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Kate Spade’s Growth Spurt

Ceo Craig Leavitt lays out his plans for the brand that continues to blossom.

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A look from Kate Spade Saturday.

Kyle Ericksen

The Fifth Avenue store in Manhattan.

The Fifth Avenue store in Manhattan.

Courtesy Photo

A Kate Spade watch.

A Kate Spade watch.

Courtesy Photo

A logo for the 20th anniversary.

A logo for the 20th anniversary.

Courtesy Photo

It’s good to be Kate.

As the crown jewel of Fifth & Pacific Cos. Inc., the Kate Spade brand is percolating on all fronts, from product to geography, opening freestanding stores, expanding international sales, and broadening its product offerings to tap into a younger customer — and, of course, getting kudos for outfitting First Daughter Sasha Obama at the inauguration ceremony last month.

But despite the brand’s roaring start, things weren’t always so bright. Founded in 1993 by Kate and Andy Spade, along with partners Pamela Bell and Elyce Arons, the brand developed a cult following for its coveted boxy handbags and accessories. In 1999, it was sold to the Neiman Marcus Group, which was eventually taken over by private equity firms Texas Pacific Group and Warburg Pincus.

Over time, the brand lost its mojo, didn’t develop new customers and its growth stalled. In November 2006, Liz Claiborne Inc. (now Fifth & Pacific Cos.) acquired the Kate Spade brand for $124 million and set out to reclaim its role as a premier accessories resource. The Spades left in 2007. Claiborne installed Craig Leavitt and Deborah Lloyd as copresidents and began updating the handbag designs and expanding the firm’s retail and wholesale presence.

When Leavitt, now ceo of Kate Spade, took that role in 2010, there was a lot of work to do.

“When I got here, we like to say the brand was asleep,” said Leavitt, in an interview at his offices at 2 Park Avenue in New York. “It wasn’t to say the brand wasn’t strong. It had a great foundation and a great DNA. It had drifted off the radar a little bit and was a bit of niche brand, but with a really strong foundation. We wanted to figure out how we take that strong foundation and build that into something bigger, more relevant in the marketplace and more meaningful.”

 

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For the first six months, Leavitt worked on developing a strategic plan and road map on how they were going to accomplish the turnaround.

“Just when we were beginning the execution of that, the world came off its wheels with the global recession,” said Leavitt.

They had some tough decisions to make. They had developed this strategic plan and suddenly they were trapped in this financial situation. “We had to decide whether we stuck to that plan or dramatically modify it to meet the needs of the crisis,” he said.

Because the company had just started to execute the strategy, the team felt strongly that they needed to forge ahead. Therefore, they didn’t do things that some of their competitors did, such as roll back retail prices or “skinny down the line.” “We felt we needed to excite the consumer with compelling product and a consistent and cogent brand story,” he said. “We pushed through. We probably bottomed out even further than some other companies did at the time. We didn’t have this knee-jerk reaction in terms of promotional pricing. I strongly believe we came out of the recession faster and stronger than some of our competitive set.”

Further, he added, it didn’t make sense in the long term for the brand to take a step backward just when it was beginning to move forward. “We came out of the other side pretty quickly and it’s been a rocket ship since then,” he said.

So how did they accomplish their goals?

“It always starts with great product,” said Leavitt. During that time period, they decided to launch jewelry and ready-to-wear in-house. “We had decisions to make. Did we want to wait and catch a rising tide as the overall economy improved? Or did we want to push through with our strategic plan? We decided to push through, and it turned out to be the right decision not only for us as a brand, but from a product perspective. We brought color and optimism to the market at the time. It turned out that was just what the consumer was looking for during those dark days.”

Consumer reception to the new lines was strong from the outset, said Leavitt. “Those things were critical to us. They helped drive the clarity about what we were moving toward, which was a global lifestyle brand.”

Cultivating both the direct-to-consumer (via vertical retail and e-commerce) and wholesale aspect of the business has been a critical component of the Kate Spade strategy. Today, 55 percent of Kate Spade’s business is direct-to-consumer, and 45 percent is wholesale. Among key wholesale accounts are Neiman Marcus, Nordstrom, Bloomingdale’s and Lord & Taylor. Leavitt said the current ratio is good, and he believes that, over time, direct-to-consumer penetration will grow, but not dramatically so. “We really believe in a multichannel approach to our business. We have a very strong wholesale business and great partners. We see continued expansion in that channel as well,” said Leavitt.

Pete Nordstrom, president of merchandising at Nordstrom, praised the Kate Spade operation.

“Kate Spade is a great partner in all classifications and channels — in stores, online and in Nordstrom Rack,” he said. “We’ve been partners for over a decade, and they are one of our most successful brands. Kate Spade is laser-focused on the customer, bringing creative ideas and exciting product that resonate with customers in a powerful way.”

Kate Spade’s financial results tell a compelling story.

In the fourth quarter ended Dec. 31, Kate Spade’s comp business increased 27 percent. The company has experienced between 22 and 38 percent quarterly comps all year. “It’s been very strong and we’re seeing continued strength. We were very happy with holiday, pushing through Hurricane Sandy’s impact in this region and winding up with great results,” Leavitt said.

In 2012, Kate Spade was expected to contribute between $94 million and $95 million in earnings before interest, taxes, depreciation and amortization. And the contribution for 2013 is expected to be between $130 million and $140 million. For the fiscal year ended Dec. 31, 2011, Kate Spade achieved net sales of $312.9 million, a 69.8 percent increase versus the previous year.

At present, the company operates 93 directly owned stores in the U.S., U.K. and Brazil, and has 91 international points of distribution via joint ventures and distribution partners. In the U.S. alone, the company has 69 Kate Spade stores and seven Jack Spade Stores.

This year, Kate Spade seeks to open an additional 40 stores in the U.S. across all its brands: Kate Spade, Jack Spade and Kate Spade Saturday. The company plans to open more stores in such places as Texas, Ohio, Indiana, Georgia and Colorado, as well as a new flagship on Madison Avenue, expected to open in late spring.

 

Looking at the whole picture, Leavitt sees growth across the board. “Really, that is most important to the future opportunity of the brand,” he said. “We are seeing very strong growth across every product category of business and every geography as we look at our global business. For us, that’s the most exciting thing about our growth — that it’s not weighted heavily to one region or one product category.”

The company expects to grow the business in the low teens for the balance of the year.

This success has spawned rumors that Fifth & Pacific could potentially spin off a piece of the Kate Spade business, but Leavitt declined comment on any rumors of a spin-off. “There’s always speculation. We have a great relationship with our parent company, and we’re focused on what we need to do here and are not distracted by the rumor mill.” Fifth & Pacific plans a Kate Spade Investor Day on March 15.

In November, Kate Spade completed its deal to buy out its Japanese joint-venture partner. It acquired the 51 percent interest held by KSJ Co. Ltd., a subsidiary of Sanei International Co. Ltd. The purchase price for the Kate Spade Japan buyout, including debt repayment, related transaction fees and use of Kate Spade Japan’s cash on hand, totaled $47.6 million. Japan is the brand’s largest market outside the U.S.

Besides owning its business in Japan, Kate Spade has a direct subsidiary in South America, based in São Paulo, Brazil. Its stores in the U.K. are also directly owned.

In China, the brand has a joint venture operating Kate Spade China. The operation saw significant expansion in 2012, with more coming in 2013. The company has distribution arrangements in the Middle East, Hong Kong, Southeast Asia and Korea, and has said it has plans to buy back its distribution in Hong Kong and Southeast Asia in early 2014. Places like Australia, Brazil, Latin America and India are also being viewed as expansion opportunities.

Leavitt said it has used the U.K. over the past year-and-a-half as a learning tool before attempting a significant entry into continental Europe.

The company has a wholesale business in Germany and is looking for wholesale expansion in France this year, with more to come in Europe as the brand moves forward.

“One thing that’s important to us is that we position the brand very similarly in all regions around the world,” said Leavitt. He said the brand is not positioned higher or lower than it is in the U.S. “We take a pretty consistent approach and that’s been really important. It’s a very small world. The consumer’s traveling and seeing the product online.”

Leavitt believes a consistent approach to assortments, brand messaging and pricing strategies has been a big part of its success.

When Kate Spade decides to add more product categories, it frequently takes the licensing route, but a number of products have also been developed in-house.

“It’s depends on whether we feel we can provide the expertise to deliver a product with excellence,” Leavitt said. The company launched apparel and jewelry internally. Last spring it introduced watches internally with “great results,” said Leavitt.

“We feel that we know our customer so well, so where we either own or can incorporate the appropriate experience to deliver an excellent product, we’re going to do that internally.”

So who exactly is the Kate Spade customer? Leavitt described her as “quick and curious and playful and strong.” “That’s what we say internally to help us identify her,” he said. He also believes she’s an educated woman, who’s interested in culture, whether that be literature, adventure, travel or the arts. “She likes to be the most interesting person at a cocktail party. She likes to stand out in a crowd. That’s why she embraces color and graphics so well.”

According to Leavitt, “She has some discretionary income. She’s 25 to 45 years old and she can live anywhere but because of her interest in culture, she either lives in or around a city, or at least gets to travel to cities on a regular basis.” Basically, she likes a bit of polish in how she puts herself together. “She’s going to be that woman in the great polka dot dress at the cocktail party that everyone’s standing around chatting with,” he said.

As for a preteen like 11-year-old Sasha Obama wearing the line to the inauguration, he said, “We have such a broad customer base. Our core customer is 30 to 45, but we have customers who are teenagers and those in their 60s and beyond. [Sasha] looked great. She wore the product really well. She looked like a young lady.”

And then there’s the woman who can’t afford Kate Spade, but aspires to be part of the lifestyle. For her, the company is launching Kate Spade Saturday this month. The line, which addresses a woman’s casual needs, is geared to a younger consumer.

“We discovered there’s a younger customer that aspires to be part of the Kate Spade New York brand, but maybe isn’t ready for it in her life yet. Perhaps she doesn’t have the cocktail party to go to after work. Maybe she’s going to a bar instead,” he said.

He added that the brand captures a lot of the same spirit, color, graphics and optimism of Kate Spade New York. “And while there’s a shared DNA, it’s a very different aesthetic as well.

 

“We’ve been nurturing this idea for quite some time,” noted Leavitt. “We wanted to launch it at a time when we were really playing from strength. You see a lot of brands launching additional lines when there’s a weakness in their parent line, and it’s a way to bolster their sales and profits. We took a different approach. We were waiting for Kate Spade to be on really solid ground with a great business trajectory and great improvements in profitability and seize the moment to launch this brand. That’s why we chose this time.”

The brand will launch in Japan this month. That introduction will be followed quickly with e-commerce in the U.S., as well as American brick-and-mortar stores initially focusing on New York and Los Angeles. “Right now, we’re seeing this as a vertical model,” said Leavitt. “But there could be some interesting wholesale plays in the future.”

Leavitt said he and Lloyd have a great working relationship and that’s been a key part of their success. “She’s a terrific creative director. We complement each other’s skill sets. What’s great is that…she also has a real desire to understand the commercial nature of our business.”

Leavitt says the company is well-positioned. “We’re in that sweet spot,” he said, noting that the brand can be aspirational for some, accessible luxury for others, and also fits well with the customer buying luxury products. “We are able to draw up and down.”

And industry observers like what they’re seeing from Kate Spade.

“They’re on fire,” said retail analyst Jennifer Black of Jennifer Black & Associates. “I think Deborah Lloyd is really talented — she’s so whimsical and her stuff is so different. It’s almost a conversation piece. They have a lot of potential globally. They’re just getting started.”

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