Liz Claiborne, Inc. Q4 2008 Earnings Call Transcript

 |  About: Kate Spade & Company (KATE)
by: SA Transcripts

Liz Claiborne, Inc. (LIZ) Q4 2008 Earnings Call Transcript March 4, 2009 10:00 AM ET


Good morning, everyone, and welcome to the Liz Claiborne Fourth Quarter 2008 Conference Call hosted by Chief Executive Officer, Bill McComb.

After the opening remarks, we will take questions. This call is being recorded and is copyrighted material. Therefore, please note that it cannot be recorded, transcribed or rebroadcast 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 earnings release can be accessed at in the Investor Relations Section. There are separate links to the slides for the 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 2008 annual report Form 10-K under the caption item 1A risk factors and statement regarding forward-looking statements as filed with the SEC.

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 as a percentage of sales, operating income, operating margin, income from continuing operations, and EPS are presented on both a GAAP and 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 fourth quarter and full year 2008 and 2007 represent a more meaningful presentation of its historical operations and financial performance since they provide period to period comparison that are consistent and more easily understood.

Now, I would like to turn the call over to your host, Mr. McComb. Please go ahead, sir.

Bill McComb

Well, thank you, Julianne. That was certainly a mouthful. Good morning and thank you for joining our fourth quarter and fiscal year 2008 earnings conference call. This morning's announcement following our earnings pre-announcement back on January 13.

In today's presentation we're going to review our quarter results in greater depth. We will discuss the GAAP impairment charge and we will review our approach and assumptions for 2009. And in case you didn't hear Julianne say it, as a reminder, we are broadcasting this presentation with speaker supported slides which are available now for viewing and will then be posted on our investor relations page of our corporate Web site for access later.

These are highly volatile times. There is a tremendous amount of uncertainty. As we indicated back in October, we are focused on controlling the controllables. Cash, costs, leverage and brand execution.

Stepping back and looking at our situation, we are enormously grateful that we took actions back in 2007 to lean the company, to narrow our portfolio and priorities, to reintroduce focus on design, merchandising and product, to accelerate our own retail mix and to build the talent in this organization to support a brand centric model. It has certainly allowed us to navigate recently in ways that we would never have been able to do had we carried the headcount and complexity of our previous footprint.

Even in the face of significant uncertainty, we take comfort that we have brands that are well differentiated, that are neither commodity priced nor true luxury, but in a zone that is both aspirational and attainable and that we have consumer data showing our desirability rating are actually increasing across all metrics including prestige, popularity and purchase intent even during this tough fourth quarter period. In addition, we're increasing or maintaining our brand awareness in loyalty indices.

So with that as a back drop, let me now ask Andy Warren, our CFO, to walk you through our results for the quarter and the fiscal year. Andy?

Andy Warren

Thank you, Bill, and good morning, everyone. Before I launch into a review of our fourth quarter 2008 financials I wanted to describe our revised segment reporting and clarify a couple of financial definitions we're using to better articulate our results.

As you will see in our press release and on this call, we made the decision to increase our reportable segments, from 2 to 3, by splitting Mexx into its own segment, calling it international based direct brands. This change is being made to formalize the enhanced transparency we have been providing in an ad hoc basis over the past several quarters, which has been needed as the Mexx business has characteristics that increasingly put it in a category by itself, i.e., business no longer operates in the United States, it's geographically complex and possesses divergent economic characteristics.

Given these differences we have made a decision to break its results into its own segment in order to provide the greatest transparency for everyone.

With this change we are now separately distinguishing what we will now call our Domestic-Based Direct Brand Segment which consists of the global Lucky, Juicy Cotoure and Kate Spade brands. The definition of our partner brand segment remains unchanged.

And now for the financial definitions. Similar to our third quarter 2008 call, there are two terms in our press release and our 10-K that I want to remind you of. First, our adjusted results exclude the impact of expenses resulting from our previously announced plans to streamline our operations and exit brands, as well as charges related to both our goodwill and trademark impairments in 2007 and 2008.

And second, our ongoing 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, that represents our true sales trend.

To further clarify this ongoing definition, we have provided brand details regarding the composition of our ongoing portfolio on appendix page 38. We believe that 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 fourth quarter results. Slide #4 titled “Goodwill Impairment.” Perhaps the biggest news in today's release is the impairment charge we have taken at year-end. We recorded non-cash goodwill impairment charges in the quarter of $382 million in our Domestic-Based Direct Brand segment.

These charges were required under the application of the current accounting convention for impairment because our market capitalization declined to a level below our book value due to adverse market conditions.

Although the results of this convention was to impair our goodwill, the fact is, these brands continue to have strong cash flows and we believe have sustainable, long-term growth potential in both sales and earnings.

To be clear, we do not believe our market capitalization today reflects the true long-term value of our company despite the obvious short-term risk and volatility resulting from these current challenging economic times. We also recorded a goodwill impairment charge of $301 million, in our International-Based Direct Brand Segment. This is also the result of impairment testing rules and conventions as well as declines in actual and projected segment profits and cash flows.

Very importantly, none of these impairment charges have an impact on our business operations, cash flows, or compliance with the financial covenants under our bank agreements.

Now, Slide #5 titled “Financial Highlights.” As you saw earlier today, we reported adjusted EPS from continuing operations of negative $0.04 per share for the fourth quarter toward the higher end of our pre-announced range provided on January 13. On a GAAP basis, the loss per share of $8.36 was primarily driven by the goodwill impairment charges I just discussed.

As we all know, the operating environment in the fourth quarter was extraordinarily difficult as consumer spending was further impacted by deteriorating global economic conditions. The highly promotional retail environment negatively impacted margins in both our retail and wholesale businesses.

Despite the earnings shortfall, we demonstrated exceptional balance sheet and cash flow management in the fourth quarter as we paid down $175 million in bank debt, primarily driven by aggressive working capital management.

In January, we announced the successful completion of an amendment and extension of our existing revolving credit facility, which extended the maturity date to May 2011.

Last week, we also announced our deeper relationship with Li & Fung. Bill will elaborate on this important relationship and partnership later in the call.

We also received a Federal tax refund of $90 million in February that greatly enhances our 2009 liquidity position.

Slide #6 titled 4Q '08 Adjusted P&L. Adjusted sales decreased 21% versus last year while ongoing total company sales, which exclude $170 million decrease relating to brands that were licensed, closed or exited, declined 12%. Changes in foreign currency change rates decreased net sales by approximately 3% during the quarter.

Adjusted gross margin decreased 260 basis points, driven by the highly promotional retail environment, which compressed margins, partially offset by increased proportion of higher margin, domestic-based, direct brand sales. I'll hold off on discussing SG&A expenses until the next slide.

Adjusted operating margins decreased year-over-year to a negative 0.7%. Adjusted diluted EPS from continuing operations was a loss per share of $0.04 compared to earnings of $0.26 in the fourth quarter of 2007.

Now, Slide #7 and #8 titled Adjusted SG&A Bridge. We are very pleased with the progress that we are making to reduce our total company cost structure. Eighteen months ago we embarked on an aggressive goal to right size SG&A costs base to $265 million.

We have already exceeded that goal and continue to work through additional cost productivity and streamlining initiatives. Our relentless pursuit of cost management will never end. On this page you see our adjusted SG&A bridge from 4Q '07 to 4Q '08, highlighting the cost reductions and our reinvestment levels.

We have significantly reduced costs in our corporate overhead, partner brands and international-based direct brand segments. Cost reduction initiatives in these three areas achieved $72 million in savings within the quarter versus last year, and fully $277 million in savings for all of 2008 versus 2007.

Conversely, in order to support the long-term growth prospects of our domestic-based direct brands we re-deployed in the fourth quarter and full year $24 million and $144 million respectively, in to retail expansion, critical people and retail infrastructure. The uncertainty of the current retail and economic environment does warrant, though, our dramatically reduced industry investment in 2009 as we plan to open approximately 12 stores versus 139 stores in 2008.

Moving now to Slide #9, titled Domestic-Based Direct Brand 4Q Performance. Although we were pleased by the sales performance in the segment, gross margin pressure and our 2008 retail expansion resulted in lower operating margins. Sales were up across all brands in this segment, driven primarily by an increased retail footprint. Excluding the impact of licensing our fragrance operations, ongoing sales increased 23%, a real testament to the vitality of these brands given the brutal marketplace.

Reduced traffic and promotional triggered AURs drove comp declines of 14% for Lucky Brand and Kate Spade and 15% for Juicy. As the highly promotional environment impacted both wholesale and retail margins in the quarter, we did move quickly to offset some of this erosion with store payroll and G&A cost initiatives.

There were several bright spots to highlight for the quarter. Lucky strong accessories performance, Kate Spade's successful holiday jewelry launch, the continued success of Juicy Couture's new flagship Fifth Avenue store and the launch of the new Juicy Intimates line.

After opening 126 new stores across Juicy, Lucky Brand and Kate Spade in fiscal 2008, our focus in 2009 will be on executing productivity improvements. As these stores become more established in their markets, we believe that we will achieve greater productivity out of our store base. We are intensely focused on adapting assortments, pricing and promotional strategies to drive metrics such as conversion rates and inventory terms.

Slide #10 titled International-Based Direct Brands. Global sales for Mexx were down 29% for the quarter, down 19% excluding the impact of changes in foreign currency exchange rates. The European and Canadian retail landscapes were as challenging last quarter as they were here in the United States, resulting in combined retail comps down 12%.

We continued to rationalize Mexx Europe's distribution points as we closed 62 concessions in 2008. We were also very focus on right sizing the SG&A structure of our Mexx business and fixing their product offerings in order to return to positive operating margins by 2010. We will dive into our turnaround and execution plans in Mexx later in the call.

Slide #11 titled Partner Brands 4Q Performance. Ongoing partner brand sales in the fourth quarter were down 22% to $324 million, driven by our Liz Claiborne and Claiborne brands. Important to note, that despite the enormously challenging wholesale environment last year, Liz & Co., DKNY Jeans and Kensie, all increased sales in full year 2008 versus 2007 exemplifying the strength and strong product offering of these profitable brands.

The ongoing component of the money brand also grew sales and achieved attractive profitability as well. Recall that we discontinued Monet 2 at JC Penny last Fall.

Adjusted operating margin performance in the partner brand segment was down significantly year-over-year to negative 6.2%, reflecting declining traffic, the key department stores and high promotional activity. In addition, as we've described in the past, the Liz Claiborne outlets are a major driver of the pro results for the brand. The corrective answer here is all about product.

We look forward to tapping the inherent upside of the dramatic product turnaround in both apparel and accessories with new design for outlet product inspired by Isaac's team, product that will we'll begin flowing to the outlets in the third quarter of 2009.

On our last call we described basic improvements of these Liz outlet stores including a modest capital spend to freshen up the stores in order to support improved pricing and margins. As we cut back our 2009 capital spending we slow the rate of spend on these stores.

Therefore, we now plan to have 15 doors fully updated by June 30th. And will assess the results as the Isaac design for outlet product flows, we will then meter the capital expansion prudently. Nonetheless on a long-term basis we see the operation being a critical part of the profit expansion model for Liz Claiborne New York.

Brands like Polo and Tommy are good examples of how to properly size the sales and profits between carefully managed wholesale distribution channels and a vertically managed all design for outlet business.

So, overall, we're obviously not pleased with the segments 2008 performance, but while we maintain a cautious outlook in the wholesale environment we are extremely encouraged by the initial sell through rates of the new Liz Claiborne New York line and are working feverishly to ensure a successful launch. You will hear more about this from Bill later in the call.

Slide #12 titled 4Q '08 Balance Sheet and Cash Flows. We could not be more pleased with the results of our working capital management throughout 2008. Accounts receivables were down 23%, reflecting our intense focus on reducing day sales outstanding.

We ended 4Q '08 with inventories down 14%. Our total debt to cap ratio was 59.6% compared to 36.9% last year. The significant increase primarily reflects the impact of the year-end 2008 non-cash goodwill impairment, which alone accounted for 90% of this increase.

Cash flow from continuing operations over the last 12 months was $204 million. Despite the tough environment and our negative 4Q earnings this still generated an enormous amount of cash last year.

Capital expenditures were $194 million for fiscal 2008. Most of this capital spend was dedicated to the net addition of 139 specialty and outlet stores. When the retail environment started to deteriorate last summer we reduced our 2008 CapEx budget.

But more importantly, as we noted during our third quarter call, we planned to reduce fiscal 2009 CapEx by more than 50% versus fiscal 2008. Given the tougher environment, we have further reduced our 2009 CapEx to $60 million to $70 million. The significant reduction versus last year further strengthens our 2009 liquidity position and enhances free cash flow.

Our next slide titled 4Q '08 Inventory. We continue to aggressively reduce inventories and ended the fourth quarter with inventories down 14% compared to 4Q '07 and down 22% versus 4Q '08. Direct brand inventory increases were in line with this expanded retail footprint while partner brand successfully reduced SKUs, managed in-flows and reduced ongoing levels.

The Liz Claiborne brand in particular was highly focused on reducing its year-end 2008 inventory levels in order to maximize our first quarter '09 launch of a new Liz Claiborne New York line.

Slide #14 Debt and Cash Forecast. We ended 2008 with $744 million in debt, which is below the $750 million to $775 million range we guided on our third quarter earnings call and fully $144 million less than year-end 2007.

We are highly focused on deleveraging the company and have successfully reduced total debt in 2008 and we will continue this trend in 2009. We will utilize 100% of our free cash flow to pay down debt, and plan no share repurchases or acquisitions in the near and medium term.

Lastly, Slide #15 titled Amended and Extended of the Bank of Credit Facility. We ended 2008 with bank debt of $234 million. The amended facility eliminates two of the previous covenants, the leverage and asset coverage ratios and revises and reduces the fixed charge coverage ratio.

The reduced revolver size from $750 million to up to $600 million reflects our smaller revenue base as well as our successful deleveraging of the company. This amendment and extension through May 2011, along with the additional cash infusion from Li & Fung and the tax refund I mentioned earlier, should provide the liquidity and stability we need to get through the next 12 months.

Obviously this is based on our current projections of cash flow and availability under our amended facility, which now is a variable borrowing base. Given the economic uncertainties we're operating within and to ensure long-term vitality we continue to evaluate additional measures to enhance the liquidity as we move through the year. Thanks for listening.

And now, I'll turn the call back over to Bill to discuss our perspectives on 2009, and operating priorities for this year. Bill?

Bill McComb

Thank you, Andy. I guess I'd like to make one more point about the performance of our retail businesses in the fourth quarter. While the fourth quarter results that Andy just shared revealed significant margin pressure, I think it's worth noting that in terms of brand execution, we saw conversion rates go up at Kate Spade, Lucky Brand and Juicy.

In addition, unit per transaction were up as well. It was the big hit in overall traffic that hurt us as well as the average unit retail and average dollars per transaction resulting from a very promotional environment. The brands are converting their consumers, launching new product category successfully and yet managing inventories very responsibly.

So, where are we headed in 2009? The lack of visibility into the next ten months makes it very hard to provide earnings guidance for this year. That said we can share with you how we're thinking about the year and planning the business.

We have a plan that calls for continued retail traffic declines year-on-year and AURs that mirror the trend in the fourth quarter pressuring comps to roughly the same levels that we saw in the fourth quarter, minus of course, the effect of the Christmas push in late December.

We're assuming these levels persist throughout 2009. That would produce comp declines in the 15% to 25% range for the three U.S. based Direct Brands in the first, second and third quarters. These comps would begin to flatten toward the end of September when the current trend began.

In terms of cost and SG&A, there are few important call outs here. As Andy indicated, while we will only be opening 12 new stores in 2009, our SG&A cost this year include a full annualation of the 126 new Juicy, Kate Spade and Lucky Brand stores added in 2008.

So, given our comp and revenue assumption, not only did we develop a conservative allocation of working capital, by brand, by quarter for 2009, but we also launched another significant cost reduction which we announced back on February 5, totaling about $70 million this year.

We believe all of this translates into an adjusted operating loss in the first half of the year and a positive adjusted operating profit in the second half. In the first quarter, we will report a meaningful loss with the incremental store base in our SG&A and minimal benefit from the February cost reduction initiative flowing through.

I believe our internal projections and models are realistic not banking on improved traffic but managing liquidity and maximizing the availability under our new bank credit facility that Andy just described are clearly job one. Our 2009 operating priorities reflect that. Cash flow and liquidity are enterprise wide objectives shared by virtually every associate. Incentive systems and goals reflect that this year.

Brand execution is a close second, though. And in this climate, our brands are using market research, listening to and observing their consumers and getting very creative about our offering. I'll give you some examples in just a few minutes.

And cost management is key this year too. I don't just mean the cost reduction we executed this past month, I mean, ruthless management of discretionary spending categories all year throughout the company, as well as additional cost out in some areas.

In addition to successfully executing all of our brands, we are very focused corporately on the turnaround at Mexx. While we were on the wrong track with our product efforts for Fall 2008, I believe we are now moving in the right direction with the repositioning that I'll describe. I'll address those actions and progress later in the call.

And of course, our re-launch of Liz Claiborne New York, which is just now hitting stores is a very important priority for us. We're excited about the metrics so far, the trade response and believe the approach with outlet that Andy just described offers tremendous profit upside.

So, when I talk about executing our brands as a major priority, of course, I'm referring to our retail dashboards, margins and sell through rates as an example. But equally important is somehow finding a way through all the economic turmoil to be even more relevant as brands to our consumers, while staying the course on the core, long-term positioning of these brands. We are of course doing this first and foremost by focusing on great product. Special, exciting, new, and smart from a value perspective.

Our teams – for our teams, brand execution centers on these five concepts. Assortment in mix shift, price point recalibration, inventory management, traffic generating promotions and what we refer to as capital like growth. While this is an extremely important part of our company performance, I will only summarize a few of the initiatives to give you some of the ideas of the kinds of changes and action that we're taking in the brands to face these tough times.

For assortment in mix shift it's all about productivity at retail. Moving our inventory investment to categories that increase conversion rate and gross margin dollars. For Juicy, we are expanding the role of intimates and lounge wear while discontinuing the men's business. At Kate Spade, we're launching a key item apparel business in the Fall and further expanding the jewelry business, which got off to a sensational start in the fourth quarter.

At Lucky brand they're nearly doubling tops as a percentage of the total assortment and introducing new entry price T-shirt programs and a Solet's program for women's tops. We also have rethought opening price points and their penetration in our lines.

At Juicy, we're increasing the number of fashion items with what we all opening price points by 40% for Fall. For Juicy accessories, where we have always had good opening price points, we will increase the penetration of these items by 25%. Lucky Brand will offer more Solet's, with opening price points like $25 and a basic jean with a great wash and good detailing for $99 making up 25% of our denim inventory.

On all the brands, we're rounding down price points that go beyond new consumers price sensitivities like 225 to 195, as an example, this is especially true at Kate Spade where our key price points range from $195 to $395.

In 2009, we will see growing concentration in that range. I think it's important to note that our merchants are not commoditizing their product. On the contrary, they're looking to offer more or less where they can. We're seeing a lot of creativity for the Fall and holiday seasons, our designers are bringing a lot of inspiration, at the same time they're being practical about every day pricing.

The inventory story continues along the lines of the past year. At wholesale our partners have dramatically reduced their open to buy dollars, taking a very conservative approach to summer and fall. We're doing the same in our own stores and this is where conservative forecasting becomes key. Our teams are working with working capital targets and have incentives to manage inventory turns.

With the addition of compelling opening price points in our lines, we plan to use more traffic generating value offers on certain items in the store, like specific track suit offers at Juicy and cross rough offers at both Kate Spade and Lucky. Cross roughs are value added offers on purchases of multiple product categories. Like a value offer on tops with a purchase of bottoms or a value offer on jewelry with a hand bag purchase.

And lastly our brands are identifying capital light ways of growing through strategic partnerships. Our U.S. based direct brands have significant untapped opportunity in markets all over the world. In some cases we have partners in place, in other areas we don't. Juicy, for example, will now be partnering in Greece and Mexico and developing a very aggressive travel retail program.

We're looking at where product licensing makes sense. Lucky Brand for instance will be lunching footwear at wholesale via the Camuto group this Fall and we're look at similar deals on other brands as well.

Another important component of our focus on brand execution is the recently announced Li & Fung partnership, where we have signed them as our exclusive agent for sourcing on all brands, on all product lines, except jewelry. We've talked about the possibility of this happening and as we said last week, a few factors drove our decision to make this move now.

The early view of the impact at Mexx and how that would translate to all our other brands combined with our challenge to address margin compression at a time when the marketplace is driving down AURs, all let us to conclude that our brands are best served by changing the management and oversight of our vendor interface.

Li & Fung's expertise in managing and developing vendors was clearly becoming, in our view, the best practice. Changes that we were attempting to make with our own management structures and systems were only aimed at improving toward that benchmark.

We're not – we're not a group here that struggles with change management, I think that that's clear nor are we group that let the grass grow under our feet. These are – these times call for reassessments of our business models, of our go to market approaches and of our sources of competitive advantage.

This partnership reflects aggressive action to access best-in-class systems, management and talent, tapping into an even broader base of regions in the world for compelling product. It also reflects a drive for enhance going in margin and improved speed to market models.

We said that the deal is G&A cost neutral after restructuring although these costs become variable as opposed to fixed. It's clearly cash positive and in terms of COGS, we're planning for it to be margin accretive for holiday 2009 and beyond.

We've said 1,000 times that we all share the goal of maximizing cash flow and liquidity. Here is a list of actions we've taken and actions we are currently pursuing to expand the availability of our bank credit line revolver. Andy has discussed already the items that we've completed, but look the list goes on.

We're currently converting all of our trade letters of credit to open account. $40 million of trade LCs at the end of 2008 will be reduced to nearly zero by the end of second quarter. We're looking to monetize our real estate portfolios. Selling the Mt. Pocono, DC and doing sale lease backs of New Jersey headquarters and the Ohio and Rhode Island distribution centers.

And we're synchronizing our trade payment terms with our manufacturing vendors, moving from an average 15 days payable to a strict 30 days payable policy across the board. And lastly we pulled the trigger on $70 million in cost reductions as we've said for this year and we're eyeing additional ones.

Let's update the record now on our total cost reduction program and re-investment initiatives. In 2007, SG&A was almost $1.9 billion and we're now projecting 2009 SG&A of just over $1.6 billion. Total cost reductions reached $450 million across corporate services, partnered brands and Mexx.

Now, to compare where we are versus the July 2007 goal of $265 million in savings, we have to look at the savings apples to apples, associated with the portfolio that we're now calling ongoing brands, netting out the cost reductions associated with disc ops.

Of the $450 million in savings total so far, $325 million are associated with the ongoing brands portfolio. And that is what you would compare to the July 2000 target of $265 million. So we've cut $325 million of SG&A versus a goal of $265 million. These SG&A cuts include the elimination of approximately 2,700 positions including a significant de-layering of management here.

Closure of six distribution centers, office space consolidation around the world, discretionary spending reductions or eliminations and most recently a company wide merit freeze in 2009.

The chart here shows that we re-invested $200 million back in a retail expansion, funding over 140 new doors for the Kate Spade, Lucky and Juicy brands as well as the needed infrastructure to operate this extended – or expanded platform in clearly greater marketing dollars.

In addition to the cost savings, we've improved our operating model through partnerships. First we achieved a lower risk capital efficient revenue model for cosmetics and fragrances by partnering with Elisabeth Arden and now we've moved to a variable versus fixed cost structure by partnering with Li & Fung on our sourcing function.

As we look forward, we'll continue to reprioritize to challenge our cost base and our business model and above all to reduce our G&A percent to sales.

At Mexx, the story should be somewhat familiar, this is a business that has two distinct performing units. Mexx Canada and Mexx Europe. It's the Mexx Europe business that has suffered, specifically the home turf markets of Western Europe, Benelux, France and Germany.

The business historically operated at depressed single digit margins. They ran a very complicated business model spanning traditional wholesale, high street concessions, franchise partnerships, licensed partnerships and owned retail.

A bloated cost structure impaired operating margin and the SG&A was typically spent in all the wrong places. Their expansion over time was marked by an undisciplined distribution strategy and the sourcing capability didn't keep pace either, hence our early move to Li & Fung with this division as our corporate pilot.

As if all of that isn't tough enough, changes to product styling started back in 2004, slowly began to alienate the core Mexx consumer. Our own efforts to improve last year were also missing.

But here's the universal truth of this brand. In the markets of continental Europe, that are home to Mexx, this brand is still very special to the consumer. Research shows that awareness in brand attribute rating are very competitive in spite of what the consumer acknowledges is disappointing execution in stores and product.

The efforts to turnaround the Mexx business are significant. We've been working hard to return this business to profitability and growth. 2009 again will be a transition year and we anticipate that Mexx Europe will be roughly a break even operation, assuming all new pressures in the historically profitable Eastern European division.

Since we last reported earnings, we have hired a new CFO, a new Chief Merchandise Officer, a new VP of Sourcing and Supply Chain, a new VP for Eastern Europe and we've promoted a new Head of Retail Operations, all top flight seasoned executives. Our search for the CEO is well underway and I cannot make any further comments on it at this time, except to say that some of the most experienced and talented merchant leaders in the business have expressed interest.

Tom Fitzgerald has accelerated the cost reductions and redeployment in spending there in the meantime. We have move forward with the closure of the UK retail stores, we recently announced the exit from Italy, we shut down the Well Being product category and we've started to rationalize retail partner store formats. Tom is essentially remodeling the shape of the company putting more emphasis on merchandising, product development and retail operations.

The Li & Fung transition there has introduced new thinking about speed to market models, calendar discipline and product and margin improvement for a Fall 2009 complete reintroduction of the brand.

As we do all this, the 2009 business plan, like I said, assumes a roughly break even business at Mexx Europe. We have assumed unimpressive comp trends as we move through current product with clearance pricing impacting both AUR and overall margin. But the new look for the second half of this year, the new assortment, the new experience, it's all vintage Mexx, literally borrowing the best of the past and applying it to today.

We are starting by reintroducing a heritage logo and selling – and a selling line that you see here, that summarizes the zesty, sexy, youthful, casual, fun loving, international, contemporary positioning that put the brand on the map in the first place. For those of you that view – that are viewing the support slides, there are some images from the new campaign that should give you a sense for the product direction that we're headed.

While product has migrated to a clean – in the past, migrated to a clean career focus, almost American aesthetic, we are now returning to a look that refer to as more twisted. Meaning eclectic, corky, more casual and more definitively international. In other words, more distinct, more fun.

In terms of our other great turnaround project, we are just now hitting retail with our restaged Liz Claiborne New York product. There is still a significant clearance environment from Fall and holiday 2008 on the floors in the apparel departments at Belk, Macy's, Dillard and Bon-Ton's. So, if you walk into one of the departments, you will see both old and new Liz Claiborne product and that's true for nearly every brand in the Missy zone.

We started shipping accessories in early February and apparel shipped later in the month. We have installed six full brand shop in shops which integrate both accessories and apparel on route to 50 by the end of April. For those of you in New York City, Macy's Harold Square opened yesterday on the fifth floor, stop in when you have a minute.

As Andy indicated we have not yet transformed the outlet doors. We will redress 15 doors of the 93 doors by July the 1st and design for outlet product will flow after that to these doors.

And finally, we launched a new Web site in February that features the product, Isaac himself and a full line commerce engine that will be added to the site in May.

The marketing campaign began with a bang in February with powerful editorial features in Vogue and the Opera Magazine and more to follow. The advertising includes InStyle, Harpers Bizarre, Glamour, Elle, Southern Living, The New York Times, the current issue of Vogue, which shows the entire new Liz Claiborne line in box features. The Opera Magazine, again and other regional publications, but a significant component of this marketing campaign is invested on the web.

The in-store visual packages are just now shipping, they're not in stores yet, they're on their way, with vivid clear signage like you see here for those of you that see the slides of new brand logos, new flags and Isaac imagery. Isaac's personal appearances program will also begin soon and will be paralleled in other markets with Tim Gun hosting events to introduce the line as well.

Inventory this quarter is down 23% versus the same period a year ago despite our improved position, first quarter margin will be pressured by our accelerated holiday clearance activity at retail. We barely have a readable data at this point, but in early view and accessories where product has been on the floor for nearly four weeks is very positive. Hand bags are up 4% versus same period 2008, small leather goods are up 13% and jewelry is up 22%.

With apparel really just hitting the floors in the past two weeks, here is what we can say. We've had the first three orders of regular price fashion in five years on the brand. Early best sellers are those fashion items that are featured in editorial and advertising like cardigans, knit tops, dresses and denim. These women are buying the kinds of items that we had not been successful selling in many of our – the past years, but items that had originally defined the brand in its early days.

In the shop in shops that we've opened we're seeing 25% to 40% sell through lists across the line versus non-shop doors, delivering a double-digit increase in average unit retail prices. As I said, we'll have 50 of these shop in shops open by the end of April.

Now, for those of you viewing the speaker supported slide here are some images of these shop in shops, this one at Belk at South Park mall at Charlotte North Carolina. Here you're seeing the brand in its full glory with accessories integrated with apparel. There is another shot right there. Looking beautiful. Great reactions from store management in all these accounts. So, that wraps up our formal presentation. Andy, before we get to Q&A, would you like to add anything about the outlook for 2009 and our approach?

Andy Warren

Sure, Bill. The priorities for the year are extraordinarily clear. We're going to, one, need to control the controllables, cost, inventories, CapEx, two, enhance the liquidity to deleverage the company, and three, drive exceptional capital light brand execution. We will absolutely deliver on these commitments this year. Now, questions.

Bill McComb

Yes, great. So – so Julianne, let's open it up for questions.

Question-and-Answer Session


Thank you. (Operator instructions) Your first question is from the line of Omar Saad with Credit Suisse.

Bill McComb

Hello, Omar.

Omar Saad – Credit Suisse

Hi, thanks. Good morning. Bill, I was hoping if you could walk through kind of the Li & Fung decision process. I know you started with Mexx, and I don't know that you've even had a chance to learn much from that relationship on the Mexx side and then the decision to kind of blow it out for the whole company. What were the, kind of the pros and cons as you went through that decision process and where do you think this takes you? From a longer term perspective, how does this change – fundamentally what Liz Claiborne is as a company?

Bill McComb

Well, yes, okay. We'll get to the last part of that. I don't think it changes anything to be honest with you. I'm a little surprised by the market, the general market places understanding of what these sourcing functions do and how they work. Take it from the top. In fact, you should know that we had visibility to a significant amount of what I'll call improvement, already in a very short window with Mexx. What you all should know is, that in a very short cycle, of what I'll call sourcing or the tendering process for a given season, the ability to improve cost of goods sold becomes very apparent. Also their processes of how they go about using different regions in the world, to basically double source or triple bid, if you will, a given product line, it absolutely became very clear to us that, that their tendering processes were far more aggressive and very advantageous to us.

Add that to the fact that as I said, the marketplace in general is putting significant pressure on AURs. Whether you think we're bearish in our view of 2009 or just realistic, any model that you would have for the business would suggest that there's going to be big AUR pressure, which really steps up the need as we say to do more with less much faster and really deliver value to the consumer. And with the early line of sight that we had to Mexx and the fact that, as I said, the changes that Peter Warner began implementing with the divisional VPs of sourcing, we began to conclude, very clearly, that Li & Fung is the benchmark, that they have the best practice in vendor management and vendor development. And if we were going to spend a lot more time and money working and pushing the issue, all we would be doing is attempting to get to the level of Li & Fung. Li & Fung specializes in apparel sourcing.

And while this was clearly a driver of competitive advantage for our company in the past, I have said prior to this announcement that we had a growing concern of the ability of that group and that investment, that big fixed cost investment to actually drive competitive advantage. I think it's become an emotional consideration for companies more than an economic one. You raise the question, what does this mean for the company of Liz Claiborne? Here's what you need to know. We still have – very importantly we have sourcing VPs of production in attached to each of these businesses and in no way is that an outsource function. The decision around the – the final decision around a vendor matrix are country of origin strategies, clearly, our compliance standards, the tech packs are built and designed by designers.

We hand over tech packs, which provide all of the design specifications, including quality levels and the accutramal or embellishments of the product in fabric. And from there it becomes a – the tendering process itself, it's all about getting the highly fragmented vendor world to deliver a given spec at a given price target on time at the quality levels that we want. And we have found, Omar, that it has gotten increasingly hard for our brand focused executives to get their arms around and intimately manage those processes all the way over in Asia. We had five offices. It was an expensive network. They were talented people, but the process only runs as good as the connection, if you will, and the management oversight of those teams.

And one of the things that you get with Li & Fung is, is literally layers of management oversight over that process that assure – I'm going to say better objectivity in the tendering process. I also think that it's that increasingly this notion of wanting a broader more diversified global platform surprisingly Li & Fung, which is, as you know, headquartered in Hong Kong, has a global base of manufacturing vendors that are actually less reliant on China than our own current network. And while there is an 80% overlap of our vendors with theirs, the way that they execute and manage in the regions, simply it beats the processes we had.

So, the bottom line answer to your question, I don't think it changes at all our view of how we create value. The – I'm saying in the world of core, context and hygiene activities, we believe that what we are is we are a design merchandising and brand marketing company. We are about brand labels. That's what we're about and we are not in any way giving up a core responsibility for what our product is and how it looks. I think we're just bringing to the table the best most professional management of the vendor management and sourcing process.

Long answer, but, Omar, in short, look, back in November what I have guessed that we would do this by now, well look, clearly, clearly we had gone into the Mexx deal in some ways thinking about it as a pilot that we would want to learn from, but the environment that we've described and the need to press, to relieve pressure on AUR says, let's – let's move into this now.

Omar Saad – Credit Suisse

Got it. And then as I think about it from a financial perspective, you get the upfront fee, they collect a fee on top of the revenues, but at some point sound like later in the year, the cost structure still actually improves even with the fee you're paying them from where you used to pay?

Bill McComb

Well, I like to separate out the G&A cost of what we pay in commission versus what our G&A cost run rate was and for purposes of clarity we refer to that as being neutral. And from a COGS perspective we absolutely positively believe and have now empirical evidence that they will be an important driver of margin improvement for us and as soon as holiday 2009.

Omar Saad – Credit Suisse

Got it. Got it. And then follow-up, the uses of the cash you guys are generating here with the tax refund and the Li & Fung deal, Andy, if you could talk about what the priorities are, is it just preserve it in the balance sheet? Pay down debt? How is the interest expense structure changed with the new debt deal in place? Can you kind of help me understand some of those moving dynamics on the balance sheet and from a financing perspective?

Andy Warren

Sure, Omar. Our focus is on deleveraging the company and paying down debt. All of these cash good guys initiatives we've been pursuing whether it be the tax refund, this Li & Fung payment et cetera is all going to down to pay down the revolver. So we are going to – to deleverage and continue to pay down debt in 2009 like we did in 2008. From an interest cost perspective, the new ABL deal is a LIBOR plus 500 basis points. Given the peg rate that we're using today, that's a total rate of only about 5.5%. So, this is really not expensive debt for us, even in this marketplace, but the focus is still very much on ensuring long-term liquidity and paying down as debt as much as we can. We just think that that deleveraging over the course of the next 12 months to 18 months is extraordinarily important.

Omar Saad – Credit Suisse

How much debt do you think you can pay down this year or the next – over the next 18 months?

Andy Warren

Well, we're not going to actually provide perspective on that right now, Omar, but these cash triggers that we've pulled to-date and we continue to pursue, are going to all go towards that, that imperative.

Omar Saad – Credit Suisse

Okay. Great. Thank you. Very helpful.

Bill McComb

Thanks, Omar.


Your next question is from the line of Ben Rowbotham with Goldman Sachs.

Ben Rowbotham – Goldman Sachs

Hi, thanks. Was hoping you might be able to share with us some of the things that you have learned through pairing up with Li & Fung at Mexx. And then perhaps if you could quantify, what the word accretion would mean for holiday 2009?

Bill McComb

Well, we definitely aren't going to – I mean, we're pretty disciplined here on this call around not sneaking any additional areas of clarity around you're models. At this point we won't comment on it, and it will vary by brand, but it's real enough to have called it out for you, and I'll say we're very, very – we're running the partnership and our – our people are being incentivized around those COGS improvements, we're absolutely positive we're going to get it. I answer the first part of your question a lot as it related to, the way that – the question that Omar asked, but let me reiterate a couple of the points. Again, you've got at Li & Fung an access to an extremely broad globally diverse vendor base. They are as capable as, as producing the vendors in central America as they are in south China. And I think that just going forward, that's a very, very, very important point. The world is getting hungrier and getting more competitive at this time.

So, the breadth of their network versus our five offices actually became a very important consideration, but what I admired was the built-in objectivity of their approach to tendering versus what I'm going to call, at times, a stock home syndrome capability that – or issue that we ran into in our own offices, where our people so many thousands of miles away from our core brands have built these longitudinal relationships with vendors that I think has gotten in some ways gotten in the way of us retendering at every seasonal period. We're talking about 40 dedicated offices in 80 countries. The culture there is, is they have an incredible service orientation. The talent and management that they bring to the table and the best practice knowledge is really amazing.

But really, this is a world, this is a part of the business that moves very, very quickly, and what you find is a company that specializes in the agency business is more adaptive to marketplace changes than a function varied in an overall company. And I will say, because Omar – Omar suggested that maybe there wasn't a lot of visibility already, just because the Mexx deal was only announced in November. I would just tell you again, those of you really understand this business know, that yes, sure we could have waited a year or two years. I'll tell you what, I think more companies are going to do this. And I wanted to be at the front of the line here with this best practice company.

But what we've seen at Mexx was, we've seen the COGS improvement that I talked about, but we've seen an additionally, Ben, the one value added comment I'll add in here that I didn't to Omar's question was, the level of support that they provide to our designers and merchants, it was astounding to us. They take and look at our line from a tech pack perspective and they brought a lot of value in terms of thinking creatively about how to even do more than what the tech pack suggested around product value at a lower price. And that feedback, back to the design and merchandising team was – has just been absolutely delightful to the people at Mexx that haven't really been used to that. And it's not only process management improvement, but really transforming our models. We've said, we've got, we want to apply a junior cycle to more businesses. Speed to market. And clearly the price value is big. So, there you go again.

Ben Rowbotham – Goldman Sachs

Yes, thank you, those last two points were helpful. And then with the Liz Claiborne New York relaunch, could you share any goals you hope to hit this year? Is that product roles out?

Bill McComb

We're going to talk more about that in May. And in May we'll be able to give you some more concrete results. We have not posted for you either back in October or today – in this call or via these announcements specific goals. What we've told you all is, that as we look at this year, the business was planned knowing that generally speaking, in that tier of wholesale, receipts are down, meaning open to buy dollars – planned open to buy dollars, on average for vendors, are down around 20 – I'm going to say 20%, some cases it's 10% to 15% in some product categories but really overall more like 20%. Given that we've said, what we did say back in October was that, that this is about – our year one is about sell through productivity, what our retailers care about is and what you need to care about is that we sell more at full price, the upside in this company, there’s a bigger swing I think than the analysts have been able to model around what percent of the volume gets sold at first full price or first mark down. We were running a business that was virtually selling at second to final mark down and the profit differences, the gross margin dollars that come in there, provide a much bigger sensitivity than actual top line or revenue management. So, the answer to your question is it's all about sell through rate.

Ben Rowbotham – Goldman Sachs

Got it. Thank you very much.


Your next question is from the line of Kate McShane with Citigroup.

Kate McShane – Citigroup

Hi, good morning.

Bill McComb

Hi there, Kate.

Kate McShane – Citigroup

Can you talk a little bit more about how promotional were in your own retail stores during the fourth quarter and so far this year? And do you think some of the comp store sales decline, for Juicy Couture, I'm thinking in particular, was the result of your competitors – I'm sorry, wholesalers discounting your brands more aggressively? And how do you deal with this going forward?

Bill McComb

Well, the answer is flat out, yes. I think The Wall Street Journal article The Chronicle the Saks 70% off phenomenon, I think it said it all and it summarized it from not only the Saks point of view but other wholesalers point of view. Owned retailers impacting just on vendors in general. There is no question. The best place I would point in the deck that we just presented, Kate, is the page that I think it was page 16 of the deck that where we give you more visibility at Kate, Lucky and Juicy to the retail KPIs. That gives you a breakdown underneath the comps. It gives you the components of traffic, conversion, UPT, AUR and ADT.

What we said was, we were able to – we were able to significantly – by 7% at Juicy, 22% at Kate and 7% at Lucky, increase conversion, which was great. And the units per transaction went up. I think that we had compelling store environments. The story is definitely around our response to the whole – the highly promotional wholesale environment. And while we didn't do it, even handedly in every store across the chain, we started in the months of October.

The Wall Street Journal story, which chronicled the November decision for the 70% off at Saks didn't talk about the September 40% off sales that started there and that were prevalent in early October on brand new Fall goods. And that, in fact, was affecting us then and how our merchants responded, they did what they had to do in malls or locations that were co – where we had a store co-located with a wholesale point of distribution that was doing that. But as the article pointed out, it got pervasive everywhere, in the middle of the mall, at the end of the mall, at all tiers, really by early November.

And so how do we insulate ourselves going forward? Well, the biggest point I'll make is – I mean, you don't 100% right? But the biggest point I'll make is that the process and systems start to normalize itself. The biggest trigger for that was the desperation of those wholesalers to make up for what ended up being significant overbuys for holiday and Fall. And even though many of us in our June, July, August conference calls with analysts talked about how we were trimming inventory on the wholesale side receipts for the back half of the year, what ended up happening post-Lehman Brothers collapse, the step wise changed – the step function change in demand, all the sudden revealed to everybody in their dashboard that they were way too heavy on inventory.

And so the biggest answer to your question is that I think the system is going to write itself in that we know what wholesalers, especially in that precious, tier one zone, they're not only bringing their open to buy dollars in the inventory levels way down, and I mean, down, they too are assuming the kind of, I think comp levels that we're talking about. A continuation of what I'll call that, that fourth quarter ex-Christmas trend, I think that's going to help a lot. In the meantime, our first line of defense promotionally is what I called the cross rough phenomenon and the every day opening price point concentration in our assortments.

So, you never inoculate yourself from it 100%. I think that the system itself will. I don't think that we're going to have – I don't think it's going to be like that this year. That said, the business plan that I've described to you assumes that kind of environment that, that we saw in the fourth quarter all through the year. And we just think that with – when you plan and forecast your business that way, it affects your working capital, it effects how you think about inventory terms and margin.

Kate McShane – Citigroup

Okay. Great. And then if I could just follow-up on one thing that you said. I know you're not giving guidance today, but is there any more color you can give around how the mix change in your stores by increasing the number of opening price points is going to impact your margins?

Bill McComb

I don't think, I honest to be – very honest with you, I don't think that I can. The intent there is, is to limit the exposure to the consumer. It's about being brand right. It's about limiting the exposure of percent off discounts, but hitting price points that feel intuitively comfortable and right for the consumer. And I'm really pleased with our merchandise planning and allocation teams work with our merchants on engineering and figuring those things out and doing it in a way that's right from a margin perspective, but I can't honesty tell you. There are too many moving parts in the model to be able to say and that component would account for blank.

Kate McShane – Citigroup

Okay. And do you see any risk at all – and I apologize because I haven't seen what this new product would look like at the opening price points that the brand could get too basic if you're skewing more towards the opening price points or –?

Bill McComb

Oh, I'm not worried about that at all. I mean I'm talking – we – we're – the $99 jean that we had – we've had and it's done extremely well. It's absolutely brand right. Brand right comes first. That is what this is all about. It isn't a miraculous down featuring of product. In fact, it's about sensibly expressing the brand and offering. The other thing that I'm not telling you is, in some areas our merchants are actually going up in price point, but they're doing it with a smaller component of the line. I mean, in the Liz line is doing that.

The Kate Spade line has broken into some new upper end price points, but when you look at the buys and the pyramid, if you will, you're seeing a greater concentration of our buys at some of the opening price points, but it's – I use Juicy accessories as an example, we've always done very well with what we call opening price point hand bags and small leather goods there and we'll continue to do that. You just have to know that, the whole challenge for our brand like I said is to emerge more relevant and yet extending and growing the long-term core positioning of the brands. So, I don't think there's any risk in it at all.

Kate McShane – Citigroup

Okay. That's very helpful. Thanks so much.


Your next question is from the line of Jennifer Black with Jennifer Black Associates.

Jennifer Black – Jennifer Black Associates

Good morning.

Bill McComb

Good morning, Jennifer.

Jennifer Black – Jennifer Black Associates

I have a couple of questions. So, I guess I'll start and – do you want take one by one?

Bill McComb


Jennifer Black – Jennifer Black Associates

Okay. It seems like this could be the perfect time for Isaac because of bridge disappearing and I wondered if you could comment on this and the attitude of retailers today when they saw the product versus when you first launched it?

Bill McComb

Yes. We'll let Dave talk about that.

Dave McTague

Hi, Jennifer, thank you for the question.

Jennifer Black – Jennifer Black Associates

Hi, Dave.

Dave McTague

I think, personally, you're 100% right. And that's part of the core stratology of bringing Isaac in. What we're finding is and to Kate's earlier question that it's not about commodity here. This is about fashion and even in some of the initial selling points that we've seen, what is driving this consumer right now is what is absolutely special. Our relentless pursuit of tremendous price value quality, speaking all the way through to our Li & Fung relationship is what's going to make this competitively correct within each of these retail stores. So, I agree with you 100%. I mean, that is the idea behind Isaac and I think as you get east here and walk Harold Square, I think you'll be blown away by what this content is and that's been the consistent message.

Bill McComb

Where would you direct her on the west coast at Macy's west?

Dave McTague

Well, Valley Fair will be putting in a new shop within – this month so certainly we can do it there, and we can go from there also, outside of Seattle as well.

Bill McComb

Jennifer, my only comment is, we don't see bridge going away. We see traditional bridge giving way to contemporary bridge. And what I think – we think that the better floor really needed in those better price points was a feeling of luck, a feeling of quality, but being true to the better price zone and not merging it up into the bridge price zones. But more importantly, I think the call out is what Isaac calls that forever 35-year-old woman, the sense of a youthfulness and contemporariness, but with a traditional – what I'm going to call, a traditional body fit. The Liz Claiborne business whether it's the pants, the denim, the tops, fit is absolutely key and yet it there is something there not only just bright, something very – what I'm going to call – what feels more contemporary and youthful, but without feeling like it's being targeted to a younger woman. So I do think that the timing is right and the environment is right and it's the coincidence of women wanting more of that contemporary – access to that contemporary look and feel and needing to be in the better price zone.

Jennifer Black – Jennifer Black Associates

Okay. But okay you said that you had 50 shop in shops and I wondered how many doors – have you said how many doors you're going to go into versus when you first launched Isaac?

Andy Warren

Well, we had – we're in approximately 1,000 doors. Certainly as you go from the various departments, you're covered in missy, petite, as well as women and then additionally, obviously, in accessories and hand bags and small leather goods and jewelry and footwear growing now. Our intent was, to Bill's earlier comment, to be very, very restrictive in how we're approaching this market-by-market. Our clear intent with our retail partners is to partner with the dominant retailer by mall. And whether it's South Park mall with the Belk family or it's here in New York City with Harold Square or in with Milwaukee with Bon Ton, or in Little Rock or Dallas with Dillard's. I mean, certainly mall by mall we know them intuitively, we want to win in each one of those markets. I think that will also help us to do better assortments and broader assortments for this woman and it will also have some impact on what has been a nearly reckless competitive situation where in the years back between the Tommy, Polo, Ralph scenario, you could blind fold the consumer drop them in a mall and it's a price war, which corner am I going to too. We don't believe that that's brand accretive and we will manage our business – we think there's more upside in deeper penetrating with a winning retailer by mall than it is to sell more points of distribution and we believe that very strongly.

Jennifer Black – Jennifer Black Associates

Okay. Got it. And then I wondered if you could talk – you didn't comment on Dana Kohl's, I saw the ad, the television ad that was great, that they did.

Bill McComb

Oh my God, it's great. Dave, tell her.

Dave McTague

Well, as I'm not on the Kohl's call, which would be we're cautiously optimistic, I'm on our call which we're pretty excited. The sell through has been fantastic. I think if you've been in any of the stores, you've seen the set up is spectacular. It goes back to those three critical pieces that we always talk about, it's product, presentation and price value, equals that demand creation, and I think as we are advertising and collaborating with Kohl's and putting the mailers out, the television campaign has been spectacular. The product is absolutely delivering on that equation. It's spectacular.

Bill McComb

And I'll adjust one more thing for both my friends, Omar and Ben, one other line of sight we had in the Li & Fung, that is going on now for the past six months was if you recall our license agreement with Kohl – in our license agreement with Kohl's, we developed the product. We hand over the tech packs and Li & Fung, who is the exclusive sourcing agent for Kohl's, develops actually sources and makes the product. That was another major data point to us. We are so delighted with their execution of our product design that our people were saying, "My God, how did they get that for that?" And that's, that's accurate into the timing of this decision and it was coincident with the insight from Mexx as well. But for those of you that haven't seen it, you should go see it. It really goes back to answer your question, Omar, "What is it to say about what we are going to be as a company." There is a case where we repositioned a brand into a different price zone and the execution is absolutely outstanding. Really proud of it.

Jennifer Black – Jennifer Black Associates

And then I have two follow ups. Can you talk about which channel of distribution you expect to see more traffic over the next six months, outlet versus mass versus department stores?

Bill McComb

Well, I think that – I mean it's a tricky question, because I don't think it's as clean as just channels. If we were to just paint with broad brush strokes we would say, outlet, outlet, outlet. But it isn't that easy because you can look within a given channel and see that, that some concepts are winners and some concepts aren't and so it's a lot lumpier than that. I mean conventional wisdom says, that outlets are going to win the most, and the tier one, the Saks, Neiman's, Bloomie's, that they'll be the softest and that second tier is probably going to have comps that look more like between 5% and 10% off. But it's deceiving, because in there, there are partners that are getting better comps through really, really aggressive compression or depression in AURs, so.

Jennifer Black – Jennifer Black Associates

Okay. Well that's why I asked the question. And then lastly, where are you on the fit specs with Lucky on the bottoms, are you happy with the new fits?

Bill McComb

Yes, for Fall, very, very, very, very happy.

Jennifer Black – Jennifer Black Associates

Okay, great.

Bill McComb

Very happy.

Jennifer Black – Jennifer Black Associates

Thank you very much. Good luck.

Bill McComb



Your next question is from the line of Bob Drbul with Barclays Capital.

Matt McClintock – Barclays Capital

This is actually Matt McClintock [ph] filling it for Bob Drbul. I have two quick questions. The first one, Bill, can you perhaps tell us a little bit about how you see the new Liz Claiborne collection fitting into the My Macy's reorganization and perhaps also add some color as to Juicy and maybe Lucky?

Bill McComb

Yes, we love My Macy's and we love it because it actually – we think it's a critical component of a strategy of nationalizing. There really was no question that the ability for – for that organization to get the kind of return on investment of a cost structure of 7 divisions or 4 big divisions, it just, it probably wasn't there. What we like about it is that it, we think it redemocratizes the roll of a given brand in a given store.

And what I mean by that is the buyers and the merchants are overall – they're pretty smart and you'd be surprised at the, what I'm going to call the overlap in the past between different Macy's divisions, at least with our brands as it related to the buys. But what My Macy's does is, first of all, what I commend it for is it is putting back in the culture at Macy's, an incredible focus on sales increases and driving comps. And you hear it in their culture, you hear it in their systems, and I think it's just great, because there's less of a focus on receipts and inventories and this and that, and they're beginning to shift now to this point that, that what's going back out the front of the door.

I'll remind you, now keep in mind, Macy's is at – we're at a point now, where Macy's is, I want to say, in the 10% of our overall business, so I remind you guys of that because sometimes when you write these reports, you think that Macy's is 40% of our sales. But we think that as it relates specifically to your question, the launch of the Liz Claiborne New York line, we think that, in fact, we've said, we've been cautious about saying that there's going to be a miraculous return on the revenue line. We've got to earn back with our department store partners proof that, in fact, the consumer wants it and sell through rate is what it's going to be. But here's the deal, My Macy's, I think, opens the door for an accelerated view to the top of what the consumer uptake looks like.

So, in an environment, frankly, where you've got compelling goods that the consumer wants, and you're earning your way back into the good graces and trying to get a better allocation of floor space and those kinds of things, what could take quarters and quarters and quarters, I think My Macy's is going to speed. Bu it ultimately is about – ultimately My Macy's is about sales and front end and the consumer and the front door and I think it's a great move for us. And I – what, I would just apply that to DKNY Jeans, I would apply to Monet, I would apply it to Kensie. You go into Macy's and you talk to store management, the folks that run the departments in those stores, and these are brands that they love. Our big fix it brand in the U.S. was the core Liz Claiborne business and it's frankly overshadowed your views of the performance of DKNY Jeans, of the Monet brand, of the Kensie brand, so there you have it.

Matt McClintock – Barclays Capital

Thanks. And the second question would be regarding the sell lease backs of the distribution centers and the headquarters is there a – maybe you could talk about it in general terms, but is there a specific dollar number that we might be looking at for how much you expect to raise?

Andy Warren

No. It's Andy. Look there's – those – those properties have enormous value and they're used and they have intrinsic value in the marketplace, but in this market, I will say from a real estate perspective, it's hard to assess that today. We're not going to sell anything for the cheap. We know these assets have value and we know they have long-term capability, so if the deal is right and the economics is right, we'll do a deal. But we're not going to specify what those economics are today. But the interest I'll say is high across all of those assets.

Matt McClintock – Barclays Capital

Alright. Great. Thanks a lot.


Your next question is from the line of Robbie Holmes [ph] with Bank of America Merrill Lynch.

Robbie Holmes – Bank of America Merrill Lynch

Oh, thanks, hi, Bill. Just a quick follow-up question. In – really a question on your 15% to 25% negative comp guidance for all brands for the first three quarters. Can you give us a sense of as you're looking at that, whether you think that will be in line with the market or are you expecting, Juicy, Lucky and Kate Spade to under comp, other specialty retailers and outlet stores during the first three quarters? And then a follow-up would be, I think – I apologize, I think I missed the '09 store opening plans for those brands and the mix of malls versus outlets if you could give me that?

And just finally, and sort of related on the, the partner brand side, I wanted to clarify – I think, Bill, you made a comment about open to buy being down 20% or some cases 10% to 15%. Is that – is that what do you think is going on just for you guys? Or is that the overall industry? And how do you think your open to buy for the next three quarters looks versus the industry, your direct competition over the next three quarters? Thanks.

Bill McComb

Okay. Well we'll take it from the top on the retail mix, two of the – we're opening 12 doors this year. One of them is international and it's a flagship for Juicy in London on of Berkley Square on Bruton Street, a great location, a fantastic store, a market that is very right for Juicy retail given the success of the brand at Sarfages [ph] and Harvey Nex [ph]. Two of the 12 doors are outlet. And – all of them are what I would call, Grade A, premium locations. They – where, even in this dog economy glad we're getting the space that we're getting. And I'm really thankful that we didn't get ahead of ourselves in April, May, June of last year in making commitment for 2009, because we were on plan for almost another 125, but we revisited – we revisited as we went from July to October, we revisited every door, we revisited the adjacencies, we fine tuned the execution and we're happy with those doors.

With regard to the comps here is the deal, Robbie, I don't do any forecasting for our competitors. I will tell you the only texture I can give you is that I've listened to some projections and the way some talk and I think that, that some folks are maybe more bullish than we are about the actual consumer and the credit situation and the impact of unemployment and the news on TV and what that does for consumption functions.

And so, I'm only in the business of actually putting perspective out there on our company. I think that generally speaking we aren't – we aren't Abercrombie as it relates to no promotion policy. I've talked about softening some of our price points in some – at full price in terms of openings and I've talked about some traffic generating value added promotions. We will do what we have to do to manage inventory because we're not going to be stupid. We are not going to be stupid, we're going to convert inventory to cash as Andy said, priority number one is cash. Liquidity, maximizing the borrowing base under our bank revolver. And so – but we're not also the – as promotional as many of the middle of the mall, retailers are. So, you can infer from that what you want on that part.

With regard to partner brands, no, what we're talking about when we talk about, again, it's some categories are slightly different. For example, contemporary, the open to buy dollars are the variance versus year ago at the category level are a little bit better than the average, but I think it's right to say that in general wholesalers are planning their open to buys down by as much as 20% for all vendors. Wouldn't you say, Dave?

Dave McTague

Yes and literally, although we have insight into that wholesale open to buy, the budget – it's across the building, I mean we have areas, like you said, Bill, within contemporary et cetera, they may not take the full brunt of those in some departments, however, the overall building that's what going on.

Bill McComb

And there are big changes in that tier one at Nordstrom, Lord and Taylor, Saks, Neiman's, in those guys in the assortments that they're buying, you're seeing – you're seeing them really buy a more – I'm going to use a word, a more moderate price point within the brands that they're going to.

Robbie Holmes – Bank of America Merrill Lynch


Bill McComb

But that's you can talk to them on their calls about that.

Robbie Holmes – Bank of America Merrill Lynch

Okay. Great. Thank you so much for the color on that, Bill.

Bill McComb



Your next question is from the line of Dana Telsey with Telsey Advisory Group.

Dana Telsey – Telsey Advisory Group

Good morning, everyone.

Bill McComb

Good morning.

Dana Telsey – Telsey Advisory Group

Can you talk a little bit about Liz products going into the outlet stores, how will they be different from what you have in the wholesale channel? And as you think of the environment, if it gets worse given – as you are planning the comps, is there more fat to cut from the operational infrastructure what do you see is happening there? And then lastly, how are you balancing the pricing environment in your own stores versus the wholesale channel of the department stores? Thank you.

Bill McComb

Sure. Okay. Let's, let's – let's see. Your first, the first question was –

Dana Telsey – Telsey Advisory Group

Liz product going to the outlets.

Bill McComb

Yes, yes, product going to the outlet. Andy described the phenomenon really well. I would just tell you that this is – think Tommy Hillfiger U.S., think Ralph Lauren Polo U.S. Actually I'd point it even more toward the Tommy model. The goal is 98% to 100% DFO. So really lets just round it, DFO 100%, we're going to start flowing that in July. So, we're going to manage what I'm going to call the wholesale side, the liquidation needs on the wholesale side, in wholesale, at point of retail, through markdowns. We don't want move goods around. We don't want to reflow goods and we don't want our outlets stores to become too one, one, two, season off liquidation centers. Those stores, we're treating as value retail stores. And I wouldn't even use the word outlet around here. I know we confused a lot of you, because we refer to it internally as the Liz retail division. It so happens that there're 93 outlet stores but they're well placed, in great centers and the capital clean up that Andy referred to, where we'll have 15 done by July the 1st, it will provide a great environment that actually emulates the shop in shop idea of minimalist fixture, bare concrete floors, clean white walls where product is really hero and the assortments are very integrated between accessories and apparel. And the delay, if you will, is, is time because we want the excitement of the line to debut in the wholesale channel and we need some time to get those stores cleaned up. But we believe that the productivity, I mean, that it is – it is still a great unplayed card in terms of how you all model the profitability profile of that Liz line. I don't think you guys have gotten that right, but you guys will work on it and get it. But I would just tell you there's no smoke and mirrors here, look at Tommy.

In terms of fat, I wouldn't – I don't like to call it fat. I would say that with 2,700 positions, the delayering of management, office space consolidations, 60Cs [ph], I wouldn't say that we're – that there's a lot of fat left, but I would say that there is – there is definitely – there are additional cost places that we can and will go. And I'm not even so sure that we are going to wait to trigger it based on a softening environment, our philosophy here, we've been guided from the beginning around a sort of audacious goal of cutting in two and a half years time, $265 million. That – we're apples to apples, we're at $325 and I think that all of these decisions that we've taken around reengineering the business model, get to the fundamental question that Omar asked at the beginning around, what do we see as our core competence, where do we want to have invested resources. And I would say that we will continue to pressure the costs lines with or without increased pressure versus our already aggressive comp assumptions.

Dana Telsey – Telsey Advisory Group

Got it.

Bill McComb

And then pricing, you asked about pricing.

Dana Telsey – Telsey Advisory Group

Yes, exactly. Between the wholesale and the retail channels, with the adjustments to opening price points, how do you see the difference changing?

Bill McComb

Well, I actually see – just so you know, that this is exactly the place that the wholesalers are going to. And when I referred in my comments to Robbie, that in fact, especially in their tier one, like in the Juicy and Lucky assortments, they too are looking for the $99 basic jean. They're – by the way they're going to carry Lucky Legend at $150, which is – at the same time we are doing the basic, we have this incredible Lucky Legend line which is the super embellished product, that even at $150 its – its got what you'd call a $300 premium denim feel and quality to it. But you see, you see the whole environment coming down to – pushing for this price point recalibration. I think the synchronization between the channels is no different than before. Yes, we do custom – custom items, we try in the assortment to separate what – in cases, what we're offering versus what they're offering.

One of our big successes at Juicy is that we have a special track suit program, where what we offer in our retail stores is different than what we offer at the department stores. And within some department stores we give them custom assortments too. But I think that the pricing is basically automatically calibrated in terms of the assortments that we're offering. We seem to be gravitating towards the same place.

Dana Telsey – Telsey Advisory Group

Thank you.

Bill McComb

Thank you. We have – I think we have time for one more question.


We do have time for one more question. And our last question comes from the line of Chi Lee with Morgan Stanley.

Chi Lee – Morgan Stanley

Hey, good morning, guys. Andy, quick question for you, in terms of cash flow excluding any possible impacts from sale lease backs of other asset monetization do you see opportunity for improvement from the 204 level in 2008 in terms of operating cash flow?

Andy Warren

Well, Chi, look, there's a couple of points to that. I mean, obviously, environment is tough and the top line is challenged. And so that's probably the variable. But we've had enormous productivity around cost, that's flowing through on our cost line, our cash line. The tax refund we got last month, that's flowing through in our operating cash line. So, I won't say whether it's going to be higher or lower, I will say that there's a lot of things that we have done and that are already completed, that we know are going to help facilitate really strong cash flows in '09 and also I'll highlight working capital. We've had a lot of success as you know, driving inventory reductions as well as actually getting day – day sales outstanding improvement in the fourth quarter of '08. All those things are leading us to believe that cash flows will be strong in '09. Its the top line that is the greatest question.

Chi Lee – Morgan Stanley

And just on working capital, does having Li & Fung now involved, change your working capital structure at all? Does it actually change the days payable terms? Also, does having Li & Fung's presence help facilitate this move to open terms?

Andy Warren

Yes, I mean, there one thing that Bill talked about when he went through the cash slide, we're looking to synchronize now, our payable terms with our manufacturing vendors. Today, we call it about a 15-day, we're looking to get that to 30-day, and that's in line with our terms at Li & Fung.

Bill McComb

But by the way, just to make a distinction, that's a decision we make, that's not a Li & Fung policy. We set that policy. To answer your question, I believe the muscle that they've got helps us achieve that goal more quickly and more uniformly. But the policy decision is ours not theirs.

Andy Warren

That’s right, absolutely right. We're going to continue to drive that payables turn like we've driven the inventory and receivable turns as well. So to us, working capital is its an ongoing metric, we're getting better and stronger at it and we're going to have definitely enhancements in our working capital turns throughout 2009.

Chi Lee – Morgan Stanley

Okay. And the move to just open turns itself again Li & Fung does help facilitate that move?

Bill McComb

Not really.

Chi Lee – Morgan Stanley


Andy Warren

Yes, look, we've had a lot of success already in the last 12 months for example, and you look at the, the open letters of credit that we've had. A year ago, we had almost $200 million of trade LCs, now we're down to $30 million. We did that all pre any kind of Li & Fung deals. So we've been aggressive and fair with our manufacturing vendors, they know where we stand with this and they understand our goals for 2009 and we're going to keep driving it.

Bill McComb

I mean to the extent that if we were to have a vendor that was unable or unwilling to comply with our new LC policy, to the extent that we have access to an even broader base of vendors that through Li & Fung, that's helpful. But these guys have done a really terrific job, reducing them as Andy said, even pre Li & Fung.

Chi Lee – Morgan Stanley

Got it okay. And just one final clarification question, just the comment that the Li & Fung deal is G&A neutral, does that imply that there's actually no additional cost saving from I believe the 450 personnel or 500 personnel that you guys are shedding with the Li & Fung deal?

Bill McComb

The assumption there is that the commission rate that we pay is essentially cost neutral to the G&A of those bodies that you just described. That's correct. Now, what we get from a value perspective, I can tell you is significantly greater. The number of resources, the quality of management, the diversity of these 40 offices with a presence all around the world. Better bang for the buck. But that is correct. What we're pointing you to is that the cost benefit comes on the COGS side not the G&A side.

Chi Lee – Morgan Stanley

Okay. Got it. And the – and the just over $1.6 billion, if you could just confirm that's for 2009 SG&A dollars?

Bill McComb

That's correct.

Chi Lee – Morgan Stanley

Got it. Okay, thank you very much.

Bill McComb

And that's SG&A dollars associated with the portfolio that we call ongoing – ongoing brands.

Chi Lee – Morgan Stanley

Got it. Okay, thank you.

Bill McComb

Thank you. Okay, well, thank you all very much for your interest, for your good questions, and for taking time to listen to our call. As we indicated, this presentation will be available out at the investor relations page of our corporate Web site. Thank you very much for your time. Look forward to talking again in May.


Thank you all for participating in today's Liz Claiborne Fourth Quarter 2008 Conference Call. You may now disconnect.

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