WWD.com/business-news/financial/liz-claiborne-reports-loss-1712904/
government-trade
government-trade

Liz Claiborne Reports Loss

The red ink continued to flow for Liz Claiborne Inc. in the second quarter.

View Slideshow

Transition pains continue to plague Liz Claiborne Inc., which on Wednesday posted a loss of $23.2 million in the second quarter, narrowed guidance for the year and scaled back plans for retail expansion.

This story first appeared in the August 14, 2008 issue of WWD.  Subscribe Today.

For the three months ended July 5, the vendor took a 25-cent-a-diluted-share hit, as compared with a $13.6 million, or 13 cent, earnings gain in the second quarter of 2007.

That comparison includes restructuring costs and discontinued operations from the brands Claiborne shuttered or sold, and the vendor said its adjusted earnings from continuing operations fell to 9 cents a diluted share from 23 cents, which it said beat Wall Street expectations. But Wall Street was still negative, and Claiborne shares traded down by as much as 19 percent during the day before finishing down 12 percent at $13.18.

by as much as 19 percent during the day before finishing down 12 percent at $13.18.

The loss came despite cutting $22 million in selling, general and administrative expenses in the second quarter.

Sales for the quarter fell 7 percent to $973.8 million from $1.05 billion. Decreased sales in Mexx’s European business and the partnered brands division, particularly the flagship Liz Claiborne and Claiborne labels, offset growth from direct brands like Juicy Couture. Ongoing adjusted sales for the total company decreased 4 percent.

The company also narrowed 2008 full-year guidance to a range of $1.40 to $1.50, from the previous $1.40 to $1.60. This updated projection assumes no improvement in the macroeconomic environment nor in Mexx’s downward retail trend in Europe.

“Let’s not lose sight of the fact we beat expectations,” said chief executive officer William L. McComb. He was referring to Wall Street’s projection of zero earnings, which the company beat on an adjusted basis that excludes discontinued operations and streamlining costs by 9 cents. “Every quarter that passes, I’m feeling better about the leading indicators. We had some great news: Lucky had a great quarter, same goes for Juicy. For Kate Spade, the new stores are opening well, but for the product, it’s really a resort and holiday story. The news that affected our stock price was what we have to do in the back half of the year.…How everyone will do for the holidays is anyone’s guess.”

Revenues at Claiborne’s direct brands increased 17 percent to $578 million, a 10 percent growth when excluding currency exchange rate. Among the results:

• Juicy Couture continued to lead the division’s growth, increasing 48 percent to $148 million in sales. The brand launched its Choose Sleep intimates line, which is already in all of its retail stores and 160 wholesale doors and will open its first concept store in the next year.

• Lucky Brand sales were up 9 percent to $118 million, and Lucky’s comps reversed their negative trend to increase 5 percent in the quarter.

• Helped by an improved wholesale business and more productive new stores, Kate Spade saw sales climb 45 percent to $30 million, though comps were down 7 percent due to its heritage stores, which are larger than the new 1,500- to 1,800-square-foot units the brand is now opening.

• The largest but poorest-performing of the four direct brands, Mexx, saw sales of $283 million, a 7 percent increase helped by the currency exchange rates from Europe, but a 7 percent decrease when currency changes were factored in. Mexx did well in Canada, but its “problem child” European turnaround is taking longer than anticipated, according to the company.

Claiborne is reducing its retail rollout through 2009 by 50 percent, halting the opening of new Kate Spade, Lucky and Mexx stores. Juicy Couture is still on track to open 35 to 45 stores in 2009.

“Given the call for capital efficiency and the need for the brands to learn more, it all made sense to push back store openings mostly from the back half of 2009 to the first half of 2010,” McComb said. “Lucky is opening a test store in Monterey, Calif., soon, and we wanted to get a full six-month market read before we move forward. With Kate’s new stores and overall concept, there is still a format tweak — considering they have an eye on launching apparel, that will change how the box looks, and we want to let the architecture team play out two or three additional concepts.”

Sales at the partnered brands division fell by 31 percent to $380 million from $550 million, and 25 percent for continued brands to $373 million from $498 million. The company plans to reduce costs at the division by another 8 to 10 percent.

Although the Liz Claiborne better women’s line and the Claiborne men’s line performed badly, the partnered segment had highlights from DKNY Jeans, Monet and Kenzie. More growth is expected there, as Macy’s expands Kenzie’s distribution from 110 stores to more than 400 in 2009.

How much of the company’s problems are self-inflicted versus how much are from the economy is “the impossible black box,” McComb said. “All of the wholesalers are doing a lot more promotional [activity], which affects everybody. But a business that has its mojo, like DKNY Jeans and Kensie, which are growing a lot, and it’s profitable growth, shows with the right product, you can succeed. That’s why I think spring 2009 is a great time to relaunch the Liz Claiborne business because it’s so rich in value — you get a lot for the money as opposed to what we have now.”

When Isaac Mizrahi’s relaunched Liz Claiborne bows for spring, the focus will not be on increasing revenues, but rather on increasing sell-throughs and natural margins, McComb said.

Claiborne has also shifted its focus from buying back shares to lowering debt. By the end of 2008, the company forecasts debt will be between $725 million and $750 million, down from $888 million at the end of 2007.

Brad Stephens, a retail analyst for Morgan Keegan & Co. Inc., said Lucky’s improved comps, Juicy Couture’s continued strength and the company’s decision to lower capital expenditures were good news, but that the Mexx European business and continued weakness in partnered brands meant the company might have to lower guidance once again.

Analyst Jennifer Black of Jennifer Black & Associates titled her Wednesday report on Claiborne: “It takes more than a day to move a battleship,” and called the stock undervalued.

View Slideshow