By and  on September 22, 2008

NEW YORK — Liz Claiborne Inc. and Narciso Rodriquez, stalemated by fundamental differences over how to grow the designer’s niche business, are in talks to possibly sever the $4 billion vendor’s stake in the brand, according to sources. Various options are being considered, and nothing has been finalized.

Rodriguez has a right, according to the contract the two firms signed in May 2007, to buy back his stake, but sources said the notoriously difficult designer is having trouble finding an investor. Other possible endings could include Claiborne maintaining a silent partnership, an active partnership or keeping a financial interest without funding additional growth, said sources. Both parties declined comment Sunday.

Taking a half interest in the $15 million Narciso Rodriguez business, which cost Claiborne an estimated $12 million, had not been part of the vendor’s core “power brand” strategy, but rather a test to learn more about the luxury market. Sources said the company, which was in the red in the second quarter, did not expect the designer business to make money for at least five years, but was disappointed by the lack of plans made to generate future growth. Claiborne had said it ultimately thought the brand could be a $100 million business — about eight times its sales when the deal was struck.

“In addition to the expansion of the existing collection business, we feel there are abundant brand extension opportunities in nonapparel and licensing categories, as well as increased international distribution,” Claiborne chief executive officer William L. McComb said in May 2007 when the deal was signed. “Unlike acquisitions of fully scaled businesses, here we are affiliating with one of the world’s finest designers to organically build a broad business in a growing and profitable category that we do not currently operate in — the luxury designer segment — that is sold in productive and partnership-oriented upscale retailers.”

Claiborne had hoped to grow the Rodriguez brand with licensed categories within its current channels of distribution, which include Neiman Marcus and Barneys New York — not taking it down market, sources said. The contract between the designer and Claiborne did not include rights for a diffusion line.

However, sources said Rodriguez and longtime business partner Kathy Kalesti did not share Claiborne’s vision of commercialization, and that McComb has chosen to walk away from the partnership rather than fight the designer on it. The possible breakdown of the deal between Rodriguez and Claiborne was first reported by Fortune magazine over the weekend.

“It’s a very difficult business if you don’t have the right partner and financial people behind you or people who really care for you,” Rodriguez told WWD in December. “LCI…is very generous and recognizes the potential of everything we should and could be doing and haven’t been able to.”

The designer’s collection has received accolades from the fashion community and has a cult celebrity following, from Sarah Jessica Parker, Rachel Weisz, Claire Danes, Jessica Alba and Jessica Seinfeld today, back to Carolyn Bessette-Kennedy’s iconic wedding gown. With Claiborne focused on growing its direct brands, such as Juicy Couture and Lucky Jeans, and stopping the losses of the core Liz Claiborne brand, dealing with a small business that wasn’t progressing in the direction it wanted wasn’t worth it for the firm, which last year shed about a dozen brands it deemed nonpriority to spend time or money on.

Sources said the first year of Claiborne and Rodriguez’ partnership was largely spent unwinding the business from that of former owner Aeffe SpA, which helped found the designer’s eponymous brand in 1997. But otherwise, the financials of the designer business — which was losing money before Claiborne and Rodriguez partnered — didn’t change.

The brand has also been unable to find a president to help lead the growth. McComb had made multiple trips to Europe to interview possible brand president contenders from luxury houses that included Gucci and Chanel, but the designer did not choose to hire any of them, according to sources. For a few months, Janice Sullivan — who’d been at Claiborne for years as president of DKNY and carried the president title over to Narciso Rodriguez — came into the designer company, where it is said her presence bothered the designer. Sullivan left about four months later to join Warnaco Group Inc. as president of Calvin Klein Jeans. Before partnering with Claiborne, Rodriquez also struggled with finding someone for that role, with former Giorgio Armani executive Roberto Pesaro leaving the post of president and ceo after less than 10 months.

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