By  on July 16, 2007

NEW YORK — Liz Claiborne CEO William L. McComb outlined a bold vision of a radically transformed company last Wednesday in a widely heralded summit with the investment community. Now the question is how well the game plan is played, said analysts, who were cautiously optimistic about the turnaround agenda.

“The plan makes sense, the goals are clear, now for the execution,” wrote Goldman Sachs analyst Margaret Mager in a research note following the packed meeting at a W hotel here. “We see these goals as attainable but also challenging.”

McComb’s blueprint is a marked renunciation of the acquisition-fueled growth strategy of his predecessor, Paul Charron, as its centerpiece is the shedding of up to 16 brands placed under strategic review. Now the company is betting the ranch on four key direct-to-consumer brands, with heavy investments of capital and talent in: Lucky Brand, Juicy Couture, Mexx and Kate Spade, which should ring up $2.2 billion in total sales this year, a figure forecast to grow to $3 billion by 2010.

“We are encouraged by the company’s new strategies to drive improvements, and believe McComb, who has been at Liz for eight months, brings a fresh and realistic perspective and approach to the business,” wrote Lehman Bros. analyst Bob Drbul in a research note.

Brands under review with a men’s wear component include Enyce, C&C California, Prana, Mac & Jac and Stamp 10. Women’s-only brands under review are Dana Buchman, Ellen Tracy, Emma James, Intuitions, J.H. Collectibles, Kensie, Laundry by Design, Sigrid Olsen, First Issue, Tapemeasure and Tint. In total, these 16 brands produce about $800 million in sales, but have operating margins in the negative low-single digits.

Liz Claiborne’s strong preference is to sell these brands to recoup capital and has hired investment bank Centerview Partners to find buyers. It could also discontinue or license some of the brands.

“With no track record, it seems fair to give CEO McComb the benefit of the doubt while recognizing there is a lot of work ahead to execute the strategies,” noted analyst Jeffrey Edelman of UBS in a research note. However, he warned “elimination of about 16 percent of Liz Claiborne’s volume will put pressure on the cost structure of the company.”

The primary growth drivers at Liz Claiborne’s four chosen “gems” will be ambitious investments in new stores. Juicy Couture, which currently operates 25 full-price stores and 16 outlets, is expected to grow to 140 stores by 2010, as revenue increases from $450 million this year to $600 million to $700 million in 2010. Men’s wear only comprises 2 percent of Juicy Couture sales now, so could represent a key growth opportunity.

Lucky Brand, which currently operates 174 full-price stores and 15 outlets, is expected to grow to 280 stores by 2010, as total revenue grows from $460 million this year to $600 million to $650 million.

Kate Spade, including its small Jack Spade men’s business, is forecast to be Liz Claiborne’s fastest-growing business, with store count growing from 26 full-price and 14 outlet units now to 120 total stores by 2010. Total revenue at Kate Spade is expected to grow from $90 million this year to $250 million to $350 million in 2010.

Mexx operates 210 stores internationally and should grow to about 400 doors by 2010, as total revenue grows from $1.2 billion today to $1.4 billion to $1.5 billion in 2010.
At least one analyst at the meeting was wary of the company placing so much emphasis on a small handful of brands, asking McComb if a trendy brand like Juicy Couture could quickly become outré in the fickle fashion world it occupies. McComb said the company’s research indicated that was unlikely to happen.

Other key components of Liz Claiborne’s new management credo are: reducing expenses by $190 million over the next three years, including large-scale job cuts; significantly increasing marketing spends to burnish its brands—something is has not done well in the past—with ad spends boosted from about $65 million this year to $130 million to $135 million in 2010; developing a best-in-class retail capability; and accelerating its supply chain to respond to fashion trends.

Analysts responded favorably to these goals, but UBS’s Edelman cautioned they could be difficult to reach without impacting the bottom line. “Retail growth, brand building and product development require high investment, and we wonder if cost savings and supply-chain initiatives are sufficient to offset these ongoing expenses,” he wrote.

Goldman Sachs’ Mager pondered the upside of spinning off one or more of Liz Claiborne’s power brands. “We believe each has the potential to stand alone as an independent public company if management and the board of directors decided this route would deliver the best value to shareholders. In our opinion, these direct brands would certainly trade at multiples more in line with high-growth consumer and retail brands that have gone public in the last three years,” she wrote.

In Liz Claiborne’s wholesale businesses—which include the Claiborne and Liz Claiborne labels, DKNY Jeans, Monet jewelry, and cosmetics—sales are expected to decline next year to $1.8 billion, from $2 billion this year, excluding the $800 million from the 16 brands under review. However, the remaining partnered brands could see very small improvements in the following years, providing stable cash flows and attractive ongoing economies.

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