cash flow hedges. To the extent the hedges are highly effective, the effective portion of the changes in fair value is included in Accumulated other comprehensive loss, net of income taxes, with the corresponding asset or liability recorded in the Consolidated Balance Sheet. The ineffective portion of the cash flow hedge is recognized primarily as a component of Cost of goods sold in current period earnings. Amounts recorded in Accumulated other comprehensive loss are reflected in current period earnings when the hedged transaction affects earnings. If fluctuations in the relative value of the currencies involved in the hedging activities were to move dramatically, such movement could impact the Company's results of operations.
F-17
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company purchases short-term foreign currency contracts to neutralize balance sheet and other expected exposures, including intercompany loans. These derivative instruments do not qualify as cash flow hedges and are recorded at fair value with all gains or losses recognized as a component of SG&A or Other expense, net in current period earnings (see Note 12 — Derivative Instruments).
Foreign Currency Translation |
Assets and liabilities of non-US subsidiaries are translated at period-end exchange rates. Revenues and expenses for each month are translated using that month's average exchange rate and then are combined for the period totals. Resulting translation adjustments are included in Accumulated other comprehensive loss. Gains and losses on translation of intercompany loans with foreign subsidiaries of a long-term investment nature are also included in this component of Stockholders' equity (deficit).
Foreign Currency Transactions |
Outstanding balances in foreign currencies are translated at the end of period exchange rates. The resulting exchange differences are recorded in the Consolidated Statements of Income or Accumulated other comprehensive loss, as appropriate.
Cost of Goods Sold |
Cost of goods sold for wholesale operations includes the expenses incurred to acquire and produce inventory for sale, including product costs, freight-in, import costs, third party inspection activities, buying/sourcing agent commissions and provisions for shrinkage. For retail operations, in-bound freight from the Company's warehouse to its own retail stores is also included. Warehousing activities including receiving, storing, picking, packing and general warehousing charges are included in SG&A and, as such, the Company's gross profit may not be comparable to others who may include these expenses as a component of Cost of goods sold.
Advertising, Promotion and Marketing |
All costs associated with advertising, promoting and marketing of Company products are expensed during the periods when the activities take place. Costs associated with cooperative advertising programs involving agreements with customers, whereby customers are required to provide documentary evidence of specific performance and when the amount of consideration paid by the Company for these services is at or below fair value, are charged to SG&A. Costs associated with customer cooperative advertising allowances without specific performance guidelines are recorded as a reduction of sales. The Company incurred expenses of $56.0 million, $56.9 million and $42.8 million for advertising, marketing & promotion for all brands in 2015, 2014 and 2013, respectively.
Shipping and Handling Costs |
Shipping and handling costs, which are mostly comprised of warehousing activities, are included as a component of SG&A in the Consolidated Statements of Income. In fiscal years 2015, 2014 and 2013, shipping and handling costs were $40.8 million, $32.8 million and $26.4 million, respectively.
Investments in Unconsolidated Subsidiaries |
The Company uses the equity method of accounting for its investments in and its proportionate share in earnings of affiliates that it does not control, but over which it exerts significant influence (see Note 20 — Related Party Transactions). The Company considers whether the fair value of its equity method
F-18
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
investments has declined below carrying value whenever adverse events or changes in circumstances indicate the recorded value may not be recoverable.
Cash Dividends and Common Stock Repurchases |
On December 16, 2008, the Board of Directors announced the suspension of the Company's quarterly cash dividend indefinitely.
The Company's amended and restated revolving credit facility (as amended to date, the "ABL Facility") currently restricts its ability to pay dividends and repurchase stock (see Note 10 — Debt and Lines of Credit).
Fiscal Year |
The Company's fiscal year ends on the Saturday closest to December 31. The 2015 and 2013 fiscal years, which ended on January 2, 2016 and December 28, 2013, reflected 52-week periods. The 2014 fiscal year, which ended January 3, 2015 reflected a 53-week period.
Subsequent Events |
The Company's policy is to evaluate all events or transactions that occur from the balance sheet date through the date of the issuance of its financial statements. The Company has evaluated events or transactions that occurred from the balance sheet date through the date the Company issued these financial statements.
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).
NOTE 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. Since the date of the acquisition, the Company has 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 is reflected as goodwill. Accordingly, the Company recorded $21.8 million of
F-19
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
goodwill, which is 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 subsidiaries.
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 subsidiaries upon closing of the KS HMT joint venture with Walton Brown (see Note 1 — Basis of Presentation and Significant Accounting Policies).
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 |
NOTE 3: DISCONTINUED OPERATIONS AND DISPOSALS
The Company completed the sale of Lucky Brand in February 2014 and substantially completed the wind-down operations of the Juicy Couture business in the second quarter of 2014.
The Company recorded pretax and after tax (charges) income of $(1.5) million, $130.0 million and $143.4 million in 2015, 2014 and 2013, 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:
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Net sales | $ | 175 | $ | 209,519 | $ | 980,488 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Loss before (benefit) provision for income taxes | $ | (3,710 | ) | $ | (46,923 | ) | $ | (36,382 | ) | |
(Benefit) provision for income taxes | (577 | ) | 660 | 1,821 | ||||||
| | | | | | | | | | |
Loss from discontinued operations, net of income taxes | $ | (3,133 | ) | $ | (47,583 | ) | $ | (38,203 | ) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
(Loss) gain on disposal of discontinued operations, net of income taxes | $ | (1,488 | ) | $ | 130,017 | $ | 143,363 | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The Company recorded charges of $3.7 million, $26.6 million and $48.4 million during 2015, 2014 and 2013, respectively, related to its streamlining initiatives within Discontinued operations, net of income taxes.
F-20
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other |
As discussed in Note 1 — Basis of Presentation and Significant Accounting Policies, 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 not reflected as discontinued operations. The Company recorded pretax losses of $21.0 million, $38.2 million and $22.9 million during 2015, 2014 and 2013, respectively, related to the KATE SPADE SATURDAY and JACK SPADE retail stores that were substantially disposed in the second quarter of 2015.
NOTE 4: INVENTORIES, NET
Inventories, net consisted of the following:
In thousands | January 2, 2016 | January 3, 2015 | |||||
---|---|---|---|---|---|---|---|
Raw materials and work in process | $ | 525 | $ | 538 | |||
Finished goods | 191,354 | 157,703 | |||||
| | | | | | | |
Total | $ | 191,879 | $ | 158,241 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
NOTE 5: PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
In thousands | January 2, 2016 | January 3, 2015 | |||||
---|---|---|---|---|---|---|---|
Land and buildings | $ | 8,080 | $ | 9,300 | |||
Machinery and equipment | 121,212 | 140,189 | |||||
Furniture and fixtures | 70,206 | 61,694 | |||||
Leasehold improvements | 120,605 | 122,029 | |||||
| | | | | | | |
320,103 | 333,212 | ||||||
Less: Accumulated depreciation and amortization | 146,140 | 159,140 | |||||
| | | | | | | |
Total property and equipment, net | $ | 173,963 | $ | 174,072 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Depreciation and amortization expense on property and equipment for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, was $37.8 million, $38.3 million and $28.0 million, respectively, which included depreciation for property and equipment under capital leases of $0.7 million, $0.8 million and $1.9 million, respectively. Machinery and equipment under capital leases was $8.1 million and $9.3 million as of January 2, 2016 and January 3, 2015, respectively.
During the third quarter of 2013, the Company sold its West Chester, OH distribution center (the "Ohio Facility") for net proceeds of $20.3 million and entered into a sale-leaseback arrangement with the buyer for a 10-year term, which was classified as an operating lease. The Company realized a gain of $9.5 million associated with the sale-leaseback, which has been deferred and will be recognized as a reduction to SG&A over the lease term.
During the second quarter of 2013, the Company sold its North Bergen, NJ office for net proceeds of $8.7 million. The Company entered into a sale-leaseback arrangement with the buyer for a 12-year term with two five-year renewal options, which was classified as a capital lease (see Note 9 — Commitments and Contingencies). During the fourth quarter of 2015, the Company initiated a plan to exit approximately 24,000 square feet of the North Bergen, NJ office and recorded a $1.0 million impairment charge related to such action, which was recorded in SG&A on the accompanying Consolidated Statement of Income (see Note 11 — Fair Value Measurements).
F-21
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 6: GOODWILL AND INTANGIBLES, NET
The following tables disclose the carrying value of all intangible assets:
In thousands | Weighted Average Amortization Period | January 2, 2016 | January 3, 2015 | ||||||
---|---|---|---|---|---|---|---|---|---|
Amortized intangible assets: | |||||||||
Gross carrying amount: | |||||||||
Owned trademarks | — | $ | 467 | $ | 467 | ||||
Customer relationships | 12 years | 7,168 | 7,422 | ||||||
Merchandising rights | 4 years | 16,132 | 12,012 | ||||||
Reacquired rights | 3 years | 14,371 | 14,371 | ||||||
Other | 4 years | 2,322 | 2,322 | ||||||
| | | | | | | | | |
Subtotal | 40,460 | 36,594 | |||||||
| | | | | | | | | |
Accumulated amortization: | |||||||||
Owned trademarks | (467 | ) | (467 | ) | |||||
Customer relationships | (5,297 | ) | (4,769 | ) | |||||
Merchandising rights | (6,629 | ) | (4,108 | ) | |||||
Reacquired rights | (14,371 | ) | (9,604 | ) | |||||
Other | (2,308 | ) | (2,219 | ) | |||||
| | | | | | | | | |
Subtotal | (29,072 | ) | (21,167 | ) | |||||
| | | | | | | | | |
Net: | |||||||||
Owned trademarks | — | — | |||||||
Customer relationships | 1,871 | 2,653 | |||||||
Merchandising rights | 9,503 | 7,904 | |||||||
Reacquired rights | — | 4,767 | |||||||
Other | 14 | 103 | |||||||
| | | | | | | | | |
Total amortized intangible assets, net | 11,388 | 15,427 | |||||||
| | | | | | | | | |
Unamortized intangible assets: | |||||||||
Owned trademarks | 74,900 | 74,900 | |||||||
| | | | | | | | | |
Total intangible assets | $ | 86,288 | $ | 90,327 | |||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Goodwill(a) | $ | 48,730 | $ | 64,798 | |||||
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
- (a)
- The decrease in the balance primarily reflected the reclassification of $16.0 million of goodwill related to the KATE SPADE businesses in Hong Kong, Macau and Taiwan to Investment in unconsolidated subsidiaries in the first quarter of 2015 upon closing of the joint venture with Walton Brown (see Note 1 — Basis of Presentation and Significant Accounting Policies and Note 2 — Acquisition).
Amortization expense of intangible assets was $8.0 million, $8.2 million and $5.7 million for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively.
F-22
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated amortization expense of intangible assets for the next five years is as follows:
Fiscal Year | Amortization Expense (In millions) | |||
---|---|---|---|---|
2016 | $ | 3.6 | ||
2017 | 3.5 | |||
2018 | 2.8 | |||
2019 | 1.3 | |||
2020 | 0.2 |
The changes in carrying amount of goodwill for the years ended January 2, 2016 and January 3, 2015 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 | (6,017 | ) | (132 | ) | (6,149 | ) | ||||
| | | | | | | | | | |
Balance as of January 3, 2015 | 63,483 | 1,315 | 64,798 | |||||||
Reclassification of goodwill to investment in unconsolidated subsidiaries(a) | (16,009 | ) | — | (16,009 | ) | |||||
Translation adjustment | 138 | (197 | ) | (59 | ) | |||||
| | | | | | | | | | |
Balance as of January 2, 2016 | $ | 47,612 | $ | 1,118 | $ | 48,730 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
- (a)
- Represents the reclassification of the goodwill related to the KATE SPADE businesses in Hong Kong, Macau and Taiwan to Investment in unconsolidated subsidiaries in the first quarter of 2015 upon closing of the joint venture with Walton Brown (see Note 1 — Basis of Presentation and Significant Accounting Policies and Note 2 — Acquisition).
NOTE 7: ACCRUED EXPENSES
Accrued expenses consisted of the following:
In thousands | January 2, 2016 | January 3, 2015 | |||||
---|---|---|---|---|---|---|---|
Lease obligations | $ | 28,544 | $ | 28,152 | |||
Payroll, bonuses and other employment related obligations | 28,194 | 27,446 | |||||
Advertising | 11,841 | 11,026 | |||||
Taxes, other than taxes on income | 11,084 | 9,275 | |||||
Deferred income | 10,798 | 7,742 | |||||
Streamlining initiatives | 10,430 | 13,633 | |||||
Employee benefits | 7,231 | 5,354 | |||||
Insurance related | 4,384 | 6,109 | |||||
Interest | 4,082 | 355 | |||||
Accrued disposition costs | — | 2,325 | |||||
Other | 35,092 | 39,509 | |||||
| | | | | | | |
Total | $ | 151,680 | $ | 150,926 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
F-23
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 8: INCOME TAXES
Income (loss) before provision (benefit) for income taxes consisted of the following:
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
United States | $ | 43,198 | $ | (6,165 | ) | $ | (34,370 | ) | ||
International | (16,962 | ) | (1,488 | ) | (2,358 | ) | ||||
| | | | | | | | | | |
Total | $ | 26,236 | $ | (7,653 | ) | $ | (36,728 | ) | ||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The provision (benefit) for income taxes was as follows:
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Current: | ||||||||||
Federal | $ | 89 | $ | (77,366 | ) | $ | 686 | |||
Foreign | 3,686 | 809 | (2,326 | ) | ||||||
State and local | 279 | (7,472 | ) | 742 | ||||||
| | | | | | | | | | |
Total Current(a) | 4,054 | (84,029 | ) | (898 | ) | |||||
Deferred: | ||||||||||
Federal | 1,544 | 1,883 | (626 | ) | ||||||
Foreign | (1,641 | ) | (2,722 | ) | (437 | ) | ||||
State and local | 571 | 489 | (2,602 | ) | ||||||
| | | | | | | | | | |
Total Deferred | 474 | (350 | ) | (3,665 | ) | |||||
| | | | | | | | | | |
$ | 4,528 | $ | (84,379 | ) | $ | (4,563 | ) | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
- (a)
- Includes a net $87.4 million reduction in the reserve for uncertain tax positions, resulting from the expiration of the related statutes of limitations in the year ended January 3, 2015.
The Company files a consolidated federal income tax return. Deferred income tax assets and liabilities represent the tax effects of revenues, costs and expenses, which are recognized for tax purposes in different periods from those used for financial statement purposes.
The effective income tax rate differed from the statutory federal income tax rate as follows:
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Federal tax at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||
State and local income taxes, net of federal benefit | 1.1 | 97.6 | 7.2 | |||||||
Officer and share-based compensation | (5.8 | ) | 226.4 | — | ||||||
Change in valuation allowance | (72.5 | ) | (185.7 | ) | (13.2 | ) | ||||
Unrecognized tax benefits | 0.1 | 1,010.9 | (1.9 | ) | ||||||
Rate differential on foreign income | 30.4 | (46.8 | ) | (15.0 | ) | |||||
Gain on disposition of subsidiary | 18.0 | — | — | |||||||
Conversion of debt to equity | — | — | (1.5 | ) | ||||||
Indefinite-lived intangibles | 8.3 | (31.0 | ) | 4.8 | ||||||
Other, net | 2.7 | (3.9 | ) | (3.0 | ) | |||||
| | | | | | | | | | |
17.3 | % | 1,102.5 | % | 12.4 | % | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
F-24
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of net deferred taxes arising from temporary differences were as follows:
In thousands | January 2, 2016 | January 3, 2015 | |||||
---|---|---|---|---|---|---|---|
Deferred tax assets: | |||||||
Inventory valuation | $ | 10,762 | $ | 9,212 | |||
Nondeductible accruals | 9,975 | 10,363 | |||||
Share-based compensation | 20,824 | 11,827 | |||||
Net operating loss carryforward | 280,280 | 300,825 | |||||
Goodwill | 5,682 | 5,603 | |||||
Capital loss carryforward | 83,099 | 68,839 | |||||
Unrealized gains | 17,532 | 8,413 | |||||
Other | 13,114 | 9,580 | |||||
| | | | | | | |
Total deferred tax assets | 441,268 | 424,662 | |||||
| | | | | | | |
Deferred tax liabilities: | |||||||
Trademarks and other intangibles | (18,395 | ) | (17,622 | ) | |||
Property and equipment | (4,711 | ) | (5,632 | ) | |||
Other | (8,205 | ) | (2,746 | ) | |||
| | | | | | | |
Total deferred tax liabilities | (31,311 | ) | (26,000 | ) | |||
| | | | | | | |
Less: Valuation allowance | (425,761 | ) | (415,173 | ) | |||
| | | | | | | |
Net deferred tax liability | $ | (15,804 | ) | $ | (16,511 | ) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of January 2, 2016, and January 3, 2015, that arose from tax deductions related to share-based compensation that are greater than the compensation expense recognized for financial reporting. The deferred tax adjustment of that difference was $44.3 million and $44.7 million as of January 2, 2016 and January 3, 2015, respectively.
As of January 2, 2016, the Company and its domestic subsidiaries had net operating loss and foreign tax credit carryforwards of $738.7 million (federal tax effected amount of $258.5 million) for federal income tax purposes that may be used to reduce future federal taxable income. As of January 2, 2016, the cumulative amount of tax deductions related to share-based compensation and the corresponding compensation expense adjustment for financial reporting was $113.8 million (federal tax effected amount of $39.8 million). The net operating loss for federal income tax purposes will begin to expire in 2028.
As of January 2, 2016, the Company and certain of its domestic subsidiaries recorded a $64.9 million deferred tax asset related to net operating loss carryforwards for state income tax purposes that may be used to reduce future state taxable income. The net operating loss carryforwards for state income tax purposes begin to expire in 2016.
As of January 2, 2016, certain of the Company's foreign subsidiaries recorded an $1.1 million deferred tax asset related to net operating loss carryforwards for foreign income tax purposes that may be used to reduce future foreign taxable income. The net operating loss carryforwards for foreign income tax purposes begin to expire in 2016.
As of January 2, 2016, the Company had total deferred tax assets related to net operating loss carryforwards of $280.3 million, of which $218.7 million, $60.5 million and $1.1 million were attributable to federal, domestic state and local, and foreign subsidiaries, respectively.
F-25
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of January 2, 2016, the Company and its subsidiaries recorded valuation allowances in the amount of $425.8 million against its net operating loss and other deferred tax assets due to of its history of pretax losses and inability to carry back tax losses or credits for refunds. This represents a total increase in the valuation allowance of $10.6 million compared to the balance at January 3, 2015.
The Company has not provided for deferred taxes on the outside basis difference in its investments in foreign subsidiaries that are essentially permanent in duration. As of January 2, 2016, there were no unremitted earnings. It is not practicable to determine the amount of income taxes that would be payable in the event such outside basis differences reverse or unremitted earnings are repatriated.
The Company did not provide deferred taxes on the outside basis difference in its former investment in Lucky Brand. The Company's outside basis difference would result in the recording of a deferred tax asset with an offsetting valuation allowance. Due to the terms of the stock purchase agreement for the purchase of Lucky Brand shares, the buyer caused the Company to treat the transaction as a deemed sale of assets, and as a result, the deferred tax asset would not be recognizable.
Changes in the amounts of unrecognized tax benefits are summarized as follows:
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Balance as of beginning of period | $ | 9,224 | $ | 84,108 | $ | 85,999 | ||||
Increases from prior period positions | 1,305 | 32 | 1,436 | |||||||
Decreases from prior period positions | (823 | ) | — | (4,348 | ) | |||||
Increases from current period positions | 243 | — | 2,000 | |||||||
Decreases relating to settlements with taxing authorities | — | — | (153 | ) | ||||||
Reduction due to the lapse of the applicable statute of limitations | (893 | ) | (74,916 | ) | (826 | ) | ||||
| | | | | | | | | | |
Balance as of end of period(a) | $ | 9,056 | $ | 9,224 | $ | 84,108 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
- (a)
- As of January 2, 2016 and January 3, 2015, liabilities associated with the amounts are included within Income taxes payable and Other non-current liabilities on the accompanying Consolidated Balance Sheets.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. For the year ended January 2, 2016, the Company increased its accruals for interest and penalties by $0.7 million and $0.2 million, respectively. For the year ended January 3, 2015, the Company decreased its accruals for interest and penalties by $10.6 million and $1.6 million, respectively. For the year ended December 28, 2013, the Company increased its accruals for interest and penalties by $2.5 million and $0.1 million, respectively. At January 2, 2016 and at January 3, 2015, the accrual for interest was $2.5 million and $1.8 million, respectively and the accrual for penalties was $1.3 million and $1.1 million, respectively.
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $9.1 million. The Company expects to reduce the liability for unrecognized tax benefits by an amount between $0.7 million and $3.5 million within the next 12 months due to either settlement or the expiration of the statute of limitations.
The Company files tax returns in the US Federal jurisdiction and various state and foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which the Company has unrecognized tax benefits, is audited and finally resolved. While it is difficult to predict the final outcome or the timing of
F-26
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
resolution of any particular uncertain tax position, the Company believes that the unrecognized tax benefits reflect the most likely outcome. These unrecognized tax benefits, as well as the related interest, are adjusted in light of changing facts and circumstances. Favorable resolution would be recognized as a reduction to the effective tax rate in the period of resolution.
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 generally no longer subject to US Federal examination by the Internal Revenue Service ("IRS") for the years before 2010 and, with few exceptions, this applies to tax examinations by state authorities for the years before 2010. The Company filed amended US Federal tax returns for 2005, 2006 and 2007 to convert expiring foreign tax credits into foreign tax deductions. The result of the amended returns increased the Company's US Federal net operating loss carryforwards by $47.0 million. As a result, the IRS has the ability to reopen its past examinations of those years. In addition, the IRS and other taxing authorities can also subject the Company's net operating loss carryforwards to further review when such net operation loss carryforwards are utilized.
NOTE 9: COMMITMENTS AND CONTINGENCIES
Leases |
The Company leases office, showroom, warehouse/distribution, retail space and computers and other equipment under various non-cancelable operating lease agreements, which extend through 2028. Rental expense for 2015, 2014 and 2013 was $89.9 million, $87.0 million and $54.3 million, respectively, including certain costs such as real estate taxes and common area maintenance.
At January 2, 2016, minimum aggregate rental commitments under non-cancelable operating and capital leases were as follows:
Fiscal Year | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In millions | ||||||||||||||||||||||
Operating leases | $ | 61.7 | $ | 61.6 | $ | 59.2 | $ | 54.6 | $ | 53.9 | $ | 172.9 | $ | 463.9 | ||||||||
Capital leases | 2.1 | 2.1 | 2.2 | 2.3 | 2.3 | 10.8 | 21.8 |
Certain rental commitments have renewal options extending through the fiscal year 2028. Some of these renewals are subject to adjustments in future periods. Many of the leases call for additional charges, some of which are based upon various escalations, and, in the case of retail leases, the sales of the individual stores above base levels. Future rental commitments for leases have not been reduced by minimum non-cancelable sublease rentals aggregating $23.1 million.
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.
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 third parties, for which the Company or certain subsidiaries of the Company may remain secondarily liable for the remaining obligations on 136 such leases. As of January 2, 2016, the future aggregate payments under these leases amounted to $92.1 million and extended to various dates through 2025.
F-27
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Buying/Sourcing |
Pursuant to a buying/sourcing agency agreement, Li & Fung Limited ("Li & Fung") acts as the primary global apparel and accessories buying/sourcing agent, with the exception of our jewelry product lines. On March 24, 2015, the Company modified this arrangement in order to, among other things, transition the buying/sourcing activities for the Company's accessories products to an in-house model, beginning with the Spring 2016 collection. The Company pays Li & Fung an agency commission based on the cost of product purchases through Li & Fung. The Company is obligated to use Li & Fung as the primary buying/sourcing agent for ready-to-wear apparel products and the Company may use Li & Fung as a buying/sourcing agent with respect to accessories products, with all such product purchases applying toward a minimum volume commitment of inventory purchases each year through the expiration of the term of the agreement on March 31, 2018. The Company's agreement with Li & Fung is not exclusive.
Other |
No single customer accounted for 10.0% of net sales in 2015. As of January 2, 2016, three customers accounted for greater than 10.0% of total accounts receivable, with an aggregate total of 34.2%.
At January 2, 2016, the Company had short-term commitments for the purchase of raw materials and for the production of finished goods totaling $107.5 million.
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.
NOTE 10: DEBT AND LINES OF CREDIT
Long-term debt consisted of the following:
In thousands | January 2, 2016 | January 3, 2015 | |||||
---|---|---|---|---|---|---|---|
Term Loan credit facility, due April 2021(a) | $ | 393,431 | $ | 396,158 | |||
ABL Facility | — | 6,000 | |||||
Capital lease obligations | 8,126 | 8,585 | |||||
| | | | | | | |
Total debt | 401,557 | 410,743 | |||||
Less: Short-term borrowings(b) | 4,514 | 10,459 | |||||
| | | | | | | |
Long-term debt | $ | 397,043 | $ | 400,284 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
- (a)
- The balance as of January 2, 2016 and January 3, 2015 included an unamortized debt discount of $1.6 million and $1.8 million, respectively.
- (b)
- At January 2, 2016, the balance consisted of $4.0 million of Term Loan amortization payments and obligations under capital leases. At January 3, 2015, 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
F-28
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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) 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
F-29
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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.
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Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 January 2, 2016, 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) | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
ABL Facility(a) | $ | 200,000 | $ | 290,969 | $ | — | $ | 10,512 | $ | 189,488 | $ | 169,488 |
- (a)
- Availability under the ABL Facility is the lesser of $200.0 million or a borrowing base that is computed monthly and comprised of 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 $8.1 and $8.6 million as of January 2, 2016 and January 3, 2015, respectively, included $0.5 million within Short-term borrowings on the accompanying Consolidated Balance Sheets.
NOTE 11: FAIR VALUE MEASUREMENTS
As discussed in Note 1 — Basis of Presentation and Significant Accounting Policies, the Company utilizes a three level hierarchy that defines the assumptions used to measure certain assets and liabilities at fair value.
The following table presents the financial assets and liabilities the Company measures at fair value on a recurring basis, based on such fair value hierarchy:
| Level 2 | ||||||
---|---|---|---|---|---|---|---|
In thousands | January 2, 2016 | January 3, 2015 | |||||
Financial Assets: | |||||||
Derivatives | $ | 1,017 | $ | 3,193 | |||
Financial Liabilities: | |||||||
Derivatives | $ | (354 | ) | $ | — |
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.
F-31
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
| | Fair Value Measured and Recorded at Reporting Date Using: | | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Carrying Value as of January 2, 2016 | Total Losses — Year Ended January 2, 2016 | ||||||||||||||
In thousands | Level 1 | Level 2 | Level 3 | |||||||||||||
Property and equipment | $ | 2,292 | $ | — | $ | — | $ | 2,292 | $ | 8,596 |
As a result of a decline in the respective future anticipated cash flows of certain kate spade new york retail locations, as well as the Company's decisions to: (i) no longer directly operate its Company-owned stores in Brazil; (ii) close all KATE SPADE SATURDAY retail operations and JACK SPADE retail stores; and (iii) consolidate office space at the Company's North Bergen, NJ office (see Note 13 — Streamlining Initiatives), the Company determined that a portion of the carrying values of such assets exceeded their fair values, resulting in impairment charges, which were recorded in SG&A on the accompanying Consolidated Statement of Income.
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:
| | Fair Value Measured and Recorded at Reporting Date Using: | | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Carrying Value as of January 3, 2015 | Total Losses — Year Ended January 3, 2015 | ||||||||||||||
In thousands | Level 1 | Level 2 | Level 3 | |||||||||||||
Property and equipment | $ | 4,127 | $ | — | $ | — | $ | 4,127 | $ | 10,358 | ||||||
Intangibles, net | — | — | — | — | 1,533 |
As a result of the Company's decision to close all KATE SPADE SATURDAY retail operations and JACK SPADE retail stores in the first half of 2015 (see Note 3 — Discontinued Operations and Disposals and Note 13 — Streamlining Initiatives), as well as a result of a decline in the respective future anticipated cash flows of certain retail locations of kate spade new york, KATE SPADE SATURDAY AND JACK SPADE, the Company determined that a portion of the carrying values of the assets exceeded their fair values, resulting in impairment charges, which were recorded in SG&A on the accompanying Consolidated Statement of Income.
In the fourth quarter of 2014, the Company recorded a non-cash impairment charge of $1.5 million to reduce the carrying balance of the TRIFARI trademark to zero, due to the expected exit of that brand.
The following table presents the non-financial assets the Company measured at fair value on a non-recurring basis in 2013, based on such fair value hierarchy:
| | Fair Value Measured and Recorded at Reporting Date Using: | | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Net Carrying Value as of December 28, 2013 | Total Losses — Year Ended December 28, 2013 | ||||||||||||||
In thousands | Level 1 | Level 2 | Level 3 | |||||||||||||
Property and equipment | $ | 15,706 | $ | — | $ | — | $ | 15,706 | $ | 1,480 | ||||||
Intangibles, net | 1,900 | — | — | 1,900 | 3,300 | |||||||||||
Other Assets | — | — | — | — | 6,109 |
The Company performed impairment analyses on certain property and equipment as a result of a decline in the respective future anticipated cash flows of certain retail locations of JACK SPADE and the decision to revise the Company's plan to outsource its distribution function (see Note 13 — Streamlining Initiatives). The Company determined that a portion of the carrying values of the assets exceeded their fair
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Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
values, resulting in impairment charges, which were recorded in SG&A on the accompanying Consolidated Statement of Income.
In the third quarter of 2013, the Company recorded a non-cash impairment charge of $3.3 million, which reflected the difference in the estimated fair value and carrying value of the TRIFARI trademark. The Company estimated the fair value of the trademark using the income-based relief-from-royalty valuation method which assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use a comparable asset. The Company assumed a market royalty rate of 3.5%, a discount rate of 14.0% and a long term growth rate of 2.0%.
Subsequent to the sale of its former global Mexx business, the Company retained a noncontrolling ownership interest in such business and accounted for its investment at cost (see Note 17 — Additional Financial Information). In the second quarter of 2013, the Company performed an impairment test based on market multiples of comparable transactions and determined that the carrying value of the investment exceeded its fair value, resulting in an impairment charge, which was recorded in Impairment of cost investment on the accompanying Consolidated Statement of Income.
The fair values of the Company's Level 3 Property and equipment and Intangible assets 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:
| January 2, 2016 | January 3, 2015 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
In thousands | Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||
Term Loan credit facility, due April 2021(a) | $ | 381,333 | $ | 393,431 | $ | 384,786 | $ | 396,158 | |||||
Revolving credit facility(b) | — | — | 6,000 | 6,000 |
- (a)
- Carrying values include unamortized debt discount or premium.
- (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,
F-33
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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 LGP would pay the Lucky Brand Note in full.
NOTE 12: 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 purposes of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases by its business in Japan. As of January 2, 2016, the Company had forward contracts maturing through June 2016 to sell 689.5 million yen for $5.9 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 January 2, 2016, the Company had forward contracts to sell 5.1 billion yen for $42.2 million maturing through March 2016. Transaction gains (losses) for the year ended January 2, 2016 were not significant. Transaction gains of $4.5 million and $8.5 million related to these derivative instruments for the January 3, 2015 and December 28, 2013, respectively, were reflected within Other expense, net on the accompanying Consolidated Statements of Income.
The following table summarizes the fair value and presentation in the Consolidated Financial Statements for derivatives designated as hedging instruments and derivatives not designated as hedging instruments:
| Foreign Currency Contracts Designated as Hedging Instruments | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset Derivatives | Liability Derivatives | |||||||||||||||
Period | Balance Sheet Location | Notional Amount | Fair Value | Balance Sheet Location | Notional Amount | Fair Value | |||||||||||
In thousands | |||||||||||||||||
January 2, 2016 | Other current assets | $ | 26,612 | $ | 1,017 | Accrued expenses | $ | — | $ | — | |||||||
January 3, 2015 | Other current assets | 39,100 | 3,066 | Accrued expenses | — | — |
The following table summarizes the fair value and presentation in the Consolidated Financial Statements for derivatives not designated as hedging instruments:
| Foreign Currency Contracts Not Designated as Hedging Instruments | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset Derivatives | Liability Derivatives | |||||||||||||||
Period | Balance Sheet Location | Notional Amount | Fair Value | Balance Sheet Location | Notional Amount | Fair Value | |||||||||||
In thousands | |||||||||||||||||
January 2, 2016 | Other current assets | $ | — | $ | — | Accrued expenses | $ | 42,156 | $ | 354 | |||||||
January 3, 2015 | Other current assets | 33,350 | 127 | Accrued expenses | — | — |
F-34
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the effect of foreign currency exchange contracts on the 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 of Gain or (Loss) Recognized in Operations on Derivative (Ineffective Portion) | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal year ended January 2, 2016 | $ | (1,409 | ) | Cost of goods sold | $ | 1,848 | $ | — | ||||
Fiscal year ended January 3, 2015 | 2,854 | Cost of goods sold | 1,161 | — | ||||||||
Fiscal year ended December 28, 2013 | 2,911 | Cost of goods sold | 1,326 | — |
NOTE 13: 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.
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 |
Based on a probability weighted approach, the Company recorded non-cash asset impairment charges in 2014 related to the then-likely closure of the KATE SPADE SATURDAY operations and JACK SPADE Company-owned stores, as discussed above.
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 14 — 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 closure of the Company's former New York office as well as reduction of office space in the Company's office in North
F-35
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Bergen, NJ, the Company recorded charges related to asset impairment, contract terminations and other charges in 2014 and 2015.
The Company expects to pay approximately $7.7 million of accrued streamlining costs during 2016. The Company does not expect any significant restructuring charges in 2016. In addition, the Company expects to pay $2.7 million of accrued streamlining costs related to discontinued operations in 2016. A summary rollforward and components of the Company's streamlining initiatives were as follows:
In thousands | Payroll and Related Costs | Contract Termination Costs | Asset Write-Downs | Other Costs | Total | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 29, 2012 | $ | 4,559 | $ | 4,243 | $ | — | $ | 15,764 | $ | 24,566 | ||||||
2013 provision(a) | 5,657 | 6 | 1,744 | 3,194 | 10,601 | |||||||||||
2013 asset write-downs | — | — | (1,744 | ) | — | (1,744 | ) | |||||||||
Translation difference | (7 | ) | 12 | — | 18 | 23 | ||||||||||
2013 spending(a) | (7,173 | ) | (2,110 | ) | — | (7,269 | ) | (16,552 | ) | |||||||
| | | | | | | | | | | | | | | | |
Balance at December 28, 2013 | 3,036 | 2,151 | — | 11,707 | 16,894 | |||||||||||
2014 provision(a) | 33,729 | 1,540 | 6,367 | 316 | 41,952 | |||||||||||
2014 asset write-downs | — | — | (6,367 | ) | — | (6,367 | ) | |||||||||
Translation difference | — | — | — | (3 | ) | (3 | ) | |||||||||
2014 spending(a) | (34,685 | ) | (2,704 | ) | — | (5,190 | ) | (42,579 | ) | |||||||
| | | | | | | | | | | | | | | | |
Balance at January 3, 2015 | 2,080 | 987 | — | 6,830 | 9,897 | |||||||||||
2015 provision(a) | 12,480 | 11,271 | 8,333 | 3,311 | 35,395 | |||||||||||
2015 asset write-downs | — | — | (8,333 | ) | — | (8,333 | ) | |||||||||
Translation difference | (1 | ) | — | — | 29 | 28 | ||||||||||
2015 spending(a) | (12,221 | ) | (7,465 | ) | — | (6,792 | ) | (26,478 | ) | |||||||
| | | | | | | | | | | | | | | | |
Balance at January 2, 2016(b) | $ | 2,338 | $ | 4,793 | $ | — | $ | 3,378 | $ | 10,509 | ||||||
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
- (a)
- Payroll and related costs provision and spending include $0.3 million, $17.3 million and $2.8 million in 2015, 2014 and 2013, respectively, of non-cash share-based compensation expense.
- (b)
- The balance in other costs at January 2, 2016 includes $2.2 million for a withdrawal liability incurred in 2011 related to a multi-employer pension plan that the Company will pay through June 1, 2016.
Expenses associated with the Company's streamlining actions were primarily recorded in SG&A in the Consolidated Statements of Income and impacted reportable segments and Corporate as follows:
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
KATE SPADE North America | $ | 19,056 | $ | 7,319 | $ | 791 | ||||
KATE SPADE International | 8,916 | 1,567 | — | |||||||
Adelington Design Group | 1,832 | 982 | 272 | |||||||
Other(a) | 5,591 | 32,084 | 9,538 | |||||||
| | | | | | | | | | |
Total | $ | 35,395 | $ | 41,952 | $ | 10,601 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
- (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.
F-36
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 14: SHARE-BASED COMPENSATION
The Company issues stock options, restricted shares, restricted share units and shares with performance features to employees under share-based compensation plans, which are described herein.
Compensation expense for stock options and restricted stock awards is measured at fair value on the date of grant based on the number of shares granted. Beginning in 2015, the fair value of stock options is estimated based on the Trinomial lattice pricing model; the fair value of restricted shares is based on the quoted market price on the date of the grant. Stock option expense is recognized using the straight-line attribution basis over the entire vesting period of the award. Restricted share, restricted share unit and performance share expense is recognized on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in substance, multiple awards. Expense is recognized net of estimated forfeitures.
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.
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 $25.6 million, $37.3 million and $7.3 million for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively. Compensation expense included $0.3 million, $17.3 million and $2.8 million for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively, that was classified as restructuring.
Stock Plans |
In March 1992, March 2000, March 2002, March 2005, May 2011 and May 2013 the Company adopted the "1992 Plan," the "2000 Plan," the "2002 Plan," the "2005 Plan," the "2011 Plan" and the "2013 Plan" respectively, under which options (both nonqualified options and incentive stock options) to acquire shares of common stock may be granted to officers, other key employees, consultants and outside directors, in each case as selected by the Company's Compensation Committee (the "Committee"). Payment by option holders upon exercise of an option may be made in cash or, with the consent of the Committee, by delivering previously acquired shares of Company common stock or any other method approved by the Committee. If previously acquired shares are tendered as payment, the shares are subject to a six-month holding period, as well as specific authorization by the Committee. To date, this type of exercise has not been approved or transacted. The Committee has the authority under all of the plans to allow for a cashless exercise option, commonly referred to as a "broker-assisted exercise." Under this method of exercise, participating employees must make a valid exercise of their stock options through a designated broker. Based on the exercise and information provided by the Company, the broker sells the shares on the open market. The employees receive cash upon settlement, some of which is used to pay the purchase price. Neither the stock-for-stock nor broker-assisted cashless exercise option are generally available to
F-37
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
executive officers or directors of the Company. Although there are none currently outstanding, stock appreciation rights may be granted in connection with all or any part of any option granted under the plans and may also be granted without a grant of a stock option. Vesting schedules will be accelerated upon a change of control of the Company. Options and stock appreciation rights generally may not be transferred during the lifetime of a holder.
Awards under the 2002 and 2005 Plans may also be made in the form of dividend equivalent rights, restricted stock, unrestricted stock performance shares and restricted stock units. Exercise prices for awards under the 2000, 2002, 2005, 2011 and 2013 Plans are determined by the Committee; to date, all stock options have been granted at an exercise price not less than the closing market value of the underlying shares on the date of grant.
Awards granted under plans no longer in use by the Company, including the 2005, 2002, 2000 and 1992 Plans, remain in effect in accordance with their terms. The 2011 Plan provides for the issuance of up to 3.0 million shares of common stock, of which no more than 1.5 million shares may be awarded pursuant to grants of restricted stock, restricted stock units, unrestricted stock and performance shares. The 2011 Plan expires in 2021. The 2013 Plan provides for the issuance of up to 9.5 million shares of common stock. The 2013 Plan expires in 2023. As of January 2, 2016, 7.6 million shares were available for future grant under the 2011 and 2013 Plans.
The Company delivers treasury shares upon the exercise of stock options and vesting of restricted shares. The difference between the cost of the treasury shares and the exercise price of the options has been reflected on a first-in, first-out basis.
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.
Beginning in 2015, the Company utilizes the Trinomial 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.
| Fiscal Year Ended | |||
---|---|---|---|---|
Valuation Assumptions: | January 2, 2016 | December 28, 2013 | ||
Weighted-average fair value of options granted | $15.92 | $10.32 | ||
Expected volatility | 76.5% | 59.5% | ||
Weighted-average volatility | 58.7% | 59.5% | ||
Expected term (in years) | 4.2 | 4.9 | ||
Dividend yield | — | — | ||
Risk-free rate | 1.9% | 0.1% to 3.9% | ||
Expected annual forfeiture | 15.3% | 12.4% |
Expected volatilities are based on a term structure of implied volatility, which assumes changes in volatility over the life of an option.
F-38
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 and 2013. 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 the Company's stock option plans as of January 2, 2016 and changes therein during the fiscal year then ended are as follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value (In thousands) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding January 3, 2015 | 1,030,969 | $ | 11.25 | 3.9 | $ | 21,613 | |||||||
Granted | 174,458 | 34.29 | |||||||||||
Exercised | (244,780 | ) | 10.07 | 5,869 | |||||||||
Cancelled/expired | (54,764 | ) | 22.08 | ||||||||||
| | | | | | | | | | | | | |
Outstanding at January 2, 2016 | 905,883 | 15.35 | 3.4 | $ | 5,686 | ||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Vested or expected to vest at January 2, 2016 | 873,924 | 14.68 | 3.4 | $ | 5,686 | ||||||||
Exercisable at January 2, 2016 | 573,593 | 8.12 | 2.4 | $ | 5,686 |
The intrinsic value per option exercised was $23.98, $24.62 and $16.46 for the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively.
As of January 2, 2016, there were approximately 0.3 million nonvested stock options with a weighted average exercise price of $13.20 and there was $2.2 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 average period of 1.3 years. The total fair value of shares vested for the years ended January 2, 2016, January 3, 2015 and December 28, 2013 was $2.3 million, $3.2 million and $4.9 million, respectively.
Restricted Stock |
The Company grants restricted shares and restricted share units to certain domestic and international employees. These shares are subject to transfer restrictions and risk of forfeiture until earned by continued employment. These shares generally vest 50% on the second anniversary date from the date of grant and 50% on the third anniversary date from the date of grant.
The Company grants performance shares to certain of its employees, including the Company's executive officers. Performance shares are earned based on the achievement of certain profit or other targets aligned with the Company's strategy.
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.
F-39
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2014, the Company granted 1,291,487 MSUs to a group of key executives with an aggregate grant date fair value of $64.9 million as staking grants ("Staking Grants") and as part of an annual LTIP. The Staking Grants have a grant date fair value of $54.8 million and vest 50% on the third anniversary of grant and 50% on the fifth anniversary of grant. The MSUs included in the LTIP represent a portion of the awards granted under that plan, have a grant date fair value of $10.1 million and vest 50% on each of the second and third anniversaries of the grant date. The MSUs issued as Staking Grants and as part of the LTIP have a minimum earnout of 30% of target. 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 years ended January 2, 2016 and January 3, 2015, the following assumptions were used in determining fair value:
| Fiscal Years Ended | |||
---|---|---|---|---|
Valuation Assumptions: | January 2, 2016 | January 3, 2015 | ||
Weighted-average fair value | $43.35 | $50.24 | ||
Expected volatility | 43.2% | 52.3% | ||
Dividend yield | — | — | ||
Risk-free rate | 1.1% to 1.7% | 1.68% | ||
Weighted-average expected annual forfeiture | 5.0% | 4.8% |
In 2015, 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.
In 2014, the other portion of the LTIP consists of an award of 202,541 performance shares that vests on the third anniversary of the grant date. The performance shares have a grant date fair value of $8.9 million that was calculated using a Monte Carlo simulation model.
For the years ended January 2, 2016 and January 3, 2015, the following assumptions were used in determining fair value:
| Fiscal Years Ended | |||
---|---|---|---|---|
Valuation Assumptions: | January 2, 2016 | January 3, 2015 | ||
Weighted-average fair value | $37.47 | $43.93 | ||
Expected volatility | 41.6% | 44.2% | ||
Dividend yield | — | — | ||
Risk-free rate | 1.0% | 0.7% | ||
Weighted-average expected annual forfeiture | 4.1% | 4.0% |
Each of the Company's non-employee Directors received an annual grant of shares of common stock with a value of $100,000 as part of an annual retainer for serving on the Board of Directors, with the exception of the Chairman of the Board, who received an annual grant of shares of common stock with a value of $150,000. Retainer shares are non-transferable until the first anniversary of the grant, with 25% becoming transferable on each of the first and second anniversary of the grant and 50% becoming transferable on the third anniversary, subject to certain exceptions.
F-40
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of award activity under the Company's restricted stock plans as of January 2, 2016 and changes therein during the fiscal year then ended are as follows:
| Shares | Weighted Average Grant Date Fair Value | |||||
---|---|---|---|---|---|---|---|
Nonvested stock at January 3, 2015 | 1,719,574 | $ | 45.39 | ||||
Granted | 570,484 | 36.87 | |||||
Vested | (112,720 | ) | 20.07 | ||||
Cancelled | (253,088 | ) | 45.67 | ||||
| | | | | | | |
Nonvested stock at January 2, 2016 | 1,924,250 | $ | 44.31 | ||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Expected to vest as of January 2, 2016(a) | 1,751,883 | $ | 44.52 | ||||
| | | | | | | |
| | | | | | | |
| | | | | | | |
- (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.
The weighted average grant date fair value of restricted shares granted in the years ended January 2, 2016, January 3, 2015 and December 28, 2013 was $36.87, $48.05 and $21.79, respectively.
As of January 2, 2016, there was $37.9 million of total unrecognized compensation cost related to nonvested stock awards granted under the restricted stock plans. That expense is expected to be recognized over a weighted average period of 2.0 years. The total fair value of shares vested during the years ended January 2, 2016, January 3, 2015 and December 28, 2013 was $2.3 million, $6.9 million and $1.6 million, respectively.
NOTE 15: PROFIT-SHARING RETIREMENT, SAVINGS AND DEFERRED COMPENSATION PLANS
The Company maintains a qualified defined contribution plan for its eligible employees. This plan allows deferred arrangements under section 401(k) of the Internal Revenue Code and provides for employer-matching contributions. The plan contains provisions for a discretionary profit sharing component, although such a contribution was not made for 2015, 2014 or 2013.
The Company's aggregate 401(k)/Profit Sharing Plan contribution expense, which is included in SG&A in the accompanying Consolidated Statements of Operations, was $1.9 million, $1.4 million and $1.3 million for the fiscal years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively.
The Company has a non-qualified supplemental retirement plan for certain employees whose benefits under the 401(k)/Profit Sharing Plan are expected to be constrained by the operation of certain Internal Revenue Code limitations. The supplemental plan provides a benefit equal to the difference between the contribution that would be made for an employee under the tax-qualified plan absent such limitations and the actual contribution under that plan. The supplemental plan also allows certain employees to defer up to 50% of their base salary and up to 100% of their annual bonus. The Company established an irrevocable "rabbi" trust to which the Company makes periodic contributions to provide a source of funds to assist in meeting its obligations under the supplemental plan. The principal of the trust, and earnings thereon, are to be used exclusively for the participants under the plan, subject to the claims of the Company's general creditors.
F-41
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16: EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per common share.
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands, except per share data | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Income (loss) from continuing operations | $ | 21,708 | $ | 76,726 | $ | (32,165 | ) | |||
(Loss) income from discontinued operations, net of income taxes | (4,621 | ) | 82,434 | 105,160 | ||||||
| | | | | | | | | | |
Net income | $ | 17,087 | $ | 159,160 | $ | 72,995 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Basic weighted average shares outstanding | 127,634 | 126,264 | 121,057 | |||||||
Stock options and nonvested shares(a)(b) | 588 | 755 | — | |||||||
Convertible Notes(c) | — | — | — | |||||||
| | | | | | | | | | |
Diluted weighted average shares outstanding | 128,222 | 127,019 | 121,057 | |||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Earnings (loss) per share: | ||||||||||
Basic | ||||||||||
Income (loss) from continuing operations | $ | 0.17 | $ | 0.61 | $ | (0.27 | ) | |||
(Loss) income from discontinued operations | (0.04 | ) | 0.65 | 0.87 | ||||||
| | | | | | | | | | |
Net income | $ | 0.13 | $ | 1.26 | $ | 0.60 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Diluted | ||||||||||
Income (loss) from continuing operations | $ | 0.17 | $ | 0.60 | $ | (0.27 | ) | |||
(Loss) income from discontinued operations | (0.04 | ) | 0.65 | 0.87 | ||||||
| | | | | | | | | | |
Net income | $ | 0.13 | $ | 1.25 | $ | 0.60 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
- (a)
- Because the Company incurred a loss from continuing operations for the year ended December 28, 2013, outstanding stock options and nonvested shares are antidilutive. Accordingly, for the year ended December 28, 2013, approximately 5.2 million outstanding stock options and approximately 0.5 million outstanding nonvested shares were excluded from the computation of diluted loss per share.
- (b)
- Excludes approximately 0.5 million nonvested shares for the year ended December 28, 2013, for which the performance criteria were not achieved.
- (c)
- Because the Company incurred a loss from continuing operations for the year ended December 28, 2013, approximately 1.5 million potentially dilutive shares issuable upon conversion of the Convertible Notes were considered antidilutive for such period and were excluded from the computation of diluted loss per share.
NOTE 17: ADDITIONAL FINANCIAL INFORMATION
Licensing-Related Transactions
In November 2011, in connection with the Company's sale of its LIZ CLAIBORNE brand and certain rights to its MONET brand to JCPenney, the Company entered into an agreement with JCPenney to develop exclusive brands for JCPenney, which included payment to the Company of a $20.0 million refundable advance. The agreement terminated by its terms without being exercised on February 1, 2013,
F-42
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and the $20.0 million advance was refunded to JCPenney on February 8, 2013, pursuant to the terms of the agreement.
Following the sale of the Liz Claiborne brand name, the Company maintains: (i) an exclusive supplier arrangement to provide JCPenney with LIZ CLAIBORNE and MONET branded jewelry; (ii) a royalty-free license through December 2016 for the LIZ CLAIBORNE NEW YORK brand, which is sold exclusively at QVC through the amended license agreement between the Company and QVC; and (iii) a royalty-free license through July 2020 to use the LIZWEAR brand to design, manufacture and distribute LIZWEAR-branded products to the club store channel.
Other Expense, Net |
Other expense, net primarily consisted of (i) equity in losses of the Company's equity investees of $6.7 million, $2.6 million and $1.2 million for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively; and (ii) foreign currency transaction losses of $4.3 million, $1.6 million and $1.1 million for the years ended January 2, 2016, January 3, 2015 and December 28, 2013, respectively.
Consolidated Statements of Cash Flows Supplementary Disclosures |
During the years ended January 2, 2016, January 3, 2015 and December 28, 2013, net income tax (payments) refunds were $(3.1) million, $1.0 million and $2.4 million, respectively. During the years ended January 2, 2016, January 3, 2015 and December 28, 2013, the Company made interest payments of $13.3 million, $34.1 million and $43.6 million, respectively. The Company received interest payments of $4.0 million for the year ended January 3, 2015. As of January 2, 2016, January 3, 2015 and December 28, 2013, the Company accrued capital expenditures totaling $8.1 million, $9.8 million and $13.3 million, respectively.
On February 3, 2014, the Company received a three-year $85.0 million note issued by Lucky Brand LLC (see Note 1 — Basis of Presentation and Significant Accounting Policies), which was reflected in Note Receivable on the accompanying Consolidated Balance Sheet.
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).
During 2013, the Company received net proceeds of $4.0 million from the sale of its noncontrolling interest in Mexx Lifestyle B.V., which is reflected as Net proceeds from disposition on the accompanying Consolidated Statement of Cash Flows.
During 2013, holders of $19.9 million aggregate principal amount of the Convertible Notes converted all of such outstanding Convertible Notes into 5,634,179 shares of the Company's common stock.
NOTE 18: SEGMENT REPORTING
The Company operates its kate spade new york and JACK SPADE brands through one operating segment in North America and three operating segments internationally: Japan, Asia (excluding Japan) and Europe. The Company's Adelington Design Group reportable segment is also an operating segment. The three reportable segments described below represent the Company's activities for which separate financial information is available and which is utilized on a regular basis by the Company's CODM to evaluate performance and allocate resources. In identifying the Company's reportable segments, the Company considers its management structure and the economic characteristics, products, customers, sales growth
F-43
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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 and Significant Accounting Policies. Sales are reported based on a destination basis. The Company, as licensor, also licenses to third parties the right to produce and market
F-44
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
products bearing certain Company-owned trademarks; the resulting royalty income is included within the results of the associated segment.
Dollars in thousands | Net Sales | % to Total | Depreciation and Amortization Expense(a) | Adjuste EBITDA(b) | % of Sales | Segment Assets | Expenditures for Long- Lived Assets | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year Ended | ||||||||||||||||||||||
January 2, 2016 | ||||||||||||||||||||||
KATE SPADE North America | $ | 1,031,123 | 83.0 | % | $ | 29,588 | $ | 177,593 | 17.2 | % | $ | 504,571 | $ | 49,827 | ||||||||
KATE SPADE International | 188,151 | 15.1 | % | 12,164 | 17,697 | 9.4 | % | 180,259 | 19,909 | |||||||||||||
Adelington Design Group | 23,446 | 1.9 | % | 206 | 4,523 | 19.3 | % | 13,852 | 471 | |||||||||||||
Corporate and Other | — | — | 7,979 | — | — | 281,679 | — | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Totals | $ | 1,242,720 | 100.0 | % | $ | 49,937 | $ | 70,207 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year Ended | ||||||||||||||||||||||
January 3, 2015 | ||||||||||||||||||||||
KATE SPADE North America | $ | 891,766 | 78.3 | % | $ | 31,905 | $ | 143,009 | 16.0 | % | $ | 467,383 | $ | 76,707 | ||||||||
KATE SPADE International | 213,582 | 18.8 | % | 13,904 | 810 | 0.4 | % | 198,677 | 55,038 | |||||||||||||
Adelington Design Group | 33,255 | 2.9 | % | 887 | 4,092 | 12.3 | % | 18,671 | 476 | |||||||||||||
Corporate and Other | — | — | 7,742 | (940 | ) | — | 241,607 | — | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Totals | $ | 1,138,603 | 100.0 | % | $ | 54,438 | $ | 132,221 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Fiscal Year Ended | ||||||||||||||||||||||
December 28, 2013 | ||||||||||||||||||||||
KATE SPADE North America | $ | 597,748 | 74.4 | % | $ | 23,961 | $ | 70,250 | 11.8 | % | $ | 58,089 | ||||||||||
KATE SPADE International | 145,404 | 18.1 | 8,476 | (815 | ) | (0.6 | )% | 9,139 | ||||||||||||||
Adelington Design Group | 60,219 | 7.5 | 625 | 12,008 | 19.9 | % | 363 | |||||||||||||||
Corporate and Other | — | — | 5,718 | (4,334 | ) | — | — | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Totals | $ | 803,371 | 100.0 | % | $ | 38,780 | $ | 67,591 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
- (a)
- For the years ended January 2, 2016, January 3, 2015 and December 28, 2013, $3.6 million, $5.2 million and $3.6 million, respectively, of Corporate depreciation and amortization was recorded within Interest expense, net on the accompanying Consolidated Statements of Income.
- (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.
F-45
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables provide a reconciliation to Income (loss) from continuing operations:
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Reportable Segments Adjusted EBITDA: | ||||||||||
KATE SPADE North America | $ | 177,593 | $ | 143,009 | $ | 70,250 | ||||
KATE SPADE International(a) | 17,697 | 810 | (815 | ) | ||||||
Adelington Design Group | 4,523 | 4,092 | 12,008 | |||||||
Other(b) | — | (940 | ) | (4,334 | ) | |||||
| | | | | | | | | | |
Total Reportable Segments Adjusted EBITDA | 199,813 | 146,971 | 77,109 | |||||||
Depreciation and amortization, net(c) | (46,311 | ) | (48,441 | ) | (35,088 | ) | ||||
Charges due to streamlining initiatives(d), brand-exiting activities, acquisition related costs, impairment of intangible assets and loss on asset disposals and impairments, net | (40,399 | ) | (30,371 | ) | (15,716 | ) | ||||
Joint venture contract termination fee | (26,000 | ) | — | — | ||||||
Share-based compensation(e) | (25,577 | ) | (37,270 | ) | (7,269 | ) | ||||
Adjusted equity loss included in Reportable Segments Adjusted EBITDA(f) | 4,872 | 2,583 | 1,179 | |||||||
| | | | | | | | | | |
Operating Income | 66,398 | 33,472 | 20,215 | |||||||
Other expense, net(a) | (11,137 | ) | (4,033 | ) | (2,062 | ) | ||||
Loss on settlement of note receivable | (9,873 | ) | — | — | ||||||
Impairment of cost investment | — | — | (6,109 | ) | ||||||
Loss on extinguishment of debt | — | (16,914 | ) | (1,707 | ) | |||||
Interest expense, net | (19,152 | ) | (20,178 | ) | (47,065 | ) | ||||
Provision (benefit) for income taxes | 4,528 | (84,379 | ) | (4,563 | ) | |||||
| | | | | | | | | | |
Income (Loss) from Continuing Operations | $ | 21,708 | $ | 76,726 | $ | (32,165 | ) | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
- (a)
- Amounts include equity in the adjusted losses of equity method investees of $4.9 million, $2.6 million and $1.2 million in 2015, 2014 and 2013, 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 13 — Streamlining Initiatives for a discussion of streamlining charges.
- (e)
- Includes share-based compensation expense of $0.3 million, $17.3 million and $2.8 million in 2015, 2014 and 2013, respectively, that was classified as restructuring.
- (f)
- Excludes joint venture restructuring expense included in equity losses of $1.8 million in 2015.
F-46
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
GEOGRAPHIC / CATEGORY DATA
Dollars in thousands | Net Sales | % to Total | Long-Lived Assets | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year Ended January 2, 2016 | ||||||||||
Domestic | $ | 1,012,657 | 81.5 | % | $ | 233,185 | ||||
International | 230,063 | 18.5 | % | 75,796 | ||||||
| | | | | | | | | | |
Total | $ | 1,242,720 | 100.0 | % | ||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Fiscal Year Ended January 3, 2015 | ||||||||||
Domestic | $ | 899,475 | 79.0 | % | $ | 254,597 | ||||
International | 239,128 | 21.0 | % | 74,600 | ||||||
| | | | | | | | | | |
Total | $ | 1,138,603 | 100.0 | % | ||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Fiscal Year Ended December 28, 2013 | ||||||||||
Domestic | $ | 648,406 | 80.7 | % | ||||||
International | 154,965 | 19.3 | % | |||||||
| | | | | | | | | | |
Total | $ | 803,371 | 100.0 | % | ||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The Company's net sales by major product category are as follows:
| Fiscal Years Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
In thousands | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Women's accessories(a) | $ | 886,630 | $ | 790,544 | $ | 507,999 | ||||
Apparel, jewelry and other | 356,090 | 348,059 | 295,372 | |||||||
| | | | | | | | | | |
Total | $ | 1,242,720 | $ | 1,138,603 | $ | 803,371 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
- (a)
- Includes handbags, small leather goods and accessories.
NOTE 19: ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is comprised of the effects of foreign currency translation and gains on cash flow hedging derivatives, as detailed below:
In thousands | January 2, 2016 | January 3, 2015 | |||||
---|---|---|---|---|---|---|---|
Cumulative translation adjustment, net of income taxes of $0 | $ | (30,054 | ) | $ | (32,096 | ) | |
Gains on cash flow hedging derivatives, net of income taxes of $8 and $1,168, respectively | 13 | 2,110 | |||||
| | | | | | | |
Accumulated other comprehensive loss, net of income taxes | $ | (30,041 | ) | $ | (29,986 | ) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
F-47
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the change in each component of Accumulated other comprehensive loss, net of income taxes:
In thousands | Cumulative Translation Adjustment | Unrealized Gains on Cash Flow Hedging Derivatives | |||||
---|---|---|---|---|---|---|---|
Balance as of December 28, 2013 | $ | (21,862 | ) | $ | 983 | ||
Other comprehensive (loss) income before reclassification | (10,234 | ) | 1,847 | ||||
Amounts reclassified from accumulated other comprehensive loss | — | (720 | ) | ||||
| | | | | | | |
Balance as of January 3, 2015 | (32,096 | ) | 2,110 | ||||
Other comprehensive loss before reclassification | (1,966 | ) | (907 | ) | |||
Amounts reclassified from accumulated other comprehensive loss | 4,008 | (1,190 | ) | ||||
| | | | | | | |
Balance as of January 2, 2016 | $ | (30,054 | ) | $ | 13 | ||
| | | | | | | |
| | | | | | | |
| | | | | | | |
NOTE 20: RELATED PARTY TRANSACTIONS
Equity Method Investments |
In June 2011, the Company established KSC with E-Land. The joint venture was a Hong Kong limited liability company and its purpose was to market and distribute small leather goods and other fashion products and accessories in China under the kate spade brand. The Company accounted for its then-40.0% interest in KSC under the equity method of accounting until the Company's purchase of the remaining 60% interest in KSC and sale of a 50% interest in KSC to Walton Brown in the first quarter of 2015. The Company made capital contributions to KSC of $2.4 million and $5.5 million in 2014 and 2013, respectively.
In the first quarter of 2015, the Company and Walton Brown formed two joint ventures focused on growing the Company's business in China (see Note 1 — Basis of Presentation and Significant Accounting Policies). 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 KSC and KS HMT. The Company accounts for its investments in the joint ventures under the equity method of accounting. During the third quarter of 2015, the Company and Walton Brown each loaned $5.0 million to KSC. As of January 2, 2016 and January 3, 2015, the Company recorded $28.1 million and $9.2 million, respectively, related to its Investments in and advances to unconsolidated subsidiaries, which was included in Other assets on the accompanying Consolidated Balance Sheets.
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Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The summarized balance sheet data of the Company's equity method investees includes KSC for both periods presented and KS HMT only as of January 2, 2016, since the KS HMT joint venture was formed in the first quarter of 2015.
In thousands | January 2, 2016 | January 3, 2015 | |||||
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Current assets | $ | 35,465 | $ | 13,462 | |||
Other assets | 34,282 | 8,072 | |||||
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Total assets | $ | 69,747 | $ | 21,534 | |||
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Current liabilities | $ | 26,409 | $ | 5,511 | |||
Other liabilities | 11,473 | — | |||||
Partners' equity | 31,865 | 16,023 | |||||
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Total liabilities and partners' equity | $ | 69,747 | $ | 21,534 | |||
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The summarized statement of operations data of the Company's equity method investees includes KSC for all periods presented and KS HMT from the date of the formation of the joint venture in the first quarter of 2015.
| Fiscal Years Ended | |||||||||
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In thousands | January 2, 2016 | January 3, 2015 | December 28, 2013 | |||||||
Net Sales | $ | 51,631 | $ | 16,036 | $ | 9,627 | ||||
Gross Profit | 31,533 | 10,772 | 6,597 | |||||||
Net Loss | (13,307 | ) | (6,713 | ) | (3,527 | ) |
Other |
Kenneth P. Kopelman (a Director of the Company) is a partner in the law firm Kramer, Levin, Naftalis & Frankel LLP, which provided legal services to the Company in 2014 and 2013. The fees for such services were not significant in such periods.
NOTE 21: RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016, new accounting guidance was issued on lease transactions. The guidance was issued to increase transparency and comparability among organizations by requiring lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by leases and disclosing key information about leasing arrangements. This guidance is effective for interim and annual periods beginning on or after December 15, 2018. The Company is currently evaluating the impact of the adoption of the new accounting guidance on its financial statements.
In November 2015, new accounting guidance on the balance sheet classification of deferred taxes was issued, which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. The guidance will require companies to classify all deferred tax assets and liabilities as noncurrent. This guidance is effective for interim and annual periods beginning on or after December 15, 2016. The Company will reclassify such balances as required upon adoption.
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.
F-49
Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. As of January 2, 2016 the carrying value of the debt issuance costs related to the Term Loan included in Other assets was $3.9 million. On January 3, 2016, the first day of the Company's 2016 fiscal year, the Company adopted the guidance and reclassified the carrying value of its debt issuance costs related to the Term Loan from an asset to a direct reduction of the liability.
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 did 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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Kate Spade & Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 22: UNAUDITED QUARTERLY RESULTS
Unaudited quarterly financial information for 2015 and 2014 is set forth in the table below.
| March | June | September | December | |||||||||||||||||||||
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In thousands, except per share data | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||||||||||
Net sales | $ | 255,316 | $ | 223,614 | $ | 281,118 | $ | 265,998 | $ | 277,328 | $ | 250,417 | $ | 428,958 | $ | 398,574 | |||||||||
Gross profit | 154,727 | 136,823 | 171,478 | 155,910 | 169,814 | 157,314 | 258,088 | 230,224 | |||||||||||||||||
(Loss) income from continuing operations | (53,559) | (b) | (38,408) | (c) | 9,249 | (d) | (13,983) | (e) | 4,510 | (f) | 2,623 | (g) | 61,508 | (h) | 126,494 | (i) | |||||||||
(Loss) income from discontinued operations, net of income taxes | (1,662 | ) | 84,578 | (708 | ) | 9,579 | (2,207 | ) | (11,753 | ) | (44 | ) | 30 | ||||||||||||
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Net (loss) income | $ | (55,221 | ) | $ | 46,170 | $ | 8,541 | $ | (4,404 | ) | $ | 2,303 | $ | (9,130 | ) | $ | 61,464 | $ | 126,524 | ||||||
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Basic earnings per share: | |||||||||||||||||||||||||
(Loss) income from continuing operations | $ | (0.42 | ) | $ | (0.31 | ) | $ | 0.07 | $ | (0.11 | ) | $ | 0.04 | $ | 0.02 | $ | 0.48 | $ | 0.99 | ||||||
(Loss) income from discontinued operations | (0.01 | ) | 0.68 | — | 0.08 | (0.02 | ) | (0.09 | ) | — | — | ||||||||||||||
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Net (loss) income | $ | (0.43 | ) | $ | 0.37 | $ | 0.07 | $ | (0.03 | ) | $ | 0.02 | $ | (0.07 | ) | $ | 0.48 | $ | 0.99 | ||||||
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Diluted earnings per share:(a) | |||||||||||||||||||||||||
(Loss) income from continuing operations | $ | (0.42 | ) | $ | (0.31 | ) | $ | 0.07 | $ | (0.11 | ) | $ | 0.04 | $ | 0.02 | $ | 0.48 | $ | 0.99 | ||||||
(Loss) income from discontinued operations | (0.01 | ) | 0.68 | — | 0.08 | (0.02 | ) | (0.09 | ) | — | — | ||||||||||||||
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Net (loss) income | $ | (0.43 | ) | $ | 0.37 | $ | 0.07 | $ | (0.03 | ) | $ | 0.02 | $ | (0.07 | ) | $ | 0.48 | $ | 0.99 | ||||||
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Basic weighted average shares outstanding | 127,489 | 124,403 | 127,663 | 126,664 | 127,682 | 126,971 | 127,703 | 127,160 | |||||||||||||||||
Diluted weighted average shares outstanding(a) | 127,489 | 124,403 | 128,431 | 126,664 | 128,118 | 127,610 | 128,267 | 127,741 |
- (a)
- Because the Company incurred a loss from continuing operations in the first quarter of 2015 and first two quarters of 2014, outstanding stock options and nonvested shares are antidilutive for such periods. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods.
- (b)
- Included a pretax charge of $26.0 million to terminate contracts with the Company's former joint venture partner in China and pretax expenses related to streamlining initiatives of $18.9 million.
- (c)
- Included pretax expenses related to streamlining initiatives of $28.9 million.
- (d)
- Included pretax expenses related to streamlining initiatives of $7.1 million.
- (e)
- Included pretax expenses related to streamlining initiatives of $4.9 million.
- (f)
- Included pretax expenses related to streamlining initiatives of $7.0 million.
- (g)
- Included a pretax credit related to streamlining initiatives of $1.1 million
- (h)
- Included pretax expenses related to streamlining initiatives of $2.4 million.
- (i)
- Included pretax expenses related to streamlining initiatives of $7.1 million.
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Kate Spade & Company
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
| | Additions | | | ||||||||||||
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In thousands | Balance at Beginning of Period | Charged to Costs and Expenses | Charged to Other Accounts | Deductions | Balance at End of Period | |||||||||||
YEAR ENDED JANUARY 2, 2016 | ||||||||||||||||
Accounts receivable — allowance for doubtful accounts | $ | 1,716 | $ | — | $ | — | $ | 979 | (a) | $ | 737 | |||||
Allowance for returns | 7,679 | 101,762 | — | 101,492 | 7,949 | |||||||||||
Allowance for discounts | 74 | 144 | — | 202 | 16 | |||||||||||
Deferred tax valuation allowance | 415,173 | 10,588 | — | — | 425,761 | |||||||||||
YEAR ENDED JANUARY 3, 2015 | ||||||||||||||||
Accounts receivable — allowance for doubtful accounts | $ | 1,800 | $ | 1,189 | $ | — | $ | 1,273 | (a) | $ | 1,716 | |||||
Allowance for returns | 7,230 | 80,453 | — | 80,004 | 7,679 | |||||||||||
Allowance for discounts | 32 | 208 | — | 166 | 74 | |||||||||||
Deferred tax valuation allowance | 497,485 | — | — | 82,312 | 415,173 | |||||||||||
YEAR ENDED DECEMBER 28, 2013 | ||||||||||||||||
Accounts receivable — allowance for doubtful accounts | $ | 1,625 | $ | 229 | $ | — | $ | 54 | (a) | $ | 1,800 | |||||
Allowance for returns | 8,501 | 85,083 | — | 86,354 | 7,230 | |||||||||||
Allowance for discounts | 533 | 371 | — | 872 | 32 | |||||||||||
Deferred tax valuation allowance | 545,565 | — | — | 48,080 | 497,485 |
- (a)
- Uncollectible accounts written off, less recoveries.
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