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KATE SPADE : & CO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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02/23/2017 | 03:44pm CET

OVERVIEW

Recent Developments and Operational Initiatives


In the first quarter of 2017, the Board of Directors, together with management,
began conducting a process to explore and evaluate strategic alternatives to
further enhance shareholder value. We have retained a financial advisor and
legal counsel to assist us with our exploration of strategic alternatives. The
Board of Directors plans to proceed in a timely manner, but has not set a
definitive timetable for completion of this process. There can be no assurance
that this review process will result in a transaction or other strategic
alternative of any kind, or if a transaction is undertaken, as to its terms or
timing. As previously disclosed, we do not intend to disclose developments or
provide updates on the progress or status of this process until the Board of
Directors deems further disclosure is appropriate or required.



In the first quarter of 2017, we entered into an agreement to open a kate spade
new york flagship store in Paris, France, which is expected to open during the
second quarter of 2017.



In September 2016, we entered into a global licensing agreement with Perfume
Center of America, Inc. ("PCA") for the design, development and distribution of
kate spade new york fragrance products through 2023. Accordingly, we now earn
royalty income under this arrangement and no longer sell fragrance products
through our wholesale channel.



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

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 long­term
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 - primarily consists of exclusive arrangements

to supply jewelry for the LIZ CLAIBORNE and MONET brands.

We, as licensor, also license to third parties the right to produce and market products bearing certain Company­owned 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

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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, including tourist dependent markets.



Macroeconomic challenges and uncertainty continue to dampen consumer spending;
job growth remains inconsistent, with stagnating real wages in certain markets
in which we operate; consumer retail traffic remains inconsistent and the retail
environment remains promotional. Furthermore, economic conditions in
international markets in which we operate, including Asia, the United Kingdom
and the remainder of continental Europe, 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.



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 focusing on our handbag business and elevating our brand voice while
incorporating relevant trends and technology; expanding product categories
within our existing network, including footwear, tech, menswear and athleisure;
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 expanded assortments to balance access and
aspiration; (iii) delivering the world of kate spade new york to our customer
seamlessly across channels through a channel­agnostic approach, while leveraging
our e­commerce site as a global flagship, offering our broadest product
assortment across our category pillars and improving delivery speed to our
consumer by continuing to enhance our buy anywhere, receive anywhere model; and
(iv) increased marketing that leverages customer relationship management ("CRM")
capability and focuses on real-time, personalized customer insight. 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
Forward­Looking Statements" and "Item 1A - Risk Factors" in this Annual Report
on Form 10­K.

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 did not
represent a strategic shift in our operations and therefore were not reported as
discontinued operations.



2016 Overall Results

Our 2016 results reflected:

· Net sales growth in our KATE SPADE North America segment, primarily reflecting

increases across all channels of our kate spade new york brand;

· Increased net sales in our KATE SPADE International segment, primarily driven

    by an increase in our Europe and Japan operations;


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· The absence of the wind­down operations of KATE SPADE SATURDAY, JACK SPADE

brick and mortar stores and our directly owned operations in Brazil, which

concluded in 2015, and, to a lesser extent, the impact of the 2015 conversion

of the Hong Kong, Macau and Taiwan entities to a joint venture; and

· Reduced net sales and gross profit in our Adelington Design Group segment,

primarily related to our LIZWEAR brand and the exited TRIFARI, TRINA TURK and

    Kensie brands.


Our 2015 results reflected:

· Net sales growth in our KATE SPADE North America segment primarily driven by

increased kate spade new york direct­to­consumer sales;

· Reduced net sales in our KATE SPADE International segment compared to 2014,

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 wind­down 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 a

three-year $85.0 million note issued to us in connection with the sale of the

Lucky Brand business (the "Lucky Brand Note"); and

· A $4.0 million write­off of the cumulative translation adjustment of our

subsidiary in Brazil due to its substantial liquidation in 2015.

Net Sales


Net sales for 2016 were $1.381 billion, an increase of $138.8 million, or 11.2%,
compared to 2015 net sales of $1.243 billion. The increase primarily reflected
increases in net sales in our KATE SPADE North America segment and our KATE
SPADE International segment. The increase in net sales compared to 2015 includes
year-over-year decreases of (i) $27.3 million related to the wind-down
operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our
directly operated business in Brazil and (ii) $6.4 million related to the
conversion of the Hong Kong, Macau and Taiwan entities to a joint venture. The
impact of changes in foreign currency exchange rates in our international
businesses increased net sales by $8.4 million.

Gross Profit and Income from Continuing Operations


Gross profit in 2016 was $826.9 million, an increase of $72.8 million compared
to 2015, primarily due to increased net sales in our KATE SPADE North America
and KATE SPADE International segments. Our gross profit rate decreased from
60.7% in 2015 to 59.9% in 2016, which was primarily driven by a decrease in
gross profit rate in our KATE SPADE North America segment outlet stores, where
the environment remains promotional, and to a lesser extent, a decrease in gross
profit rate in our KATE SPADE International segment. The decrease in gross
profit rate was partially offset by: (i) an increase in penetration of our KATE
SPADE North America e-commerce operations; and (ii) the dilutive impact on the
2015 gross profit rate of the wind-down operations of KATE SPADE SATURDAY and
JACK SPADE brick and mortar stores, which were substantially completed in the
second quarter of 2015.

We recorded income from continuing operations of $151.6 million in 2016, as compared to $21.7 million in 2015. The year­over­year change primarily reflected: (i) an increase in gross profit; (ii) a decrease in Selling, general & administrative expenses ("SG&A"), including a $26.0 million charge to terminate contracts with our former joint venture partner in China

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in 2015; and (iii) the absence in 2016 of the $9.9 million loss on settlement of the Lucky Brand Note that was recorded in 2015.

Balance Sheet


We ended 2016 with a net cash position (total cash and cash equivalents and
marketable securities less debt) of $85.1 million as compared to a net debt
position (total debt less cash and cash equivalents and marketable securities)
of $98.9 million at year­end 2015. The $184.0 million increase in our net cash
position primarily reflected: (i) the generation of $247.3 million of cash from
continuing operating activities over the past 12 months; (ii) the funding of
$49.1 million of capital and in-store shop expenditures over the last 12 months;
and (iii) the funding of aggregate loans of $6.5 million to the KS China Co.,
Limited ("KSC") and KS HMT Co., Limited ("KS HMT") joint ventures.

RESULTS OF OPERATIONS

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

2016 vs. 2015


The following table sets forth our operating results for the year ended
December 31, 2016 (52 weeks), compared to the year ended January 2, 2016
(52 weeks):


                                                                Fiscal Years Ended                    Variance
Dollars in millions                                   December 31, 2016      January 2, 2016        $          %

Net Sales                                            $           1,381.5    $         1,242.7    $ 138.8       11.2 %
Gross Profit                                                       826.9                754.1       72.8        9.7 %
Selling, general & administrative expenses                         643.3                687.7       44.4        6.5 %
Operating Income                                                   183.6                 66.4      117.2      176.5 %
Other expense, net                                                 (8.3)               (11.1)        2.8       25.7 %
Loss on settlement of note receivable                                  -                (9.9)        9.9          *
Interest expense, net                                             (19.7)               (19.2)      (0.5)      (2.9) %
Provision for income taxes                                           4.0                  4.5        0.5       10.1 %
Income from Continuing Operations                                  151.6                 21.7      129.9          *
Discontinued operations, net of income taxes                         2.0                (4.6)        6.6          *
Net Income                                           $             153.6    $            17.1    $ 136.5          *

--------------------------------------------------------------------------------

*Not meaningful.

Net Sales


Net sales for 2016 were $1.381 billion, an increase of $138.8 million, or 11.2%,
compared to 2015 net sales of $1.243 billion. The increase primarily reflected
increases in net sales in our KATE SPADE North America segment and our KATE
SPADE International segment. The increase in net sales compared to 2015 includes
year-over-year decreases of (i) $27.3 million related to the wind-down
operations of KATE SPADE SATURDAY, JACK SPADE brick and mortar stores and our
directly operated business in Brazil and (ii) $6.4 million related to the
conversion of the Hong Kong, Macau and Taiwan entities to a joint venture. The
impact of changes in foreign currency exchange rates in our international
businesses increased net sales by $8.4 million. Including e-commerce net sales,
kate spade new york comparable direct-to-consumer sales increased by 9.1% in
2016; excluding e-commerce net sales, kate spade new york comparable
direct-to-consumer sales increased by 1.1% in 2016.

Net sales results for our segments are provided below:

· KATE SPADE North America net sales were $1.156 billion, a 12.1% increase

compared to 2015 net sales of $1.031 billion, primarily reflecting increases

    across all channels of our kate spade new york brand.  The increase in


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net sales compared to 2015 includes a year-over-year decrease of $12.9 million
related to 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.




We ended 2016 with 108 kate spade new york specialty retail stores and 68 outlet
stores, reflecting a net addition of 4 kate spade new york specialty retail
stores and 4 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 2016 was approximately 396 thousand square feet, a 9.6% increase compared to 2015; and

-Sales productivity was $1,511 per average square foot in 2016, an increase of 1.2% compared to 2015, on a constant currency basis. Sales productivity was $1,496 in 2015, on a reported basis.

· KATE SPADE International net sales were $201.8 million, a 7.3% increase

compared to 2015 net sales of $188.2 million, primarily driven by an increase

in net sales in our Europe and Japan operations, partially offset by a $12.7

million decrease related to the wind-down operations of KATE SPADE SATURDAY,

JACK SPADE brick and mortar stores and our directly operated business in Brazil

and a $6.4 million decrease related to the conversion of the Hong Kong, Macau

and Taiwan territories to a joint venture. The impact of changes in foreign

currency exchange rates in our international businesses increased net sales by

    $9.5 million.




We ended 2016 with 25 kate spade new york specialty retail stores, 54
concessions, and 14 outlet stores, reflecting a net addition over the last
12 months of 3 specialty retail stores, 2 concessions and 1 outlet store. 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 2016 was approximately 85 thousand square feet, a 16.4% increase compared to 2015; and


-Sales productivity was $1,520 per average square foot in 2016, a decrease of
14.3% compared to 2015, on a constant currency basis. Sales productivity was
$1,634 in 2015, on a reported basis.

· Adelington Design Group net sales were $23.3 million for 2016, a decrease of

$0.2 million, or 0.7%, compared to 2015, primarily related to a $2.3 million

decrease in our LIZWEAR brand and a $1.7 million decrease in the exited

TRIFARI, TRINA TURK and Kensie brands, partially offset by a $3.8 million

increase in the licensed MONET and LIZ CLAIBORNE brands.

Comparable direct­to­consumer 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 non­comparable one full

fiscal month prior to the scheduled closing date;

· A remodeled store will be changed to non­comparable 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 re­open date;

· A store that relocates becomes non­comparable 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

· E­commerce sales are comparable after 12 full fiscal months from the website

    launch date (on the first day of the 13th full month).


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We provide comparable direct-to-consumer net sales as a key operating metric
because we consider it an important supplemental measure of performance and
believe it is frequently used by securities analysts, investors and other
interested parties in the evaluation of companies in our industry. Our
definition of comparable direct-to-consumer net sales may not be comparable to
similarly titled measures of other companies.



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 e­commerce net sales.



Gross Profit


Gross profit in 2016 was $826.9 million, an increase of $72.8 million compared
to 2015, primarily due to increased net sales in our KATE SPADE North America
and KATE SPADE International segments. Our gross profit rate decreased from
60.7% in 2015 to 59.9% in 2016, which was primarily driven by a decrease in
gross profit rate in our KATE SPADE North America segment outlet stores, where
the environment remains promotional, and to a lesser extent, a decrease in gross
profit rate in our KATE SPADE International segment. The decrease in gross
profit rate was partially offset by: (i) an increase in penetration of our KATE
SPADE North America e-commerce operations; and (ii) the dilutive impact on the
2015 gross profit rate of the wind-down operations of KATE SPADE SATURDAY and
JACK SPADE brick and mortar stores, which were substantially completed in the
second quarter of 2015.

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 decreased $44.4 million, or 6.5%, to $643.3 million in 2016 compared to 2015. The change in SG&A reflected the following:

· The absence of $35.3 million of expenses incurred in 2015 associated with our

streamlining initiatives, brand­exiting activities and acquisition related

costs;

· The absence of a $26.0 million charge incurred in 2015 to terminate contracts

with our former joint venture partner in China;

· A $9.5 million decrease in SG&A in our KATE SPADE International segment,

including a reduction associated with the wind-down of our Company-owned stores

in Brazil;

· A $1.0 million decrease in our Adelington Design Group segment; and

· A $27.4 million increase in SG&A in our KATE SPADE North America segment,

primarily related to direct­to­consumer expansion reflecting increased

e-commerce fees, rent and other store operating expenses, partially offset by

reduced annual incentive compensation.

Operating Income

Operating income for 2016 was $183.6 million (13.3% of net sales), compared to $66.4 million (5.3% of net sales) in 2015.

Other Expense, Net


Other expense, net amounted to $8.3 million in 2016 and $11.1 million in 2015.
Other expense, net consisted primarily of (i) equity in the losses of KSC and KS
HMT of $6.5 million and $6.7 million in 2016 and 2015, respectively; (ii) a $1.4
million and $4.0 million write­off of cumulative translation adjustment in
connection with the liquidation of foreign subsidiaries in 2016 and 2015,
respectively; and (iii) foreign currency transaction gains and losses.

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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 in Note 3 of Notes to Consolidated Financial Statements.

Interest Expense, Net

Interest expense, net was $19.7 million in 2016, as compared to $19.2 million in 2015, primarily reflecting a net reduction in interest income of $1.2 million, driven by $2.1 million associated with the prepayment of the Lucky Brand Note in the first quarter of 2015.

Provision for Income Taxes


The income tax provision of $4.0 million in 2016 primarily represented current
tax on operations in certain jurisdictions and a net increase related to
uncertain tax positions, partially offset by a net increase in deferred tax
assets for indefinite-lived intangible assets. The income tax provision of $4.5
million in 2015 primarily represented increases in deferred tax liabilities for
indefinite­lived intangible assets, current tax on operations in certain
jurisdictions and an increase in the accrual for interest related to uncertain
tax positions. We continue to assess whether any significant changes in
circumstances or assumptions have occurred that could materially affect our
ability to realize deferred tax assets. We expect to release the valuation
allowance when we have sufficient positive evidence, including but not limited
to, the magnitude and duration of our historical losses as compared to recent
profits within taxing jurisdictions to overcome such negative evidence. Until
then, we continue to maintain a valuation allowance against our net deferred tax
assets, exclusive of our deferred tax liability for indefinite lived
intangibles.

Income from Continuing Operations


Income from continuing operations in 2016 was $151.6 million, or 11.0% of net
sales, compared to $21.7 million in 2015, or 1.7% of net sales. Earnings per
share ("EPS"), basic from continuing operations was $1.18 in 2016 and $0.17
in 2015. EPS, diluted from continuing operations was $1.17 in 2016 and $0.17
in 2015.

Discontinued Operations, Net of Income Taxes


Income from discontinued operations in 2016 was $2.0 million, reflecting a gain
on disposal of discontinued operations of $1.9 million and $0.1 million of
income from discontinued operations. 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. EPS,
basic from discontinued operations was $0.02 in 2016 and $(0.04) in 2015. EPS,
diluted from discontinued operations was $0.02 in 2016 and $(0.04) in 2015.

Net Income


Net income in 2016 was $153.6 million, compared to $17.1 million in 2015. EPS,
basic was $1.20 in 2016 and $0.13 in 2015. EPS, diluted was $1.19 in 2016 and
$0.13 in 2015.

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,
brand­exiting 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,
other than non-cash share-based compensation expense. 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.

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Segment Adjusted EBITDA for our reportable segments is provided below.


                                                                Fiscal Years Ended                   Variance
Dollars in thousands                                  December 31, 2016      January 2, 2016        $          %
Reportable Segments Adjusted EBITDA:
KATE SPADE North America                             $           226,385    $         177,593    $ 48,792    27.5%
KATE SPADE International (a)                                      27,889               17,697      10,192    57.6%
Adelington Design Group                                            5,014                4,523         491    10.9%
Total Reportable Segments Adjusted EBITDA                        259,288    

199,813

Depreciation and amortization, net (b)                          (45,782)    

(46,311)

Charges due to streamlining initiatives (c),

 brand-exiting activities, acquisition related
costs and loss on asset disposals and
impairments, net                                                 (9,204)    

(40,399)

Joint venture contract termination fee                                 -    

(26,000)

Share-based compensation (d)                                    (27,139)    

(25,577)

Adjusted equity loss included in Reportable
Segments Adjusted EBITDA (e)                                       6,450                4,872
Operating Income                                                 183,613               66,398
Other expense, net (a)                                           (8,270)             (11,137)
Loss on settlement of note receivable                                  -              (9,873)
Interest expense, net                                           (19,714)             (19,152)
Provision for income taxes                                         4,071                4,528
Discontinued operations, net of income taxes                       2,024              (4,621)
Net Income                                           $           153,582    $          17,087

--------------------------------------------------------------------------------

*Not meaningful.

(a) Amounts include equity in the adjusted losses of our equity method investees

      of $6.5 million and $4.9 million in 2016 and 2015, respectively.


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

(c) See Note 13 of Notes to Consolidated Financial Statements for a discussion of

streamlining charges.

(d) Includes share­based compensation expense of $0.3 million in 2015 that was

classified as restructuring.

(e) Excludes joint venture restructuring expense included in equity losses of

$1.8 million in 2015.

A discussion of Segment Adjusted EBITDA of our reportable segments for the years ended December 31, 2016 and January 2, 2016 follows:

· KATE SPADE North America Adjusted EBITDA for 2016 was $226.4 million (19.6% of

net sales), compared to $177.6 million (17.2% of net sales) in 2015. The

year­over­year increase reflected an increase in gross profit, as discussed

above, partially offset by an increase in SG&A. The increase in SG&A reflected

expenses associated with direct-to-consumer expansion, including an increase in

e-commerce fees, rent and other store operating expenses, partially offset by

reduced annual incentive compensation.

· KATE SPADE International Adjusted EBITDA for 2016 was $27.9 million (13.8% of

net sales), compared to $17.7 million (9.4% of net sales) in 2015. The

year-over-year increase reflected increased gross profit and a decrease in

SG&A, including a reduction in SG&A associated with the wind-down of our

Company-owned stores in Brazil.

· Adelington Design Group Adjusted EBITDA for 2016 was $5.0 million (21.5% of net

sales), compared to Adjusted EBITDA of $4.5 million (19.3% of net sales)

in 2015. The increase in Adjusted EBITDA reflected reduced SG&A, partially

    offset by decreased gross profit.


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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
Dollars in millions                                  January 2, 2016      January 3, 2015         $           %
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 included year­over­year decreases of: (i) $33.6 million related to the
wind­down 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
wind­down operations. These were partially offset by an increase of $2.5 million
resulting from outperformance in our kate spade new york e­commerce flash sale
website in North America. Excluding the additional week in 2014, kate spade new
york comparable direct­to­consumer sales, including e­commerce, increased by
12.6% in 2015; excluding e­commerce net sales, kate spade new york comparable
direct­to­consumer 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

direct­to­consumer and wholesale net sales in our kate spade new york brand.

The increase in net sales compared to 2014 includes year­over­year decreases

of: (i) $23.3 million in the KATE SPADE SATURDAY brand as we substantially

completed the wind­down 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 e­commerce flash sale website.



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

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-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. Sales productivity was $1,437 in 2014, on a reported
basis.

· 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 wind­down 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. 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. Sales productivity was $1,711 in 2014, on a reported basis.

· 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.

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 one­time opportunity presented
by the Juicy Couture real estate portfolio.

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 direct­to­consumer 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, brand­exiting activities and acquisition related costs.


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Impairment of Intangible Asset

In 2014, we recorded a non­cash 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 write­off 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.

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 in Note 3 of Notes to Consolidated Financial Statements.

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 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").

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 write­off of deferred financing fees in 2014 as a result of a
reduction in the size of our amended and restated revolving credit facility (as
amended to date, the "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 indefinite­lived 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
indefinite­lived 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. 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.

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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.

Segment Adjusted EBITDA

Segment Adjusted EBITDA for our reportable segments is provided below.


                                                          Fiscal Years Ended               Variance
                                                                        January 3,
Dollars in thousands                                January 2, 2016        2015           $         %
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, impairment of intangible asset 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)

Discontinued operations, net of income taxes                 (4,621)         82,434
Net Income                                         $          17,087    $   159,160

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*Not meaningful.

(a) Amounts include equity in the adjusted losses of our equity method investees

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 share­based 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.


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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

year­over­year increase reflected an increase in gross profit, as discussed

above, partially offset by an increase in SG&A related to direct­to­consumer

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

year­over­year increase reflected: (i) the closure of our Company­owned 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.

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, including our e-commerce platform; (iv) fund operational and
contractual obligations; 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. The outstanding balance of the Term Loan as provided under a term
loan credit agreement that we entered into on April 10, 2014 (the "Term Loan
Credit Agreement") 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. No such prepayment was required with respect to the
fiscal years ended December 31, 2016 and January 2, 2016.

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



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.



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

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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 2016 with $478.5 million in cash and cash
equivalents, compared to $297.9 million at the end of 2015 and with
$393.4 million of debt outstanding, compared to $396.8 million at the end
of 2015. The $184.0 million increase in our net cash position primarily
reflected: (i) the generation of $247.3 million of cash from continuing
operating activities over the past 12 months; (ii) the funding of $49.1 million
of capital and in-store shop expenditures over the last 12 months; and (iii) the
funding of aggregate loans of $6.5 million to the KSC and KS HMT joint ventures.

Accounts Receivable decreased $19.4 million, or 20.0%, at year­end 2016 compared
to year­end 2015, primarily reflecting the timing of 2015 fourth quarter
wholesale shipments, partially offset by a year-over-year increase in wholesale
net sales.

Inventories decreased $24.4 million, or 12.7% at year­end 2016 compared to
year­end 2015, primarily related to: (i) improved inventory management; (ii)
improved efficiencies with the buy online, ship from store capabilities; and
(iii) the continued growth of our licensing business.

Borrowings under our ABL Facility peaked at $8.0 million in 2015. We had no outstanding borrowings under our ABL Facility at December 31, 2016 and January 2, 2016.


Net cash provided by operating activities of our continuing operations was
$247.3 million in 2016, compared to $120.5 million in 2015. This $126.8 million
year­over­year change was primarily due to increased earnings in 2016 compared
to 2015 (excluding depreciation and amortization, foreign currency gains and
losses, impairment charges and other non­cash items) and a reduction in cash
outflows related to working capital items. The operating activities of our
discontinued operations used $2.4 million and $15.0 million of cash in the
fiscal years ended December 31, 2016 and January 2, 2016, respectively.

Net cash (used in) provided by investing activities of our continuing operations
was $(59.2) million in 2016, compared to $18.6 million in 2015. Net cash used in
investing activities in 2016 primarily reflected: (i) the use of $49.1 million
for capital and in­store shop expenditures; (ii) the use of $6.5 million for
loans to the KSC and KS HMT joint ventures; and (iii) a purchase price
adjustment payment of $2.4 million to The Lane Crawford Joyce Group ("LCJG").
Net cash provided by investing activities in 2015 reflected: (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 interests in the joint ventures; (iii) the use of $60.2 million for
capital and in­store shop expenditures; (iv) the payment of $10.0 million to
acquire E-Land's 60% interest in KSC; and (v) the use of $5.0 million for the
investments in and advances to KSC. The investing activities of our discontinued
operations provided $0.6 million in 2015.

Net cash used in financing activities was $3.2 million in 2016, compared to $8.5 million in 2015. The $5.3 million year­over­year change primarily reflected: (i) the absence of a net $6.0 million repayment of borrowings under the ABL Facility in 2015.


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Commitments and Capital Expenditures


Pursuant to a buying/sourcing agency agreement, Li & Fung Limited ("Li & Fung")
acts as a global buying/sourcing agent. On March 24, 2015, we modified the
existing arrangement in order to, among other things, transition the
buying/sourcing activities for our accessories products to an in-house model,
beginning with our Spring 2016 collection. The modification included a reduction
of the annual minimum value of inventory purchases and a change in the
commission rates for certain products. 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 91 such
leases. As of December 31, 2016, the future aggregate payments under these
leases amounted to $66.5 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 44 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.

We expect capital expenditures and working capital cash needs to be financed with available cash and cash provided by operating activities.


The following table summarizes as of December 31, 2016 our contractual cash
obligations by future period (see Notes 1, 9 and 10 of Notes to Consolidated
Financial Statements):


                                                                            Payments Due by Period
                                                     Less than                                        After
Contractual cash obligations *                        1 year        1 - 3 years      4 - 5 years     5 years       Total
(In millions)
Operating lease commitments                         $      67.8    $       124.8    $       113.8    $  143.8    $   450.2
Capital lease obligations                                   2.1              4.4              4.7         8.4         19.6
Inventory purchase commitments                            143.7                -                -           -        143.7
Term Loan                                                   4.0              8.0            379.0           -        391.0
Interest on Term Loan (a)                                  15.8             31.0             23.3           -         70.1
Total                                               $     233.4    $       168.2    $       520.8    $  152.2    $ 1,074.6

--------------------------------------------------------------------------------

*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                      December 31, 2016      January 2,

2016

      Term Loan credit facility (a)    $           385,794    $         

388,667

      ABL Facility                                       -                 

-

      Capital lease obligations                      7,612               
8,126
      Total debt                       $           393,406    $         396,793

--------------------------------------------------------------------------------

(a) The balance as of December 31, 2016 and January 2, 2016 included aggregate

      unamortized debt discount and deferred financing fees of $5.2 million and
      $6.3 million, respectively.


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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 December 31, 2016, availability under our ABL Facility was as follows:


                                                                                        Letters of
                                          Total         Borrowing      Outstanding        Credit       Available         Excess
In thousands                           Facility (a)      Base (a)      Borrowings         Issued        Capacity      Capacity (b)
ABL Facility (a)                      $      200,000    $  268,527    $           -    $      8,447    $  191,553    $      171,553

--------------------------------------------------------------------------------

(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.

Off­Balance Sheet Arrangements

We have not entered into any off­balance 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 by our businesses in Japan and Canada. As of December 31, 2016, we had
forward contracts to sell 3.0 billion yen for $27.9 million maturing through
March 2018 and 18.6 million Canadian dollars for $14.0 million maturing through
March 2018.

We use foreign currency forward contracts outside the cash flow hedging program
to manage currency risk associated with intercompany loans. As of December 31,
2016, we had forward contracts to sell 5.1 billion yen for $43.4 million
maturing through March 2017, 6.1 million British pounds for $7.5 million
maturing through March 2017, and 5.4 million Canadian dollars for $4.0 million
maturing through March 2017. Transaction (losses) gains of $(0.8) million and
$4.5 million related to these derivative instruments for December 31, 2016 and
January 3, 2015, respectively, were reflected within Other expense, net on the
accompanying Consolidated Statements of Income. Transaction gains (losses) for
the year ended January 2, 2016 were not significant.

Inflation

The rate of inflation over the past few years has not had a significant impact on our sales or profitability.

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

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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 share­based 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.
Distressed inventory is written down to the expected recovery value to be
realized through off­price 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
tangible and intangible assets acquired in a single transaction. 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 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 direct­to­consumer, wholesale and licensing
operations. Retail store and e­commerce 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 pre­approval
from management. Discounts are based on trade terms. Estimates for end­of­season
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,

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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.

Accounts Receivable - Trade, Net


In the normal course of business, we extend credit to customers that satisfy
pre­defined 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 on­going merchandise are recorded at
the lower of actual average cost or market value. We continually evaluate the
composition of our inventories by assessing slow­turning, 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 in­house 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
indefinite­lived 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 indefinite­lived 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 indefinite­lived 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 relief­from­royalty 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

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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.

The recoverability of the carrying values of all intangible assets with finite
lives is re­evaluated 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 2016 and 2015.


In 2014, we recorded a non­cash 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.

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 two­step 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 2016, 2015 or 2014.


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.

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.

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Share­Based Compensation

We recognize compensation expense based on the fair value of employee
share­based 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 share­based 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, share­based compensation expense could be
materially impacted.

ACCOUNTING PRONOUNCEMENTS

For a discussion of recently adopted and recent accounting pronouncements, see Notes 1 and 21 of Notes to Consolidated Financial Statements.

© Edgar Online, source Glimpses

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Financials ($)
Sales 2017 1 502 M
EBIT 2017 215 M
Net income 2017 109 M
Finance 2017 152 M
Yield 2017 -
P/E ratio 2017 26,70
P/E ratio 2018 22,02
EV / Sales 2017 1,89x
EV / Sales 2018 1,70x
Capitalization 2 985 M
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Consensus
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Buy
Mean consensus OUTPERFORM
Number of Analysts 19
Average target price 23,2 $
Spread / Average Target -0,30%
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Managers
NameTitle
Craig A. Leavitt Chief Executive Officer & Director
George M. Carrara President & Chief Operating Officer
Nancy J. Karch Non-Executive Chairman
Thomas Linko SVP, Chief Financial & Accounting Officer
Linda S. Yanussi SVP-Information Technology & Global Operations
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