By  on May 1, 2007

NEW YORK ­ William L. McComb has a tough turnaround on his hands.

The chief executive officer of Liz Claiborne Inc. warned Tuesday that there was more bad news ahead as the company reported a 65.5 percent slide in first-quarter earnings as a result of weak wholesale figures in Claiborne’s traditional women’s sportswear brands.

For the quarter ended March 31, net income fell to $16.2 million, or 16 cents a diluted share, from $46.9 million, or 45 cents, in the year-ago period. Sales fell a more modest 1.6 percent, to $1.15 billion from $1.17 billion in the same quarter last year.

Wall Street reacted negatively Continued from page oneto the news; Liz shares fell to $37, down 17.3 percent from the previous day’s close of $44.72.

“It’s a very serious day for the company,” McComb told WWD. “We did what needed to be done, though we didn’t see it coming with a long runway. These are hard headlines, but we aren’t alone in this, particularly in the women’s sportswear area.”

For 2007, the $4.99 billion firm projected on Tuesday that net sales would be flat to down by low-single digits, with adjusted earnings per share in the $1.90 to $2.05 range, excluding the impact of streamlining and strategic review expenses, as well as acquisitions, divestitures or stock repurchases. Claiborne expects its retail segment to continue to lead growth, but also expects it will lose more ground on the wholesale side.

“We are aggressively addressing risks and pressures in the business. We have a sense of urgency,” McComb said. “The actions we’re taking are aimed at building the business, not for one quarter, but for the long haul, and we’ll therefore take some time to achieve the desired results.”

The ceo put off answering many questions from analysts and the press by saying they would be addressed at a half-day meeting on July 11, which he called “a strategy summit of sorts.”

“We will frame out the key elements of the growth strategy that we will pursue over the next three years and beyond, including financial targets,” McComb said. “More specifically, we will detail our thinking about the current portfolio, including an understanding of our historical overreliance on traditional wholesale apparel brands, what we intend to do about it and how it will impact our M&A strategy.”McComb blamed “an acceleration of many of the negative trends that have impacted our wholesale business over the past few years,” including “a greater reliance on private brands magnified by retail consolidation; a squeeze on moderate brands like Emma James, J.H. Collectibles and Tapemeasure; a reduction in sales plans and consumer demand for the traditional and bridge brands, like Sigrid Olsen, Liz Claiborne, Ellen Tracy and Dana Buchman, and ever-growing demands for increased margin,” as well as “an increasing demand by retailers for exclusively branded labels for their floors, coupled with a reduced reliance on more broadly distributed lines.”

Commenting on the troubled women’s sportswear brands, McComb told WWD that Claiborne could divest any or all of them, make them exclusive to different stores or expand them into retail.

Wholesale apparel sales dropped 7.4 percent, to $701 million. The company attributed $45 million of the drop to a shift in retailers’ calendars, which pushes back orders a week into the next quarter this year. The rest Claiborne attributed to weakness in Sigrid Olsen, J.H. Collectibles and Ellen Tracy, which was partially offset by the new exclusive Liz & Co. business for J.C. Penney and $13 million in favorable exchange rates.

Wholesale non-apparel sales fell 3.7 percent, to $133 million, due to losses in accessories, which were softened by gains in cosmetics and Juicy and Lucky sales.

“The result is fall 2007 orders that are substantially below those levels originally discussed with several of our major retail partners during the end of the year and even during our market meeting,” McComb said.

On the bright side, retail sales shot up 15.6 percent, to $305 million, thanks to the addition of dozens of stores, though comps fell 3.5 percent. Claiborne blamed losses in Sigrid Olsen stores, which he said suffered product issues.

And consolidation in department store retailing is clearly taking its toll. McComb confirmed news first reported in WWD in January that Macy’s was cutting its business with the Liz Claiborne brand by dropping it from some doors and reducing order volume in others. For spring 2007, the brand was no longer sold at 55 Macy’s doors and it will leave another 45 in the fall — primarily stores on the low end of the Federated food chain that have the worst productivity with the Liz Claiborne brand. At other stores, including the Herald Square flagship, the space for the Liz Claiborne brand will be reduced or orders will be edited.“Macy’s, too, is right-sizing orders for a leaner and more productive inventory management, but it is also taking that further step of reducing the sales plan for the Liz Claiborne apparel brand in the back half,” McComb said on the call. “We believe that our decision to launch Liz & Co. at J.C. Penney was a contributing factor to this reduction, regardless of the fact that the Liz & Co. brand offering differs in targeted consumer, products, price point and promotion strategy. The combined impact at Macy’s accounts for approximately 50 percent of our overall reduced fall bookings corporately.”

Margaret Mager, retail analyst and managing director for Goldman Sachs & Co., applauded McComb’s decision to cut order sizes and even doors to fend off paying markdown money later.

“I was surprised by the magnitude of the earnings reduction on one hand,” said Mager. “On the other hand, it ultimately took an outsider to face an industry business practice that needs to change. It’s an opportunity for everyone in the industry to access a reality that needs to change for the benefit of all parties involved.”

The growth of Liz & Co., which Claiborne projects will be profitable this year, may more than offset the decline of orders for the Liz Claiborne brand, McComb projected.The growth of the collaborative brand with Penney’s was one bright spot, along with continued expansion of Claiborne’s retail operation, particularly Juicy Couture, Lucky Brand Jeans, Mexx and Kate Spade. Acquired at the end of last year, Kate Spade added $20 million in revenues to the first quarter.

“They have some good brands, but they have big pieces of their pie with limited to no growth,” said Brad Stephens, an analyst for Morgan Keegan & Co. Inc. “That piece of the pie is bigger than the piece of the pie that can grow. Liz is taking the right strategy in emphasizing their niche brands, but I don’t think it’s an overnight fix.”

Stephens added that he was “shocked by the magnitude” of the call’s bad news, but that he “liked how McComb speaks and that he fessed up.”“It’s clear from this analysis that we have a tale of two cities on our hands,” McComb said in the call. “There are some remarkable bright spots in our portfolio: lifestyle brands that span men’s and women’s, multiple product classifications in multiple geographies, brands that are growing and have significant profit potential. At the same time, the pressure on our wholesale portfolio from industry trends has intensified significantly. It’s time we take action to address these issues head on, swiftly and intelligently.”

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