Liz Claiborne Inc. Q1 2009 (Qtr End 00/00/00) Earnings Call Transcript

| About: Kate Spade (KATE)

Liz Claiborne Inc. (LIZ) Q1 2009 Earnings Call May 13, 2009 10:00 AM ET


William McComb – CEO

Andy Warren – EVP & CFO

Dave McTague – EVP Partnered Brands


Benjamin Rowbotham - Goldman Sachs

Omar Saad - Credit Suisse

Kate McShane - Citigroup

Robert Drbul - Barclays Capital

Jennifer Black - Jennifer Black & Associates

Chi Lee - Morgan Stanley

Robert Ohmes - Banc of America/Merrill Lynch



Good morning everyone, and welcome to the Liz Claiborne first quarter 2009 conference call hosted by Chief Executive Officer, William 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 on Form 10-K and Quarterly Report on Form 10-Q for the first quarter of 2009, under the caption item 1A risk factors and statements 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 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 first quarter of 2009 and 2008 represent a more meaningful presentation of its historical operations and financial performance, since they provide period-to-period comparisons 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.

William McComb

Thank you all for joining our conference call today as we discuss our first quarter 2009 results. Joining me on the call this morning are our CFO, Andy Warren, and Dave McTague, Executive Vice President, Partnered Brands.

And as usual we will be using speaker support slides as mentioned which we will talk to throughout the discussion. Those slides are available now via our webcast and later via our Investor Relations website.

So this morning we announced that with restructuring costs included we posted a GAAP loss of $0.93 per share which on an adjusted non-GAAP basis was a loss of $0.37 per share. Although I would characterize the environment now as generally stable, meaning literally the situation is not getting any worse out there, it was in fact a very challenging environment for profitability this quarter.

No doubt, 2009 will be a tough year for many companies and many industries and ours is not an exception. So before Andy and I walk you through a detailed analysis of the results, let me make some overall comments about our performance, our strategy, and our goals.

You certainly don’t need to be reminded that every action we take, every step we make here, is oriented toward building a strong business for the long-term and ensuring that we are one of the strong survivors of this recession.

From brand talent to product, to cost and capital management, to distribution strategy and resource allocation, we are still a work in progress. But with huge accomplishments behind us and the right focus upon us. We have a solid portfolio of consumer brand equities and we’re reengineering our business operations to strengthen those brands and build a profitable corporation.

We will emerge from the recession as a company with a great offering and a healthy business model. Let me start the call then by restating our 2009 operating assumptions and how first quarter actually looked against those assumptions.

So going to page two here of the slide deck, at the end of 2008 we built our business plans for the year assuming demand curves that were consistent with sales trends that we saw in October, November, and early December. We said that from first through third quarter we would see comps in our US based direct brands declining versus year ago between 15% and 25% each month and by the fourth quarter of this year, those comp numbers would begin to flatten out as we anniversary the tough holiday season of 2008.

We also assumed a significant inventory reduction by our wholesale customers beginning in the first quarter with receipt plans overall in the marketplace being reduced on average by 20% all the way through holiday 2009.

We did not provide earnings guidance for the year or for the remaining quarters given the uncertainty in sales and margin levels, but we said back in March that we expected to post a meaningful loss for the first quarter as we did this morning.

We also said we would post a loss for the first half, our view for the second quarter is also a loss and although we’d expect the GAAP loss to be lower then first quarter as our restructuring costs declined, the second quarter sales and adjusted earnings profile will be nominally improved versus what we’re showing today for the first quarter.

But by the third quarter we [inaudible] cost reduction plan announced back in February netting through the income statement and that additionally reduced marketplace inventories would alleviate some of the pressure on margins.

And by fourth quarter we expect to be profitable, reflecting our revamped cost structure, improved merchandising efforts, and Li & Fung’s collaboration via sourcing which kicks in for holiday 2009 assortments.

This sales and earnings scenario continues to characterize our thinking. Though there is a generally optimistic tone on the news and in some industry reports, we see the environment as still fundamentally promotional with the reserved consumer and significantly reduced traffic.

In spite of this outlook we remain committed to manage our liquidity position very carefully as we have done to date, with the focus on maximizing our availability under our bank credit facility. So as we look at first quarter results and flash forward through the year, we believe these operating assumptions and principals still hold and provide the best framework for modeling and thinking about 2009.

The results we posted this morning show that comps were in line with our 15% to 25% forecasted reduction and while we posted a 19% reduction in SG&A in the quarter versus 2008, the loss in earnings on an adjusted basis was in fact meaningful.

We are managing inventory very closely as we prioritize cash management but traffic was down versus year ago levels all through the quarter in all brands, with very few exceptions our store managers report anecdotally that their peer adjacent tenants are seeing the same traffic patterns.

Given the promotional activity we pursued to stimulate conversion, we saw our gross margin rate in the US based direct brands fall by 400 basis points. Our priority was inventory reduction and turn in those businesses. Changes in merchandising including pricing, mix, and assortments will be more noticeable in our stores this fall.

This coupled with lower year over year inventories should reduce the level of necessary promotions leading to better gross margins. I’m pleased to report that we exceeded expectations on cash flow and liquidity in first quarter 2009, with debt reduced by $235 million versus quarter end 2008, with accounts receivable down 32% and inventory down 17%.

And we ended the quarter with $166 million in borrowing availability on our credit line and you’ll hear from Andy about an amendment around the fixed charge coverage covenant which we also announced this morning.

We are confident that with our liquidity position, our ABL terms, and additional initiatives that may generate cash we will have the needed flexibility to navigate this tough earnings environment. On the March conference call we shared our thinking about merchandising strategies for the back half of the year to improve our conversion and increase average unit retail sales versus year ago.

Rather then go back through that list of plans today, we will focus on breaking down the results from the first quarter by business in this call, providing as much insight as we can on what’s happening now in our channels.

Lastly we’ve very pleased with last week’s announcement that we hired Thomas Grote as CEO at Mexx. We are equally pleased with the relaunch of the Liz Claiborne New York brand where the consumer is reacting well to the new line and natural sell through rates are actually healthy on new merchandise. More on those points later.

So now let me hand it over to Andy to walk you through the overall results and then I’ll share some key insights on the major brands and segments before taking questions.

Andy Warren

Thank you William, good morning everyone. I’ll begin my discussion with a review of our income statement and balance sheet metrics.

Sales from continuing operations decreased 29% versus the first quarter of 2008 which had an extra fiscal week. Important to note that ongoing sales excluding foreign exchange rate fluctuations decreased by only 17%. Ongoing domestic based direct brands decreased 1%. International based direct brands, our Mexx brand, was down 29% in the quarter and ongoing partnered brands decreased by 23% year over year.

As you may recall our ongoing sales exclude brands and operations that have been closed, exited or license, such as our fragrance business that are not accounted for as discontinued operations. These ongoing sales reflect the brands and operations that we have in our portfolio going forward and therefore better represent our true sales and trends.

Adjusted gross margin decreased 380 basis points driven by the highly promotional retail environment which compressed margins partially offset by an increased proportion of higher margin domestic based direct brand sales.

I’ll hold off on discussing our SG&A expenses and trends until the next slide. Adjusted operating margin decreased year over year to a negative 5.6%. Though our SG&A was down 19%, the drop in sales and erosion in gross margin drove this negative operating margin.

Lastly, adjusted diluted EPS from continuing operations was a loss per share of $0.37 compared to earnings of $0.33 in the first quarter of 2008. Slide five titled adjusted SG&A bridge, on this past March year end conference call we provided an update to our total cost reduction program and reinvestment initiatives.

Recall that our fiscal 2007 total adjusted SG&A spend was almost $1.9 billion and that we were projecting our 2009 SG&A to be reduced to just over $1.6 billion. Due to the continued pressure on the top line and gross margins we have further reduced our forecasted total SG&A for this year to slightly under $1.6 billion.

Our year over year first quarter SG&A trend reflects our insatiable focus on cost productivity with SG&A down 19%. On this page you see our adjusted SG&A bridge from 1Q08 to 1Q09 highlighting the cost reductions and our reinvestments. We have significantly reduced costs in our corporate overhead partnered brands and international based direct brands segments.

Cost reduction initiatives in these two areas achieved $73 million in savings within the quarter alone versus last year. Conversely in order to support the long-term growth prospects of our domestic based direct brands, we redeployed $9 million into retail expansion and retail infrastructure.

Give the deterioration and uncertainty of the current retail and economic environment though, we did dramatically reduce our store platform growth for 2009. As we’ve stated before we plan to open only 10 to 12 stores this year versus 139 stores in 2008.

We will continue to reprioritize and challenge our cost base and our business models throughout 2009. We are more focused then ever on controlling the controllables and only spending in areas that offer fast payback and attractive returns.

We believe that an SG&A rate of 40% in a normalized environment is an appropriate long-term target for the company.

Now slide six, titled 1Q09 balance sheet, and cash flow, we continue to be pleased at the results of our working capital management especially given our challenged earnings profile in the first quarter. Accounts receivables were down 32% reflecting on one hand revenue declines and a lower sales base due to the out licensing of our fragrance business and on the other hand, our intense focus on reducing day sales outstanding.

We ended 1Q09 with inventories down 17%. More on this key metric on the next slide. Total debt at the end of 1Q09 was $754 million, down $235 million from the first quarter of 2008. I’ll review a debt reduction walk with you later on the call.

Cash flow from operating activities over the past 12 months was $401 million. Despite the tough environment and our negative first quarter earnings, we still generated an enormous amount of cash flow. The strong cash flow includes $126 million of total net tax refunds throughout this past year as well as $75 million associated with the Li & Fung sourcing agreement.

Capital expenditures were $166 million for the past 12 months, most of this capital spend was dedicated to the net addition of 109 specialty and outlet stores across Juicy, Lucky, and Kate of which only two were opened so far this year.

Given the tough operating environment we have planned our 2009 capital expenditures at $60 to $70 million versus $194 million last year. The significant reduction versus 2008 further strengthens our 2009 liquidity position and enhanced our free cash flow.

Our next slide is 1Q09 inventory, we continue to aggressively reduce inventories and ended the first quarter with inventories down 17% compared to the first quarter of 2008. This reduction is on top of the 18% reduction we realized in 1Q08 versus the first quarter of 2007.

Domestic based direct brands inventories were up 6% which is in line with their expanded retail store count which grew by 37%. Partnered brand inventories was down 38% in the quarter. The Liz Claiborne brand has been and will continue to be highly focused on reducing old product inventory levels in order to maximize the launch of the new Liz Claiborne New York line throughout 2009.

At the beginning of the year in our Liz outlet business alone we had significant old product inventories to liquidate. At the end of 1Q that stock level was down 43%. We will go into holiday 2009 with a cleaner inventories then last year and dramatically reduced stock levels.

Moving on to slide eight, we successfully reduced total debt by $235 million versus the first quarter of last year. You have heard us say on several earnings calls and investor conferences over this past year that one of our critical financial priorities is to deleverage the company.

We are highly focused on paying down debt and plan to continue this trend throughout 2009. We will utilize 100% of our free cash flow to reduce debt and plan no share repurchases or acquisitions in the near or medium term.

As you can see on this slide our 2009 cash flow and liquidity priorities are as follows; aggressively pursue additional cost reduction initiatives to lower our 2009 total SG&A spend to below $1.6 billion, improve inventory turns and working capital efficiencies, pursue owned real estate modernization opportunities, in particular distribution centers that we have vacated as a result of successfully consolidating our distribution network, and synchronized payment terms with manufacturing vendors from to 30 plus dates.

We are tirelessly focused on enhancing our liquidity profile. All of the initiatives I just listed are in progress and well underway. Slide nine titled current bank credit facility, we get many investor questions about our ABL facility, in particular how much availability do we have in this revolving credit line.

I will provide this simple schedule on all of our calls going forward about this year in order to provide total clarity and transparency. Our availability formula starts with the lesser of $600 million, our borrowing base calculation comprised primarily of eligible accounts receivables and inventories.

Our borrowing base is lower given our heavy emphasis on enhancing working capital efficiencies and having clean inventories in this environment. The next line is our total global outstanding borrowings. This plus our issue trade and standby letters of credit are subtracted from the borrowing base to derive our total availability.

This net ABL availability is calculated daily. At the end of 1Q our availability was $166 million. Today it is in excess of $200 million. With an ABL the most important element is in fact the borrowing availability and our actions are focused on keeping that availability high enough to meet our needs in any economic scenario.

We are comfortable with our availability forecast for the remainder of the year and believe that we will have the liquidity we need to successfully navigate through what we are forecasting to be a continued difficult retail and economic environment.

Slide 10, now let me elaborate on an amendment that we just completed regarding this ABL facility. As we reported to the bank group our February fixed charge covenant calculation, uncertainty arose about the treatment of the tax refund we have received in the “cash taxes calculation” in the covenant. Together with the bank group we decided to amend the [deal] language for clarification and in doing so we now have a more traditional ABL structure with a springing fixed charge covenant versus a full time test, and where the cash taxes calculation cannot be less then zero going forward.

Therefore the five following terms have been added or amended and are now in effect for our facility. First the fixed charge covenant from April 2009 through June 2010 is now a springing covenant based upon availability, which means that the covenant is not in effect provided that our availability exceeds agreed upon minimum levels.

This minimum level is $90 million except for October and November of this when it must exceed $75 million and December 15 through the end of fiscal January 2010, when it must exceed $120 million. It goes back to being a full time covenant in July 2010 through the May 2011 maturity.

Second the fixed charge covenant level if it springs into effect stays at 1.25 through June 2010 and steps up to 1.5 in July 2010 through maturity.

Third we agreed to a new minimum availability covenant of $50 million at all times except for October and November of this when it must exceed $45 million.

Fourth the trademark value advance of $30 million stays in the borrowing base calculation through the May 2011 maturity versus dropping down to zero this November.

And lastly there is now a full time LIBOR floor set at 1.5%. The LIBOR spread is unchanged at plus 500 basis points based upon availability.

One important note, although the ABL facility does not mature until May 2011 one technical accounting aspect to this amendment that the ABL revolver will now be classified as short-term versus long-term debt.

This new classification has absolutely no effect on our liquidity or ability to borrow nor does it change the May 2011 maturity date.

In terms of stress testing the earnings, cash flows, and the ABL availability for the remainder of the year, when we flow through the 2009 earnings profile that William outlined earlier on the call, i.e. a second quarter loss only nominally better then 1Q, and a second half that gets sequentially better, we do not go below the springing availability threshold. In fact, we project our year end availability to be well in excess of over $250 million going into 2010.

That coupled with the additional liquidity enhancing initiatives that are well underway, gives us confidence in our ability to offset any additional earnings shortfalls that may occur in the back half of the year given the highly uncertain nature of this environment.

Thanks for listening and now I’ll turn the call back over to William to discuss our operating initiatives and our key priorities for the remainder of the year.

William McComb

Thanks Andy, clearly we’re in the middle of an extraordinary time here with economic forces hitting the P&L at the business very negatively right now. We believe that all of these issues will resolve as the economy improves but the near-term is still marked by a lot of uncertainty. So let me start now by looking at the US based direct brands which is page 12 of the slide presentation.

Looking at sales, let me amplify Andy’s point about the out licensing of the fragrance business, for the domestic based direct brands this reduced the sales base in the first quarter by $16 million versus year ago. The bigger discussion point here is the profit margin we’re seeing in this business segment.

There are four factors that diluted this quarter’s margin rate, the first factor is the wholesale channel. Our wholesale customers for these brands are tier 1 department stores, primarily Sacs, Nordstrom, Bloomingdales, and Neiman Marcus. These retailers have historically delivered very high full price sell throughs on Lucky Brand, Juicy Couture, and Kate Spade.

Now they’re promoting with the depth and frequency of retailers like Macy’s and that has greatly diluted our margin on sales in that channel particularly at a time when inventories there are still high relative to demand. To dimensionalize this effect, we estimate that at least half of the unit sales in the first quarter were sold at markdowns of 30% or higher across these brands.

This has forced us in turn to address our own pricing in our retail stores driving AUR’s down as we promote to compete. Traffic is the second major driver effecting our profitability. The good news is that traffic has become stable, the bad news is that it is stable at levels between 15% and 20% off year ago levels.

Even with improved conversion, the combination of reduced traffic and reduced AURs together both at levels approximately 20%, pressured the gross margin rate in our retail stores by more then 500 basis points during the quarter.

The southwest and northeast are regions with comps that are typically worse then what we’re seeing in other regions often by a few points. The third effect on our margins is dilutive new store openings. We had 109 new stores spanning all three brands ramping in this quarter versus year ago. Needless to say these stores added a fixed cost expense burden in excess of $20 million during the quarter yet they saw the same AUR in traffic profile that comp stores were seeing contributing to lower then normal ramping of profitability in these doors.

This stressed our segment level operating margin on both a comparative and absolute basis for the quarter. And finally as we indicated several times, our commitment to managing our cash position has led us to turn inventory at the expense of margin. While the segment reported a positive 6% inventory increase to support 37% new stores.

Comp business inventory meaning inventory supporting comp points of distribution in both wholesale and retail was down 8% for this segment as we responded with price, clearly adding to reduced AUR’s across the brands.

Here is how the segment breaks out on key reporting metrics by brand, Juicy sales net of the fragrance licensing were up 6% in total to $132 million for the quarter. Lucky Brand delivered $97 million in sales, which was down 11% and Kate Spade sales were up 9% to $30 million buoyed by new wholesale distribution and 79% more retail stores versus the same period in 2008.

Comp store sales were tough as discussed. Juicy comps were down 22%, Lucky Brand comps down 18%, and Kate Spade comps were down 27%. The 109 new stores are broken out by brand here on the right side of this page, 38 new Juicy stores in the past 12 months, 38 new Lucky Brand stores, and 33 new Kate Spade stores.

In line with our thinking about the quarter these general trends will repeat themselves on our next call we believe. All four factors that crushed operating margins this quarter will continue into the second quarter. But we believe more appropriate inventory levels at wholesale and retail will relieve some of the AUR pressure while improved execution in merchandising will help drive full price conversion.

So now let’s look at the Mexx business, while still comping negatively we’re seeing moderating declines, minus seven for the quarter. We’re now projecting an operating loss for the European division this year stemming from reduced orders by our wholesale accounts across Europe most significantly in eastern Europe where the demand shock is severe.

Russia in particular is seeing very poor sales trends, true trend breaks with the past few years driven by the collapse of oil prices. There are significant cost reduction initiatives in place at Mexx that will improve the G&A pressure but the story for this division is ultimately a product one. We have stores in great locations, in need of better product to be more productive.

Last quarter we shared with you images from fall product done by the interim management and design team which reflected huge step in the right direction. Some franchisees and wholesalers have given us very good feedback on this path. The most important step in the turnaround finally came last week when we announced that we hired Thomas Grote, formerly from Espirit, as our CEO. Thomas has the experience and the capability this business needs.

He grew up leading both wholesale and retail operations. He is a true product merchant. He is an outstanding leader with very good marketing instincts and he knows the core markets that Mexx competes in. I see Thomas as a Mickey Drexler caliber hire for us, being both CEO and merchant leader. He has big ambition and vision to rebuilt Mexx and make it a leader in its segments in Europe. Thomas will periodically join us for these quarterly calls once he’s up and running in his new role.

In the meantime we will proceed with cost reductions this year and a vastly improved product direction for fall. Even so, as I said we are projecting an operating loss for the year as the historically profitable eastern European business contracts. However its important to note that cash flow from the business will be positive reflecting reductions in working capital and CapEx.

Now let’s turn to Dave McTague to discuss the partnered brand segment.

Dave McTague

Thank you William, ongoing sales in partnered brands declined this quarter by 23%. In every brand sales have suffered as wholesale customers have reduced orders supporting their own inventory reduction goals and overall store wide sales declines.

And the Liz business is still showing the biggest declines as we continue to clear through the carry over of Liz inventory and work to complete our entire transition into the new line of Liz Claiborne New York by Isaac Mizrahi. The margin store is the same as we saw in fourth quarter, very high promotion levels in the tier 2 department stores across all brands and clearance of old Liz Claiborne styles drove the greatest margin pressure.

Despite the tough economic backdrop we are very pleased with the consumer acceptance of the Liz Claiborne New York product. We are seeing apparel and accessory sell through rates that are healthier then what we’ve seen in the past several years.

That means the items are selling well at full price in what is still a very, very promotional environment. In our new shop in shop environments, 40 installed to date, we have experienced improvements each month in regular price sell through rates achieving an average of roughly plus 8% to 9% per week and in AUR’s which are up 16% to 20% versus average wholesale doors across the country.

Similarly in our outlet business which provides us the cleanest read pre versus post net of any partners events, we are seeing AURs go up from $19.00 last year to $30.00 this year on the new merchandise. The math of our profitability with this brand rests completely on the full price sell through rates and the AURs so this early traction is early evidence that this brand can become profitable again.

This is just the beginning obviously. The four general steps to growing this business profitably center first on getting back into the right doors. There still remain about 30 A or B level doors we are targeting across the majors. In addition we have opportunity within our existing 400 A or B doors for growth back to historical sales volumes prior to our receipt reductions and floor moves.

For reference if we got back to 2006 levels in these A and B doors alone, we would grow sales by $200 million. More importantly though we need to upsize the inventory buys by classification and across categories within the door and brand offering. Simply put, most of our partners were testing or experimenting with the new line to see if it had traction, and on a door basis under bought or bought am experimental mix of items.

We are now working with the senior retail management and planning teams to get the floor sets right sized going forward in spite of still very conservative total receipt management by these partners. The mix of fashion, key items, and replenishment basics will therefore evolve. The buys were light on traditionally favored product categories from Liz like dresses, pants, and shorts for spring yet these categories exhibited very strong sell through rates.

Our partners are realizing they missed some great conversion opportunities by being out of stock in some of these basics. We’re working early and often now with both door level planning and merchandising to maximize classification, size, and regional sale opportunities by retail partner and mall.

As we’ve discussed with you the outlet business remains our greatest margin expansion opportunity in partnered brands. With a fleet of 92 LCNY doors, that will see Isaac base product chain wide beginning in August, we can control the brand presentation and assortments to maximize our profit profile.

The early signs in doors that have some mix of new Liz Claiborne New York merchandise show as I said before, significantly higher AURs. We wish we could just snap our fingers and have all of the 92 doors refit with signage, lighting, and fixtures, and carry a full load of new inventory. But realistically we have to manage down a still very significant load of old Liz inventory which will take through this year and manage the capital very conservatively.

Since we put in place a new president, a new merchant and a new head of planning for the partnered brands outlet we are comping positively with pricing strategies that are working to clear the excess and raise AURs.

I am very excited about this channel as a profit maker for us when we normalize our inventory levels, and introduce the new product line chain wide. The last call out here is a rapid sourcing and shipping capability for the brand. The most profitable transactions by definition involve the hottest items in the assortment.

By improving our capability in this area to actually increase the percentage of inventory that gets bought nearer to the season, or in the season that we can produce and ship from today’s 10% to more like 20% to 25% of the inventory we are increasing our ability to drive a healthier margin for us and for our retailer.

This is what we do routinely in our Liz and Co. and Cole’s product lines. Now that we have [inaudible] as a brand with a great designer behind us, and partners that are looking for us to grow again as a resource, this becomes a must have capability. Thankfully Li & Fung will work on this with us, but it has much to do with changing the entire development calendar with our partners as it does with changing our vendor processes.

We think we can dramatically overhaul the system with partners on board and Li & Fung as well.

William McComb

Thanks Dave, I’m sure the listeners will have some more questions for you in a minute. I certainly hope everyone was able to hear all of your remarks. You made some important comments. Let me now make a few summary comments and reflect on our forward-looking 2009 perspective.

As I said earlier the rate of decline has stabilized and like every other retailer we look forward to macro improvements as we move through 2009. The second quarter to date comp trend through last week appears slightly improved although that reflects the Easter shift, what we didn’t get in March we got in early April.

Our basic view is that our consumer is still very cautious. She’s spending conservatively, she fancy’s being smart and she is looking for what we call promotion action. She’s treasure hunting the department stores and is still being rewarded for it.

That said we believe our business model has been adjusted appropriately and will continue to be adjusted appropriately to meet our customers’ needs and value and price proposition shifts. There is not doubt that assortment shifts and surgical pricing recalibration will help in the back half. But as long as the department stores continue to go from event to event to event, and the savvy shopper syndrome continues to dominate, we will see margin pressure across the portfolio.

I feel very good about our strategic framework and the actions we’ve taken on merchandising, on store productivity, on cost and cash management, in this environment. Our primary research again tells us the consumer remains interested in our brands, though we have to wait it out.

So now let’s get to questions as I’m sure that you all have many.

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Benjamin Rowbotham - Goldman Sachs

Benjamin Rowbotham - Goldman Sachs

My question really had to do with gross margins within the quarter, I know you mentioned that the direct brands were down about 400 basis points, any color on how the partnered brands division and the international direct brand division fared.

William McComb

I think you can find it on that chart, if we flip back to the speaker support slides. We saw that the adjusted operating margin at international based direct brands which is of course the Mexx business in Canada and throughout Europe, it went from in first quarter 2008 from 6.1% to negative 6.4%.

Benjamin Rowbotham - Goldman Sachs

Perhaps I misspoke, I was more referring to the gross margin rates not the operating profit margin rates.

William McComb


Andy Warren

International, as William said the Mexx businesses, was 52% and domestic base direct brands was also 52%.

William McComb

Okay so let’s put it back in basis points, its comparable. What you’re going to see is international base direct brands, the gross margin rate was down 418 basis points and partnered brands down 600 basis points.

Benjamin Rowbotham - Goldman Sachs

Is there any way to think about on the partnered brands side how much of that was due to the liquidation of historical or legacy Liz Claiborne product versus the new stuff or actually more importantly the ongoing portion of the brand both Liz Claiborne and the other exclusive labels that you deal with in that channel.

William McComb

I can tell you this, we don’t have a bridge in front of us that does that, and its hard to tease it out as you well know, it definitely skews to the clearance, very heavy clearance of the excess of what call old Liz. That said, I don’t want to mischaracterize the fact that as we all said two or three times, it is a very promotional environment out there.

And all of the product lines have sort of been lumped into clearance, even some of the new Liz product. Its falling into a promotion cadence that reflects everybody’s need to drive turn, drive turn, and goose traffic. So there’s no question that that partnered brand SKU is, the SKU, almost the 400 to 600 SKU is driven by that massive clearance of the old Liz but generally speaking, capture the point that it is still very promotional out there.

Benjamin Rowbotham - Goldman Sachs

And with that, I think that you mentioned that the legacy inventory positions were down about over 40%, when should we see that stuff fully cycle through.

Dave McTague

Realistically as we had stated earlier, we’re going to get through that within this year. Logically you’d like to see it be clean going into Q3, but the reality is is that there are remnants of this product as the stores manage their clearance activities somewhat effectively and sometimes not so effectively.

William McComb

Obviously our outlets will carry a heavier load of that into the fourth quarter and then the wholesale partners, the wholesale partners will be cleaner by the beginning of third quarter.

Benjamin Rowbotham - Goldman Sachs

On the SG&A side, targeting below $1.6 billion in dollars, how should we think of that cadence evolving over the next three quarters from a year to year decline perspective.

William McComb

I don’t think at this point we’re prepared to give you any call outs on that except to say that the mantra that we have our eye on additional initiatives, that are both cash generating as well as SG&A accretive. We will continue to pursue those, but at this point Andy do you have any clearer guidance.

Andy Warren

It should be pretty evenly distributed really, most of the actions are behind us. We really have gone through the people side, the distribution consolidation side, discretionary spending is down over 60% so far year to date, so at this point I would say, I would model that fairly flatly and consistently across the quarters.


Your next question comes from the line of Omar Saad - Credit Suisse

Omar Saad - Credit Suisse

The kind of guidelines that you laid out for the rest of the year, what are the underlying assumptions, just want to kind of clarify, is it pretty much that things kind of stay in the same trends they’ve been on in terms of consumer spending patterns, and promotionality at retail, things like that. Are you assuming any sort of change for the better or for the worse.

William McComb

No, and this is a consistent position from what I’ll call the beginning of the year, back when we made the decision to look at and think about the year as having a fairly flat demand profile. Using the what we call here the October, November, and early December run rates. We basically said we’re going to normalize the demand curve from our view at that level all the way through the year.

So the optics of the comps obviously change as we go up against easier comparative basis in the fourth quarter but we have been consistent at every meeting we’ve been to and in any public venue in saying that while we loved a lot of the silver lining conversation that’s beginning to happen in the industry and in the press at large, we haven’t changed our view that those demand curves are sort of at a new normal.

What we indicated on the call earlier that we think fundamentally makes a difference in the profit equation, first of all, never mind the fact that first quarter always is the lowest skewing quarter for us seasonality wise with the mix of retail and wholesale that we have. But we said that generally speaking our view of marketplace inventories is that they were, that while they were lower in spring then they were in fall, they were still high.

Most of them were bought in the September, orders were papered in September and October and while there is some RTVs that took place to make some adjustments, generally speaking industry inventories were high in the market. And so we’ve said that to the degree that it could get controlled, it will be a little bit lower in the second quarter but by third and fourth quarter inventory, market level inventories are getting under control.

And we’re not seeing any exuberant or irrational buying behavior by any accounts. Who knows if this is going to change holiday marketplace takes place the first two weeks in June and gets papered by the end of June but I just don’t think that anybody right now is reacting by changing their planning assumptions to say, gee rather then planning our receipts down across the store by on average 20% we’re going to only make that 10%.

Nobody’s made that change yet. So we think that marketplace inventories will improve and that therefore there will be a greater opportunity to improve natural margin or first, what I’ll call full price and first markdown sell through rates, which will improve profitability but we’re not bullish. I mean in any of these scenarios that we’re talking about we’re not calling it a return to a new normal. We’re still characterizing it as a very promotional environment.

And I think the other thing that can’t be lost is this concept that we’re talking about around the savvy shopper syndrome. Women in all categories of spending are, they have a new pride which is they want to be smart and this treasure hunting thing is, it’s a rewarding game for them. So those that are spending are spending on different terms then they were before and they’re looking for “excuses” to make the buy.

And that’s the kind of thing that just doesn’t roll up and go away in one or two quarters. And maybe more like the back half of 2010 the industry will see a less price elastic consumer. We certainly hope so.

Omar Saad - Credit Suisse

On the topic of inventory out there at retail, the old Liz inventory, how are you going to go about getting rid of that. How does that process work, its not like its going to be out there until the end of the year, does that hinder the new Liz stuff doing what it could do.

William McComb

The funny thing is is that the consumer finds what she wants right, and so there’s the basic driven value, [uber] value hunting shopper that is, honestly she’s buying the old product at the very, very deep, deep discount but its being offered in both our outlet and in wholesale and it is successfully turning.

The fact that our outlet stores, don’t forget by and large only just over a dozen of our 92 outlets currently have any new Liz Claiborne New York by Isaac Mizrahi product and so most of them don’t have any and yet we’re comping positively in these outlet doors and that is a, if you recall, that is a big trend break from I’m going to say the past five or six quarters where we’ve been comping very negatively in those outlets.

So the new merchant team, the new president, the new planning team that Dave put in in outlet, they had honestly an almost immediate response in the business to their plans. And so we are turning it, yes, we have a lot in outlet. Most of the “problem” is going to be from third quarter to fourth in outlet and you’ll see those inventory levels dwindle. They’ve got plans all through the year.

We’re confident we’re going to be able to get rid of it. What we’re not willing to do because frankly we can’t afford to burn the product, so we are finding the most optimal way to move it. We’ve made a conscious decision not to just haul it out of stores.

Definitely slows the “up take” if you will of the new line but that’s less and less of a problem in the department stores. We did say that we would be introducing this Liz line over a period of seasons and regaining our qualifications or our credentials with the wholesalers and I think that’s happening even a little bit faster then maybe we would have thought it would.

But I don’t see the clearance is going to be a problem for the up take because the consumers are finding it and differentially shopping it and by the way, they’re seeking it out okay, they’re coming into stores and they’re asking for it.

I think the bigger issue is that yes, you will see dilutive pressure on the margins as we’re clearing that stuff.

Omar Saad - Credit Suisse

Thomas Grote at Mexx, has he had any initial thoughts to share with you and then also, what’s his incentive compensation based on.

William McComb

First of all, well he is formally an employee of Espirit, he is still technically a part of that organization, committed to the organization till the end of June, and so no, we are not working behind the scenes with him. He actually starts in this job officially October 1. He understands the brand very, very well. He grew up next to it. It’s a brand that in all of the glory early years when Mexx was a really very healthy and growing brand, in the same markets that Espirit was a juggernaut, it was the competitor that he admired the most and had I’ll say, watched over the most.

Its not true in recent years. I think they grew less fearful of it. But this is a true merchant king product base leader and he’s got very clear visions of how to engineer store and wholesale productivity. Extremely well known in the wholesale community but really is, this is a guy that my comparison to the Mickey Drexler caliber is, this is a leader of a business that knows how to engineer profitability via product.

I’m really, I’m proud of this appointment for our company and I believe it is a big inflection point and I think you’ll think that too when you have the opportunity to hear him out on his plans.

Omar Saad - Credit Suisse

And his compensation is there any incentive comp plan, typically what would you use.

William McComb

Yes, of course he has a salary and an annual bonus opportunity that’s tied to achieving annual business plans, and in this particular case those goals will 100% be oriented around the EBIT of the business and restoring it in a healthy and sustainable way and his longer-term incentives are also oriented around the EBITDA and EBIT lines of the P&L and with an eye toward capital efficiency.


Your next question comes from the line of Kate McShane - Citigroup

Kate McShane - Citigroup

My first question you had on your slide that the 2009 cash flow and liquidity priorities, I’m just wondering how much room do you think you have left on the first two initiatives of cost reduction and inventory turns and you also mentioned possible DCs that could be a monetization opportunity, how many you’re looking at and would you lease that facility back.

Andy Warren

On the first, the cost reductions as I said we went into the year targeting a little over $1.6 billion of SG&A, our view today is now slightly under $1.6 billion. So call it, we’re looking at $30 to $40 million of additional cost reduction and again our view on cost reduction and cost productivity will never stop. Its something that we think we can continue to churn and get dollars out of for many quarters to come.

On the inventory side, our goal is an additional turn of inventory between now and year end and I think we can continue that process certainly not only through 2009 but into 2010 as well so we definitely improving metrics but we have a ways to go to get the best in class and we have people and processes and metrics in place to help get there.

So I think you’re going to see continued improvement on the working capital turn side. And then as far as real estate goes I think on the last call I mentioned its certainly a challenging environment to monetize real estate. We do have a couple of buildings and facilities that are up for sale. There is interest. We are negotiating with a couple of parties right now and any proceeds we get will go towards debt reduction.

So all of those are well underway. There’s clearly some liquidity enhancements still to be derived in the next six to 12 months from each of those and we’re bullish on being able to get them done.

Kate McShane - Citigroup

My last question is going back to inventory, can you talk about what inventories would have been during the quarter excluding the exited businesses and I just wanted to make sure, did you say that your customers are ordering 20% less year over year and do you think your inventories could be in line with this exited businesses by the end of the year.

William McComb

In line with the exited businesses, tell me what you mean—

Kate McShane - Citigroup

I’m sorry, ex the exited businesses and in line with the down 20% if that is indeed the number at your wholesale accounts.

William McComb

Well we actually we talked about it on the last call and its pretty much, this is sort of a universal statement. It spans the US based direct brands as well as the partnered brands that the down 20%, it even applies to Europe believe it or not. This sort of down 20% is a new planning value that retailers are bringing in as their own inventory reduction objective and it definitely is what pre guides the buys in these showrooms.

And there are places and parts of the lines where we’re doing better then that but I would say just in general, yes, the 20% reduction which we see as a planning value carried out all the way through the year should result in what we’re calling eased marketplace inventory levels in third and especially fourth quarter.

And we think that that is, gives the opportunity for more full price sales. There is a big focus by these retailers to leave some buying dollars, some receipt dollars for what they’re calling and what Dave spoke to as in season chase opportunities and you know as well as we do that that really is a very front loaded concept.

You can turn chase on in weeks one, two, three, four, and five, of a quarter and pretty much after that anything that you’re doing isn’t going to be falling within that quarter, but there definitely is this notion with these department stores that they want to have more open to buy available in the quarter to be able to read and react.

And the vendor community is very spotty on who’s good at it and who’s not. They are, our partners on Liz Claiborne New York are really calling this out as a big opportunity especially with categories that I’m not going to call that are replenishment oriented but that have a more basic component to them where we can engineer working with them, engineer the capability to turn it on fast and make it happen.

And I think the beauty of lapping another season with Isaac’s work we’re going to be settling on what these key items are and what as a resource what our woman is coming to us for so that we can plan to be able to do up to more like 20% of the total dollars in season on this sort of chase basis.

Andy Warren

To answer your first question, about a third of inventory reduction is driven by brands that were sold or discontinue to licensed.

William McComb

And you caught my comment that even though in the domestic based direct brands, even though the segment showed a 6% lift in inventories that was to support 37% more stores but that on a comp business basis the comp points of distribution in wholesale and retail in US based direct brands inventory was down 8%.


Your next question comes from the line of Robert Drbul - Barclays Capital

Robert Drbul - Barclays Capital

I guess just one really question really is how, you talked just a second ago about the retailers focusing on, or maybe retailers and you focusing more on fast turnaround for the Liz Claiborne line in the fall and I’m just curious how are orders looking for the fall right now and then currently for the performance of the brand, are there any regions doing better then others.

William McComb

The region question is about the Liz Claiborne New York brand.

Robert Drbul - Barclays Capital

Yes, correct.

William McComb

No, the pattern that Dave has talked about with you is that in any region of the country in any of the accounts that we partner with, where we have a more controlled environment meaning the shop in shops, the 40 plus shop in shops that Dave talked about, we’re seeing very high natural margins, the 8% to 9%.

And in less controlled environments we’re seeing a lift in both AUR and in natural margin versus what we would have called the Liz Claiborne line a year ago so we’re seeing that, but the effect is less regional then it is model where we integrate accessories and apparel and we fixture it and lay it out appropriately and control the buy a little more, we’re seeing a really, really successful business in every part of the country.

So that was the second part of your question. The first part of your question—

Robert Drbul - Barclays Capital

How are orders looking for the fall.

William McComb

I would say again in line with that guidance of roughly down 20. Now that said importantly we’re in the middle of some pretty significant discussions with the retailers around right sizing these floor sets and as they are quickly doing their deep reads on first quarter many of the merchant leaders are calling out we need more of this, we need more of this, I’ll just call out Castleton Macy’s for example, the receipt level is probably one third of what it ought to be to support that A level door.

Now the good news was that was 100% incremental because we weren’t in Castleton. But they tiptoed us in, on an almost experimental basis, now based on how the line is performing, we’re stopping and we’re engineering that door for the right allocation and buy.

So we do believe that there’s going to be an opportunity to as Dave gets the door level plan right sized that there’s going to be real growth even within the doors that we’re already in. But right now, fall pre holiday, not counting holiday, is right in line with the down 20.


Your next question comes from the line of Jennifer Black - Jennifer Black & Associates

Jennifer Black - Jennifer Black & Associates

Congrats on your hire at Mexx, fantastic. I have a couple of questions, I wondered if you could talk about where you feel you are with the transition of Mexx, with product and store specifically, are you on track with John Moore, product to deliver for fall, and are you making changes to the esthetics of the store yet.

William McComb

We’re really, really happy with the interim design and merchandising teams work. John Moore as you called out, Chris Colby, Tom Fitzgerald, that team in a short amount of time, they really did a great job in restoring a look and a quality level in product that evokes the old and popular Mexx. And that said, I’ll just be totally transparent and honest, I’ve hired Thomas because this guy is an absolute marketplace expert and when he arrives, I think that the path that we’re going down which really is that Mexx is a brand that celebrates the pure joy of life and you see that in the new marketing that we showed in the last slideshow on the last quarterly call.

And you’ll definitely see that in the what we call street smart assortment that John put together. Giant step in the right direction but I mean Thomas will take it to whole other level I’m sure in terms of pricing and assortment planning and actually engineering assortments to develop a turn that makes sense for the business.

We’re an inch deep and a mile wide in terms of product classifications and how the buys work in terms of wholesale and retail. In terms of the second part of your question, no, we’re doing some very fanciful things that we’ve learned a lot about, using, on this capital light approach meaning with virtually a shoestring of capital right now while we’re in the process of transitioning people and esthetic and product we’ve made some dramatic changes to a handful of stores to test the vitality of a different look, but not with expensive capital dollars.

And it just goes to show when you see plus 20% lift in a door after a simple, simple, prop reset with some things with paint and the right things with music, it ends up the store staff get a little bit more committed. We did something in [Eutrek] which is about 20 km south of Amsterdam that has really given everybody a great sense of what this brand can do.

But all of this to me is the appetizer. The entrée is coming and that’s what Thomas and the team that Thomas assembles and directs, I think that they’ll take it a giant step forward. But we’re to be crystal clear, we are not spending capital at Mexx right now and I think our first priority is to get the wholesale business back on track. We have a lot of points of distribution both in wholesale and through franchisee that have good stores.

I talked a lot for a year and a half about the wrong doors and the wrongs markets, and we’ve done a lot of rationalization of those. There are a whole lot of really good stores or good shop in shops, or good franchisee partners and they’re in need of great product. And so we’re not going to spend a lot of capital to turn the business around. We’re going to go a capital light approach with an unbelievable emphasis on product.

Again, why we are bullish about this is I mean first of all, the permission to believe starts with the right management team and that’s the big step that we took with the announcement last week. But the underlying consumer view of the brand is very healthy and very positive. Very, very high awareness levels, awareness levels that almost rival Espirit’s. But the consumer has not been given a good, they haven’t been given a good product or shop experience and that’s what Thomas will bring to the table.

I wish he could start six months ago, I wish he could start tomorrow, but waiting for him, in Europe these are normal leave periods are three to six months, in some cases nine months. So we’re just grateful that we got the right guy and that he’s going to start in October.

Jennifer Black - Jennifer Black & Associates

My next question is can you talk about the personal appearance schedule of Isaac and Tim Gunn over the balance of the year and I was curious to know how many events and what kind of volume as far as percent increases do you see when you do these events because I’m sure its huge.

William McComb

Its huge, its absolutely hilarious. You get 700, 800 people showing up to the Isaac events, in some cases more then that. Dave, why don’t you talk to this.

Jennifer Black - Jennifer Black & Associates

Let me finish the rest of this, is there any way that you can track the possibly first time buyer in these stores, I don’t know if there’s software or how you could do that, but as far as them returning to buy the product again.

Dave McTague

A couple of different things, first we have a pretty robust strategy in how we’re attacking event management that differs from our retailers. Where typically the retail community, the best event strategy that they have is a promotion, we’re attacking that to try to generate increase in sales in number of units per transaction and conversion.

Certainly we’re trying to drive more traffic to the stores through the events but its just as much about improving conversion rates and raising the amount of product that they’re buying each time. We have scheduled for the balance of the year, over 200 personal shopping events with our stylists out in the field.

We’ve done about 80 of those in the first quarter and we’ve seen to William’s point sales increases from 25% to 300% by door. And some of these events are a simple as invitations going out, setting up a table with wine and cheese etc., and its an evening out for the girls and they come in and we help them, 30 minutes we’ll give you three outfits is really how we’re talking to the consumer about it.

We have found that, now when you layer on nuclear weapons like Isaac Mizrahi and Tim Gunn, you’re talking about doors that are up by thousands percent increments. I mean they’re doing a week in two hours so events that we’ve done at Macy’s, at Bon Ton and Yorktown, at South Park in [Belk] we will continue to lay out about one per month is what we can manage right now because it takes a lot to get those done, but I think more importantly then those, its what can we do locally in more doors over 400 or 500 doors that’s really moving the needle that’s focusing on increased revenue and meeting sales plan expectations and profit.

William McComb

And I’ll just add that Tim Gunn is going to be doing some what I’ll call multi brand events with mall developers where all of basically fashion shows in the mall featuring all of our brands. And Tim doesn’t hawk our product, he’s there as a consultant to the consumer and so he talks about key fashion trends and he uses different parts of our line as a reference point.

And that’s something new that we’ve never done and there’s a great level of interest with mall developers because of the frankly, the sense that these are hot brands and we have multiple points of distribution in any given mall and it will be traffic generating to have Tim be a part of that.

So that’s something new that we’re doing that will begin for the fall season. And we look to do over 20 of those.

Jennifer Black - Jennifer Black & Associates

Are you reevaluating the pricing structure at Juicy and what I mean is are you adding any merchandise with sharper price points in your store and then how is the passport program going.

William McComb

Yes, we’re doing it, I want to call it sort of surgical not as a total, we’re not basically retiering all of the pricing but we are surgically inserting key items in key price points. We did it at Kate Spade with handbags that had opening price points of $195. Interestingly though I will tell you that some of Deborah’s higher priced merchandise, some of the newer higher styled, higher priced merchandise at Kate is actually selling through higher then the entry level price points.

Kind of fascinating in this environment. The consumer there is really, while traffic is really down there’s a deeply loyal consumer there and they’re really appreciating new product. But at Juicy there definitely are surgical additions to the line and handbags would be one of those call outs that I would give you.

We also announced that we are introducing a line call Bird, which is a line of street wear basics I will call it that have a slightly more sophisticated look. Pam and Gayla have done this line and we’ll be introducing that in about eight of our own retail stores this fall and, Dorf Goodman as an example will take it but we actually think that it has great potential for the line across the board.

Its price points are on average $300 but there’s a very high degree of value to the fabrications and the quality on it. Let me think about what else, I would say that in general I think that for fall holiday that the Juicy assortment will include about a third more SKUs priced between $200 and $300 because those sharper price points as you put it, we are definitely seeing the consumer demand those.

So about a 30% lift in SKUs that are priced between $200 and $300.


Your next question comes from the line of Chi Lee - Morgan Stanley

Chi Lee - Morgan Stanley

Question for you going back to the Liz legacy inventory, do you think that the efforts to really build the brand awareness on the new line is actually accelerating the obsolescence of the old legacy line. In other words what sort of incentive besides price do the customers have to go out and shop the old line knowing that there’s a new pipeline of product coming down.

William McComb

Honestly, virtually none. I mean what happens is they tend to be adjacent on the floor in the department stores and for the person that likes a 70% off discount sign, you know it’s a different shopper in some ways. It really is. The old line was a lot more basic and so you have to really differentiate the outlet situation versus the wholesale.

The new customer the new one that’s reacting to the extensive marketing and buzz that’s out there, they’re walking into our department store customers and by and large they’re seeing anywhere from two thirds of the store to three fourths of the floor pad being devoted to that. At the beginning, you know how this works, in January it was all excess.

In February it was three fourths excess, in March it was half. In April its more like a quarter. And there’s a good still solid core of that quarter that’s there, its just merchandised separately but in an adjacent way.

Chi Lee - Morgan Stanley

And as you continue to pull back floor space on some of the old legacy doors and the legacy businesses, from a competitive perspective who are you really seeing encroaching on that old space and where are you seeing greater presence from other brands.

William McComb

Its actually going the other way. Its, we would answer your question by saying the steady decline in 2006, 2007, and 2008, there are a number of brands including private label that was taking that space. Now you see it going the other way. Now the discussions and in fact the actions on the floor are reclaiming space and/or moving to whole new pads and/or carving out all new square footage for shop in shops.

So its going the opposite way.

Chi Lee - Morgan Stanley

And then finally the availability target for $250 million by the end of the year, does that assume any incremental cash infusions either from tax receipts or monetization of assets.

Andy Warren

No it doesn’t, that’s just our normal operating funds [lull] that we’ll have for the next seven to eight months, should yield that level of availability at year end. So all the other things we talked about are incremental to that.


Your final question comes from the line of Robert Ohmes - Banc of America/Merrill Lynch

Robert Ohmes - Banc of America/Merrill Lynch

A couple of questions, one in terms of the Liz New York line can you just sort of, I know you mentioned there’s 40 shop in shops to date, can you just tell us what your plans are for the rest of 2009 and maybe even into 2010 and whether that target has changed given the initial retailer response. The second part of that question is really of the 92 outlets, how many should we sort of see in terms of full remodels and the third part is in regards to Li & Fung, are you looking for higher IMU’s on your product category from Li & Fung and how much of that should we expect to be passed on to the customer.

William McComb

Let’s in reverse order because our memories work best that way, we’re definitely looking for higher IMUs and we said, don’t forget we said two things, we said the Li & Fung deal is accretive in terms of total G&A and will be starting in holiday 2009 accretive from a gross margin perspective.

And we have not given any guidance as, for you to plan how accretive it will be in gross margin because really by brand and by product category it depends. We’re also making some trade offs between IMU and quality. We absolutely, positively, every single one of our brands has a quality goal and a quality initiative that Li & Fung is playing into.

And that certainly came into play in that very first five week round of [tech pack] bidding that we saw from Mexx back in November and December of 2008 and we were so impressed with the simultaneous quality lift and IMU improvement that obviously like we said we rolled into an accelerated roll out of the collaboration with them.

So the answer is yes, assume its accretive. No, that its not just pound for pound dollars and gross margin that we’re also looking to improve quality. So now let’s reverse course to the first part of your question and Dave why don’t you take that.

Dave McTague

So the shop in shop growth strategy is that wholesale, you’re correct we’ve got 40 now. We had said early or I guess last quarter our intent was to roll 50 out as we’re doing the ROI analysis which happens to be pretty easy looking at how well they’re doing. Our intent would be to continue that strategy to roll out.

It also have everything to do with positioning in these A and B doors and recapturing some doors that we have long since been out of because we think that there is enormous accretive growth there for us. So stay tuned on the increments of those. Certainly we’d like to cover our top 100 doors as we get into mid 2010 at the very least.

Relative to the outlet remodels, what we have in the hopper right now and are executing by EOM June will be 14 across the country. So we’re quite eager to get those done. It’s a very clean format. We have merchandised literally to the hanger fixture level which is where we’re going with wholesale as well and we’re quite enthusiastic about getting those up and running and learning from them as we go.

William McComb

Thank you all very much for joining the call. I think everyone needs to turn into a pumpkin right now and we look forward to talking some more in the near future. Thank you.

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