VIEWPOINT: Has Liz Claiborne reached a turning point?
Five years after taking the helm at Liz Claiborne Inc, it's hard to see exactly what William McComb has achieved. Sales are down, last year it could only muster a loss of $305.7m, and nearly one-quarter of its heyday brands have gone. But yesterday the company was confident it had finally reached a critical turning point.
When William McComb succeeded the near legendary Paul Charron as CEO of Liz Claiborne Inc back in November 2006, many in the apparel and retail businesses wondered if someone without an apparel background could safely steer a vessel the size of Claiborne into a more hospitable environment for customers and investors.
Charron had been among the primary drivers in the move by larger companies to acquire smaller, more niche-oriented ones in the 1990s. But one of McComb's first decisions was to mark 16 brands for "strategic review" and a possible sale, liquidation or licensing, as well as reorganise the firm into two units - Partnered Brands and Direct Brands - separating the main parts of its business.
On the one hand were the Direct lifestyle brands that were growing and vital enough to merit retail expansion as well as investment support; while on the other, those in the Partnered area were mature and dependent on growth from an increasingly small group of mass and department store retailers.
Roll forward five years, though, and it's hard to see exactly what has been achieved. In fiscal 2006 the business posted a full-year profit of $255m on sales of $4.994bn. But last year it could only muster a loss of $305.7m on sales of US$3.012bn. What's more, it was weighed down by an eye-watering $578m in long-term debt.
Nearly one-quarter of its heyday brands had been offloaded - including the loss-making Mexx business which was sold last month for $85m to a joint venture led by private equity firm The Gores Group. And the slowdown in consumer spending and competition from department stores' own private labels has compounded tumbling sales in its Partnered Brands unit.
Refocus on three core lifestyle brands
So could this all be about to change? McComb certainly hopes so with yesterday's announcement that Liz Claiborne Inc is to shed five more non-core brands, including its namesake line, for $328m. It will also change its name as the businesses refocuses on three core global lifestyle brands - Kate Spade, Juicy Couture and Lucky Brands.
"Today is a big day for Liz Claiborne Inc...another critical turning point," he told investors on Wednesday (12 October). "The company is de-risking operationally and financially at a time when markets around the world are showing no patience for highly levered apparel companies.
"At the close of these transactions, LCI will be a more appropriately levered, more capital efficient, dynamic, growth-oriented retail-based company: the culmination of years of work."
It's true that stripping out these brands will help Liz Claiborne to halve its year-end debt to between $270m and $290m. Essentially the company has sold the bulk of its Partnered Brands division including Liz Claiborne and Monet to JC Penney; Kensie, Kensiegirl and Mac & Jac to Bluestar Alliance; Dana Buchman to Kohl's; and will terminate the DKNY Jeans and DKNY Active license agreement early.
And the move has been welcomed by investors. The announcement sent shares up 36% to $6.96, with Edward Yruma, retail analyst with KeyBanc Capital Markets, describing the sales as "one of its most transformative transactions" and "a positive surprise," adding that "the company has now largely divested itself of its legacy assets."
The next big question though is whether the strength of the mono-brands - Juicy Couture, Lucky Brand, and Kate Spade - will continue, and how much cash these brands can generate going forward?
"We believe the company continues to have considerable wholesale and retail opportunities for Kate Spade and Lucky both in the US and abroad," notes Carla Casella at JP Morgan Securities.
"Juicy Couture remains more of a transition brand in our opinion as LIZ works to change the perception of the brand. This could take time for the company to reduce the number of wholesale doors and, in many locations, to swap out of Juicy and into the new Bird sub-brand."
The apparel seller yesterday reported same-store sales expectations for September, putting Lucky Brand Jeans up 44% and Kate Spade up 114%, but said Juicy Couture is set to drop 5%.
Last month Mary Ross Gilbert, CFA, managing director of Imperial Capital's Institutional Research Group, told just-style more changes were likely at the company. In particular she believes there will be moves to sell off the overseas business, where Liz Claiborne currently retains the rights to market and distribute the brand outside the US.
And Kate Spade's success, both from a sales and margins perspective, singles it out for a possible IPO, she believes. "We wouldn't be surprised to see that brand spun off for an initial public offering of stock in the next 12-24 months."
Some commentators are going even further, suggesting Liz Claiborne Inc's decision to sell off Liz Claiborne marks the beginning of the end, and that the next step could simply see the sale of the whole company.
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