By  on March 3, 2005

NEW YORK — Liz Claiborne Inc. turned in fourth-quarter profits of $82.7 million, or 75 cents a diluted share, a 13.1 percent increase, but couldn’t keep Wall Street happy.

Anxious, perhaps, because of the continued sales decline of the core Liz Claiborne brand and 2005 forecasts, investors traded shares of the firm down $2.34 or 5.4 percent to $41.37 on the New York Stock Exchange Wednesday.

“The retail climate is currently challenging, and we will continue to plan our businesses conservatively, focusing on solid execution and disciplined inventory management,” chairman and chief executive officer Paul Charron said in a statement.

The quarter’s profits compared with year-ago earnings of $73.1 million, or 66 cents. Sales for the three months ended Jan. 1 jumped 16.1 percent to $1.2 billion compared with $1.03 billion a year earlier.

For the year, net income rose 12.1 percent to $313.6 million, or $2.85 a diluted share, on a 9.2 percent increase in sales to $4.63 billion.

“There were questions about the Liz brand again, downsizing it further and I think people didn’t want that to happen,” said analyst Jennifer Black of Jennifer Black & Associates.

Sales of the core Liz brand dropped 18.8 percent in 2004 and are projected to decline by mid- to high-single digits this year.

She said the forecast is not as robust as some on Wall Street would have liked.

“Management painted a conservative picture,” said Black. “The market took it literally and isn’t giving them any credit for their diversification. I’m really surprised at the reaction.”

Without the aid of any future acquisitions, Claiborne is looking for earnings of $2.96 to $3.02 a share in 2005 on a 6 to 8 percent increase in sales. The profit forecast includes a planned accounting change and a move away from stock options that is expected to cut earnings by 10 to 12 cents a share. Wall Street was looking for earnings of $3.13.

However, it’s hard to envision Claiborne making it through the year without some sort of deal.

Traditionally one of the most acquisitive companies in the apparel industry  — snatching up the likes of Enyce, Juicy Couture and Ellen Tracy in recent years — Claiborne did not make any acquisitions in 2004 and made just one small deal this year, buying C&C California for an initial price of $28 million in January.The planned combination of Federated Department Stores and May Department Stores, which was made official on Monday, might influence the acquisition path Claiborne and vendors throughout the industry ultimately take. Together, May and Federated account for 22 percent of the firm’s business.

“There’s no question in my mind that this megamerger…will stimulate a consolidation on the wholesaler side,” Charron said on a conference call with Wall Street. “In some cases, it will be consolidation out of necessity.”

Companies, even very large ones, are going to look to gain both scale and substance through deal-making.

Charron said Claiborne wouldn’t stray from its core strategies or stretch to make a deal that was too risky, though. “The question then becomes, what is the definition of financial attractiveness?”

Historically, financial attractiveness for Claiborne’s acquisitions meant that they would  add to earnings within a year, he said. A bigger deal, however, might not be accretive within a year.

“Stay tuned,” Charron said. “A lot of rules are being rewritten. It’s going to be a very interesting space to operate in for the next two or three years.”

Many of the rules of the fashion game have already changed since Charron joined Claiborne in 1994, as can be seen by the sheer breadth and diversity of the firm’s portfolio of  businesses. Juicy Couture, which had sales of $47 million when Claiborne acquired it in 2002, is now nearly four times larger, opened its first store in Las Vegas in October and is pulling in sales there in excess of $1,000 a square foot. Claiborne also added 19 new Sigrid Olsen stores last year and 20 more are on the way this year.

“The bottom line is that we have shifted away from American department stores frankly as their share of the total market has declined,” said Charron. “They’re still a large and profitable portion of our business. Barring some sector turnaround, they will probably become less important to us.”

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