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Claiborne Plans to Outsource Mexx to Li & Fung

Drastic wholesale markdowns hurt third quarter profits for Liz Claiborne.

Liz Claiborne Inc. released its third-quarter numbers a day early, but the vendor’s Veteran’s Day earnings call was filled with news in its own right. Claiborne said it will outsource Mexx’s sourcing to Li & Fung Ltd., described the drastic wholesale markdowns that led to its third-quarter $68.7 million loss, and laid out plans for the Liz Claiborne brand relaunch under Isaac Mizrahi for spring.

Confirming an Aug. 15 report in WWD, Claiborne said it would outsource the Mexx Global Sourcing Operations to Hong Kong-based Li & Fung. The two entered into a buying agency agreement, expected to be completed by Dec. 19, under which the $1.25 billion Amsterdam-based retailer’s buying offices in Hong Kong, Bangalore, Shanghai and Shenzhen will be integrated into Li & Fung.

The news follows a 15 percent decline in Mexx’s third-quarter sales and a prolonged difficult turnaround of the brand, which prompted a shake-up of Mexx’s management team in September.

“At Mexx, we had many simultaneous challenges and, after carefully assessing the situation, we determined that Li & Fung could get us three giant steps in one [with product, cost and speed-to-market],” said Claiborne chief executive officer William L. McComb on the Tuesday call. “With all the other things going on at Mexx, we felt that the quantum leap step by doing Li & Fung made sense.”

McComb added he did not foresee outsourcing other areas of Claiborne’s sourcing to Li & Fung, nor did he plan to sell the retailer — the biggest and most troubled of the company’s four direct brands — to Li & Fung, as sources had speculated.

On the partnered brands side, McComb said that during the quarter wholesale conditions were worse than he had anticipated. He pointed to what he called a “feverish markdown cadence” with September and October 40-percent-off sales of fall merchandise in “tier one” stores including Saks Fifth Avenue, Neiman Marcus and Bloomingdale’s.

“There’s an arms race out there right now, where they’re really competing for traffic,” McComb said. “There’s no way that every vendor is going to be paying 100 percent of their liabilities here, given that the department stores themselves have made marketing and merchandising decisions to be very, very aggressive just so they are not caught empty-handed.”

Chief financial officer Andy Warren added the retailer was marking down less aggressively in its own stores, where the company is projecting low double-digit comp declines for the fourth quarter.

Going into spring, the focus shifts to the relaunched Liz Claiborne brand, where all of its outlet stores and 50 top shop-in-shops will be dramatically restaged by April.

“We own and operate 92 outlet stores, most of which are in dire need of capital improvement,” said Dave McTague, executive vice president of partnered brands. “On average they are 9,500 square feet and are 8.5 years old….They stopped being an effective point of distribution for the mother brand years ago.

“Flip to April 2009, when the number-one remaining capital spend priority is refurbishing these to be productive stores for the Liz Claiborne New York brand,” McTague continued. “For about $100,000 per store, we can improve lighting, carve down square footage, improve signage and fixtures. The vision Isaac has for the wholesale shop-in-shops applies here: minimalist, where the product is literally the hero of the shop.”

On the full-price wholesale side, the brand is exiting about 200 unprofitable D-doors for spring, to be in a total of about 1,200 doors. McTague said he expects top line numbers for the brand to be down slightly for spring, between the economy and reducing the door count, but said the retail reaction had been positive. The company is projecting margins for the first season to be at least 10 percent, and ultimately grow to beyond 25 percent.

“The retail community came in, and certainly we were the brand that everyone wanted to hate,” McTague said. “Well, they were all shocked, and I think the most compelling statement was, ‘You have completely screwed up our open-to-buy now.’ There isn’t anything in the marketplace that is as compelling as what we are bringing. We are, however, being conservative, as we do not want to over book this line. This is a long-term investment brand strategy for us, and we will grow it accretively over time.”

Additionally, the company shed light on the marketing plan around the Liz Claiborne relaunch with Mizrahi. For personal appearances, which have been attracting 500 to 600 customers, McComb said Mizrahi will likely make about five and Liz Claiborne Inc. chief creative officer Tim Gunn will likely make about 15. Marketing will also include live online trunk shows with Mizrahi, direct-mail and print advertising, and “a multitier event strategy” including collaborations with local charities and businesses.