NEW YORK — Improved execution and its recent Mexx Canada acquisition lifted Liz Claiborne Inc.’s second-quarter earnings 19.5 percent, a penny above analysts’ expectations.
For the three months ended June 29, net income was $38.8 million, or 36 cents a diluted share, from $32.5 million, or 31 cents, in the year-ago quarter. Wall Street’s consensus estimate was 35 cents. The results beat Liz’s previous guidance of 33 to 35 cents for the quarter.
Sales were up 8.6 percent to $789.5 million from $727 million, the 26th consecutive quarter of sales growth for the firm. Sales guidance from Liz had been an increase of between 6 and 8 percent.
Wholesale apparel sales in the quarter were up 5 percent in the quarter to $513.4 million, due in part to contributions from the Mexx acquisition. Wholesale nonapparel sales were up 12.3 percent to $96.1 million, led by strong sales in handbags, jewelry and fragrances. At retail, sales rose 18.7 percent to $177 million, driven by the inclusion of 73 Mexx specialty stores and 25 Lucky brand stores opened in the past 12 months. However, same-store sales at the specialty stores declined 10 percent, while outlet store sales were down 4 percent.
Overall, sales were helped by stronger full-priced selling. Top sellers in the women’s categories were pants and knit tops. The men’s market remained a challenging sector, but sales in DKNY men’s were up significantly from last year.
Paul Charron, chairman and chief executive officer, said during a conference call that he’s “not going to have any trouble signing off on any of the financials” when asked about the new Securities and Exchange Commission requirement that, beginning next month, requires ceo’s to verify the accuracy of financial statements.
“In the areas of corporate governance and responsibility, we have routinely studied best practices throughout American industry,” Charron said. “We believe that the approach we employ and the processes that we have in place are consistent with best practices. We are constantly reviewing our governance processes with an active board and with outside and objective advisers to ensure we remain at this high standard.”
The ceo told analysts that retail selling for the quarter was solid in April because of lean inventories and regular higher price selling in general. However, unseasonably cool weather in May resulted in lackluster sales, which rebounded in June. Because May’s underperformance led to some promotional activity earlier than in prior years, Charron questioned the rationale of those retailers getting a head start on promotions when inventory levels were so lean.
Charron said he remained optimistic about the next six months, even though a range of issues such as stock market volatility, conflict overseas and possibility of more terrorism here “has taken its toll on the consumer psyche.”
However, he said, the time was right for a change in the way department stores do business.
“I do see an awareness on the part of several key department store retailers that the business model employed for many years is less relevant today because you’ve had consolidation on the supplier side,” Charron asserted. “All the weak players are out of money, and the idea that people will give and give and give in terms of markdowns — that idea is outmoded, inappropriate and it [isn’t] going to happen. You can no longer stack it high, sell it cheap and go to the vendor and expect that the vendor is going to pay you.”
He explained that Liz has been preaching new business models with select key retailers centering on the heavy technology investments that the firm has recently made, as well as the information gleaned from experience working with such retailers as Wal-Mart, Target and Kohl’s.
“I think some time in the next six to 12 months, you’re going to see a full-blown test of a rather new and different approach to the management of the department store business. In the interim, what you’re seeing is a real focus on productivity and turn and inventory control,” Charron said. The emphasis, he continued, was not on product, style and silhouette, but on the flow of goods, end-of-the-month inventories and getting more sales out of less inventory.
As for acquisitions, Charron said, “the current environment presents us with a number of attractive opportunities to evaluate,” while actual acquisitions would need to be “consistent with our multibrand, multichannel diversification strategy.”
The company provided third-quarter guidance for EPS in the range of 76 to 78 cents, with sales ahead three to four percent. For the full year, Liz is projecting EPS of between $2.17 and $2.20 on a five to seven percent sales increase.
For the six months, income increased 15.1 percent to $89.7 million, or 84 cents a diluted share, from $78 million, or 74 cents, in the year-ago period. Sales were up 8.3 percent to $1.68 billion from $1.55 billion.
Shares of Liz advanced 17 cents, or 0.6 percent, to close at $26.68 in New York Stock Exchange trading Thursday.