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Fifth pacific companies management discusses q4 2013 results Good morning, everyone, and welcome to the fifth pacific companies, inc.Year end 2013 conference call hosted by chief executive officer, billMccomb.Therefore, pleaseNote that it cannot be recorded, transcribed or rebroadcasted without fifth pacific’s permission.Your participation implies compliance with these requirements.If you doNot agree, simply drop off the line.PleaseNote that there will be a slide presentation accompanying the prepared remarks.There are separate links to the slides for webcast and phone participants.PleaseNote that statements made during this call that relate to the company’s future performance and future events are forward looking statements within the private securities litigation reform act.These forward looking statements are based on current expectations and are subject to those qualifications and cautionary statements set out in this morning’s press release, including those under the caption, cautionary statements regarding forward looking statements, as well as in the company’s annual report on form 10 k for the fiscal year ending december 28, 2013, under the captions item 1a risk factors and statement regarding forward looking statements to be filed with the sec.The company undertakesNo obligation to publicly update or revise any forward looking statements whether as a result of new information, future events or otherwise.Also pleaseNote that during this call and in the accompanying slides and press release, net sales, gross profit, gross margin, sg sg margin, operating income loss, other expense income, net interest expense, net income loss before provision, benefit for income taxes, provision benefit for income taxes, income loss from continuing operations and eps are presented on both a gaap andNon gaap adjusted basis.In addition, adjusted ebitda net of foreign currency transaction adjustments, company wide adjusted ebitda and comparable adjusted ebitda areNon gaap measures that are also presented in the accompanying slides and press release.The company presents these adjusted ebitda measures because the company believes that these measures represent a more meaningful presentation of the company’s historical operations and projected financial performance as these measures provide period to period comparisons that are consistent and more easily understood.The company considers these measures as important supplemental measures of its performance and believes they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies and its industry.The company believes that the adjusted results for the fourth quarter and 2012 and 2013 fiscal years represent a more meaningful presentation of the company’s historical operations and the financial performance since they provide period to period comparisons that are consistent and more easily understood.Now i would like to turn the call over to your host, mr.Mccomb.Please go ahead, sir.Good morning.Thank you all for joining our call this morning as we report performance metrics and earnings results for fiscal 2013 and its fourth quarter.I’m joined byCraig leavitt, who officially becomes ceo of the newly named kate spade company tomorrow;And, of course, george carrara, who has been our chief financial officer and chief operating officer throughout 2013 and is becoming president and chief operating officer of kate spade company tomorrow as well;And i’d be remiss if i didn’t mention deborah lloyd, chief creative officer of kate spade company and the creative force behind the brand.We reported our earnings results in the press release this morning, much of which had been estimated and made public back on january 9 when we also provided an outlook for 2014 and announced my departure from fifth pacific companies as well as the transition to the new corporate name and the management successions that i just described.On the call today, i’ll review company highlights for the quarter.Craig will then provide a detailed commentary on the fourth quarter kate spade businesses and then george will provide a summary of key financials, corporate operating update and our 2014 outlook.And then before we open it up to questions, i’d like to take a few minutes to direct some of my own questions toCraig and george for the benefit of the listening audience.And finally, all 3 of us will be available to answer your questions.So let’s go ahead and dive into the results.The fourth quarter was, overall, a very strong quarter for the company.Kate spade posted total revenue of $256 million, reflecting a growth rate of 48% versus fourth quarter of 2012, and direct to consumer comp sales up 30% and an adjusted brand ebitda expansion of 48% to $64 million, all on the heels of product wins in a rapidly expanding consumer base.While the overall marketplace was even more promotional than holiday 2012, we ran a strong full price business while competing where we needed to with some sharp price points.Kate spade gross margins for the quarter were down about 90 basis points versus 2012, driven by a higher promotion rate.As in third quarter, small leather goods and the core handbag business were sell through leaders for the business along with gifting, which is a major category every holiday.During the quarter, the brand opened 11 new full price stores and 3 new outlet stores domestically.Internationally, we opened 2 concessions and via partners in our jv in china, a total of 7 new stores were opened.Kate spade ended the quarter with comp store sales of $1, 265 per square foot, up about 14% over the latest 12 months.This marks our 14th consecutive quarter of annualized productivity growth.We’ll turn here to slide page 3.Overall, i’d characterize 2013 as an outstanding year.On a comparable basis, inclusive of the results of lucky brand, but excluding juicy couture, adjusted ebitda was $126 million, consistent with our preliminary results issued in early january.Lucky brand isNow being accounted for as discontinued operations, so we’llNo longer include the brand in our results.While managing 2 complicated and protracted strategic reviews, one at juicy couture and one at lucky brand, we managed to keep a laser focus on kate spade.The strategic reviews resulted in transactions that we expect will provide the company an estimated total $370 million to $380 million in net proceeds and enable the kind of resource allocation and management attention that’sNow needed to fully fund an accelerated growth plan at kate spade.George will speak more on how the company is impacted in light of these divestitures.Kate spade saw total 2013 revenue jump 61% to $743 million.Direct to consumer comp sales for the business were up 28% for the year.Comps for the e commerce business were up 49%, while brick and mortar same store sales were up approximately 16%.Customer acquisition overall in 2013 was extraordinary.And the business in japan,Now wholly owned following the buyout of our jv partner in the fourth quarter of 2012, grew 36% in total sales and posted organic growth in direct to consumer comps of up plus 19% for the year in total.For the quarter, kate spade japan posted organic dtc comps of 26%.PleaseNote, beginning december 2013, the direct to consumer comps for kate spade japan areNow included in the comps for the total brand.We launched the kate spade saturday brand this past march, carefully leveraging operating expense where that makes sense, but distinctly targeting that brand as a new business for more entry level customer and one that is inherently more casual.The timing of this investment is critical in my view.We need the asset to address the distinct high opportunity customer groups as we expand around the world.I personally view 2013 for kate spade saturday as the yearNot unlike 2008 for kate spade new york:Foundational, establishing, awareness generating and filled with learning and early traction with a new demographic.The overall brand’s adjusted ebitda margin for the year was 17.6%, down 300 basis points compared to 2012, reflecting the dilution from 4 preplanned factors:One, the accounting impact of consolidating the japan business;Two, investments in organizational infrastructure to enable the recently announced buyout of our distributor, globalluxe, in southeast asia;Three, the investment in kate spade saturday;And finally, very slight dilution from jack spade.What wasNot planned were the headwinds from the depreciation of the japanese yen, which had a significant impact.For the year, we opened 40 new stores inNorth america, 2 in brazil and 6 in japan.We also opened a total of 11 international concessions, 10 in japan and 1 in france.Our joint venture in china opened 7 new stores,Now totaling 20, and the partnership in the middle east isNow managing 6 stores across 3 countries.And finally as i mentioned, our team spent the year preparing for the buyout of globalluxe, which we closed earlier this month, an operation that ran a total of 14 stores across singapore, macau, taiwan, hong kong and malaysia and generated approximately $44 million in retail equivalent sales.An additional $8 million in retail equivalent sales were generated in 13 stores in indonesia and thailand.So with that overview of the quarter and the year, let meNow turn it over toCraig leavitt, who will add even greater detail to fourth quarter performance at kate spade.Craig?Thanks, bill.First, let me make some overall comments about the marketplace in the fourth quarter.For one, the marketplace was very promotional and we’ve seen this since fourth quarter 2008 and every year, the holiday promotion intensity seems to increase.I think this is especially true for power retailers.We all see what’s happening with deep discounts that used to appear in the malls in mid december have been slowly creeping into the space earlier and earlier every year.AndNow it seems that black friday is really black wednesday night and black thursday and cyber monday is really cyber thursday, and once these events begin, they don’t really end.We aim to be in the middle of the pack of our direct competitive set in terms of promotional presence.Don’t forget, unlike some competitors, we’re still in the early days of acquiring new customers.We see some of our promotional activity as a gateway to introduce our brand to a new audience and build our database.We then use brand marketing campaigns to convert this group into full price customers.We will continue to be nimble and leverage promotional strategies thoughtfully and strategically.We have seen our promotional approach working, and customers are entering our brand through online promotional sales then also making purchases on our site or in our stores.We’ve heard many analysts asking whether orNot the handbag and accessories markets are beginning to slow growth wise.The answer isNo.No.We still see more and more women putting the investment share of their disposable income into luxury and near luxury brand accessories.Now the race to the bottom may be moving faster and faster in some apparel categories, but accessories remains a growth category fueled by primary and longitudinal consumer attitudes and behavior. We sawNothing to buck that trend in the fourth quarter.In fact, handbags and small leather goods and kate spade gift accessories were our strongest growth categories this year overall and in the fourth quarter, as bill mentioned.We continue to like what we see with new store openings. We opened 14 new doors inNorth America during Q4.I think one of our strengths is the broad base of brand acceptance geographically for what feel like instant successes in place like the derby street shoppes in hingham, massachusetts and burlingame avenue in the san francisco area, as well as our new outlet in st.Louis that opened just prior to the start of q4, all of which continue to see incredibly strong demand.Internationally, we had a very strong quarter in our japan business both in stores and online, with comps of 26%, with some of the biggest increases coming from higher priced products especially in handbags.We opened 4 new doors in china this quarter as we continue to build brand awareness in the region.In hong kong and southeast asia, we’ve prepared for the recent acquisition of our business and the launch of our distribution agreement in singapore, malaysia, indonesia and australia.Leading performers for the quarter by category included core handbags, wallets, jewelry and apparel.Within apparel, top performers were outerwear, dresses and separates like woven tops and sweaters.Even with the positive comp results we reported, we had some missed opportunities due to low inventories on best selling items, particularly in core handbags in the last weeks of holiday.We relaunched our paper and desk accessories with a new licensee at the start of the fourth quarter, which added to the comp increases during the important gifting period.Particularly important in our wholesale environments are gifting programs which focus on small leather goods, jewelry and watches were [ph] successful again this quarter.Our e commerce business experienced a significant increase in traffic, and we found that the shoulder pricing approach to our business continues to work.During q4, we saw consumers looking for sale as well as entry points to the brand, but consumers also responded positively to aspirational products with price points ranging from $498 all the way to $1, 998.Among the highest sell throughs were the swarovski statement necklace at $698, as well as our best selling emma dress at $798, which had a 100% sell through.

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