Saturday, March 15, 2008 2 comments ++[ CLICK TO COMMENT ]++

Added to Watch List: Kenneth Cole Productions (KCP)

I need to diversify my investments a bit and have been looking at the other big beaten-up sector in the US markets last year: consumer discretionary. Lately I have been looking for a good food products, clothing, or retail business. Sears Holdings (SHLD) is one option that I'm looking at. Another new one I'm considering is Kenneth Cole Productions (KCP).

Kenneth Cole Productions is a small cap company that designs and sells shoes and apparel targetted at the fashionable middle-class. Like most clothing or shoe companies, it is down about 50% from its peak in the past year. The company has been on a downtrend for the last few years, with weak sales and earnings. There are a lot of other companies with similar characteristics so it's hard to say if this company is uniquely attractive.

Ticker: KCP
Market cap: appox $300 million

P/E: 44.80 (depressed)
Forward P/E: 16.59
P/S: 0.59
P/B: 1.24

ROE: 2.84% (depressed)
Debt/Equity: no debt

The chart below, courtesy Morningstar, shows some key figures for the last 10 years along with some of my comments.

source: Morningstar

Sales and earnings have been weak over the last few years. I don't forsee this improving any time soon, given the state of the US economy. P/E is really high and ROE is really low, but this is due to depressed earnings. Historically the company has had good ROE that was above 10%.

The company has a strong balance sheet (no debt; lots of cash). The company has a dual-voting share structure, with the founder having around 90% voting power with only about 30% of the voting shares. However, given that the owner, Kenneth Cole, is the person behind the brand, it is an acceptable risk worth taking. Nevertheless, corporate governance can be problematic if the company runs into financial problems.

The stock isn't cheap on a P/E basis but it is trading at a decade low in terms of price-to-book and price-to-sales. I think this is worth investigating if it drops to a p/b of 1 (30% drop from here). Given the deteriorating stock market, we may hit that number by the middle of this year.

One additional item foreign investors (I'm Canadian) need to consider is the US$ decline. If you think the US$ will decline much further then it is somewhat risky to invest in US stocks (assuming you are not hedging it).

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2 Response to Added to Watch List: Kenneth Cole Productions (KCP)

March 16, 2008 at 8:58 AM

You may want to consider SHOO. It is also depressed but has better metrics

March 16, 2008 at 11:58 AM

Thanks for the suggestion. I'll take a look at that.

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