Kenneth Cole’s Surprise Q2 Guidance

by MR Magazine Staff

NEW YORK – Kenneth Cole Productions late Tuesday reported higher profits and sales for the first quarter, but it issued guidance for the second quarter that was well below previous analysts’ expectations.

At the same time, the company said it would begin offering a men’s sportswear collection under the Kenneth Cole New York brand for spring 2008 and appointed Marty Nealon divisional president of its full-price retail stores and e-commerce business.

During the three months ended March 31, net income grew 12.3% to $3.4 million, or $0.17 a diluted share, from $3.1 million, or $0.15, in last year’s comparable period. The quarterly EPS result was greater than the $0.16 expected by analysts and fell within the range of $0.15 and $0.18 last provided by the firm.

Net sales grew 6.8% to $119.9 million from $112.2 million. Royalties declined 8.8% to $9.5 million, principally due to the termination of Paul Davril as the firm’s men’s sportswear licensee, putting total revenues for the quarter up 5.5% at $129.3 million.

Gross margin fell to 40.6% of revenues from 41.9% a year ago as wholesale margins tightened and a shift in the mix towards wholesale.

In announcing its decision to produce and market a Kenneth Cole New York sportswear collection in-house, the company said the new grouping “will incorporate a wider range of price points than previously available under that label.” The start-up effort will require about $7 million in operating costs for which there will be “few, if any, revenues” this year.

Kenneth Cole, chairman and chief executive officer, called the reintroduction of KCNY “a unique opportunity to take control of an existing, developed, yet under-penetrated business with significant growth opportunities. It is also an opportunity to further enhance and evolve a classification of product paramount to the overall stature of each of our brands.”

The decision to bring KCNY in-house appears to end, at least for now, what has been a continuing saga about Kenneth Cole’s management of its men’s sportswear business. Last November, KCP terminated Paul Davril’s license for Kenneth Cole New York men’s and women’s sportswear but extended PDI’s license for Kenneth Cole Reaction men’s sportswear through 2008.

Then, in January, KCP changed direction and decided to terminate the Reaction license for men’s sportswear at the end of the current year.

On Monday, Cole said that the firm is “pleased by the ongoing performance and acceptance of the Reaction brand. We are confident that Reaction, which continues to represent the largest portion of our business at retail, will benefit from this initiative.”

The decision also suggests that KCP is reconsidering its earlier plans to position KCNY as an “affordable luxury” brand and aim KC Reaction at better department stores. Numerous market sources have indicated that the plan has met with resistance not only from KCP’s retail accounts but also with some licensees.

The company issued guidance for the second quarter for earnings of $0.14 to $0.16 a fully diluted share, well below the current consensus estimate of $0.27. Revenues are expected to be approximately $120 million versus a consensus estimate of $136.8 million.

As the new divisional president of direct-to-consumer business, Nealon will report to Cole. Since last August, she had served as a consultant to KCP on strategic initiatives. Earlier she spent four years as president and CEO of US operations at HSN (Home Shopping Network) and prior to that was with Claire’s North America for six years as chief operating officer.

During the first quarter, consumer-direct revenues were up 1.6% to $36.9 million while comparable-store sales declined 1.5%.