CLAIBORNE JUST MEETS SECOND QUARTER ESTIMATES

Byline: Thomas J. Ryan

NEW YORK — After reporting second-quarter earnings marginally ahead of estimates, Liz Claiborne Inc. said Tuesday it now expects to reach the high end of its earnings projections for the full year as improved margins and expense controls offset moderation in sales growth.
Claiborne now is looking for sales to have high single-digit increases in the second half rather than the low double-digit gains projected earlier this year, citing not only the souring economic forecasts but also persistent weakness this spring in better women’s apparel. On a conference call, Paul R. Charron, chairman and chief executive, said the firm plans to “tightly control” inventories to avoid excess stock and heavy markdowns.
“In the projected environment, we would rather be conservative and wrong and leave some business on the table than risk being aggressive and wrong and ending up with material markdowns and inventory liabilities,” Charron told analysts. “We take this prudent approach even though the effect in the current environment will likely be a slight shortfall in original sales growth expectations.”
With the aid of its increasingly diversified portfolio, Claiborne still expects low double-digit gains for the year, which should allow the firm to meet the upper end of its 10 to 15 percent earnings-per-share growth target, he said.
Claiborne made its projections while reporting earnings dipped 0.3 percent in the second quarter ended July 1, to $31.5 million from $31.6 million a year ago. An aggressive stock buyback program lifted earnings per share to 58 cents, ahead of Wall Street’s consensus estimates of 56 cents, from 50 cents a year ago. About 54.5 million average shares were outstanding in the quarter versus 63.4 million a year ago.
Operating income grew 8.8 percent to $53 million, while interest costs — primarily to pay for stock buybacks — depressed the bottom line. Sales advanced 8.9 percent to $661.7 million from $607.7 million. Notable gains were seen in brands selling to moderate-priced channels and in recent acquisitions such as Laundry by Shelli Segal, Lucky Brand Dungarees and Sigrid Olsen as well as cosmetics. These offset softness and high markdowns in women’s better apparel.
Shares of Claiborne jumped 3 1/8 to close at 41 3/4, an 8 percent increase. The stock’s spike surprised some analysts — particularly given the news of slower sales in the second half — but others said that a dismal spring at department stores had investors fearing the worst. Some analysts also backed Claiborne’s shift toward greater caution. “We think the company is doing the right thing in this tenuous retail environment, especially in apparel,” said Susan Silverstein, at Banc of America Securities. “It’s better to be conservative and save those gross margin pennies cause it could get even more expensive if they stay aggressive and the environment stays the same.”
Breaking out results by operating segment revealed:
Wholesale sales rose 9 percent, driven by “continued strong growth” in its specialty-market brands, such as Crazy Horse, Emma James, First Issue, Russ and Villager, that sell to chains including Sears, Roebuck & Co., Wal-Mart Stores Inc., J.C. Penney Co. and Kohl’s. Also driving gains were Olsen, Lucky Brand and Laundry, all acquired last year; and a “very successful” launch of the Crazy Horse men’s line at Penney’s. Also seeing increases were DKNY jeans, Claiborne casual sport and Elisabeth. Declines came in career, men’s and Dana Buchman. The segment also lost sales because of the licensing of its dress business to Leslie Fay.
Wholesale nonapparel nudged up 0.2 percent as “significant growth” in the Candies and Curve cosmetic lines and gains in jewelry offset declines in handbags and fashion accessories.
Retail sales gained 4 percent, but were short of plan. Outlet sales gained 4.5 percent due to 23 additional outlets, but dropped 8 percent on a comparable-store basis. Among specialty retail formats, Liz Claiborne and Elisabeth both showed mid-single-digit same-store sales declines, but comps at its 14-unit Lucky Brand chain rose 20 percent. Overall profitability improved due to fewer markdowns and reduced expenses. At the quarter’s end, Claiborne had 143 outlets occupying 1.1 million square feet and 101 retail stores, or 420,000 square feet.
Analysts were particularly impressed that gross margins jumped to 40.5 percent of sales from 39 percent. “With the negative comps in stores and the tough sell-throughs in women’s casual, that was very impressive,” said Lee Backus, at Buckingham Research.
On the call, Claiborne said margins are benefitting from significantly lower unit costs due to continued consolidation of its supplier base, as well as new management systems that have greatly improved Claiborne’s ability to control inventories.
Dennis Rosenberg, at Credit Suisse First Boston, also said the quarter shows that Claiborne can offset weakness in some areas with strength in others.
“It just demonstrates that their diversification strategy is working,” said Rosenberg.
Charron said the quarter was “a bit more challenging” than expected, and the overall performance “validates the benefits of our diversified portfolio strategy” as shortfalls in women’s were offset by gains in other areas. Claiborne further pressed on with this strategy during the quarter with its announcements of the pending acquisition of Monet Group, the fourth-quarter launch of Elisabeth.com and the holiday launch of the Nicki Taylor apparel for Target, as well as the repurchase of 2 million shares.
“We are a critical supplier to department store chains, specialty stores, national chains and discounters. We will respond to the consumer, wherever she chooses to shop,” Charron said.
He noted that, as an example of Claiborne’s multibrand/multichannel push, the Liz Claiborne brand will make up 50 percent of corporate sales this year versus 70 percent in 1997, and department stores will account for 50 percent of sales this year, down from 65 percent in 1997.
Charron also told analysts that Elisabeth.com, a full-price e-commerce Web site serving the plus-size customer being developed in a joint venture with Chelsea Interactive, will we launched “at virtually no cost to us” and offers Claiborne “the best opportunity so far at understanding the dynamic between the shopper and Internet.”
Denise Seegal, president at Liz Claiborne, described Claiborne’s performance at retail during the quarter as “mixed.” On the downside, she said the better-priced women’s apparel — which includes casual, career, misses, petites and plus sizes — “felt the affects of spring season industrywide macroeconomic and fashion malaise.” DKNY jeans and the active business also felt this impact somewhat.
A lack of fashion newness was part of the problem this spring as the same styles filled the market as did in spring 1999, she said, adding that the company and retailers “overestimated” the consumer’s desire for “trend forward” merchandise. Claiborne was too deep in stretch fabrics and alternate length pants and didn’t have enough basics as the market shifted to a traditional from a fashion cycle. “We believe we’re back on track for improved fall and holiday selling,” said Seegal.
On the upside, she cited “solid” gains in the moderate channel. “We continue to differentiate ourselves from the competition by delivering trend right with branded price-value combination that is unparalleled in the moderate segment.” The men’s Crazy Horse launch at Penney’s will be followed this fall by the launch of a Nicki Taylor line at 150 Target stores.
Among recent acquisitions, Sigrid Olsen “continues to experience strong sales” at retail and improved profits. Laundry also improved profitability though Claiborne sees opportunities to drive sell-throughs at retail. Lucky Brand’s men’s and women’s products generated “solid increases at retail.” Fragrances continued to see double-digit gains at retail, and a Lucky You fragrance will bow in August.
Kenneth Cole women’s began shipping in June, and the firm is “so far pleased with the performance at retail and also with the response to recent completion of the holiday market for the line.”
Dana Buchman bridge is “starting to show signs of a turnaround,” with mid-single-digit increases at retail. Seegal cited solid retail gains in jewelry, international and men’s dress furnishings.
DKNY jeans is being hurt by the shift away from the fashion cycle, and a fall launch of Metro Jeans features more basics. Charron said the DKNY jeans line was a “little over-assorted” and he suspected that the company and retailers pushed status denim “a little too aggressively” in the past.
Buckingham’s Backus believes Claiborne could be setting the stage for a strong 2001, when the payback from acquisitions and licensing deals with Kenneth Cole and for DKNY City should be fully realized.
“You really should have strong momentum next year with double-digit top line growth and less investment spending, which should provide some operating margin expansion,” he said.
In the half, earnings increased 2.2 percent to $77.9 million, or $1.42 a share, from $76.3 million, or $1.20 a share, a year ago. Operating income gained 7.5 percent to $127.3 million. Sales ran up 12.4 percent to $1.47 billion from $1.31 billion.

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