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Liz Scores in Second Quarter

Aided by acquisitions, Liz Claiborne’s bottom line came in at the high end of expectations and sales soared past plan in the second quarter.

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NEW YORK — Liz Claiborne is taking strategic steps to keep up with the shifting retail landscape, while continuing its strong financial showing.

Company executives discussed some of these initiatives and the industry’s woes Thursday as the firm reported positive second-quarter results. Aided by acquisitions, the bottom line came in at the high end of expectations and sales soared past plan, with earnings per diluted share rising to 41 cents and the top line increasing by more than 20 percent.

Claiborne officials said the apparel industry is changing dramatically, with everything from too many stores to cross-channel shopping reordering the retail universe. Against this landscape, Claiborne is looking for its broad portfolio of brands and some new initiatives, such as LizPlanning, which, as reported, is intended to technologically streamline the relationship with retailers, to help it pull through and ahead.

Claiborne is also attempting to satiate the department stores’ need for individuality by offering more differentiated product through new lines with more targeted distribution. Also, for the first time, the firm will alter portions of its offerings from its larger brands for separate retailers.

This month, the firm will launch three lines for spring — two in the better sphere and one in the moderate — which will be distributed selectively. The firm declined to reveal the names of the new lines.

Trudy Sullivan, executive vice president, said in a phone interview that department store operators are beginning to make the moves necessary to improve their businesses and that Claiborne is working with them to that end.

“We see some bold thinking out there,” she said. “They’re all trying very diligently to move in the right direction.”

To keep in step with the changing times, she noted Claiborne will turn to its technology and ability to manage the great complexity necessary to provide stores with differentiated merchandise. The efforts to stay ahead of the apparel curve seem to be working so far.

Net income in the quarter ended July 5 advanced 15 percent to $44.6 million, or 41 cents a diluted share. This compared with year-ago profits of $38.8 million, or 36 cents.

Investors gave their stamp of approval by trading up shares of the firm 80 cents, or 2.4 percent, to close at $34.43 on the New York Stock Exchange Thursday.

Sales growth exceeded that of the bottom line with a 21.5 percent rise in revenues to $959.4 million from $789.5 million a year ago.

Although Claiborne beat out its sales estimate calling for 10 to 13 percent growth and hit the high end of its earnings projections, chairman and chief executive Paul Charron acknowledged the tough times besieging the sector.

“I read in the newspapers and see on television reports that the recession is over,” the ceo said on a conference call with analysts and investors. “If this is the case, I do not understand why so many of our retail partners are still generating flat to slightly negative comps.”

Charron cited a laundry list of factors transforming the apparel industry — to the benefit of some and the detriment of others — including cross-channel shopping, the expansion of price-oriented retailers such as Wal-Mart and Kohl’s, and overcapacity played out in too many stores with too much product chasing too few customers.

These factors, no doubt, played into a more promotional quarter than Claiborne was expecting. The promotional activity, said Charron, “translated into increased markdown assistance versus going-in plan, with this extra funding targeted at both department stores and national chains.”

Overall gross profits sank during the quarter to 44.4 percent of sales from 44.7 percent a year ago. The fall reflected the promotional activity, which resulted in markdown assistance and was partially offset by inventory control and lower sourcing costs.

Second-quarter inventories inflated by $96 million, or 21.9 percent, to $531.7 million. Claiborne noted that roughly 85 percent of the increase resulted from three factors: $47 million of the inventory gain came from acquisitions and new businesses, $19 million from the timing of fall receipts and $16 million from currency exchange rates.

Charron sees inventory reductions at retail as an ongoing trend and not just a hiccup. “This is a permanent thing,” he said. “Department store retailers and [chains] like J.C. Penney are studying [stores] like Target, and one of the characteristics of Target all along has been to focus on turn and productivity. I view this as a productive, intelligent thing for the retailers to do. This whole idea of speed to market is a good thing. This is taking the fluff and the excess out of the system. You just can’t afford to have the excess.”

In the face of consolidation on the vendor side, Charron said: “Retailers have concluded that the markdown dollars are not as forthcoming as they once were and they’ll stop over-ordering when they realize if they order too much and they don’t sell through at an appropriate price, then they’re not going to get the markdown money and so it’s on their nickel.”

That’s a lesson that seem to be sinking in, he said.

“This is a cleansing period and the great operators will get better and they’ll survive, and people that are failing will either go away or they’ll change,” he added. “There’s no real margin for error here.”

Accordingly, Charron lauded May Co. chairman and ceo Gene Kahn for his decision to close 32 low-volume Lord & Taylor stores, which was reported earlier this week and will come at the cost of roughly 3,500 jobs. “Good for him, he’s right,” Charron said. “Those are the kind of decisions that retailers have to make.”

Retailers are also continuing their push for exclusivity or differentiation, he noted.

To that end, Claiborne will be launching two better lines for spring with a limited distribution. One of the brands will make use of career insights the firm has gained from its bridge businesses, Dana Buchman and Ellen Tracy, while the other leans on its sweater and knit expertise. The firm will also be launching a moderate line for spring.

By business segment, Claiborne’s wholesale apparel unit produced a 2.2 percent rise in operating profits to $46 million, while sales rose $112 million, or 21.8 percent, to $625 million. The recent additions of Ellen Tracy, Mexx Canada and Juicy Couture added $50 million in sales, while foreign currency exchange added $18 million and the introduction of products in the special markets business and growth of Mexx Europe, exclusive of currency exchange, added $44 million.

Operating profits at the firm’s non-apparel wholesale business rose to $7 million, after breaking even a year ago, on a 21.9 percent rise in sales to $117 million. The retail business posted a 9.5 percent increase in operating income to $23 million, while sales of $212 million represented a 19.8 percent rise for the segment.

During the first half, profits pushed ahead 21.2 percent to $108.7 million, or $1 a diluted share, from $89.7 million, or 84 cents, a year ago. Sales for the 27 weeks ascended 21 percent to $2.04 billion from $1.68 billion a year ago.

For the full year, Claiborne reaffirmed its earnings guidance of $2.49 to $2.55 a share, despite an increase in its sales target to 11 to 13 percent growth. The firm had been looking for a 9 to 11 percent rise in sales.

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