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TMCNet:  KATE SPADE & CO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF

[May 14, 2014]

KATE SPADE & CO - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF

(Edgar Glimpses Via Acquire Media NewsEdge) FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Business Segments Our segment reporting structure reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of our businesses across multiple functional areas including specialty retail, retail outlets, e-commerce, concessions, wholesale apparel, wholesale non-apparel and licensing.


The three reportable segments described below represent our brand-based 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 consider economic characteristics, as well as products, customers, sales growth potential and long-term profitability. As such, we report our operations in three reportable segments: † KATE SPADE segment - consists of the specialty retail, outlet, e-commerce, concession, wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags) and licensing operations of our kate spade new york, KATE SPADE SATURDAY and JACK SPADE brands.

† Adelington Design Group segment - consists of: (i) exclusive arrangements to supply jewelry for the LIZ CLAIBORNE and MONET brands; (ii) the wholesale non-apparel operations of the TRIFARI brand and licensed KENSIE brand; (iii) the wholesale apparel and wholesale non-apparel operations of the licensed LIZWEAR brand and other brands; and (iv) the licensed LIZ CLAIBORNE NEW YORK brand.

† JUICY COUTURE segment - consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and licensing operations of the JUICY COUTURE brand. We continue to support wind-down operations of the JUICY COUTURE brand, pursuant to the license agreement with ABG - Juicy LLC ("ABG"), as discussed below.

We, as licensor, also license to third parties the right to produce and market products bearing certain Company-owned trademarks; the resulting royalty income is included within the results of the associated segment.

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, unemployment levels remain high, consumer retail traffic remains inconsistent and the retail environment remains promotional. In addition, as economic conditions improve in certain real estate markets in which we operate, the landlord community is requiring higher rents and occupancy costs. Furthermore, economic conditions in international markets in which we operate, including Europe and Asia, remain uncertain and volatile. We continue to focus on the execution of our strategic plans and improvements in productivity, with a primary focus on operating cash flow generation, retail execution and international expansion.

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.

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 -------------------------------------------------------------------------------- Table of Contents 39 products on a competitive and efficient basis, and continuing to drive profitable growth at KATE SPADE. Our operating and financial goals for our KATE SPADE brand are based on the following strategies: (i) fueling top line growth by opening new retail locations in North America, Japan, Brazil, the United Kingdom and Southeast Asia, evolving price points to create access for new customers and to aspirational categories, focusing on expansion of certain product categories with broad distribution opportunities and high branding relevance, including watches, jewelry, sunglasses and fragrance and launching e-commerce platforms in Europe; (ii) evolving our customer experience with a channel agnostic approach including improved Customer Relationship Management ("CRM") capability, expanding selling and service programs at selected retail stores and enhancing the e-commerce experience; (iii) expanding our use of partnerships for margin expansion; (iv) strengthening the foundation of KATE SPADE SATURDAY; and (v) increased investments in marketing that leverage CRM capability and focus on acquiring new full price customers.

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 Form 10-Q and in our 2013 Annual Report on Form 10-K.

Recent Developments and Operational Initiatives During 2013 and the first quarter of 2014, we pursued transactions and initiatives with a focus on becoming a multi-national, mono-brand business and which improve our operations or liquidity.

On February 5, 2014, we reacquired the existing KATE SPADE businesses in Southeast Asia from Globalluxe Kate Spade HK Limited ("Globalluxe") for $32.3 million, including $2.3 million for working capital and other previously agreed adjustments. Prior to the transaction, we sold to Globalluxe under a wholesale distribution agreement. Following the transaction, we maintain wholesale distribution to distributors who operate the businesses in Singapore, Malaysia and Thailand and recognize direct-to-consumer sales in Hong Kong, Macau and Taiwan.

On February 3, 2014, we 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 aggregate consideration 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 Lucky Brand Dungarees, LLC ("Lucky Brand LLC").

The Lucky Brand Note matures in February 2017 and is guaranteed by substantially all of Lucky Brand LLC's subsidiaries. The Lucky Brand Note is secured by a second-priority lien on all accounts receivable and inventory of Lucky Brand LLC and the guarantor subsidiaries and a first-priority lien on all other collateral of Lucky Brand LLC and the guarantors. The accounts receivable and inventory secure Lucky Brand LLC's asset-based revolving loan facility on a first-priority basis, and the other collateral secures that loan facility on a second-priority basis. The principal amount of the Lucky Brand Note increases by $5.0 million per year in equal monthly increments and bears cash interest of $8.0 million per year, payable semiannually in arrears. The Lucky Brand Note is prepayable at any time by Lucky Brand LLC without a prepayment premium, subject to certain restrictions as to the minimum amount that may be prepaid without our consent.

Under a transition services agreement with Lucky Brand LLC, we are required to provide Lucky Brand LLC with certain transitional services, such as IT support, accounting services, tax services and other services that were provided at the corporate level while Lucky Brand was owned by us. The services will be provided at cost for up to a maximum of two years from the closing date, subject to earlier termination of the various services by Lucky Brand LLC.

On November 6, 2013, we sold the Juicy Couture IP to ABG for a total purchase price of $195.0 million (an additional payment may be payable to us in an amount of up to $10.0 million if certain conditions regarding future performance are achieved). The Juicy Couture IP is licensed back to us until December 31, 2014 to accommodate the wind-down of operations. We will pay 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 $51.0 million, which is expected to be completed in the second quarter of 2014.

-------------------------------------------------------------------------------- Table of Contents 40 Debt and Liquidity Enhancements On April 10, 2014, we entered into a term loan credit agreement (the "Term Loan Credit Agreement") which provides for term loans in an aggregate principal amount of $400.0 million (collectively, the "Term Loan") maturing in April 2021.

The Term Loan is subject to amortization payments of $1.0 million per quarter, 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. We used the proceeds from the issuance to redeem all of our remaining outstanding 10.5% Senior Secured Notes due April 2019 (the "Senior Notes").

On April 14, 2014, we redeemed $37.2 million aggregate principal amount of the Senior Notes at 103.0% of their principal amount, plus accrued and unpaid interest. On May 12, 2014, we redeemed the remaining $334.8 million aggregate principal amount of the Senior Notes at a price equal to 105.25% of their principal amount, plus accrued and unpaid interest. As a result of these transactions, no Senior Notes remain outstanding. See "Financial Position, Liquidity and Capital Resources." Our cost reduction efforts have included tighter controls surrounding discretionary spending and streamlining initiatives that have included rationalization of distribution centers and office space, store closures and staff reductions, including consolidation of certain support and production functions and outsourcing certain corporate functions. We have also engaged more extensively in direct shipping and other arrangements. We expect that our streamlining initiatives will provide long-term cost savings. We will also continue to closely manage spending, with 2014 capital expenditures expected to be approximately $100.0 million, compared to $80.6 million in 2013.

For a discussion of certain risks relating to our recent initiatives, see "Item 1A - Risk Factors" in this Form 10-Q and in our 2013 Annual Report on Form 10-K.

Discontinued Operations The activities of our former Lucky Brand business and our JUICY COUTURE business in Europe have been segregated and reported as discontinued operations for all periods presented. We continue activities with certain JUICY COUTURE operations and therefore the remaining activities of that brand have not been presented as discontinued operations.

Overall Results for the Three Months Ended April 5, 2014 Net Sales Net sales for the first three months of 2014 were $328.1 million, an increase of $82.4 million, or 33.5%, compared to net sales for the first three months of 2013, including the estimated impact of a $22.8 million increase in net sales in our KATE SPADE and JUICY COUTURE segments resulting from the inclusion of a 14th week in the first quarter of 2014. Net sales increased in our KATE SPADE and JUICY COUTURE segments, partially offset by a decline in net sales within our Adelington Design Group segment.

Gross Profit and Loss from Continuing Operations Gross profit in the first three months of 2014 was $181.5 million, an increase of $40.4 million compared to the first three months of 2013, primarily due to increased net sales in our KATE SPADE and JUICY COUTURE segments, partially offset by decreased net sales in our Adelington Design Group segment. Our gross profit rate decreased from 57.4% in 2013 to 55.3% in 2014 due to the absence of licensing sales and increased promotion activity at JUICY COUTURE and the impact of a change in sales mix due to timing at KATE SPADE.

We recorded a loss from continuing operations of $54.7 million in the first three months of 2014, as compared to a loss from continuing operations of $39.6 million in the first three months of 2013. The period-over-period change primarily reflected: (i) an increase in Selling, general & administrative expenses ("SG&A"), including charges related to streamlining initiatives, brand-exiting activities and acquisition related costs; (ii) an increase in gross profit; (iii) a decrease in Interest expense, net; (iv) a decrease in Other expense, net; and (v) the absence in the first quarter of 2014 of a loss on extinguishment of debt of $1.1 million and loss on sales of trademarks of $1.3 million that were incurred in the first quarter of 2013.

-------------------------------------------------------------------------------- Table of Contents 41 Balance Sheet We ended the first three months of 2014 with a net debt position (total debt less cash and marketable securities) of $267.1 million as compared to $431.3 million at the end of the first three months of 2013. The $164.2 million decrease in our net debt primarily reflected: (i) the receipt of net proceeds of $319.9 million from the dispositions of the Juicy Couture IP, Lucky Brand and our former investment in Mexx; (ii) the funding of $93.6 million of capital and in-store shop expenditures over the last 12 months; (iii) the use of $39.2 million in cash from other activities of our discontinued operations over the past 12 months; (iv) the receipt of proceeds of $34.8 million from the exercise of stock options; (v) the payment of $32.3 million for the acquisition of the existing KATE SPADE business in Southeast Asia from Globalluxe; and (vi) the receipt of aggregate net proceeds of $28.9 million from the sale-leaseback of our West Chester, OH distribution center (the "Ohio Facility") and North Bergen, NJ office. We also used $39.0 million of cash from continuing operations over the past 12 months.

RESULTS OF OPERATIONS As discussed above, we present our results based on three reportable segments.

THREE MONTHS ENDED APRIL 5, 2014 COMPARED TO THREE MONTHS ENDED MARCH 30, 2013 The following table sets forth our operating results for the three months ended April 5, 2014 (comprised of 14 weeks) compared to the three months ended March 30, 2013 (comprised of 13 weeks): Three Months Ended Variance April 5, 2014 March 30, 2013 Dollars in millions (14 Weeks) (13 Weeks) $ % Net Sales $ 328.1 $ 245.7 $ 82.4 33.5 % Gross Profit 181.5 141.1 40.4 28.6 % Selling, general & administrative expenses 224.6 163.1 (61.5 ) (37.7 )% Operating Loss (43.1 ) (22.0 ) (21.1 ) (95.5 )% Other expense, net (0.3 ) (1.9 ) 1.6 86.8 % Loss on sales of trademarks -- (1.3 ) 1.3 * Loss on extinguishment of debt -- (1.1 ) 1.1 * Interest expense, net (9.5 ) (12.3 ) 2.8 22.8 % Provision for income taxes 1.8 1.0 (0.8 ) (89.4 )% Loss from Continuing Operations (54.7 ) (39.6 ) (15.1 ) (38.0 )% Discontinued operations, net of income taxes 100.9 (12.6 ) 113.5 * Net Income (Loss) $ 46.2 $ (52.2 ) $ 98.4 * * Not meaningful.

-------------------------------------------------------------------------------- Table of Contents 42 Net Sales Net sales for the first quarter of 2014 were $328.1 million, an increase of $82.4 million, or 33.5%, when compared to the first quarter of 2013, including the estimated impact of a $22.8 million increase in net sales resulting from the inclusion of a 14th week in the first quarter of 2014.

Net sales results for our segments are provided below: † KATE SPADE net sales were $217.1 million, a 54.0% increase compared to 2013, reflecting increases across all operations in the segment and an estimated increase of $18.4 million due to the additional week in 2014.

We ended the quarter with 127 specialty retail stores, 52 outlet stores and 46 concessions, reflecting the net addition over the last 12 months of 35 specialty retail stores, 10 outlet stores and 9 concessions and the acquisition of 6 specialty retail stores, 2 concessions and 1 outlet store.

Key operating metrics for our KATE SPADE retail operations included the following: - Average retail square footage, including concessions, in the first three months of 2014 was approximately 350 thousand square feet, a 42.2% increase compared to 2013; - Sales productivity was $324 per average square foot as compared to $261 for the first three months of 2013; and - Excluding the additional week in 2014, comparable direct-to-consumer net sales, including e-commerce, increased by 22.5% in the first three months of 2014; excluding e-commerce net sales, comparable direct-to-consumer net sales increased by 21.1%. Including the additional week in 2014, comparable direct-to-consumer net sales, including e-commerce, increased by 29.3% in the first three months of 2014; excluding e-commerce net sales, comparable direct-to-consumer net sales increased by 27.7%.

† Adelington Design Group net sales were $6.5 million, a decrease of $9.0 million, or 58.1%, compared to 2013, primarily reflecting the following: - A net $5.0 million decrease primarily related to the LIZWEAR, LIZ CLAIBORNE NEW YORK and private label jewelry businesses; - A $3.1 million decrease related to the licensed LIZ CLAIBORNE and MONET brands; and - A $0.9 million decrease primarily related to our former Dana Buchman brand supplier agreement.

† JUICY COUTURE net sales were $104.5 million, a 17.1% increase compared to 2013, which primarily reflected increases in our e-commerce, wholesale non-apparel, wholesale apparel and specialty retail operations, partially offset by a decrease in our licensing operations.

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).

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 the first quarter of 2014 was $181.5 million (55.3% of net sales), compared to $141.1 million (57.4% of net sales) in the first quarter of 2013. The increase in gross profit is primarily due to increased net sales in our KATE SPADE and JUICY COUTURE segments, partially offset by decreased net sales in our Adelington Design Group segment. Our gross profit rate decreased from 57.4% in 2013 to 55.3% in 2014 due to a change in sales mix due to timing, the absence of licensing sales and increased promotion activity at JUICY COUTURE and -------------------------------------------------------------------------------- Table of Contents 43 the impact of a change in sales mix due to timing at KATE SPADE.

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 $61.5 million, or 37.7%, to $224.6 million in the first quarter of 2014 compared to the first quarter of 2013. The increase in SG&A reflected the following: † A $36.1 million increase in expenses associated with our streamlining initiatives, brand-exiting and acquisition related costs; † A $35.1 million increase in SG&A in our KATE SPADE segment, primarily related to direct-to-consumer expansion reflecting: (i) increased compensation related expenses; (ii) increased rent and other store operating expenses; and (iii) increased e-commerce fees and advertising expenses. The increase also included incremental SG&A associated with the KATE SPADE businesses in Southeast Asia; and † An $8.6 million decrease associated with reduced costs at Corporate and in our JUICY COUTURE and Adelington Design Group segments.

SG&A for the first quarter of 2013 included $1.1 million related to Lucky Brand, which represents expenses related principally to distribution functions that were included in the Lucky Brand historical results, but are not directly attributable to Lucky Brand and therefore, have not been included in discontinued operations.

SG&A as a percentage of net sales was 68.4%, compared to 66.4% in 2013, primarily reflecting increased expenses associated with our streamlining initiatives, brand-exiting activities and acquisition related costs.

Operating Loss Operating loss for the first quarter of 2014 was $43.1 million ((13.1)% of net sales) compared to an operating loss of $22.0 million ((9.0)% of net sales) in 2013.

Other Expense, Net Other expense, net amounted to $0.3 million and $1.9 million in the three months ended April 5, 2014 and March 30, 2013, respectively and consisted primarily of (i) foreign currency transaction gains and losses and (ii) equity in the (losses) earnings of our equity investee.

Loss on Sales of Trademarks In the first quarter of 2013, we recorded $1.3 million of transaction costs in connection with the sale of the Juicy Couture IP.

Loss on Extinguishment of Debt During the first quarter of 2013, we recorded a $1.1 million loss in connection with the conversion of $11.2 million of our former 6.0% Convertible Senior Notes due June 2014 (the "Convertible Notes") into 3.2 million shares of our common stock.

Interest Expense, Net Interest expense, net was $9.5 million for the three months ended April 5, 2014 and $12.3 million for the three months ended March 30, 2013, primarily reflecting: (i) the recognition of $2.3 million of interest income in 2014 primarily related to the Lucky Brand Note; (ii) a $0.8 million decrease related to the amortization of deferred financing fees; (iii) a decrease of $0.7 million related to reduced borrowings under our Amended Facility and the extinguishment of the Convertible Notes in 2013; and (iv) an increase of $0.8 million in interest expense related to the Senior Notes.

Provision for Income Taxes The income tax provision of $1.8 million and $1.0 million for the three months ended April 5, 2014 and March 30, 2013, respectively, 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.

-------------------------------------------------------------------------------- Table of Contents 44 Loss from Continuing Operations Loss from continuing operations in the first quarter of 2014 was $54.7 million, or (16.7)% of net sales compared to $39.6 million in the first quarter of 2013, or (16.1)% of net sales. Earnings per share, Basic and Diluted ("EPS") from continuing operations was $(0.44) in 2014 and $(0.33) in 2013.

Discontinued Operations, Net of Income Taxes Income from discontinued operations in the first quarter of 2014 was $100.9 million, reflecting a gain on disposal of discontinued operations of $105.3 million and a $(4.4) million loss from discontinued operations. Loss from discontinued operations in the first quarter of 2013 was $12.6 million, reflecting a loss on disposal of discontinued operations of $(12.7) million and $0.1 million of income from discontinued operations. EPS from discontinued operations was $0.81 in 2014 and $(0.11) in 2013.

Net Income (Loss) Net income (loss) in the first quarter of 2014 was $46.2 million compared to $(52.2) million in the first quarter of 2013. EPS was $0.37 in 2014 and $(0.44) in 2013.

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; and (iii) losses on asset disposals and impairments. Unallocated Corporate costs also exclude non-cash share-based compensation expense. In addition, Segment Adjusted EBITDA does not include Corporate expenses associated with the following functions: corporate finance, investor relations, communications, legal, human resources and information technology shared services and costs of corporate facilities and our former executive offices, which are included in Unallocated Corporate costs.

We do not allocate amounts reported below Operating loss to our reportable segments, other than equity income (loss) in our equity method investee. Our definition of Segment Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

Segment Adjusted EBITDA for our reportable segments and Unallocated Corporate costs are provided below.

Three Months Ended Variance April 5, 2014 March 30, 2013 In thousands (14 Weeks) (13 Weeks) $ % Reportable Segments Adjusted EBITDA: KATE SPADE (a) $ 32,269 $ 18,956 $ 13,313 70.2 % Adelington Design Group 427 3,872 (3,445 ) 89.0 % JUICY COUTURE (19 ) (8,596 ) 8,577 99.8 % Lucky Brand 54 (660 ) 714 -- % Total Reportable Segments Adjusted EBITDA 32,731 13,572 Unallocated Corporate Costs (15,275 ) (17,119 ) Depreciation and amortization, net (b) (15,223 ) (12,233 ) Charges due to streamlining initiatives, brand-exiting activities, acquisition related costs and loss on asset disposals and impairments, net (c) (25,289 ) (4,738 ) Share-based compensation (d) (20,324 ) (1,787 ) Equity loss included in Reportable Segments Adjusted EBITDA 298 270 Operating Loss (43,082 ) (22,035 ) Other expense, net (a) (251 ) (1,905 ) Loss on sales of trademarks -- (1,274 ) Loss on extinguishment of debt -- (1,108 ) Interest expense, net (9,522 ) (12,341 ) Provision for income taxes 1,807 954 Loss from Continuing Operations $ (54,662 ) $ (39,617 ) * Not meaningful.

-------------------------------------------------------------------------------- Table of Contents 45 (a) Amounts include equity in the losses of our equity method investee of $0.3 million for the three months ended April 5, 2014 and March 30, 2013.

(b) Excludes amortization included in Interest expense, net.

(c) See Note 12 of Notes to Condensed Consolidated Financial Statements for a discussion of streamlining charges.

(d) Includes share-based compensation expense of $16.5 million and $0.4 million in 2014 and 2013, respectively, that was classified as restructuring.

A discussion of Segment Adjusted EBITDA of our reportable segments and Unallocated Corporate costs for the three months ended April 5, 2014 and March 30, 2013 follows: † KATE SPADE Adjusted EBITDA for the first quarter of 2014 was $32.3 million (14.9% of net sales), compared to $19.0 million (13.4% 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 payroll related expenses, rent and other store operating expenses, e-commerce fees and advertising expenses.

† Adelington Design Group Adjusted EBITDA for the first quarter of 2014 was $0.4 million (6.6% of net sales), compared to Adjusted EBITDA of $3.9 million (25.0% of net sales) in 2013. The decrease in Adjusted EBITDA reflected reduced gross profit, partially offset by reduced SG&A.

† JUICY COUTURE Adjusted EBITDA for the first quarter of 2014 was not significant compared to Adjusted EBITDA of $(8.6) million ((9.6)% of net sales) in 2013. The period-over-period change reflected reduced SG&A and increased gross profit driven by selling as we continue our efforts to wind-down the JUICY COUTURE operations.

† Lucky Brand Adjusted EBITDA for the first quarter of 2013 was $(0.7) million, which represents expenses related principally to distribution functions that were included in the Lucky Brand historical results, but are not directly attributable to Lucky Brand and therefore, have not been included in discontinued operations.

Unallocated Corporate costs include costs for corporate finance, investor relations, communications, legal, human resources and information technology shared services and costs of corporate facilities and our former executive offices. Unallocated Corporate costs decreased to $15.3 million for the three months ended April 5, 2014 compared to $17.1 million for the three months ended March 30, 2013 due to cost reimbursements from the transaction services agreement associated with the sale of the former Lucky Brand business and reduced occupancy costs, partially offset by increased professional fees and payroll and related expenses.

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) fund outstanding liabilities and any remaining efforts associated with our streamlining initiatives, including contract termination costs, employee related costs and other costs associated with the sale of the Juicy Couture IP and Lucky Brand; (iv) invest in our information systems; (v) fund operational and contractual obligations; and (vi) potentially repurchase or retire debt obligations. We expect that our streamlining initiatives will provide long-term cost savings.

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 commencing 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. We used the proceeds from the issuance 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"), including (i) all of our existing material domestic restricted subsidiaries, (ii) all future wholly owned restricted subsidiaries (other than foreign subsidiaries, CFCs, CFC holding companies and subsidiaries of any of the foregoing and certain immaterial -------------------------------------------------------------------------------- Table of Contents 46 subsidiaries) and (iii) all future non-wholly owned restricted subsidiaries that guarantee capital markets debt securities or term indebtedness of the Company or any Guarantor.

The Term Loan 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 ours and the Guarantors' other assets (the "ABL Priority Collateral" and together with the Term Priority Collateral, the "Collateral"), which secure our Amended 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.

The Term Loan Credit Agreement restricts our 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. The Term Loan Credit Agreement also contains certain covenants and events of default that are customary for credit agreements governing term loans.

Amended Facility. On April 18, 2013, we completed a third amendment to the Amended Facility, which extended the maturity date from August 2014 to April 2018. Availability under the Amended Facility, availability is the lesser of $350.0 million and a borrowing base that is computed monthly and comprised of our eligible cash, accounts receivable and inventory. The Amended Facility also includes a swingline subfacility of $55.0 million, a multicurrency subfacility of $100.0 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 Amended Facility of up to $200.0 million is available for the issuance of letters of credit, and standby letters of credit may not exceed $65.0 million in the aggregate. The Amended 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 Amended Facility, with a spread based on the aggregate availability under the Amended Facility.

The Amended Facility restricts our ability to, among other things, incur indebtedness, grant liens, issue cash dividends, enter into mergers, consolidations, liquidations and dissolutions, change lines of business, make investments and acquisitions and sell assets, in each case subject to certain designated exceptions. In addition, the amended terms and conditions: (i) provide for a decrease in fees and interest rates (including eurocurrency spreads of 1.75% to 2.25% over LIBOR, depending on the level of availability); (ii) provide improved advance rates on eligible inventory; (iii) require us to maintain pro forma compliance with a fixed charge coverage ratio of 1.0:1.0 on a trailing 12 month basis if minimum aggregate borrowing availability falls below $35.0 million, or 10.0% of the commitments then in effect; (iv) require us to apply substantially all cash collections to reduce outstanding borrowings under the Amended Facility when availability under such facility falls below the greater of $40.0 million and 12.5% of the lesser of the borrowing base and aggregate commitments; (v) permit the acquisition of certain joint venture interests and certain distribution territories; (vi) decrease specified aggregate availability conditions to making certain other investments; and (vii) permit certain other acquisitions, investments, restricted payments, debt prepayments and incurrence of unsecured indebtedness if we are able to satisfy specified payment conditions.

Based on our forecast of borrowing availability under the Amended Facility, we anticipate that cash flows from operations and the projected borrowing availability under our Amended Facility will be sufficient to fund our liquidity requirements for at least the next 12 months.

-------------------------------------------------------------------------------- Table of Contents 47 There can be no certainty that availability under the Amended Facility will be sufficient to fund our liquidity needs. Should we be unable to comply with the requirements in the Amended Facility, we would be unable to borrow under such agreement and any amounts outstanding would become immediately due and payable, unless we were able to secure a waiver or an amendment under the Amended Facility. Should we be unable to borrow under the Amended 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 Amended 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 Amended 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 the first three months of 2014 with $128.5 million in cash and marketable securities, compared to $7.4 million at the end of the first three months of 2013 and with $395.6 million of debt outstanding at the end of the first three months of 2014, compared to $438.7 million at the end of the first three months of 2013. The $164.2 million decrease in our net debt primarily reflected: (i) the receipt of net proceeds of $319.9 million from the dispositions of the Juicy Couture IP, Lucky Brand and our former investment in Mexx; (ii) the funding of $93.6 million of capital and in-store shop expenditures over the last 12 months; (iii) the use of $39.2 million in cash from other activities of our discontinued operations over the past 12 months; (iv) the receipt of proceeds of $34.8 million from the exercise of stock options; (v) the payment of $32.3 million for the acquisition of the existing KATE SPADE business in Southeast Asia from Globalluxe; and (vi) the receipt of aggregate net proceeds of $28.9 million from the sale-leaseback of our Ohio Facility and North Bergen, NJ office. We also used $39.0 million of cash from continuing operations over the past 12 months.

Accounts Receivable decreased $15.4 million, or 15.1%, at April 5, 2014 compared to March 30, 2013, primarily due to the sale of Lucky Brand and decreased wholesale sales in our JUICY COUTURE segment, partially offset by an increase in KATE SPADE accounts receivable due to increased wholesale sales. Accounts receivable decreased $2.5 million, or 2.8%, at April 5, 2014 compared to December 28, 2013, primarily reflecting the presentation of the JUICY COUTURE business in Europe as held for sale as of April 5, 2014 and the timing of wholesale shipments.

Inventories decreased $9.9 million, or 4.5% at April 5, 2014 compared to March 30, 2013, primarily due to the sale of the Lucky Brand business and a decrease in JUICY COUTURE inventory, partially offset by an increase in KATE SPADE inventory to support growth initiatives and to support the transition of JUICY COUTURE stores to KATE SPADE stores. Inventories increased $25.5 million, or 13.8%, compared to December 28, 2013, primarily due to an increase in KATE SPADE inventory to support growth initiatives.

Borrowings under our Amended Facility peaked at $4.9 million during the first three months of 2014, compared to $75.3 million during the first three months of 2013. Outstanding borrowings were $4.9 million at April 5, 2014, compared to $44.1 million at March 30, 2013.

Net cash used in operating activities of our continuing operations was $81.2 million in the first three months of 2014, compared to $51.0 million in the first three months of 2013. This $30.2 million period-over-period increase in the use of cash was primarily due to a $33.5 million decrease in working capital items. The operating activities of our discontinued operations used $17.4 million and $15.1 million of cash in the three months ended April 5, 2014 and March 30, 2013, respectively.

Net cash used in investing activities of our continuing operations was $68.7 million in the first three months of 2014, compared to $18.7 million in the first three months of 2013. Net cash used in investing activities in the three -------------------------------------------------------------------------------- Table of Contents 48 months ended April 5, 2014 primarily reflected: (i) the payment of $32.3 million for the acquisition of the existing KATE SPADE businesses in Southeast Asia from Globalluxe; (ii) the use of $28.7 million for capital and in-store shop expenditures; and (iii) the payment of $7.7 million of transaction costs associated with the sale of the Juicy Couture IP. Net cash used in investing activities in the three months ended March 30, 2013 primarily reflected the use of $15.7 million for capital and in-store shop expenditures and $3.0 million for investments in and advances to KS China Co., Limited ("KSC"). The investing activities of our discontinued operations provided $138.5 million in the three months ended April 5, 2014, and used $7.8 million in the three months ended March 30, 2013.

Net cash provided by financing activities was $31.2 million in the first three months of 2014, compared to $42.9 million in the first three months of 2013. The $11.7 million period-over-period change primarily reflected the decrease in net cash provided by borrowing activities under our Amended Facility of $42.2 million, partially offset by an increase in proceeds from the exercise of stock options of $29.9 million.

Commitments and Capital Expenditures During the first quarter of 2009, we entered into an agreement with Hong Kong-based, global consumer goods exporter Li & Fung, whereby Li & Fung was appointed as our buying/sourcing agent for all of our brands and products (other than jewelry) and we received a payment of $75.0 million at closing and an additional payment of $8.0 million in the second quarter of 2009 to offset specific, incremental, identifiable expenses associated with the transaction.

Our agreement with Li & Fung provides for a refund of a portion of the closing payment in certain limited circumstances, including a change of control of the Company, the divestiture of any current brand, or certain termination events. We are also obligated to use Li & Fung as our buying/sourcing agent for a minimum value of inventory purchases each year through the termination of the agreement in 2019. Since 2009, we have completed various disposition transactions, including the licensing arrangements with J.C. Penney Corporation, Inc.

("JCPenney") in the US and Puerto Rico and with QVC, Inc. ("QVC"), the sales of the KENSIE, KENSIE GIRL and MAC & JAC trademarks, the sale of the Juicy Couture IP and the sale of Lucky Brand, which resulted in the removal of buying/sourcing for such products from the Li & Fung buying/sourcing arrangement. As a result, we refunded $24.3 million of the closing payment in the second quarter of 2010 and $1.8 million in the second quarter of 2012 and settled $6.0 million in the fourth quarter of 2013. We were not required to make any payments to Li & Fung as a result of the sale of Lucky Brand. In addition, our agreement with Li & Fung is not exclusive; however, we are required to source a specified percentage of product purchases from Li & Fung.

In connection with the disposition of the former Lucky Brand business, the 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 or assumed by third parties, for which we remain secondarily liable for the remaining obligations on 208 such leases. As of April 5, 2014, the future aggregate payments under these leases amounted to $195.9 million and extended to various dates through 2025.

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 $51.0 million, which is expected to be completed in the second quarter of 2014.

Our 2014 capital expenditures are expected to be $100.0 million, compared to $80.6 million in 2013. These expenditures primarily relate to our plan to open 65-70 retail stores or concessions globally in 2014, 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 cash provided by operating activities and our Amended Facility.

Debt consisted of the following: In thousands April 5, 2014 December 28, 2013 March 30, 2013 6.0% Convertible Senior Notes (a) $ -- $ -- $ 8,150 10.5% Senior Secured Notes 381,799 382,209 383,312 Revolving credit facility 4,900 2,997 44,084 Capital lease obligations (b) 8,896 8,995 3,184 Total debt $ 395,595 $ 394,201 $ 438,730 -------------------------------------------------------------------------------- (a) The balance at March 30, 2013 represented principal of $8.8 million and an unamortized debt discount of $0.6 million.

-------------------------------------------------------------------------------- Table of Contents 49 (b) The increase in the balance compared to March 30, 2013 primarily reflected the sale-leaseback for the office building in North Bergen, NJ during the second quarter of 2013, partially offset by the expiration of a capital lease for machinery and equipment during the fourth quarter of 2013.

For information regarding our debt and credit instruments, refer to Note 9 of Notes to Condensed Consolidated Financial Statements.

Availability under the Amended Facility is the lesser of $350.0 million and a borrowing base that is computed monthly and comprised of our eligible cash, accounts receivable and inventory. The Amended Facility also includes a swingline subfacility of $55.0 million, a multicurrency subfacility of $100.0 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 Amended Facility of up to $200.0 million is available for the issuance of letters of credit, and standby letters of credit may not exceed $65.0 million in the aggregate.

As of April 5, 2014, availability under our Amended Facility was as follows: Letters of Total Borrowing Outstanding Credit Available Excess In thousands Facility (a) Base (a) Borrowings Issued Capacity Capacity (b) Revolving credit $350,000 $215,997 $4,900 $18,388 $192,709 $157,709 facility (a) -------------------------------------------------------------------------------- (a) Availability under the Amended Facility is the lesser of $350.0 million or a borrowing base comprised primarily of eligible accounts receivable and inventory.

(b) Excess capacity represents available capacity reduced by the minimum required aggregate borrowing availability under the Amended Facility of $35.0 million.

Off-Balance Sheet Arrangements As of April 5, 2014, we had 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 foreign currency collars, forward contracts and swap contracts to hedge specific exposure to variability in forecasted cash flows associated primarily with inventory purchases and intercompany loans mainly of our KATE SPADE business in Japan. As of April 5, 2014, the Company had forward contracts maturing through March 2015 to sell 2.1 billion yen for $20.6 million.

We use foreign currency forward contracts outside the cash flow hedging program to manage currency risk associated with intercompany loans. Transaction (losses) gains of $(0.6) million and $4.0 million related to these derivative instruments were reflected within Other expense, net for the three months ended April 5, 2014 and March 30, 2013, respectively. As of April 5, 2014, we had forward contracts to sell 4.0 billion yen for $39.2 million maturing through June 2014.

See Note 16 of Notes to Condensed Consolidated Financial Statements.

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 Condensed 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 are summarized in Note 1 of Notes to Consolidated Financial Statements and in Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7, each included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013. There were no significant changes in our critical accounting policies during the three months ended April 5, 2014. 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 -------------------------------------------------------------------------------- Table of Contents 50 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.

ACCOUNTING PRONOUNCEMENTS For a discussion of recently adopted and recently issued accounting pronouncements, see Notes 1 and 18 of Notes to Condensed Consolidated Financial Statements.

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