Blog: Leonie BarrieCost cuts drive growth

Leonie Barrie | 17 August 2009

Nearly two years of cost-cutting and reorganisation at Liz Claiborne still hasn’t been enough, it seems, with the New York based apparel maker last week announcing another wave of cuts aimed at saving an extra $100m next year.

The catalyst this time was a 29% slump in second quarter sales, which helped widen its losses to $82.1m from $23.2m last time. Worryingly, the biggest falls were in its two largest business units – Mexx Europe and partnered brands (its domestic wholesale unit) – where second quarter revenues fell 34.8% and 35.6% respectively. Sales were also down at its key Juicy Couture, Lucky Brand and Kate Spade labels.

The apparel firm has been hit hard as consumers continue to cut back on discretionary spending and department stores dramatically increase their promotional activity and lower their inventories. But it also recognises that while it has been good at cost reduction, it now needs to focus on strategies that drive sales and rebuild gross margins.

There was good and bad news at US men’s suit maker Hartmarx, which has finally been saved from liquidation after being sold to British private equity firm Emerisque Brands and its partner SKNL North America. The deal, which was agreed in June, was completed after repeated last-minute delays. But a dispute over costs has led to the closure of two of the firm's factories – Anniston Sportswear and Seaford Clothing – with the loss of nearly 500 jobs.

Meanwhile in Germany, fashion house Escada finally filed for insolvency after the company's last-ditch bid to restructure its finances failed to find favour with shareholders. And insolvent retail group Arcandor has abandoned its search for a buyer for the whole business, and is now planning to break up its Karstadt department store and Primondo mail-order units with the loss of around 3,700 jobs.

The moves by both companies were not entirely unexpected. Escada has been fighting insolvency for months, with debts running at EUR187.6m in April this year. Likewise, Arcandor was forced to file for insolvency in June after the German government rejected pleas for state aid to help repay loans of EUR710m (US$1bn).

For suppliers such as Li & Fung, though, business is booming. The consumer goods powerhouse has posted a 13% rise in first-half profit to HK$1.397bn (US$180m), and agreed a new sourcing deal with women's wear retailer The Talbots.

While growth has been driven by cost control, with turnover falling on weak markets and customer insolvencies, this has also been offset by positive contributions from new customers such as Liz Claiborne. New outsourcing deals like the Talbots one will be crucial if Li & Fung is to achieve its goal of a core operating profit of US$1bn in 2010.



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