By  on August 1, 2007

William L. McComb braced shareholders for a rough ride in his first-quarter earnings call three months ago — and for good reason. On Tuesday, Liz Claiborne Inc. said its earnings plummeted 65 percent in the second quarter, led by losses in the "partnered brands" segment, which is full of labels the $4.99 billion vendor is looking to sell.

For the quarter ended June 30, net income fell to $13.6 million, or 13 cents per diluted share, from $39.4 million, or 38 cents, in the year-ago period. Sales increased a modest 0.5 percent to $1.13 billion from $1.12 billion in the same quarter last year. It was the second quarter in a row that earnings fell by 65 percent.

"The major headlines for the second quarter were as expected," McComb told shareholders in a conference call.

The first six months of the year reflected similar numbers. Earnings fell 65.5 percent to $29.8 million, or 29 cents a diluted share, from $86.4 million, or 83 cents, in the same period last year. Sales slid 0.5 percent to $2.28 billion from $2.3 billion last year.

For the first time, Claiborne broke out results for its new divisions: direct brands — Juicy Couture, Kate Spade, Lucky Brand Jeans and Mexx — and partnered brands — which include the 16 under review for possible sale, including Ellen Tracy, Dana Buchman, Prana and Enyce. As expected, the direct brands saw sales growth, while the partnered brands declined. The direct brands division, on which the company is banking its future, made up 43.7 percent of sales for the quarter, up from 35 percent in the same quarter last year, before the company acquired Kate Spade.

The direct brands segment saw sales increase 25.5 percent to $494 million. Juicy Couture sales jumped 72.4 percent to $100 million. Lucky Brand Jeans revenues were up 26.2 percent to $108 million, though operating income and margins were down, primarily due to the doubling of marketing spending for Lucky and Juicy this quarter over the same period last year.

Mexx volume was flat, excluding the impact of exchange rates, with positive results in Canada offsetting losses in the core European market. Kate Spade was not in the Claiborne fold last year, but McComb noted it "continues to be on plan with a slightly dilutive profit margin."The partnered brands saw sales decline 12.9 percent to $637 million, driven by continued losses in the Liz Claiborne brand, the Curve fragrance, the Monet brands, Sigrid Olsen, Laundry by Design, Ellen Tracy and First Issue. The signature brand, along with Curve and the Monet collections, are being held onto and the other four are part of the 16 brands on the selling block.

McComb called the narrowing of the company's portfolio "action number one" and he said the first three weeks of the auction were exceeding his expectations, with dozens of parties expressing interest across all 16 subsidiaries.

"I think that the base assumption is that 14 to 16 will probably go," he said. "The interest is very strong and it appears to be competitive."

When asked by an analyst why Claiborne was selling Prana in light of the success of Lululemon's recent initial public offering and the interest in the yoga apparel market it reflects, McComb said Prana stood out as the brand it most pained him to part with based on potential.

"We have such faith and such belief in that team, that what we said was we'd either go for broke and go all the way on that business model or we'd put it in the hands of somebody that will," McComb said. "If we're not happy with the value that we get for it, we're going to [keep and expand it]. That said, the path to profitability on that business is not soon."

He said Claiborne has chosen to focus on investing its talent and funding on its four power brands and adding a fifth like Prana could stretch the firm's resources too thin.

McComb added the company is still conducting searches for a chief operating officer on the retail side to report to corporate chief operating officer Michael Scarpa, as well as a chief information officer and a ceo for Kate Spade.

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