Liz Claiborne Inc. earnings tumbled 65 percent in the third quarter as retailers canceled orders, reduced replenishment lines and bought cautiously from the apparel giant’s nine brands that are up for sale.

For the three months ended Sept. 29, net income fell to $33.1 million, or 33 cents a diluted share, from $95.2 million, or 93 cents, in the same period last year. Sales for the period slid 4 percent to $1.26 billion from $1.31 billion.

This story first appeared in the October 31, 2007 issue of WWD. Subscribe Today.

“It’s not like there are a lot of vendors that are succeeding extraordinarily in partnered brands,” chief executive officer William L. McComb told WWD. “The environment is tough and retailers are being conservative. With our new hat of responsibly managing the supply line, we’ve encouraged that.”

Sales growth of 18 percent in the direct brands — Juicy Couture, Lucky Brand Jeans, Mexx and Kate Spade — to $629 million from $527 million, could not overcome losses of 19 percent in the troubled partnered brands, to $634 million from $781 million.

Adding to the weakness in partnered brands were costs from the company’s restructuring. Lost income from sold brands, increased strategic selling and general and administrative costs all dragged down the $4.99 billion vendor’s bottom line.

Claiborne is in the second phase of a strategic restructuring plan, which involves focusing on direct brands and divesting 16 partnered brands, including Ellen Tracy, Dana Buchman and Sigrid Olsen. The company has sold four moderate brands to Li & Fung, combined two moderate brands into existing brands and discontinued a final moderate brand last month. It is focusing on selling its higher-margin brands, which the company predicts will be completed by the end of the first quarter of next year, rather than the second, as previously anticipated. After receiving initial bids this month, Claiborne said it is meeting with select bidders for management meetings and due diligence.

Meanwhile, McComb said the partnered brands “have met some cautious buying patterns from wholesale partners who are waiting to see the results of the review.” Across the nine remaining brands on review, he said the company has had order cancellations and reductions in replenishment lines.

“You announce you are putting brands under review and it’s a scary thing for retailers,” McComb said. “While it isn’t a race against the clock, it is in the best interest of everyone to finish Phase II sooner than later.”

In the partnered business portfolio, brands under strategic review and those that Claiborne is keeping — most prominently, the Liz Claiborne brand — both are suffering from “very cautious” fourth-quarter retail orders and “delivered softer-than-expected sales” this quarter, part of an industry trend, McComb said.

Citigroup retail analyst Kate McShane said Claiborne’s announcement about retailers’ orders could be the beginning of grim news as other vendors start to report third-quarter results.

“This is the first real indication directly from a company that there has been cancellations of orders,” McShane said. “Liz’s outlook for the fourth quarter and 2008 is concerning for all manufacturers and confirms that between now and holiday the industry is going to be tough.”

McShane added that the retail environment today is even tougher than when Claiborne held its July 11 Investor Day to present its plan.

“It is a different retail environment out there [since the July 11 announcement], but how we execute the strategy is what is important, not reconsidering the strategy,” McComb said. “The big theme of the call is patience. The dumbest thing we could do is retrench on [the direct brands] aspect of our strategy. “

The Liz Claiborne brand, which still makes up about one-fifth of the company’s sales, continues to experience difficulties. “The Liz Claiborne brands suffered a one-two punch from product issues and the warm fall weather,” McComb said.

While the Liz & Co. exclusive at J.C. Penney has continued to prosper, the namesake line as well as the Villager line at Kohl’s have hurt sales.

Management added that it is pulling back on marketing investment for the Liz Claiborne brand after being underwhelmed by the results of the Liz Is campaign.

“The Liz Is campaign with the timing of the Liz & Co. launch sent the wrong message,” said Dave McTague, the new executive vice president of partnered brands. “We will be moving a significant amount of marketing spend to the consumer experience.”

McTague said he is close to completing his Liz Claiborne brand turnaround plan, an initiative that he said has been his first priority in the two months since the former Converse president joined Claiborne. He said it will stand on three pillars: aggressive product improvement; demand creation and marketing, and product presentation.

Although direct brands continued to perform better than partnered brands, that division was not without hiccups:

l While Lucky sales increased 11.5 percent to $109 million, Lucky retail comps fell 2 percent because of warm weather this fall, the company said. Claiborne is boosting advertising for the brand, including its first national ad campaign, and analysts seem optimistic this could turn around comps.

l Mexx Europe comps fell 2 percent and, excluding foreign currency exchange rates, sales slid about 1 percent to $339 million. “Mexx Europe is engaged in the same kind of turnaround that the overall corporation has initiated,” McComb said.

l Juicy Couture continued strong with 48 percent increases in revenues to $135 million and 18 percent comps growth.

l Acquired in the fourth quarter last year, Kate Spade’s sales were $20 million in the third quarter.

For the first nine months of the year, earnings sank 65 percent to $62.8 million, or 62 cents a diluted share, from $181.5 million, or $1.75, on a 1 percent slip in sales to $3.46 billion from $3.50 billion.

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