LIZ CLAIBORNE EARNINGS RISE 5.1% IN 1ST QUARTER

Byline: Thomas J. Ryan

NEW YORK — Liz Claiborne Inc. has reentered growth mode, and it’s just starting to pay off.
Riding a 15.5 percent sales hike, Claiborne’s first-quarter earnings rose 5.1 percent to $46.5 million from $44.7 million, easily beating Wall Street estimates.
Sales jumped to $809.5 million from $700.8 million, powered by a string of acquisitions last year: Sigrid Olsen, Lucky Brand Dungarees and Laundry. Excluding acquisitions and dresses — which have been licensed out to Leslie Fay Co. — sales were up in the mid-single digits. Top performers were brands sold at moderate channels such as J.C. Penney, Sears, Kohl’s and Wal-Mart, as well as cosmetics, but gains were across nearly all lines.
Earnings per share jumped 21.4 percent to 85 cents from 70 cents, as an aggressive buyback program reduced average outstanding shares to 55.3 million from 64.1 million.
Results were skewed by a $3 million pretax gain from the sale of marketable securities. Excluding this gain, EPS was 81 cents, exceeding the consensus estimate of 78 cents. Excluding the investment gain, pretax earnings were flat, as interest expense tied to share buybacks and acquisitions matched a 6.6 percent increase in operating earnings.
Analysts were impressed that Claiborne was able to increase operating income despite start-up costs for new licensed Kenneth Cole and DKNY lines, but were more encouraged by Claiborne’s rejuvenated top line.
“They’ve accelerated their sales growth,” said Brenda Gall at Merrill Lynch. “They needed to have a number of things to grow the top line, and now they have it with the acquisitions and licenses, and they appear to be looking for more.”
Gall said the newer growth initiatives should provide a bigger payback in the latter half of the year as the Cole line is launched. Start-up costs for Cole and DKNY were partly to blame for general, administrative and selling costs increasing to 28.2 percent of sales from 27.5 percent.
Dennis Rosenberg at Credit Suisse First Boston noted that strength was seen across many lines, and even weaker spots such as Dana Buchman and career seem to be turning around. “It seems like everything is going right for them,” he said.
In Rosenberg’s view, the firm’s recent push to add brands and grow through channels outside the traditional department store will pay off.
“The department store channel is a mature channel, and they need to expand into different brands and channels in order to grow in double digits,” he said.
In a conference call, officials broke out performance by segment:
Wholesale sales jumped 12.4 percent, largely due to acquisitions. Claiborne also cited “continued strong growth” in special markets serving the moderate price-point channel, with a “very successful” launch of Crazy Horse men’s wear to J.C. Penney. Brands also include Villager, First Issue, Emma James and Russ. Gains were also seen in men’s apparel and women’s casual. Dana Buchman and career fell, but are “seeing much stronger retail selling” this spring. Dresses declined due to the licensing of the Liz Claiborne brand to Leslie Fay.
Non-apparel sales jumped 20.7 percent, driven by a “significant increase” in sales of Candie’s and Curve cosmetics lines. Officials said the handbag area has faced an “onslaught of competition” and is lowering price points to maintain market share.
Retail sales jumped 11.8 percent, with the outlet division ahead 12.2 percent and full-price business slightly down.
Paul R. Charron, chairman and chief executive, noted that the quarter marked Claiborne’s 17th consecutive quarter of sales growth and 21st of growth in earnings per share before restructuring charges. “The ability to successfully execute our multibrand, multichannel strategy in addition to our ongoing stock repurchase program enabled us to achieve our third consecutive quarter of double-digit growth in sales and earnings per share,” said Charron. “Sales and earnings gains were once again achieved across the majority of our portfolio of brands.”
On the call, Denise Seegal, president, said the three acquisitions and two licensing deals entered into last year should add $1 billion in sales and $1.00 per share over the next five years.
Sigrid Olsen increased its in-store shops to 344 from 182 when bought last February, primarily by additions to Dillard’s and Parisian.
Lucky Brand, acquired last May, is seeing a “solid increase” in bookings in both men’s and women’s. Given “extremely strong customer reaction,” 20 more Lucky stores will be added this year. The $10 million launch of Lucky fragrance will increase exposure for the whole brand, she said.
Laundry, acquired in October, increases Claiborne’s presence in high-end stores such as Saks Fifth Avenue, Bloomingdale’s and Nordstrom. With DKNY’s better line and Kenneth Cole, Laundry gives Claiborne “a leading position in the rapidly growing contemporary segment.”
Seegal said she is “very pleased” with the market launch of the Kenneth Cole New York women’s line for fall 2000, with the name carrying the “potential to be America’s next mega-brand.” Reaction, a denim-driven sportswear line, will make its debut in fall 2001, and Unlisted, a junior line, spring 2001. The DKNY better line, which has not yet been named, will debut for spring 2001.
DKNY jeans and activewear sales increased, with a strong launch into juniors this February. However, Seegal did note that some retailers are seeing general softness in status denim. Charron said the status denim area has been “under scrutiny by retailers” for the last six to nine months due to a weaker performance by some of the major players, but he said DKNY is “faring well” with sales being driven by basic denim jeans, and the new junior business doing “extremely well.”
Charron also said Claiborne has the financial prowess and management capacity to pursue new growth opportunities. He said the firm will consider acquisitions as long as their debt is above investment grade. The firm ended the quarter with total debt at 28 percent of total capitalization.
Claiborne said it is planning conservatively this year, with inventories down 4.5 percent to $389 million in the quarter. Excluding new businesses, inventories fell 10 percent. “In the current environment, the downside risk of ending with excess inventories is not worth the upside benefit of increment sales,” Charron said.

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