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Executives

William L. McComb – Chief Executive Officer

Dave McTague – Executive Vice President – Partnered Brands

Andrew Warren – Executive Vice President, Chief Financial Officer

Analysts

David Glick – Buckingham Research Group

Kate McShane – Citigroup Investments Research

Benjamin Rowbotham – Goldman Sachs

Robert Ohmes – Merrill Lynch

Robert Drbul – Barclays Capital

[Chai Lee] – Morgan Stanley

Liz Claiborne, Inc. (LIZ) Q3 2008 Earnings Call November 11, 2008 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Liz Claiborne third quarter conference call hosted by Chief Executive Officer Bill McComb. After the opening remarks, we will be taking questions. This call is being recorded and is copyrighted material, therefore please note that it cannot be recorded, transcribed, or rebroadcasted without Liz Claiborne’s permission. Your participation implies compliance with these requirements. If you do not agree simply drop off the line.

Please note that there will be a slide presentation accompanying the prepared remarks. The slides and earning release can be accessed at www.lizclaiborneinc.com in the investor relations section. There are separate links to the slides for webcast and phone participants.

Please note that statements made during this call that relate to the company’s future performance and future events are forward-looking statements within the Private Securities Litigation Reform Act. These forward-looking statements are based on current expectations and are subject to the qualifications set out in this morning’s press release, as well as in the company’s quarter report on Form 10Q under the caption ‘Item 1A – Risk Factors and Statement Regarding Forward Looking Statements Report’ which was filed yesterday with the SEC and the company’s 2007 annual report on Form 10K.

Also please note that during this call and in the accompanying slides and press release net sales, gross profit, gross margin, SG&A, SG&A percent of sales, operating income, operating margin, income from continuing operations, and EPS are presented on both a GAAP and a non-GAAP basis. Reconciliations of adjusted results to the actual results are available in the tables attached to the earnings release and slides captioned ‘Reconciliation of Non-GAAP Financial Information.’ The company believes that the adjusted results for the third quarter and first nine months of 2008 in comparable 2007 periods and the adjusted projected results for fiscal 2008 represent a more meaningful presentation of its historical and estimated operations and final performance since they provide period to period comparisons that are consistent and more easily understood.

Now I’d like to turn the call over to your host, Mr. McComb. Please go ahead, Sir.

William L. McComb

Thank you, Christy. Good morning and thank you all for joining today’s call. While we have pre-announced our estimated third quarter earnings two weeks ago we are pleased today to review the business with you, to update you on our key initiatives, and to answer any questions you have regarding this earnings release.

Our actual earnings on both a GAAP and adjusted basis fell right in the centre of the range we projected two weeks ago with the GAAP loss right at $0.10 per share and on an adjusted basis earnings from continuing operations at $0.39 per share, right in line with how we guided the quarter back in August during our second quarter earnings call.

Generally speaking, the start of the poor environment today hit hard in late August and September where back to school was lighter than expected across the board in terms of traffic and transactions. The department stores reacted very quickly by heavily discounting new fall merchandise on all brands.

Top line sales were up in direct brands with the opening of 35 more stores in the third quarter across the Kate Spade, Juicy Couture, and Lucky brands. We also began announcing specific steps to move forward our turnaround of the Mexx business, starting with the change of management announced back in mid-September. We named Tom Fitzgerald as interim CEO and are now accelerating decisions in sourcing, product design, costs, organization deployment, and marketing in time to take a giant leap by fall 2009. Tom Fitzgerald brought with him a consulting creative director and the two have taken numerous steps very quickly with the team at Mexx to address what we believe are the essential elements of our plan to restore the brand. One action taken to date is the assignment of Li and Fung just this morning as the sourcing agent for the business, a shift from handling the line in-house which I’ll discuss later in the call when I review each of the direct brands in more detail.

We announced that we would no longer partner with Narciso Rodriguez in growing his business, a decision that was bilaterally reached, and in light of the rapid deterioration in the luxury segment it was a decision that was well timed. Funding emerging opportunities is not now our mandate. While we have to execute our portfolio of brands pragmatically, balancing both caution and boldness.

To that end we also announced that Sean Combs has acquired the ENYCE business, a property put under review last summer and retained after insufficient bidding earlier this year. We evaluated alternative structures for the brand throughout 2008 as the urban wear market segment rapidly declined, fuelled in part by financially troubled specialty wholesalers and a migrating consumers. It makes a lot of sense for Sean Combs to run this business. His organization has excellent talent, access to distribution, and can run the brand very efficiently. For us it can mean again reduced losses in the partner brands world.

In terms of core brands, we unveiled the spring 2009 Isaac Mizrahi designed Liz Claiborne line to the trade back in September. It was reviewed very positively and our teams have been working very carefully to make this re-launch a success. While the economy and the state of the consumer will challenge every segment of the industry next year, there is a silver lining on this one. The pricing and quality scream value while the product itself is just an explosion of colour and excitement across all the product categories. We believe it’s sure to tempt the consumer. Dave McTague is here on the call today to talk about his re-launch approach, including our plans to dramatically restage all 92 Liz Claiborne outlet stores by April 2009.

We have talked about our approach to very carefully manage the balance sheet. Again, we posted lower inventory in accounts receivable versus this period last year. We continue to improve our planning and allocation functions across the brand as we monitor the demand and markdown profile of each business.

Beyond our report on the third quarter, a very important component of the news in our pre-announcement two weeks ago was our new view of fourth quarter. While we are extremely pleased with our fall assortments, including value-oriented price points and outstanding gift-giving plans, the fourth quarter started with consumption, traffic, and average dollar transactions falling dramatically in all channels in all brands.

As I said in our pre-announcement, on top of what I would call a real softness in September during back to school the consumer was hit hard by the gripping financial moods in early October and quickly retreated. The response was an immediate demand shock, a clear and instant reaction to the banking crisis and the uncertainty coming from Washington. We’re seeing it around the United States and in most of the key markets that Mexx competes in. Whereas earlier in the year we saw extremes in markets like Southern California and Florida, today the fall in traffic has been all over. Tourist areas like Hawaii and Las Vegas are down considerably, although our New York City 5th Avenue Juicy flagship is very strong, but was primarily by foreign shoppers.

The October trend including our view of department store promotion resulted in a changing guidance for our adjusted earnings from continuing operations to a range of $0.19 to $0.24 for the fourth quarter resulting in a range of $1.02 to $1.07 per share for the full year. This chart provides a bridge from 2007 to actual adjusted earnings per share from continuing operations to the range we are now guiding. On the positive side, we eliminated loss-producing brands; we reduced G&A in non-core, non-revenue areas; we improved our working capital position; we put in place some very strong holiday merchandising plans; and we expanded our retail base on Lucky, Juicy, and Kate Spade. So many of these gains will be offset in the fourth quarter by the cutback in discretionary spending hitting the apparel and accessories categories and the significant promotional activity at department stores. As we indicated, our projections assume comp store declines in the low double digits. While we took action all year at Mexx on cost, a turnaround in profitability there can only be achieved through great product and marketing execution as well.

As we move forward, there is one theme that stands out: we have to carefully control what we can control. So let me focus you on the two areas that we are focusing our people internally: astute brand execution and rigorous balance sheet and cash flow management. We are thankful that we have a much more focused brand portfolio and that we have winning teams driving these brands. Our strategic emphasis on brand will help us going forward and we’re in the process of aligning compensation targets with productivity metrics for 2009. Three examples include inventory turns, conversion rates, and sell-through rates. These are efficiency metrics and favour our focus on prudent uses and returns on capital.

Make no mistake, all the work that we’ve done here culturally is to focus our brand centric teams on outstanding product execution. Our people are responding to trend data and are engineering outstanding value into fantastic products. Our collective mantra is to snap the consumer into purchasing. True, they may be out next year in fewer numbers, but we are believers that strong brands can win when backed by great execution. Now is when you make sure that your people are committed to service, that our fixtures and displays are really magnificent, and that the brand offer makes sense.

In terms of rigorous cash and balance sheet action, I think these statements speak for themselves. Cash is king. We are using our rich free cash flow to pay down debt and we expect a 2008 year-end balance below last year’s level as much as $135 million. We believe that cash flow from operations in our existing credit facilities will be sufficient to fund liquidity needs through determination of our current revolver, which is October 2009. While we are not providing guidance on this call for 2009 sales or earnings we are finalizing a realistic business plan and believe we will have the cash flow and, moreover, the access to liquidity needed to run the business effectively. Andy will provide further insight on our balance sheet and liquidity in just a moment.

We noted during our second quarter call that we would flow our retail expansion in 2009 having added over 200 stores in the past 24 months. This reduction not only makes sense in terms of managing cash very conservatively, but also in terms of assuring astute plan execution. These stores all have productivity opportunities.

Our total capital expenditure is planned down 50% in total versus 2008 levels. In addition to the reduced retail expansion capital at Mexx is cut by 50% and systems and facilities across the corporation by 30%.

Now I’d like Andy to review the financial performance in the quarter and I’d like him to make some comments on the balance sheet as well. Andy?

Andrew Warren

Thank you, Bill, and good morning, everyone. Before I launch into a detailed review of our third quarter, 2008 financial I’d like to clarify a couple of definitions we’re using to report our results. First, our adjusted results exclude the impact of expenses resulting from our previously announced plan for streamlining our operations, exit brands, and impaired trademarks in both 2007 and 2008.

Second, ongoing and direct partner brand sales exclude brands and operations that have been licensed, closed, or exited that are not accounted for as discontinued operations. These ongoing sales reflect the brands and operations that we’ll have in our portfolio going forward and therefore better represent our true sales trend.

To further clarify these definitions we’ve provided additional details regarding the composition of our ongoing portfolio on [inaudible] 23, 24, and 25. We believe these adjusted and ongoing results provide a more meaningful and relevant perspective on our operational and financial performance.

Now I’ll walk you through our third quarter financial results. [Inaudible] adjusted P&L summary. Adjusted sales decreased 15% last year. Ongoing total company sales, which excluded $181 million related to brands that were licensed, closed, or exited, but not presented as discontinued operations, declined 1%.

Changes in foreign currency exchange rates increased net sales by approximately 2% during the quarter.

Adjusted gross profit margin improved by 130 basis points driven by higher gross profit rates and increased proportion of sales from our direct brand segments, which yielded a higher gross profit margin than the company average partially offset by a decrease in gross profits and our partner brand segments.

I’ll hold off on discussing SG&A expenses until the next slide.

Adjusted operating margins decreased year over year to 6.1%. This operating margin is totally unacceptable and we remain extremely focused on improving this critical metric to continue cost productivity and enhanced gross profit flow through.

Adjusted diluted EPS from continuing ops was $0.39 compared to $0.60 in the third quarter of 2007. These third quarter results were in line with the guidance we provided back in August and re-affirmed in our October pre-announcement. Given the significantly challenging macro-economic environment we started to experience in late August we drove expense control throughout the company to offset the softening top line.

Now slide six titled, “Adjusted SG&A Bridge.” As you’ve heard me say before, one critical element of our turnaround plan included significant redeployment resources to support long-term growth. This means achieving real productivity in summaries and redistributing those cost savings to meaningful growth opportunities. On this stage you can see our adjusted SG&A bridge from 3Q07 to 3Q08 highlighting the cost reductions and our reinvestment levels. We are very pleased with this overall $25 million year-over-year reduction in SG&A spending.

We have significantly reduced costs in both our corporate overhead and partner brand segments. Cost reduction initiatives in these two areas include $69 million in savings for the quarter. Cross actions taken since last year include closing and consolidating four distribution centres, cutting our workforce by over 1,500, and significantly reducing our management layers. To support the build out of our direct brands we’ve deployed over $25 million in retail expansion, critical people, retail infrastructure, and marketing.

We remain extremely focused on rightsizing our general administrative costs, on investing in our future growth drivers. This challenging retail and economic environment requires us to, more than ever, remain intensely focused on cost rationalization.

Moving to slide 7 titled, “Direct Brands 3Q Performance.” We are very pleased with the strong sales growth in our direct brand segment in the third quarter. Including the impact of licensing of our fragrance operations, ongoing sales increased 1%. Although we were quite pleased with both sales and gross margin performance, our planned SG&A investments and further erosion of Mexx resulted in low operating margins.

As outlined in the last slide, these critical brand building SG&A investments, retail expansions, we opened 149 stores in the last 12 months, team management hires and marketing all will continue to support and fuel future growth for the segment.

Juicy Couture had another strong quarter with ongoing total sales across all channels and categories of 20%. Juicy comp store sales were up 5% despite the challenging environment. We continue to be pleased with the performance of our new stores and particularly excited about the recent opening of our 5th Avenue [Side Shift] store as it is already exceeding our robust expectations.

Lucky comps went down 4% in the quarter primarily as a result of softening at our full-price stores in women’s denim. The Lucky team is still working to evolve the denim assortment.

Kate Spade posted comp sales down 13% in the quarter driven by double-digit traffic declines at their full-price stores. The Kate team is very focused on regional marketing and CRM initiatives to help drive traffic to its full-price stores during this critical holiday period. [Inaudible] performed better as shoppers responded favourably to the assortment which provided a strong price value relationship.

Global sales at Mexx were down 9% for the quarter, down 15% excluding the impact of changes in foreign exchange rates. Both Mexx Europe and Canada had a very challenging quarter resulting in comps down 13%. Mexx Canada, which had positive comps in the first half of 2008, had comps down 15% this past quarter. We continue to rationalize Mexx Europe’s distribution points. We closed 111 concessions, 12 specialty, and 7 outlet stores over the past 12 months. Bill will dive into our turnaround and execution plans at Mexx later in the call.

After completing 125 store openings across Juicy, Lucky, and Kate for the full year 2008 our focus in 2009 will be on executing productivity improvements and achieving operational excellence in our broad retail platform. We are diligently focused on executing plans to drive productivity metrics, conversion, inventory turns, and actively managing controllable costs such as store staffing.

Now slide 8 titled, “Partnered Brands 3Q Performance.” Ongoing partner brands sales in the third quarter was down 5% to $399 million. While sales were down at the Liz Claiborne and Claiborne brands they were partially offset by sales growth at Liz & Co. and Kensie brands. Adjusted operating margin performance in the partner brand segment was down 100 basis points year over year to 2.3% reflecting declining traffic at key department stores and high promotional activity from both Liz Claiborne and Claiborne brands. Liz Claiborne outlets continue to underperform. Dave will walk you through out turnaround plans for these outlets later in the call.

As I said before, we are as enthusiastic as ever about the turnaround of these lines and with Isaac Mizrahi and John Bartlett, but they will not impact the results until the spring of 2009. We continue to plan for the remainder of 2008 conservatively, especially given the challenging macroeconomics and retail environment.

Slide 9 titled, “3Q08 Balance Sheet and Cash Flow.” We are extremely pleased with the results of our working capital management throughout 2008. Accounts receivable were down 27%, down 28% including the impact of foreign exchange rates, reflecting our intent focus on reducing day sales outstanding. We ended 3Q08 with inventories down 24%.

My next slide provides a brief inventory analysis. Our total debt to cap ratio was 41.4% compared to 32.2% last year. This increase primarily reflects the impact of the year-end 2007 Good Will impairment which added approximately 670 basis points, as well as capital expenditures and acquisition related payments for the last 12 months.

Cash flow from operations over the last 12 months was $293 million, a $1 million increase year over year. We continue to be highly focused on cash generation and are confident that we’ll grow total year cash flow from continuing ops to $300 million to $325 million versus $257 million in 2007.

Capital expenditures were $212 million for the last 12 months. Most of this capital expense was dedicated to the net addition of 140 specialty and outlet stores. Given this tough environment we decided to lower our capital expenditure forecasts for the remainder of 2008 by $15 million to $195 million. And more importantly, we’re cutting our 2009 CapEx spend by 50%.

Our next slide titled, “3Q08 Inventory.” On our third quarter 2007 earnings conference call we committed to thoughtfully and aggressively reduced inventories and have put in place tight internal controls to manage inventories throughout 2008. We have made significant progress. Ending third quarter inventories down 24% compared to 3Q07. Direct brand inventory increases were in line with its expanded retail footprint while partner brands were successful in managing inflow and reducing ongoing levels. The Liz Claiborne plan in particular has been highly focused on reducing its year-end 2008 inventory levels in order to maximize our launch of the new Liz Claiborne New York line in February of next year.

Slide 11 titled, “Debt & Cash Forecast.” We ended 2007 with just under $900 million in debt; $587 million relating to the Eurobond and other debt facilities as well as $701 million in outstanding revolver debt. By the end of 2008 we are forecasting our total debt balance to be in the range of $750 million to $775 million driven by healthy free cash flows and more than offsetting planned capital expenditures and the impact of foreign currency exchange rates. We estimate that this will result in a year-end 2008 total debt to cap ratio of 32% compared to 37% at year-end 2007.

As we look forward we’ll continue to utilize our free cash flow to pay down debt and plan no share repurchases or acquisitions in the near-medium term. Our 2009 6% CapEx reduction will significantly enhance our free cash flows next year.

Slide 12 titled, “Current Bank Credit Facility.” At the end of the third quarter there was $409 million outstanding against our $750 million revolver facility leaving up to $341 million of availability. Looking forward to the fourth quarter, we’re forecasting revolver pay down of approximately $185 million resulting in a year-end revolver balance of $225 million leaving us with fully $525 million of revolver availability at year-end.

Lastly, slide 13 titled, “Bank Credit Facility Update.” Since many of you have been asking, we’re in compliance with our bank covenants in the third quarter and, based upon our current forecast, expect to be in compliance as well in the fourth quarter this year. As Bill indicated, our current credit facility matures in October 2009 and is projected to have an available balance of $525 million at year-end 2008.

I characterize our bank group as very supportive, having successfully executed two facility amendments in 2008. If you look beyond October 2009 we’re in active dialogue with our top banks, including J. P. Morgan and Banc of America, providing the timing, tenor, and structure of an amended and extended facility that provide us the ongoing liquidity and financial flexibility we need.

Thanks for listening and now I’ll pass the call to Dave.

Dave McTague

Thank you, Andy. We’ve already shared the underlying vision of our restage. There are literally millions of women in this country that love Liz Claiborne and what it stands for. After hiring Isaac Mizrahi and transforming the product we are now working out the final details of a distribution and marketing plan that sensibly gets this product in front of these women. Everything we have done is aimed at integrating the brand for our consumer. The product all speaks to one brand vision in a way that it hasn’t since Liz herself was here. We are equally focused on cross channel integration, wholesale, our outlet retail, and in re-launching the commerce presence.

In a lot of ways, as challenging as this time is, the new product is just what the doctor ordered for this consumer. We have always had great price points, but now we have the product that should outperform those price points. From all that have seen the line and as Bill stated, we hear it screams value.

Core to our re-launch is motivating the steals itself. We are specifically engaged with our retail partner and their regional and area store manager to provide special web and Intranet-based seasonal training modules with Isaac himself. These are already scheduled both live, via satellite, as well as taped in archives for the selling associates and visual display teams. These sessions will train them about the new product, design point of view, and style made easy, taking on Isaac’s philosophy on fashion for every woman with Liz Claiborne New York.

This reinforces our belief that our sales associates are the biggest brand ambassadors. In addition, our staff of Liz Claiborne New York stylists will be in the stores providing selling associates with news, updates, additional product knowledge seminars, as well as grass roots customer shopping events and trunk shows for their clientele.

We will launch a fully integrated demand creation and marketing plan, getting closer to our woman through reaching her where she is, on-line participation, including live trunk shows featuring Isaac, a targeted print media campaign, in-store shop and visual enhancements utilizing consistent campaign imagery, specific collaboration with our retail partners utilizing their targeted vehicles of direct mail, on-line, and other print campaigns, and multi-tier event strategy. We bring Isaac live to select markets and expand the reach of those events via our new media reality, as well as collaborations with local charities and businesses. These are important to our customers.

In terms of wholesale distribution we are building multi-category shopping shops in the 50 most visible and profitable department stores by end of first quarter. At the same time we are exiting 200 D-level stores that can’t deliver the brand appropriate assortment or profit model for success.

I’m also very excited to share our retail plan. As you know, we own and operate 92 outlet stores, most of which have been in dire need of a capital improvement. These are the stores that remain after a rationalization throughout 2007 and earlier this year. They can be strong producers and are in great outlet centres. Know that they are not producing a profit for us now after years of high profitability. What these stores needed in addition to a basic capital cleanup is fresh and relevant product. That’s what they will have by April when we start flowing Liz Claiborne New York products, including products made for outlets by Isaac’s team.

Let me show you what this transformation can look like. Here you have some snapshots of the stores today. On average they are 9,500 square feet and are 8.5 years old. We treated them as mini-moderate department stores with multiple brands, bad signage, and primarily liquidated inventory. As we divested brands that comprised a majority of the square footage they lost their last remaining purpose. They stopped being an effective point of distribution for the mother brand ages ago. As we divested brands we lost the four-wall profitability these stores did generate.

Flip to April 2009. The number one remaining capital spend priority is refurbishing these could-be-productive stores for the Liz Claiborne New York brand. For about $100,000 per store we can improve lighting, carve down square footage, improve signage and fixtures, and create – yes, even for outlets – a more romanced and modern environment. The vision Isaac has for the wholesale shopping shops applies here, minimalist, where the product literally is the hero in the shop.

This outlet business represents a huge opportunity to expand profit margins and will complement the overall marketing execution and consumer brand experience. We will have more to say about our marketing plans as the launch nears. We do in fact plan to spend efficiently next year. We anticipate significant help from publicity and unpaid media as editors and publications have indicated significant interest in the high designs, high value offering during these times.

Bill?

William L. McComb

That’s great, Dave. Let me start now on the direct brands. First we’ll start with Mexx. We’re very excited about this morning’s announcement that we’re partnering with Li and Fung to improve the product at Mexx. They will help us with quality, with cost, and with speed to market; all three that are challenged. We have spent several months evaluating our options. Ultimately we believe that there are a lot of mutual benefits to a partnership with Li and Fung. Right now we won’t answer any specific questions to quantify that benefit in the short term, but we will next year when we have all of the elements of the next turnaround plan quantitatively and qualitatively laid out together.

While we had hoped for the past 18 months that the product direction that our team was taking for 2008 would result in a winning trend, we didn’t get the traction that we had wanted and needed to improve the profitability of this business. Assortments that should have shown improvement didn’t as early as April.

We believe that the single greatest opportunity at Mexx is in fact product and marketing. The brand execution has grown cold and distant and it’s lost the sex appeal that put it on the map in the first place. The consumers tell us they want better value, product that stands out with greater quality. We will fix that in a very visible way by fall 2009 with a return to what we’ll call a true heritage Mexx positioning.

In addition to rejuvenating the product line and the marketing message we are continuing to rationalize distribution. We closed a total of 111 concession shops and 19 specialty stores in the past 12 months while simultaneously expanding some shopping shops in V&M in Holland, one of the premier department store customers of the brand. Tom Fitzgerald is leading a re-examination of productivity of all of our retail space and we’re also looking to strengthen our position with our best wholesale partners.

We have called out the retail operation at Mexx as one area that needs significant improvement still. In addition to gaining from Tom’s expertise in that area, we’ve promoted the company’s strongest retail operator and we’re now focusing on getting assortments and product flow right to improve turn and lower excess while managing costs and better incentivizing the store level staff.

Perhaps the most significant change we aim to make soon is a shift to what we’ll call a true merchant-led structure at Mexx; a model that Tom understands and can replicate and one that will come much more naturally to the CEO that we plan to appoint early next year. Today our wholesale and retail divisions act separately and lack the appropriate product-based coordination. Our intended organization deployment will address this and will strengthen our execution across channels and product categories.

At Juicy we saw healthy top-line growth in the third quarter. The brand rolled out new product in new stores and re-launched its website in an enhanced partnership with Neiman Marcus. International continues to report very strong sales growth.

Wholesale, which has historically been profitable and brand right, remains less of a driver in today’s environment. Promotion activity, especially in the top tier of department stores, has been unprecedented in September and October and has impacted Juicy’s margin this quarter.

As we look forward the formula remains intact focusing on innovation, strong opening price points, expanded international distribution, and brand evolution, including new product categories that offer the right value and fun. In the short term we have an outstanding holiday program that is hitting stores now on all channels with a very clear focus on gift giving.

For Lucky, during the quarter we opened 13 more stores in total and expanded accessories throughout the chain. Our men’s business comped strongly. Our women’s tops program, which we talked a lot about, is performing, but in women’s denim the new fashion program has not worked so far to drive comp growth. Non-core sources of revenue at Lucky, like Kid’s, E-commerce, and International, were all up considerably.

This business also put a strong focus on gift giving for holiday 2008, but going forward the plan remains focussed on the product categories and assortments that we’re driving now. My comments about inventory management and cost control apply, as does the concept of astute brand execution.

Kate Spade. This business is like the others. It has been impacted by the consumer shock with Kate Spade comps down in the third quarter, but we’ve made real progress on a lot of fronts. The fall and holiday lines were very well received by wholesale retailers and spring, which marks our first full season from the new management team, was even better received. E-commerce and the international business performed very well in the third quarter.

The outlet business, bolstered by 25 stores as of the end of the quarter, is performing well and is proving to be an important investment for us. The team has taken price points up and down in the full-price line and both ends are performing well, although traffic, as Andy pointed out, is very soft. One of our best selling collections, the Sullivan, is also our most premium priced right now. We believe this woman buys smart, but still buys. She’s looking for extended value; a piece that will stand out but be fashionable for a long time. Kate Spade can be that in this downturn. I think a good example is the new jewellery line which Chuck debuted on October 15th. It is already performing extremely well, even in this very poor economy, indicating a very bright spot as it continues to roll through our specialty stores.

With the cutback in retail expansions we are only planning to open three specialty stores and one outlet in the Kate Spade format next year. The company has an initiative to expand gross margin via sourcing.

So if I could summarize now let me say a few things. Having spent nearly 16 months repositioning our company and now facing more uncertain times than ever externally, we’re focused on controlling the controllables. We’re managing costs very carefully, aiming to rationalize even further to help offset additional downside if needed. We’re managing inventory and receivables very cautiously in every division of the company. We’ve cut capital spending plans in half leaving in place a smart cleanup of the Liz Claiborne outlet stores as Dave reviewed and reducing all other categories of capital spend.

Our focus is to repay debt using our rich cash flows. Productivity is the theme in how we will manage each of the brands. Our people are focused on great brand and product execution. And I have to say we really have an outstanding team in place that is hunkering down right now and executing. As you look at 2009 we’re grateful that put in place all the product initiatives that we have from the re-launch of the mother, Liz Claiborne, line to the new men’s business to the Dana Buchman business at Coles which launches in February. The numerous product launches in direct brands, the Kensie, DKNY Jeans, and Monet expansions included.

Now let’s open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Robert Drbul – Barclays Capital.

Robert Drbul – Barclays Capital

Hi, good morning. The first question that I have for you is, when you look at the next 60 days or so can you give us a comp expectation in your numbers for Juicy? I’m not sure you gave that. I guess the other question that I have is, what’s the total dollar or percentage of sales for the quarter for your retail stores that will be done between Thanksgiving and Christmas?

William L. McComb

Well, on the latter part of your question it’s a very significant number. It’s about 75% of the profitability of those businesses happen in that period in the quarter from Thanksgiving to Christmas. So it’s still, believe it or not, half way through the quarter it’s still too early to say whether or not the guidance that we’ve given for the quarter is going to change or not. Right now we’re sticking to the guidance that we provided two weeks ago for the quarter. We think that’s solid and, as we said, we’re assuming low double-digit comp declines in total for our retail chains.

We do not report or project monthly or quarterly comps by brand when we give guidance, Bob.

Robert Drbul – Barclays Capital

Okay. On the partner brand side of it, can you give us an idea how your order book for the spring came in, in terms of either on a percentage basis or dollars for partner brands in total or for the Liz brand itself.

William L. McComb

Dave, why don’t you take that question, especially with regard, make the comment on the Liz line.

Dave McTague

Sure, Bill. Thanks for the question, Bob. First, as Jennifer Black recently so poignantly put it, down 10 is the new flat. And I think that’s a great characterization of the planned receipt level for 2009 on an average in wholesale. We’re happy to date with the bookings on the spring line. As we’ve said before, if we did this launch right we’d probably be down overall. As we exit certain stores and manage the inventory for strong profitability and better natural margins. Creating regional destinations is one of our planning principles. Here I mean we’re making sure that in a given high-traffic mall we have one major store that becomes known as the place to buy Liz Claiborne New York. That store is where we’re going to distort all of our marketing spending and efforts. We certainly can’t dribble it out to every available store in the universe, so instead we’re getting it right out to winning stores in each major mall. Candidly, bilaterally we’ve got to break some bad habits as we plan these buys. We were all so used to using these restores for receipts rather than planning it carefully as a lifestyle brand. In light of this approach we’re very happy with the way that the buy came in.

Robert Drbul – Barclays Capital

Great. Good luck. Thank you.

Operator

Your next question comes from Robbie Ohmes – Merrill Lynch.

Robert Ohmes – Merrill Lynch

Thanks. Actually, two quick questions. The first one just in terms of the Li and Fung announcement that you guys made this morning. Bill, can you talk about whether this is sort of a one-off situation with Mexx or could you actually see more of the Liz Claiborne brands sourcing being outsourced?

The other question I think is probably more for Andy. Andy, could you talk about the streamlining charges that you expect for the fourth quarter and then also what level of streamlining charges we should expect for 2009?

William L. McComb

Okay, Robbie, this is Bill on your first question with regard to Mexx and Li and Fung. To be very clear, no, I don’t see this as another shoot of fall with regard to the total Liz Claiborne sourcing organization. The situations are actually very different. Right now, if you recall back, I’m going to say it was April or May when we re-integrated the sourcing organizations in partner brands and direct brands to be very proximate to the total product development effort, design and merchandising. I would never want to right now disintegrate that. At Mexx we had many simultaneous challenges and after carefully assessing the situation we determined that Mexx, that Li and Fung could get us three giant steps in one whereas we could get there on our own through changes with regard to the leadership and management of the sourcing team, but with all the other things going on at Mexx we felt that the quantum leap step by doing Li and Fung made sense. We don’t have that situation at Liz Claiborne. We’re very proud throughout LCI on the other divisions the role that sourcing is playing right now in improving quality and working very closely with design and merchandising on speed to market. So we don’t see that in our crystal ball, Robbie.

Second question, Andy.

Andrew Warren

Hi, Rob. It’s Andy. It’s a fair question. When we look across historically the streamlining costs we’ve had to date and the costs associated with laying off 1,500 employees while consolidating four distribution centres, dealing with management, etcetera, an awful lot of cost incurred to date, we do anticipate less cost going forward. I’ll tell you, Robbie, given the environment and given what we see the next 12 to 18 months looking like being very challenging, we do want to continue to pursue costs and opportunities and look for areas to optimize our cost structure. We still will have some streamlining costs in the fourth quarter and even 2009. I would say considerably less than we’ve had in the past. But we’re going to always look for opportunities to get productivity and cost rationalization and that will continue for the next several quarters.

Robert Ohmes – Merrill Lynch

Can you give me the number for the fourth quarter, roughly? Or range?

Andrew Warren

Well, Robbie, we’re still working through that. For example, with the Li and Fung announcement there will be some restructuring costs associated with that. Great long-term productivity, but a little bit of restructuring costs in the fourth quarter. We continue to work through that. I’m not going to give you a range now, but we’re quantifying it. It should be, I’d say, roughly in the range of where the third quarter was, but we’re still working through that quantification.

Robert Ohmes – Merrill Lynch

Okay. Terrific. Hey, thanks a lot guys.

Operator

Your next question comes from [Chai Lee] – Morgan Stanley.

[Chai Lee] – Morgan Stanley

Good morning, guys. Just on direct brands, the margin deterioration we’ve seen in the quarter, can you just give me a sense of how much deleverage is going on at the level of comp deterioration that we’re seeing?

William L. McComb

Well, there are a couple factors in there. There’s some deleveraging, but as I called out there’s also in this quarter in direct brands a profitability hit from the wholesale channel that I would say we haven’t seen in many of the other quarters. Andy, I don’t know if there’s any other colour that you can add to the deleveraging question.

Andrew Warren

Well, I think the other point to raise is we’ve opened up 140 stores in the last 12 months. So we’ll certainly get, in the first year of store productivity is the worst year. As those stores come on line and we focus on productivity in those stores getting more established in their markets and branding we’re still going to get better turnover and profitability out of that store base. So I think some of that is going to be an enhancement on how those stores will perform based on more quarters and more months of operation.

William L. McComb

Yeah, I mean, I think it’s important to point out that gross margin is healthy there. That’s important. You are seeing SG&A go up as we’re opening these new stores and making other investments, as we said. And then the softness, frankly, and profitability in wholesale is what I think is dialling into that equation. Those three factors.

[Chai Lee] – Morgan Stanley

Okay. And then one more question for Andy. Andy, the letter of credit facility availability went from $400 million last quarter to $285 million. Is that a permanent reduction in the letter of credit facility availability?

Andrew Warren

No, it’s not. We’re moving to open accounts. Like a lot of other vendors in our space. We’re working to go to open account versus these letters of credit, which is good for the vendor and good for us and good for the supplier. That’s the process that we’ve been working with and being aligned with the vendor community on. As we work through that migration that you’ll see as the credits come down, but they’re still in line fully funded and in order for us. But it’s that strategic direction to work those down over time.

[Chai Lee] – Morgan Stanley

Okay. Thank you.

Operator

Your next question comes from Kate McShane – Citigroup.

Kate McShane – Citigroup Investments Research

Hi, good morning. I was trying to, I was wondering if you could help us understand the markdown environment that you expect for the fourth quarter, both in wholesale and retail. I think last year we were facing much higher inventories, especially at the department stores, and as a result had a lot more clearance activity. In this year and in these times do lower inventories mean less clearance and then, therefore, better margins? And what do you expect or what does your guidance assume?

William L. McComb

Kate, hi. This is Bill. I think that what you just described was in fact what we were anticipating in what I’ll call the June-July-August period. We had worked very well with our wholesale partners in managing inventory positions carefully. There was even a point, Kate, when Dave and I reviewed some buys in the June and July period where I actually worried that we would be out of stock on key items at retail in the wholesale environment between Thanksgiving and Christmas. I have to tell you that’s changed. With the demand profiles that I’ve described and the change there the biggest thing that’s different than what you would have said a year ago or even looking in June and July is that these wholesalers have jumped the gun on promotions far ahead of the computer algorithms around what the markdown rate ought to be. I’ve referenced the stories of some of the tier one retailers, I’ll name Saks as an example, opening new fall merchandise in September at 40% off. So there’s an arms race out there right now where they’re really competing for traffic and despite what I would say were conservative inventory positions that might have driven the environment that you were describing, the markdown environment is incredible.

I think we’ve made the comment publicly, you know, there’s no way that every vendor is going to be paying 100% of their liabilities here given that the department stores themselves have made marketing and merchandising decisions to be very, very aggressive just so they’re not caught empty handed here. There’s a feverish markdown cadence going on and I do think that there is a possibility here that the consumer is going to show up a little more strongly than people are anticipating between November, between Thanksgiving and Christmas. I think after that the trends that we’ve looked at and the consumer confidence that we’ve all read about in the news is really going to define 2009.

Andrew Warren

And Kate, just to add to that, while we do not quantify markdown assumptions in the [inaudible] we do expect a highly promotional environment to continue in the fourth quarter. Our updated guidance that we talked through reflects our best estimate of markdown assistance that will be required in this environment and we’ll continue to manage our expenses and closely scrutinize retailer assistance. We’re sober on the environment and sober on what the expectations will be over the course of the next two months.

Kate McShane – Citigroup Investments Research

Okay. So the markdown environment is really much tougher in the department stores. We shouldn’t expect to see similar levels of markdowns at your own retail stores?

William L. McComb

I would say no. I mean, that’s not how we market, that’s not how we run our stores. That said, we give our retailers the ability to do what they have to do in a given market. I can’t say that we’re item for item matching those wholesalers. We’re not. And yet we’re still moving goods. So we’re being careful about gross margin.

But you know, Kate, the big call out that I’ll tell you that is obviously, this is an obvious statement, really, really different here is the markdowns that you’re seeing in tier one, Saks, Nordstrom, Bloomingdale, Neiman, they are extraordinary.

Kate McShane – Citigroup Investments Research

Okay. And then my other question, Bill, in light of the current environment are you still standing by the operating margin goal of 9% to 11% in 2010?

William L. McComb

I’ll remind you what that was. For partnered brands we talked about 9% to, I’ll call it 8% to 10% as the normalized goal for that business segment. For 2009 we haven’t provided any sales or earnings guidance. We really believe that when you look at the portfolio of businesses that we’ve got that the direct brand segment can post normalized operating profit between 15% and 20% and that partnered brands can post between 8% and 10%. Virtually every decision that we take is about moving toward or engineering that kind of profitability. We made a lot of progress this year on cost and brand effectiveness and sourcing and merchandising and SKU rationalization. It’s completely in the fog now in terms of what’s happening in terms of the externality, the demand profile, category volume, traffic. So can’t give any guidance on what to expect in margin for 2009.

Kate McShane – Citigroup Investments Research

Okay. Thank you very much.

Operator

Your next question comes from David Glick – Buckingham Research Group.

David Glick – Buckingham Research Group

Good morning, Bill. Just a follow up on the pricing in your full-price stores. With your top tier retailers promoting like items potentially in nearby locations are you guys giving some thought to matching on some highly visible items or are you just continuing in the same regular price and clearance cadence that you typically follow in your full price stores?

William L. McComb

It’s day by day. The good news is that the overlap of the wholesale accounts and our retail accounts or stores isn’t one for one and we’re thankful for that. Right now, no, we have not done that. Up until now we have not done that. We have absolutely fantastic, compelling promotions associated with holiday and gift giving. Frankly there are some very different assortments that we have in our retail stores and we use those to drive conversion. Overall, David, I would say it is too early to make a final call on fourth quarter and to be able to tell you what will happen in those retail stores, but thankfully up until now we haven’t had to do that and it’s certainly helping on the gross margin line.

David Glick – Buckingham Research Group

Great. And Dave, just to follow up on the Liz Claiborne New York, you gave us some sense of the order book for the overall wholesale business at the level of the new flat, I guess, down 10. Now that the dust has settled, you know, after retailers have reviewed the Liz Claiborne New York line, I was just curious, now that they’ve gone back and looked at what probably is a different open to buy in women’s for spring 2009 versus when they reviewed the line, I’m just curious now that the dust has settled for that line in particular are you still seeing retailers who had walked away from the brand coming back and if you can give us some sense of the order book and store count for that particular business relative to the overall trend in your wholesale order book.

Dave McTague

Sure. Thank you, David. Reiterating what I had already said, the retail community came and certainly we were the brand that everyone wanted to hate. They were all shocked. And I think that the most compelling statement was, you have completely screwed up our open to buy now. I don’t feel sorry for my competitors. We’re earning the opportunity to get the open to buy dollar and I would say categorically across the retail community they have given us support. I think the big piece is that taking down and out 200 unprofitable stores that we don’t believe either from a regional strategy perspective or a pure profitability perspective, that’s where I think we have significant wins. We’ll be in the neighbourhood of about just at or under 1,200 stores. But seriously the big advantage here is Isaac. It’s all about newness. The colour is trend right. There is nothing compelling going on in department stores as you walk that better area. Certainly not moderate. So there isn’t anything that they have seen in the marketplace that is as compelling as what we’re bringing. We are, however, being conservative. We do not want to overbook this line. We want to be very careful with the receipts. This is not a race or a sprint. This is a long-term investment brand strategy for us and we will grow it accretively over time. We hope that even like we had said in the midst of this economic challenge we are seeing her shopping and she is highly discerning in her selection now, but we believe this product is going to be that product for her.

David Glick – Buckingham Research Group

So it’s fair to say that 1,200 stores is lowered by 200 stores versus 2008 and that he volume, you’re looking to shift in less more profitably. Is that a fair characterization?

Dave McTague

That’s a fair characterization, absolutely.

William L. McComb

And I think the key thing that Dave talked about in both of his answers, both times here, was this sort of regional centre of excellence approach. Where you go into a high traffic mall and there will be one big store that is very successful in a mall that he’s putting most of his money. His fixturing money, his co-op money, Isaac showing up for a trunk show, Tim Gunn going in and doing a road show promotion with a product. You can get tripped up here by numbers because you know, David, probably better than most that the distribution of profitability out of a 1,200 store base is very distorted to the best 50 and 100 stores. So the one thing I want you to take away from this, all these questions about averages and things like that really miss the focus that this team has on engineering and planning a successful brand impression and profitability.

David Glick – Buckingham Research Group

Great. I appreciate that colour. Just one last quick follow up. In the mid-tier obviously that channel is struggling as well and has been struggling for probably longer than the luxury tier. I was just curious if you could give us some colour on the tone of business and your Liz & Co. and Concepts line at Penney’s, which have been big drivers for you in the partner brands segment. Can we continue to expect to see growth there in 2009?

William L. McComb

Thanks for the question. I think as it relates to Liz & Co. we’re working intimately with J. C. Penney on this business. I would submit for Penney’s overall, as you’ve seen from their specific releases, their forecast is conservative as they go forward. Their current business, like every retailer right now, is down significantly. Within that mix we are performing satisfactorily and are relatively happy with the results that we’re getting in the midst of the environment that we’re in. We are planning with the exact same strategy with Penney’s intelligently and conservatively by store. We are planning the business regionally. We are not looking for go-go growth in revenue. We are keenly focused only on profitability.

David Glick – Buckingham Research Group

Is it fair to say you’re happier with your women’s business there at the moment versus men’s?

William L. McComb

Yes. I think that’s a fair assumption.

Dave McTague

Always have been.

David Glick – Buckingham Research Group

Okay. Thanks a lot. Good luck.

Operator

Your next question comes from Benjamin Rowbotham – Goldman Sachs.

Benjamin Rowbotham – Goldman Sachs

Hi. Yes. Can you hear me?

William L. McComb

Yes, we can.

Benjamin Rowbotham – Goldman Sachs

Okay. Great. I was just hoping you guys could maybe help quantify the size of the opportunity at outlet a little bit better. What the size of that business is, where the margins are at right now, where they’ve been, and maybe how you envision the unit economics changing in this turnaround.

William L. McComb

Huge and significantly. I mean, this is one of those situations where it’s up from the grave. This was, I think Dave described it beautifully. We ran this like a mini mid-tier department store, moderate department store. Multiple brands, heavy emphasis on clearance, no good capital appropriation. We have wonderful people in the field working in these stores. I mean, honestly, a lot of people say that. I have to tell you we have people that have made this their career. They have been dying for a product re-launch. What a fantastic vehicle.

First of all, you should know that internally, culturally we refer to this execution as Liz Retail, not Liz Outlet. I know that our outlet partners, their landlords will smile as I say that because they’ve been telling us for a long time that we’ve got some of the best space in their malls, we’ve got incredibly advantaged lease positions in terms of rents, and we’ve let this be sort of the underbelly of the company. With Isaac coming there is, and that product coming and the associated capital investment that Dave talked about, roughly $100,000 per store spent between right now and April of 2009 with the visuals that if you didn’t get a chance to see the presentation, the flipcharts that Dave was using as before and after you need to, it’s worth your while to go and take a look at those. I can tell you that what has become a loss for us can easily make 10% here with all of the changes that we have going on. Frankly, on a normalized basis, Benjamin, this ought to have a four-wall profitability of about 25%. Between 20% and 25% easily. It could go north of that. It could go north of 25%. I say normalized because you know as well as I do, point number one, it’s a launch year for us and, point number two, the external environment is really tough. The reason we prioritize this initiative as our number corporate capital spend is that mall traffic is still robust and we’re not taking advantage of it. Thirdly, newness. We’ve got an unbelievable vehicle here.

I think that the size of the opportunity is significant. When you’re talking about 92 stores, look, all I can refer you to is the Tommy Hilfiger business, and I don’t have their numbers but I can tell you that you talk to people in the industry and they’ll say that at nearly 150 stores this is a huge profit pool for them. We know it can and will be for us too.

Benjamin Rowbotham – Goldman Sachs

Great. That’s really helpful. Then my only other question is, I understand that given the economy macro backdrop the unwillingness to maybe put a 2009 guidance out there today, but on the last conference call you did highlight some SG&A targets for 2010. I think 40% as a rate of sales with cuts across a variety of different pools of 8% to 10%. Are those numbers still good or are you thinking more about less or more there?

William L. McComb

Those metrics still remain on the dashboard for us.

Benjamin Rowbotham – Goldman Sachs

Great. Thank you very much.

Operator

We have time for one final question. That question comes from Jennifer Black – Jennifer Black and Associates.

Jennifer Black – Jennifer Black and Associates

Good morning. I was just curious if you guys measure conversion versus your traffic in your retail stores.

William L. McComb

Oh, God, yes, Jennifer. Key metrics. When I mentioned on the call that as we were already changing the compensation structures internally toward some productivity measures, one of them being inventory turn and another being conversion. Now for the wholesale business we look at sell-through rates. But for conversion we absolutely do and in a time like this, Jennifer, for the field that becomes the key metric under a controlling and controllable banner as a retailer. Get a transaction out of everybody that walks in the door. We’ve had some fantastic, we started focusing on conversion all the way back when we were planning the fall assortments. I think I said on the second quarter call that we designed fall 2008 and holiday 2008 with conversion metrics in mind.

Jennifer Black – Jennifer Black and Associates

So how do you feel about the conversion thus point at each of the divisions at retail?

William L. McComb

You know what, I think that to be perfectly truthful we have a huge opportunity for improvement, Jennifer. I know that Lucky just ran a program where they had for a period of time a 30% conversion goal. I know that we had a few more than a dozen stores make that goal, but I would tell you that our businesses are in the, let’s just call it the low teen range. I think we can in some cases double the conversion rate. On an ongoing basis, not just in the face of a tough economy. When I’ve been talking about with this broad store base that we have we have a huge conversion opportunity I’m talking about even when the times were better.

If you go back to the whole Lucky plan that we started talking about at the end of last year for fall 2008 where we talked about the role that women’s tops should play going from a tops to bottoms ratio that is frankly less than one to one in the first half of the year to an eventual goal of four to one, that’s all about conversion. We know that we’re walking too many women that could be tops purchasers at Lucky and not getting enough share of the wallet there. Accessories has been a big driver in improving conversion and we’re really, really happy with how that’s added to it, but in some ways we’re still rolling out a broader penetration of accessories in those concepts.

At Kate Spade we still, I’ll tell you that until the product gets perfect, which as you know is spring 2009, that’s when our bet is when Deborah Lloyd and her design teams, when they’ve contributed to 100% of that assortment, I think that conversion is going to get a lot better in that business then.

And Juicy has good conversion, but there’s opportunity for I would say significant improvement there. In all of those businesses.

Jennifer Black – Jennifer Black and Associates

Great. And then one other question. You mentioned the PAs by Isaac. If you had your dream how many PAs do you think he can make? Can he go to all 92 outlet centres? I’m just curious.

William L. McComb

No. Definitely not.

Jennifer Black – Jennifer Black and Associates

I didn’t think so.

William L. McComb

And the good news is, the good news is, let me talk for a second about what Tim Gunn has done and what he’s going to do. Tim Gunn has conducted, Dave, how many has he done to date? Is it about 30 in total?

Dave McTague

Yeah.

William L. McComb

In about a year’s time he’s done about 30 PAs. Now, that’s a very aggressive travel schedule for Tim. Tim is roughly 75% of his time focused on Liz Claiborne and the other 25% is his production time externally. These PAs attract between 500 and 600 people. Women drive in carloads of four and five from as far as 60 miles away. It is absolutely incredible. Dave’s focus is Isaac is going to focus on going to key department stores and probably a few of the outlet retail doors. When I say a few I’m going to talk about five. So if you had to throw a number out there it’s probably 15 department stores and five stores. We intend for Tim’s program, which is just such a great, great, grassroots effort where obviously he’s not the designer of the line, he is Tim Gunn. He is a third party fashion consultant that does an amazing job engaging the retailers associates on the store floor and creating a tonne of excitement. Now that we’re going to have this incredible line the power of the two of them reign differently. Isaac is obviously the artistic director/creative director of the business. Him going into those big stores, I think that’s the most realistic use of Isaac.

Jennifer Black – Jennifer Black and Associates

Okay. Great. Well, good luck.

Operator

I would now like to turn the call over.

William L. McComb

Okay. Is that it for questions I think?

Operator

Yes. That’s it for the questions.

William L. McComb

Okay. Thank you very much for joining our conference call today. We look forward to more discussions about our business as it progresses. Thank you very much.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: Liz Claiborne, Inc., Q3 2008 Earnings Call Transcript
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