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Liz Sees Red in First Qtr.

Liz Claiborne Inc. chief executive officer William L. McComb's tale of two cities analogy continues to haunt him.

Liz Claiborne Inc. chief executive officer William L. McComb’s tale of two cities analogy continues to haunt him.

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

On Tuesday the company posted a first-quarter loss of $31 million, or 33 cents a diluted share, down from profits of $16.2 million in the first quarter of 2007. The bottom line was hurt by $44 million in restructuring costs.

The results exhibited the same story for the beleaguered vendor: direct brand sales grew 28 percent to $610 million, while partnered brand sales slid 14 percent to $501 million.

Facing what McComb called “a very light second quarter,” the vendor lowered its 2008 adjusted earnings per share guidance to a range of $1.40 to $1.60 from a previous range of $1.50 to $1.70.

“Today, on an apples-to-apples basis, you saw an uptick, and we hit what analysts had been expecting,” McComb told WWD. “But the second quarter is always a tough quarter, and this quarter will be tougher than normal.”

Sales for the quarter increased about 5 percent to $1.12 billion from $1.07 billion.

Juicy Couture continued its growth streak with revenues increasing 58 percent to $140 million. Lucky Brand Jeans sales rose 21 percent to $110 million, Kate Spade sales climbed 44 percent to $28 million. Helped by the strength of the euro, Mexx revenues grew 20 percent to $342 million, though McComb said, “Mexx is underperforming the market overall” and “our execution has been poor.”

But this time around, the tale of two cities story included a twist, as even the partnered brands developed haves and have-nots. The company pointed to Kensie, DKNY Jeans, Liz & Co. and Monet as growth leaders, and the Liz Claiborne brand, Claiborne men’s and Kohl’s Villager business as leading losses.

“Department stores are promoting heavily, conserving their open to buy and managing their inventories carefully,” Dave McTague, executive vice president of partnered brands, said. “The fall of the partnered brands environment will continue to be tough, especially on our declining brands. We are carefully watching our exposure to order cancellations and markdowns….While we won’t claim success in 2008, with careful execution, we are on course for significantly improved results in 2009.”

McTague added there are plans to improve all three of the worst performing brands for spring 2009. Isaac Mizrahi will relaunch the flagship Liz Claiborne brand, John Bartlett will do the same for Claiborne men’s, and Villager will be discontinued and replaced by Dana Buchman, which Claiborne has licensed exclusively to Kohl’s.

Claiborne also has significant sourcing changes on the horizon, and McComb said an announcement should be forthcoming in the next month. The vendor has already moved some of its sourcing out of China into Vietnam, Indonesia and Cambodia, and is considering Jordan and Egypt.

“I have not been happy with the degree to which sourcing has been integrated in the brands and the degree to which we drive our competitive advantage,” McComb said. “We will be taking a substantive approach to integrating sourcing with design, merchandising, and merchandise planning and allocation.”

Analyst Jennifer Black, of the firm that bears her name, thinks the revisions are realistic. “Unless we go into a depression, this could be a turnaround story,” Black said. “The big question is if this is a 2009 story or a 2010 story.”

Black said she was encouraged by Juicy’s “extraordinary growth and potential” (even proposing Juicy could open special stores for its new intimates line), Kate Spade’s prime segment given the current economic situation, and Lucky’s plan to add more fashion denim and tops. On the partnered brands side, Black said, “I’m dying to see the Isaac Mizrahi line. In the meantime I have no expectations for the Liz brand.”

But Brad Stephens, a retail analyst for Morgan Keegan & Co. Inc., said he was wary about the store rollout plan for Lucky, which entails 20 to 25 full-priced stores and 15 to 20 outlets this year, after the brand’s stores have experienced negative comps. He was also concerned that the strategy for Kate Spade of opening 12 outlets to six full-priced stores could hurt the brand image. Plus, Mexx also continues to underperform.

Claiborne’s stock closed Tuesday at $18.75, up 38 cents.