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Executives

William L. McComb - Chief Executive Officer, Director

Andrew C. Warren - Chief Financial Officer

Tom Fitzgerald - Senior Vice President, Direct Brands

David McTague - Executive Vice President, Partnered Brands

Michael Scarpa - Chief Operating Officer

Analysts

Kate McShane - Citigroup

Benjamin Rowbotham - Goldman Sachs

Analyst for Robert Ohmes - Banc of America

Omar Saad - Credit Suisse

Mary Gilbert - Imperial Capital

Robert S. Drbul - Barclays Capital

Jennifer Black - Jennifer Black and Associates

Chi Li - Morgan Stanley

Liz Claiborne, Inc. (LIZ) F2Q09 Earnings Call August 12, 2009 10:00 AM ET

Operator

Good morning, everyone and welcome to the Liz Claiborne second quarter 2009 conference call hosted by Chief Executive Officer Bill McComb. After the opening remarks, we will be taking questions.

This call is being recorded and it 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 www.lizclaiborneinc.com in the investor relations section. There are separate links to the slides for webcast and phone participants.

Please note that statements made during this call that relate to the company's future performance and future events are forward-looking statements within the Private Securities Litigation Reform Act. These forward-looking statements are based on current expectations and are subject to the qualifications set out in this morning's press release, as well as in the company's 2008 annual report on Form 10-K and quarterly report on Form 10-Q for the second quarter of 2009 under the captions “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 a non-GAAP basis.

Reconciliations of adjusted results to the actual results are available in the tables attached to the earnings release and the slides captioned “Reconciliation of Non-GAAP Financial Information”. The company believes that the adjusted results for the second quarter and first half 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.

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

William L. McComb

Thank you, Melissa. Good morning. Thank you all for joining our conference call to review the second quarter adjusted earnings as reported this morning in the press release. Andy Warren, our CFO, will join me to review the quarter and discuss strategies and initiatives that are underway to turn around our performance in this very dynamic marketplace. Dave McTague will also then join to answer questions with us.

We have seen significant deleveraging in the business since this recession took its dramatic turn last September. Over the past three quarters collectively, our sales had been down 25%. Our wholesale customers, which were 63% of our sales in 2008 across the corporation have been cutting receipts on all businesses to account for new demand profiles from the consumer and sales at our domestic mall and street locations have been down consistently between 15% and 25% each quarter on a comp store basis, fueled by poor traffic at shopping centers.

And while we’ve been good at cost reduction, the story from our first half is clear -- deleveraging has gotten ahead of us and we are not profitable in this quarter as a result. While many economists are declaring the end of the recession is upon us and technically they may prove to be right, we think that the consumer has adopted a new mindset that is going to be long-lasting. Research shows that shoppers’ perceptions of job security and income levels have been steadily sliding since January and they plan to cut back now on back-to-school shopping. Interestingly, the new found concern with consumers is present at all levels of income with up market consumers displaying as much caution as the lower end shopper -- all of this suggests to us that this savvy shopper syndrome that we talked about on our last quarterly call will continue into the holiday season and that we cannot rely on easier comparisons alone to save the day.

Our efforts going forward are focused on reengineering our business to reflect what we are calling the new normal, so we are making changes to brand strategies and cost structures, to pricing, positioning, distribution and messaging, as well as getting to the right relationships between sales trends, gross margin rates and dollars, and the cost structures of each business.

No question we have a lot of moving parts in this business and with the restructuring going on simultaneously at MEXX Europe and in partnered brands, this second quarter snapshot of the business is indeed not pretty. Where other companies in our industry have cash cow fully scaled businesses, the two largest and most mature components of our business are in fact losing money, dragging down the P&L rather than providing supporting pillars. But this is just a snapshot of a point in time. Later in the call, we will discuss each of the three reporting segments, the individual business dynamics, and what we are doing to address the new normal in each.

So now turn to slide page number two, and I would like to start the call by reminding you of what we’ve said about the 2009 operating environment. We’ve not provided earnings guidance this year but we’ve talked to trends that we could see developing in sales and operating margin using this framework on this chart. We’ve said that we’d expect to see comp store sales perform at the same levels that we saw in fourth quarter of 2008, down between 15% and 25% for all three of the domestic based direct brands.

By fourth quarter of this year, specifically mid-September, we expect to see comp trends improve as we anniversary the sharp downturn that began when Lehman Brothers filed bankruptcy and the new consumer paradigm emerged.

In terms of operating margin, we said the first and second quarters would both deliver a loss, our thinking on second quarter got more bearish back in mid-June when we announced our convertible offering as we saw exchange rates worsening and the deleveraging pressures continuing. We’ve also said that we anticipate sequential improvement in the third and fourth quarter earnings as cost reductions flowed through, marketplace inventories adjust, and in the fourth quarter as more of our product has been engineered to margin better with assortments that are priced with a stronger value statement overall.

On the last call, we discussed the margin impact from the transition of inventory from old to new Liz Claiborne New York. Our operating assumptions for the year have included sequential benefit in the third and fourth quarters, as well as in both outlet and wholesale as the brand continues to transition. And overall, the [Lian Phung] transition should start delivering benefit with holiday assortments in all of the brands.

Lastly, we have been consistent that our actions and initiatives would focus on managing our liquidity position and maximizing our availability under our bank credit facility.

So with that as the backdrop, turn now to slide page 3, let me summarize briefly the second quarter results that we posted this morning compare against that framework. Comps were right in range, posting down between 15% and 23% across the U.S. based direct brands. Wholesale sales across all brands at all retailers were down 39% as well, as retailers pulled back on every brand to respond to demand changes.

Our adjusted SG&A costs were down $70 million or 16% versus second quarter 2008, a good effort on costs but now we can see it is clearly not enough, given the sales volume. We posted an adjusted operating loss of $0.48 per share, which included non-cash impact from FX translation of the Euro bond of about $0.05 per share, excluding that impact, the loss was moderately worse than what we saw in the first quarter which, as a reminder, was a loss of $0.37 per share.

Gross margins decreased 80 basis points compared to second quarter of 2008 but improved 280 basis points compared to the first quarter, reflecting the correction of inventories at retail.

We continued to manage key balance sheet metrics with inventory down 22%, accounts receivable down 33%, and debt reduction of $180 million compared to year-ago.

And finally, availability under our bank credit facility was significant at the quarter end at $215 million.

I will now turn it over to Andy to give you more detail on [inaudible] balance sheet and to discuss the convertible offering from June. Andy.

Andrew C. Warren

Thank you, Bill and good morning, everyone. Before I go through the slides, let me take a minute first to provide some perspectives on our P&L. What we have experienced throughout this year, and 2Q was no exception, is that our top line has been under tremendous pressure. The drop in sales have been significant in both wholesale and retail. Our brands are positioned in the better and premium marketplaces, where open to buy dollars have been cut back more dramatically in response to a more frugal consumer.

And though we have worked to and successfully improved gross margins and made significant cost cuts, operating margins have been hurt by the deleveraging of the top line. You will hear much more later in the call about our reengineering the P&L in recognition of this dynamic. Sales are lower, requiring us to [redraft] our brand strategies and our cost structures to this new reality -- specifically, we are further attacking the cost line in all of our segments.

We fully understand that we must do much more than just cost-cutting -- we must also focus on strategies that drive sales and rebuild gross margins. While today’s results show the painful impact of the new economic reality, we are not standing still. You will see throughout the presentation that we are pursuing strategies in pricing, distribution, sourcing, operations, and asset management to put us in a better position as we go forward in this new normal operating environment.

Now let’s look to slide 4 and I will review our 2Q income statement and balance sheet metrics. Sales from continuing operations decreased 29% versus second quarter 2008. This is in line with the first quarter variance to last year.

Total ongoing sales decreased by 23%. As you may recall, our ongoing sales exclude brands and operations that have been closed, exited, or licensed, such as our fragrance business that are not accounted for as discontinued operations. These ongoing sales reflect that brands and operations that we will have in our portfolio going forward and therefore better represent our true sales trend.

We do anticipate our third quarter sales results to have a similar composition to last year; therefore we will not need to highlight this ongoing definition in [inaudible].

Gross margin decreased by 80 basis points, driven by the highly promotional retail environment, which compressed margins, slightly offset by an increased proportion of higher margin domestic based direct brand sales. We are encouraged, however, by the 280 basis point improvement in gross margins versus the first quarter of this year. Bill will provide a more granular view of our margin trends by segment later in the call.

Next is SG&A, which was down 16% versus 2Q08. I will walk you through more details of our successful cost reduction efforts on the next slide.

Operating loss was $45 million, which was essentially flat to our first quarter loss of $44 million. Operating margin decreased year over year to a negative 6.6%. Although SG&A was down 16%, the significant sales decline, mainly in MEXX Europe and partner brands, and our subsequent deleveraging expense profile drove this negative operating margin.

Lastly, adjusted diluted EPS from continuing operations was a loss per share of $0.48 compared to earnings of $0.11 in the second quarter of last year. As Bill already mentioned, this result was consistent with the updated forecast we provided in June in conjunction with our convertible bond offering when we exclude the non-cash charge of $0.05 per share resulting from the impact of changes in foreign currency exchange rates relating to the Euro bond.

To quickly summarize the issue, after we wrote off all the MEXX good will at the year-end 2008, the carrying value of our MEXX assets, which were a natural hedge for our Euro bond, was now for the first time since the notes were issued, less than the carrying value of the Euro bond obligation; therefore, a portion of the quarterly foreign exchange translation adjustment of the Euro bond is now recorded to the P&L versus all of it through equity.

Again, all of this effect is non-cash.

Now moving on to slide 5, in our first quarter conference call, we projected our 2009 SG&A to be reduced to slightly under $1.6 billion. At that time, we had implemented cost reduction initiatives to offset the continued pressure on our top line and gross margins. Our intense focus on cost reduction continues and we now forecast our total SG&A this year to be approximately $1.575 billion.

Later in the presentation, I will outline an additional $100 million of cost actions we plan to take this year in order to properly re-baseline our total SG&A structure for 2010.

Looking first though at the current quarter, our year-over-year second quarter SG&A trend reflects our successful cost productivity efforts with SG&A down 16%. We have significantly reduced costs in our partner brands and international base direct brand segments, as well as within our corporate overhead. Cost reduction initiatives in these three areas achieved $54 million in savings within the quarter alone versus last year.

Conversely, we redeployed $7 million of retail expansion and retail infrastructure to support the net addition of 70 new stores across Juicy, Lucky, and Kate for the last 12 months.

Given the deterioration and uncertainty of the current retail and economic environment, we dramatically reduced our store platform growth for 2009. We plan to open approximately 12 stores across our domestic [inaudible] brands versus 128 new stores in 2008.

As we indicated on our first quarter conference call, we will continue to reprioritize and challenge our cost base and our business models throughout 2009. We are more focused than ever on controlling the controllables and only spending in areas that offer fast pay-back and attractive returns.

Slide 6 -- we remain pleased with the results [inaudible] capital management, especially given our challenged earnings profile versus last year. Accounts receivables were down 33%, reflecting on one hand sales decreases in our international [bay struck] brands and partner brand segments and on the other hand, our intense focus on reducing day sales outstanding.

We ended 2Q09 with inventories down 22% and total debt of $718 million, down $180 million from the second quarter of 2008. Cash flow from continuing operations of the last 12 months was $381 million. Despite the tough environment and our negative second quarter earnings, we still generated an enormous amount of cash flow. This strong cash flow includes $137 million of total net tax refunds throughout this past year, as well as the $75 million associated with the [Lian Phung] sourcing agreement.

Capital expenditures of $145 million for the last 12 months -- most of this capital spend was dedicated to the net addition of 70 specialty and outlet stores across Juicy, Lucky, and Kate, of which only nine were open so far this year. Given the tough operating environment, we had planned our 2009 capital expenditures at $60 million to $70 million versus $194 million last year. We now expect capital spend to be approximately $70 million this year as we were presented with several attractive brand right opportunities that drove our CapEx spend to be at the higher end of this previously communicated range.

Our next slide is 2Q09 inventory -- we continue to aggressively reduce inventories at the end of the second quarter with inventories down 22% compared to last year. Domestic based and international based direct brand inventories were down 16% and 18% respectively, reflecting reduced inflows and better managed excess liquidation during the quarter.

Partner brands inventories were down 32% in the quarter as they also managed inflows and reduce ongoing levels.

The Liz Claiborne brand has been and will continue to be highly focused on reducing old product inventory levels in order to maximize the value of the new Liz Claiborne New York line throughout 2009. Bill will elaborate on the successful efforts to reduce and liquidate old Liz product in our outlet stores later during the call.

Across all of our brands, we expect to head into holiday 2009 with cleaner inventories than prior years and dramatically reduce stock levels.

Moving on to slide 8, we successfully reduced total debt by $180 million versus the second quarter of last year to $718 million. You have heard us say on several earnings call 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 and 10. 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. Our cash flow and liquidity priorities for the remainder of the year and beyond are very clear -- drive continued cost productivity, improve [cap] utilization and monetize non-strategic assets.

Slide 9 -- we walked you through our availability calculation on the first quarter conference call. We will summarize the methodology today and then going forward, we will simply update you on the numbers.

Availability starts with the less of $600 million or a borrowing base calculation comprised primarily of eligible accounts receivables and inventories. Our borrowing base calculation is now down to $387 million, given our heavy emphasis on enhancing working capital terms and having clean inventories in this environment.

Total global outstanding borrowings 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 2Q, our availability was $215 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.

Now moving on to slide 10, during the second quarter we saw an opportunity in the capital markets to increaser our ABL availability, enhance liquidity and strengthen the balance sheet. The convertible bond markets had been closed for a number of months, causing increased demand for these offerings.

In June, we issued $90 million in convertible bonds, returning in 2014 at an attractive 6% cash coupon rate. We used the net proceeds to pay down the ABL borrowing base under our [many] credit facility, therefore maximizing our liquidity for the future. This transaction also extended the weighted average maturity of our debt and as a result we believe that when the time comes, we will have more options and flexibility in extending our working capital line of credit.

We weighed these benefits very carefully with a dilutive effect of the convertible when our performance improves. But in this economic environment, capital windows open and shut very quickly, so we prioritized to improve liquidity over dilution.

In the short and long-term, we believe that our investors will drive greater benefit from our now stronger balance sheet.

Now, let’s quickly discuss how we are accounting for these notes -- although the cash coupon on the note is 6%, GAAP accounting requires us to record interest expense in our P&L at the implied non-convertible debt rate of 12.25%. The notes are reflected on a balance sheet at a discounted debt amount of $69 million, with the balance of $21 million recorded at equity. This debt discount will [accrue] to par over the life of the deal.

If our average stock price during any quarter exceeds the conversion price of $3.58, we will adjust the share count for EPS calculation purposes, subject to our intent to settle the principal amount of the notes in cash. Should income from continuing operations be less than zero for the period, the share count will not be adjusted as such additional shares would be anti-dilutive.

Upon conversion, we will settle the $90 million principal amount in cash and have the option to settle any amount over $90 million if applicable in cash, shares, or any combination thereof, subject to NYSE cap on shares.

Lastly on the next slide, back in March on the year-end 2008 conference call, we outlined the extensive cost savings we realized since 2007. Slide 11 walks you from our total 2007 SG&A spend through our latest thinking for 2010. In 2009, our SG&A totaled almost $1.9 billion. During these past two years, cost reductions totaled almost $440 million across corporate, partner brands, and MEXX. On an ongoing basis, similarly defined as ongoing sales earlier in the call, costs are down approximately $350 million.

Retail expansion reinvestment totals $200 million, funding approximately $140 new stores since 2007 for Juicy, Lucky, and Kate, as well as the infrastructure required to operate this expanded platform plus increasing marketing investments.

As you can see from the slide, we planned from the beginning of this year for SG&A to be approximately $1.63 billion. During the first quarter conference call in May, we committed to additional cost actions to offset the challenging sales and gross margin trends we are seeing in the businesses.

Today, after driving cost disciplines across every part of our business, we are forecasting our total SG&A for the year to be down in an additional $55 million to approximately $1.575 billion.

Looking ahead now to next year and taking into account our recent performance, as well as the continued uncertainty of our global markets, we have initiated an additional $100 million of cost actions so that our 2010 SG&A base line is reduced to approximately $1.475 billion. This additional $100 million of cost productivity is well underway and includes further distribution center consolidations, additional headcount reductions, streamlining of support functions, and right-sizing our production teams to be better aligned with our [Lian Phung] partners. We expect the majority of these actions will be completed by the end of this year, resulting in a total impact of $100 million for 2010.

As we look forward, we will continue to reprioritize and challenge our cost base, as well as our business models and processes in order to above all reduce our SG&A as a percent of sales.

Thanks for listening and now I’ll turn the call back over to Bill to discuss our segment results and our key priorities for the remainder of the year.

William L. McComb

All right. Thank you, sir. So taking a look now at slide page 12, sales in the domestic based direct brand segment were down 8% in total during the quarter, excluding the impact of the fragrance out licensing to Elizabeth Arden. You can see to the right of this chart that comps were in range with our guidance with Juicy at down 17%, Lucky down 23%, and Kate Spade down 15%. Total domestic ongoing wholesale sales in direct brands were down 21% in the quarter, while sales outside of the U.S. were down 15%.

Sales in total at Juicy were down 13, Lucky down 8, and Kate Spade total sales were up 12.

As we saw in the first quarter, we had 70 of our stores still in their year-one sales ramp, which we know dilutes margin. Eight new stores of the 12 to be opened in 2009, as Andy indicated, were open during the second quarter. Wholesale accounted for 48% of total sales in this segment in 2008 and in the past three quarters, wholesale sales have dropped 25%, putting more deleveraging pressure on this segment as well. The cost reduction plan that Andy detailed will carve out $25 million of overhead in this segment additionally largely aimed at the support of the downsized wholesale functions and related areas.

Adjusted gross margin for the segment was up one point, driven mainly by less shrinkage and reduced air freight but also we are benefiting from a mix shift -- more jewelry and accessories and a richer mix of retail versus wholesale, both of which helped the gross margin percentage.

Those trends will continue going forward but at 53%, we are still significantly below where we want to be. We recognize that our product development, our assortment strategies, our retail wholesale mix, and our sourcing efforts with [Lian Phung] are the keys to better margin.

As I’ve said before, in late fall and holiday our lines will be showing more changes in that direction and our teams have been working with new assumptions and consumer insights as they plan their assortments, pricing, and product costing for their spring and summer 2010 presentations.

Again, here are some salient facts about fall and holiday -- at Juicy, over 40% of apparel items will hit the shelves at opening price points. We expanded the presence of higher gross margin categories like jewelry and are offering fewer consumer choices on handbags at Kate Spade and a very important initiative at Lucky Brand, now half of the blue jeans inventory beginning in October will be priced at or under $99 price points. This is going to be very hot with well differentiated product, a clear good, better, best strategy. You’ll see more innovation at each price tier there.

Within the $100 million cost initiative that Andy introduced, $25 million will come out of this segment. This $25 million will come from consolidation of distribution centers and other facilities, reduced wholesale support teams and frankly with sales down overall administration as well as some merchandising and design team support will be cut.

Currently the segment is operating with a fully loaded SG&A rate of over 50% and while we know that that number should be between 35 to 40 at a normalized level, our biggest lever here is store productivity, not cost cutting. For that reason, our merchants are focused on building productivity as the number one mission going forward.

In addition, we still have a significant reliance on wholesale with these businesses. Wholesale tends to be incremental during times of expansion and robust economic growth but in times of contraction, it can be dilutive, reducing productivity in our own stores and adding undue margin pressure through promotion practices. So we are reevaluating and reevaluating our wholesale strategy, ensuring that door by door we are working with the right partners, we are giving them the right assortments, and that we are doing as much differentiation as possible between their offering and the assortments in our own stores.

Take a look at the next page, slide page number 13 -- the next two segments where our sleeplessness begins are here. Whereas liquidity and bank loans kept both Andy and I up at night during the late fourth quarter last year, now it’s the excessive losses coming from both partner brands and international direct brands that keep us up at night. In both cases, we are taking swift action to reduce their drag while addressing the underlying fundamentals.

Where the problems at MEXX began with the wrong management team, the problems in partnered brands are more fundamental. Archaic business practices in the industry, which are driving down profit pools, exacerbated by life cycle management gone awry over many years here on the Liz Claiborne brand, which we are just now correcting.

So first let’s take MEXX -- in international direct brands, we again have to differentiate the MEXX business in Canada from the business in Europe. Total sales were down $73 million in the second quarter, down 31% in Europe and only 3% in Canada excluding FX. We saw huge cuts in orders this quarter from some of our Eastern European partners who are seeing significant declines in traffic and sales across the market. Comps in our own stores in Europe were off by 15%; in Canada, they were off by 7%. Gross margin rate improved during second quarter versus first but was down versus year-ago. We experienced a high product return rate during this quarter and the promotional impact has taken its toll even in Europe.

We’ve continued to close on profitable concession as we rationalize the distribution strategy but costs at MEXX Europe remain hugely out of line post deleveraging. We’ve cut $87 million to date but MEXX's share of the $100 million cost-out program that Andy detailed is $25 million more, which will be implemented after Thomas Grody, our new CEO for MEXX, arrives. He begins formally in his role on October 1st and he will land with a well-constructed turnaround plan.

He will be creating a strong divisionalized product team structure and building a truly merchant led organization. A few weeks ago we announced three new appointments who will join Thomas’ management team. Volker Schmidt will join as global head of wholesale development and Sales Vice President for Region 2; Jim Novak will join as global head of product for all divisions. Both Volker and Jim came from Esprit, where they worked with Thomas for many years and will start on November 1st.

And in addition, Newt Bergdorff was named Vice President of Marketing for MEXX worldwide. He is a seasoned professional marketer who has tremendous experience in brand building and is most recently coming from the TBWA advertising agency.

Restoring a growing and profitable wholesale business in our core markets in Europe is the first priority in their turnaround plan. Thomas plans to keep capital spending limited while he focuses on building a truly great, very commercial product line. We will detail their plan more specifically after Thomas arrives.

Needless to say, the drop in sales we saw here in second quarter is putting significant pressure on our corporate profits and this trend will continue through the end of the year. But we have bought Thomas and his new team the time that they will need by taking the proactive steps to shore up our balance sheet. And while it won't happen overnight, we are confident that Thomas and this management team will lead an effective turnaround. MEXX is still a large business with deep roots in a dozen markets and a renewable brand resonance.

So turning to slide page 14, as I said the second topic keeping us up at night is the partnered brands group, where we posted a reduction of approximately 600 basis points in operating profit margin from already anemic year ago levels.

On one hand, the brands in total serving J.C. Penny’s and Kohl’s are performing exceptionally well and Monet performed very well too, reflecting the strength in general of center core jewelry all through the year. On the other hand, the Liz Claiborne, Kensie, and DKNY Jeans businesses were all I’d say severely impacted on the sales and margin lines from inventory contractions and promotional activity at the tier two department stores we serve in this segment. Sales for this segment were down 28% in the ongoing partnered brands, the apples-to-apples measure [inaudible] that we are still operating following the strategic reviews of 2007 and 2008.

Adjusted gross margin rate was flat to a year ago and up versus first quarter, reflecting the mix of old versus new Liz Claiborne improving as we sell through the clearance inventory.

On slide page 15, as we said the operating margin was down significantly to negative 6.2%. The primary driver of this decline as you can see on this page was in fact deleveraging, stemming from the cuts made by department stores to contract inventory. For DKNY Jeans and Kensie, these zones saw real drops in traffic and sales, thus provoking what I would call a true inventory contraction. For LCNY, the new Liz Claiborne New York, it’s a different story, which I will detail in just a minute.

But to address the deleveraging head on, we implemented cost reductions as Andy said back in February but these ultimately were not enough. So on Monday of this week, we began implementing a new plan to bring down SG&A in this segment by $50 million, reflecting our belief first that we can run the LCNY business with greater simplicity and much greater efficiency and the cost reductions that we are implementing here, the $50 million, will virtually eliminate the segment loss at today’s sales and gross margin levels, an important step in righting this business swiftly.

The next page, slide page 16, in terms of the Liz Claiborne New York business, the story is very mixed. Let me detail it for you. First of all we are extremely pleased with the partnership between the brand and Isaac Mizrahi. What a shame it is to have had to relaunch this brand into the jaws of a serious recession which has clearly affected our department store partners willingness and ability to support drastic changes in penetration and volume at time when they are across-the-board reducing buying risks and cutting inventory levels. They are clearly playing it safe right now with their inventory dollar, favoring the tried and true versus the new.

But there are bright spots in the results and lessons learned on how to move forward in a conservative and risk averse environment. First, the outlet business, which is about a third of domestic Liz Claiborne brand sales, has seen positive results of the relaunch where the new product is being very well received at the consumer level. We are seeing year-to-date AURs that are approximately 50% higher than Liz Claiborne product in the same stores a year ago. The gross margin year-to-date on this new Liz Claiborne New York brand at outlet is in line with our goals, approximately 600 basis points of improvement versus the Liz Claiborne product in stores last year.

We opened 11 new concept stores that have a completely new look and feel and costs only about $150,000 each to redo, an amazing statement for such a tiny investment. These stores still feature a significant amount of old Liz clearance which we are working through but the new Liz Claiborne New York product is prominently featured and is now the focus of merchandising in those doors.

In these stores we are seeing AUR, conversion, and gross margin that are significantly higher than the rest of the fleet. While the outlet business in the first half contributed 30% of our operating loss in the partner brand segment, the trends we are seeing so far with the new product validate that we can return this channel to profitability, as we’ve been discussing, as we sell through the old inventory. New Isaac inspired outlet products accounted for only 2% of our sales in our Liz Claiborne outlets in the first quarter and still only 20% of sales in second quarter, again due to the inventory load of old products. But by December of this year, we expect the new Liz product to account for 70% of sales in these outlet doors.

In terms of performance in department stores, we built 43 shop-in-shops that have proven to be very successful, where we are selling to a younger clientele, where we sell more fashion items than before, and where the AURs are significantly higher than we’ve seen in years. But the results of those shops in the middle of this great recession have not swayed our partners to expand volume and penetration an A doors that we have lost over the years.

Our partners have told us that they want a stronger presence of both replenishment and seasonal key items from historically proven winning product categories like cut and sew knits, sweaters, and pants. They are very complementary about the design and quality and look of the line, the overall line presentation, and the pant bit has been a big home run. They like the sales trend on key items but in general they are looking for more basics as they are taking very conservative approaches to fashion. They have said that this is an essential step in getting expanded distribution so we are responding to their input. We continue to see terrific media coverage of the relaunch in markets across the country and so we remain patient and at the same time we are focused on expanding distribution in conjunction with addressing retailer feedback on the product and merchandising mix.

The next page, titled reengineering strategies, the approaches to address sales, gross margin, and SG&A, which are many fold, are summarized on this slide here. As Andy and I have said many times, we are addressing virtually every element of our business model to adjust to the new consumer paradigm that we are seeing, where more premium priced better [inaudible] brands are really battling for share with value-sensitive deal conscious consumers. We’ve covered a lot of initiatives in the presentation and this chart is a good lead behind for you to summarize all of them. As we’ve said, Melissa said at the beginning, it will be available in the deck that you can access at our investor relations website after the call.

Lastly, I want to focus on slide page 18 on second half 2009 perspective. While we are still not providing any specific adjusted earnings guidance for the remainder of 2009, we will continue to say that we are taking a cautious outlook and we believe that the fourth quarter may end up being more promotional than some analysts or competitors are projecting. In fact, when we consider that last year saw across the marketplace strong unit volume sales in response to aggressive promotions and this year the quantity of inventory will be lower, we are not banking on a material rebound in pricing to cover the lost units. Broadly speaking, we think that this could be the industry surprise of holiday 2009 -- sales declines on top of sales declines as demand remains tepid, begetting unplanned markdowns and fewer gross profit dollars to cover expenses. So until we see evidence of sales rebound, our first line of defense remains cost cutting, with virtually every retailer lowering prices in one form or another to go after what we are calling the new savvy shopper. We foresee a very crowded marketplace, a very competitive environment with highly compressed pricing. We think it’s likely that a high number of retailers in 2010 will start to close stores as they continue their work to bring supply in line with the new demand curve. The first wave in addressing this, as we’ve seen, is inventory and prices but the second wave we believe will be square footage reductions. Both suggest an ongoing promotional environment.

So we think consumer spending in apparel and accessories will remain depressed while even the threat of unemployment continues to plague purchasing. And so we are now projecting that wholesale net sales will continue to decline in the third quarter by the 25% to 30%. In total, sales for the company will likely be down in the 20% to 25% range for third quarter and 10% to 15% for fourth quarter.

One driver of reduced sales remains reduced traffic overall versus year-ago levels but particularly in the Northeast. As well, we see retail partners managing inventories through the fourth quarter, down double-digits, not single-digits. And in terms of gross margin, we are projecting that the third quarter will be flat to second quarter 2009 and will show improvement in the fourth quarter by 100 to 200 basis points compared to third quarter.

Okay, that’s a lot to swallow. We’ve had a lot to say this morning. What we’d now like to do is open the call up to questions. So Melissa, go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kate McShane with Citigroup.

Kate McShane - Citigroup

I just wanted to clarify one of your comments as you went through your outlook -- last quarter you had said you expected Q4 comps to improve as you anniversaried the downturn and the original guidance was for Q4 comps to be flat. Is that not the case any longer based on your comments?

William L. McComb

Very good question -- obviously you are hearing a slightly different tone from us as it relates to third and fourth quarter. You know, we think it’s very hard to call sales right now on it. We have said that as we begin to anniversary the big downturn starting in September, we’re saying that we believe the retail comp trend will flatten -- that doesn’t necessarily indicate zero. It could be in the -- the comps could be down in the low-single-digits, and that could happen. Obviously the profitability of the company in the fourth quarter will be very dependent on what the sales levels are. The call that we’ve put out here is that in general for the company, we think that sales will be down between 10% and 15% and that takes into account a projection that wholesale net sales will decline fairly significantly.

Kate McShane - Citigroup

Okay, great and are there any brands of yours at the department stores where you think inventories still need to be worked through?

William L. McComb

You know, as I think about it, no -- I don’t think we have any significant inventory bubbles out there. I think that what you are hearing in our tone is there is less of an inventory related issue around potential markdown liability in the fourth quarter but what we are doing is we are saying that the consumer phenomenon a la what we are hearing, seeing, and feeling about our own insight about back to school, the reticence of he consumer to show up and actually come back with a lot of spending suggests to us that the actual base consumer demand will be soft and that retailers will be -- that they will be promoting. Not from the perspective of last year to dump inventory -- our inventory levels are very clean at retail, even on the Liz business where there’s still some level of clearance out there and will be but that’s mainly in our outlet stores.

Kate McShane - Citigroup

Okay, and then the final kind of housekeeping question in regard to inventory, can you give a number of what inventory growth for the quarter was excluding the impact of the discontinued brand?

William L. McComb

Let’s go on to the next question and we’ll circle back to you on that.

Operator

Our next question comes from Ben Rowbotham with Goldman Sachs.

Benjamin Rowbotham - Goldman Sachs

Good morning and thank you for taking my question. It really relates to MEXX -- I was wondering what the historical gross margin rates have been there, like where you think you can get them back up to. And also when Thomas Grody does step in, what exactly is going on in the wholesale segment that he can change and what kind of timing could we possibly see around upside there?

William L. McComb

Well, I mean, one of the benefits of Thomas’ deep experience in France and Germany and Benelux and even Eastern Europe -- and frankly that as well of Volker Schmidt who is coming in for that big market in Germany where we have really been under-developed and it’s a huge market, the wholesalers knowledge and respect of them and their knowledge and respect of Jim Novak coming in as head of product, I think it’s going to drive a wave of interest to come and see their work and I think you can't underestimate how important that as a door opener is. This is a very well-known, well-regarded, and well-respected management team. That’s point number one.

The wholesale marketplace in Europe remains a very attractive marketplace relative to the wholesale environment in the U.S. because it’s very different. It is not nearly as fragmented -- or I should say it is very fragmented. It’s not nearly as consolidated. It’s lacking the oligopoly that you see market to market in the U.S. There’s a much stronger mix of three, four, five, six, seven door mini chains and the structure and partnership, they don’t have this what I call this archaic industry practice where there is a landed development price for the product and then there is all this series of markups and then there are all these series of markdowns and then an end-of-season reconciliation process. They don’t do that over there. There isn’t an end-of-season process. They tend to manage their inventory more efficiently and in many cases, there are -- the vendor themselves have more control points, whether there are a significant number of concession points and the space tends to be more controlled.

So it’s attractive. I will say what’s going on over there like no where in the world right now is exempt from the trends that we are seeing in both wholesale and retail. It’s not as bad in some markets in Europe as it is here but there definitely is contraction.

That said for us, I think it’s fair to say we’re at rock bottom and there’s a real opportunity to rebuild and accounts that stopped coming back to our show room three seasons ago have indicated an interest to come back, so that’s the upside. This has a lot to do with getting very, very sellable product. The retailers in those core markets -- Benelux, France, and Germany will say that the brand name MEXX has a lot of horsepower in it and they are just waiting for somebody to unlock it with great product execution priced right with the right value proposition with quality.

Benjamin Rowbotham - Goldman Sachs

That’s great and if I could just squeeze one more in -- the Liz Claiborne outlet group, can you talk about how -- what the comp trends have been there, and then specifically within the stores that have seen the new product rollout and then how fast of a flip in profitability can we see? Those are pretty large AUR jumps that we are seeing, at least per your slides.

William L. McComb

Absolutely -- first of all, I think you know we don’t disclose separately Liz Claiborne outlets from a comp perspective, so I can't now start commenting on that. We are going to try to give you as much data as we can -- we try to increase the flow of knowledge and information so that you can build your models and I know that’s what you are trying to get at here.

I think -- you’ve got to look at -- I mean, we’ve given you some data here that I think is helpful. We said that 30% of the loss from the Liz Claiborne outlets has come so far this year has come from the outlet business and -- 30%. But that’s with -- in first quarter only 2% of the inventory being sold was the new product and in second quarter, only 20%. And so as we -- to answer your question as the mix old versus new changes and frankly we get even better and better and better at the mix of fashion and core items, I think that we would be talking about profitability flowing through some time in 2010. And I can't be specific about quarter or the profile -- a couple of other factors that depend on it but it really relates to the clearance of the old product, getting it out.

Benjamin Rowbotham - Goldman Sachs

Great, thanks for that and best of luck.

William L. McComb

Thanks, Benjamin. Let’s go back to Kate’s question -- I think Andy has an answer for Kate.

Andrew C. Warren

The answer is for the inventory at the end of the second quarter, the impact was actually de minimis from brands that were licensed or closed. The inventories on an apples-to-apples basis were down 21% versus the reported 22%, so it’s a small impact.

William L. McComb

Kate is not on so she can't get clarification but let’s keep going. Melissa, next question.

Operator

Our next question comes from Robert Ohmes with Banc of America.

Analyst for Robert Ohmes - Banc of America

It’s [Helene] calling in for Robbie -- a quick question on the department stores. Can you just give us a little more -- I don’t know if spring bookings for 2010 have come in but just sort of what the department stores are thinking in terms of the order books, whether they remain as cautious as they have been for fall and holiday.

William L. McComb

Okay, you know what, spring -- the only markets that have taken place to date are jewelry and accessories, like handbags. Actual apparel markets open in early September so we have no forward-looking comment about how those markets are going. Dave McTague is here -- Dave, any comments you want to make sort of qualitatively to answer her question about the accessories marketplaces?

David McTague

To your earlier comment, Bill, just about product architecture and pricing, we’ve been very thoughtful in responding to the consumer and the retailer. We did launch Spring ’10 market, accessories market a week ago in Monet as well as Liz Claiborne. We were very pleased with the results. We presented a much more focused collection and a tighter point of view, very strategic in pricing and a good, better, best format and worked much more collaboratively with the retailers in what the assortments that they will have on the floor in addition to our brand.

So I would tell you that we are very pleased with the market results.

Analyst for Robert Ohmes - Banc of America

Thanks, and one last question -- what tax rate are you guys using for the back half?

Andrew C. Warren

About 33%.

Analyst for Robert Ohmes - Banc of America

Thanks.

Operator

Our next question comes from Omar Saad with Credit Suisse.

Omar Saad - Credit Suisse

On the $100 million SG&A target for next year, some of the restructuring initiatives around that, a couple of things -- one is how do you get comfortable with the kind of run-rate you’ve been running at, I think it’s roughly 52% SG&A rate as a percent of sales -- how did you get comfortable with target? Is it a bottoms up -- do you use a bottoms up approach or a top down approach? And then given the importance of your need to drive sales to generate some leverage on the SG&A dollars, how do you make sure that you are not pulling away much needed investment behind some of the brands to drive the top line next year?

William L. McComb

Well, I still think that we’ve taken a fairly conservative approach at that. I mean, let me start with the partnered brands number, which I said was $50 million, half of the $100 million cost-out. Dave has had a watchful eye for nine months now on the development process and model on the Liz Claiborne brand and I will tell you we were very, very careful as we worked with Isaac from the start of 2008 through the launch of this to not in any way start making big fundamental changes in the level of resources. But now as we have gone through call it three major seasons of product development, we have a comfort level now that [Lian Phung] has fallen into place and the dust has settled from sort of all of those transitions, we are very clear about where streamlining will actually drive a faster flow of product, quicker approvals, and frankly a better result for us,

In terms of bottoms-up, tops-down, I mean, it’s a little bit of both. I mean, the reality is the deleveraging impact you can't ignore and you have to look at the metric and say all right, we’ve got to be driven by it and partnered brands, it’s very top down from the perspective that the sales deleveraging that is there, we really need to respond to it. As I said on the direct brands where we plan to take $25 million out, I said that those three brands are running at a combined SG&A level that’s over 50% and while we want it to be between 35 and 40, the primary lever there is sales door productivity, dollars per square foot. And so over there, we are very selective in bottoms upping in direct brands the cost profile. So we didn’t take a target and say we’ve got to cut it to this level -- frankly, that would involve -- it would involve closing stores and it would involve cutting too deep.

At MEXX, I still think that the $25 million number is a light number. I think the $25 million of this 100 just reflects that there are some things that Thomas’ team that’s in place right now has on their mind to do. I think Thomas will come in and when he gets his turnaround plan secured and prioritized, he will do even more than that.

But in general, Omar, there’s a sense that you’ve got to change your models during this. I mean frankly, in some cases we have too much product development going on, we have still a proliferation of styles and in some cases design adoption rates that are not right. It’s slowing us down and we just planned to use the cost reductions to bring a little more edge to the business.

Andrew C. Warren

And Omar, just to add to that, you’ve heard me say before that cost out is a process and these actions that we laid out is the result of an ongoing process that we’ve been pursuing here. It’s looking at outsourcing opportunities of our back office, it’s the distribution teams looking at and analyzing how do we further consolidate our distributions and look at do you see bypass with our customers.

So this is a result of an ongoing two-year effort that it continually ongoing and we are not going to ever stop this effort of looking at every element of our cost structure and how do we make it more productive and streamline it. So this is a result of a lot of those efforts that we continue to look at daily.

William L. McComb

I mean, in every case we ask our top executives -- at the end of the day, is the resulting organization smarter, faster, leaner, more entrepreneurial, a little edgier, more empowered, and I think the answer is yes and I think that as Andy said, some of these things have been long studied like fundamental changes in the distribution model -- we’ve been working on that like we did the [Lian Phung] deal for months before we announced it.

Andrew C. Warren

And I will say clearly that though we feel very comfortable with this $100 million get, our view is we are never done and we are going to continue to look at this $1.475 billion new base we have for 2010 and come up with new ideas and better ways to gain productivity. So this effort is something you will hear from us for several years to come.

Omar Saad - Credit Suisse

Okay, so if I kind of run through some of the numbers you gave as the target for SG&A dollars this year and some of the top line ranges for the second half, your SG&A rate is going to be [retracting] over 50%. What’s your -- versus I think 45% last year and in the 30s a couple of years ago. Where do you think -- how do you think this plays out here because it’s very hard with a gross margin under 50% to operate at an SG&A level above 50%. When do you think you will see that cross over where the gross margin -- where you get the leverage on the SG&A side or the cost combination of leverage and SG&A where you generate a positive operating margin?

William L. McComb

Well, a lot of it is dependent, right, on what happens with the outlet business, which is a store productivity story, so it’s about those AURs on the Liz Claiborne brand in those outlets, and outlet turning to profitability there. And it’s about store productivity at Kate, Lucky, and Juicy. Juicy is already very juicy, right? It’s got very, very high productivity per square foot. But we actually think that there’s more growth to be had there.

And at Lucky and Kate, the opportunity is significant and it’s central to the thesis of SG&A at the total corporate aggregate line coming down. MEXX is the other big part of it though -- I mean, we’ve said that in one fell swoop, we’re going to get partner brands to a level that is smart and that is sustainable, that can feed the business and fuel growth and that can eliminate a loss.

And on the others, on both of the others, it’s about sales productivity.

Omar Saad - Credit Suisse

Okay, and then one last question on the same topic -- the $100 million target, you kind of sound a little bit more cautious on the top line in the back half. If you need to go deeper if the recession gets deeper and -- how much deeper can you go on the cost-cutting side?

William L. McComb

You know, I would never give a number because I really believe in the power of cognitive dissonance. Like I said when we took a hard look at what was going on with sales over the last three quarters being down in total, corporately 25% -- the power of that deleverage is so significant that -- I mean honestly, when you are backed into that corner, you see ideas, you see options, you see better models and you can respond to them and so the answer is -- I think Andy answered your question really well. I’ll tell you, if the world is surprised by the level of promotion activity and the softness of the consumer through third and fourth quarter, we absolutely will be back on the call talking about more things that we can and will do and we will always have an eye on what capabilities are core to this enterprise and this company and what are frankly more hygiene or context that can be done in other flexible ways.

Omar Saad - Credit Suisse

Okay, thank you. Good luck.

Operator

Our next question comes from Mary Gilbert with Imperial Capital.

Mary Gilbert - Imperial Capital

Good morning. Kind of keeping on the same subject, when we’re talking about the Liz Claiborne New York business, this is the -- used to be the sort of core franchise, it’s interesting because it sounds like the -- like a Macy’s, let’s say. They want to have more basics -- they don’t want to take risks but it sounds like you are getting good sell-through on the product in the outlet business, so I guess my question is it sounds like you are designing something that is relevant to the consumer but the department store wants to take a more conservative approach but it might not necessarily be what the consumer wants. So I wondered if you could address that.

And then two, you were just talking about getting the whole partnered brand, including this core LCNY kind of back to normal profitability cash cow levels, when can we see that and then again, most concerned about what’s going on with that LCNY business with the core department stores and how we get there?

William L. McComb

Well, I’ll let Dave make some comments in a second too on this because we probably each have different or complementary perspectives. The first thing you should know about outlet is that the merchant team in outlet that does design for outlet product with the design team that works with Isaac, they in fact have -- I don’t want to distort your view, they have built fantastic replenishment business. They have a lot of basics, they have a lot of the same kind of core items that the merchandising teams at say Macy’s want a piece of and so when we talk about the new Liz Claiborne product selling in outlet, frankly it’s a good mix of fashion and basic core. I think that that merchandising team is frankly going down a path of having a lot of bread and butter because that’s what the outlet business is about.

There’s no question that I think what we are saying is that -- and seeing in terms of merchandising the floor, what the 43 shop-in-shops that we control have in common with the outlets that we also control are, this fashion statement has actually attracted a whole new customer while in addition, exciting and delighting the core consumer that we’ve had. And so the fashion part of the business, it’s not just what sells through -- it’s the look and the gestalt that it brings to the brand that has been very important.

There is no question that department stores are playing it really safe and that they approach the relaunch with business as usual, really anniversarying off of what was a terrible fall 2008. You know, they planned spring 2009 even though Isaac was doing the business and there was a lot of great stuff to buy, they were really taking it experimentally. They wanted to learn from the shop-in-shops that we were doing. They are listening to us about outlet. I think that we are working very collaboratively but it’s going slow and it’s going slow because as I said, we launched into the jaws of a recession and they are managing it very conservatively.

Dave, what’s your perspective on this?

David McTague

I agree with you, Bill. I think some of the other comments that you had made earlier, you know, the consumer mindset and paradigm at the department store is a different consumer in most cases than this outlet consumer. The department stores are driving traffic through promotional activities, period. That is impacting AUR. It certainly is impacting what the assortment architecture needs to be and we are moving with great speed to an architecture that is more similar to what we are being successful with in outlet with the department stores, collaborating with them all along the way.

I think the main delta in first half ’09 between outlet and department stores outside of these 11 renovated stores and the 43 shop-in-shop concepts is primarily the amount of fashion versus replenishment and key items. And a key item in an outlet store is eight or 10 colors -- I mean, it is a very significant inventory commitment. It is intended with a throughput mentality. It has a sell-through rate on it that they attack and we have total control of that presentation and environment and there is a dedicated consumer traffic pattern in those outlet stores.

So there are several differences there between the two. I would say everyone is seeking the same thing. The traction is a little slower with department stores. I think the fashion percentage out of the gate was a little higher and more broad. We’ve also shifted that in the back half of the year, moving about 15% out of fashion and into more fashionable key items in color multiplier with new price points. I mean, we’ve attacked our pricing strategies tremendously by classification in a good, better best strategy, really clear on what the out-the-door retails are going to be in this promotional environment, so with [Lian Phung], we have attacked this from a sourcing perspective and where maybe our gross margins aren’t reflecting that it’s primarily because we’ve been honest about what the out-to-door retail needs to be.

Mary Gilbert - Imperial Capital

Okay, and so now we are not going to see -- I want to make it clear -- when are we going to see this in the stores and is this really going to affect 2010 or will we also see these -- the new price points that are good, better, best in the stores for the holiday?

William L. McComb

Well, you will absolutely see it for holiday. I mean, we started this program from Q3. We moved it in double-digit percentages for Q4. Naturally Q4 is more of an item-centric presentation and selling of commodity, if you will, from a gifting perspective anyway. So taking that normal -- whatever normal is today but taking that into consideration from Q4, we have dramatically added to that. So you will absolutely see that in the back half of this year.

Mary Gilbert - Imperial Capital

Okay, great. And then one other thing on the wholesale direct brand segment, it sounded like there was a concern about the strategy there. I guess you feel -- I was wondering if you were questioning the whole approach with the wholesale business on the direct brand. Could you talk about that a little bit?

William L. McComb

Well, the answer is yes and what I said in my comments were that in times of contraction, wholesale can be dilutive. If the market is shrinking, it can actually reduce productivity in our own stores and add undue margin pressure through promotion practices. And so -- also we put a lot of capital into building out a store fleet so I will tell you the general managers and merchants in those businesses are thinking about everything we do needs to increase the return on invested capital on that invested base of stores. And I don’t want to leave you with the impression that we are looking to get rid of wholesale. I mean, we try to think from the consumer perspective and so we think about literally in markets how can wholesale add to accessibility for the brand? I think that what we are thinking through is we are thinking through differentiated assortments door by door, even more aggressively and thinking about reduced numbers of doors.

Mary Gilbert - Imperial Capital

Okay. Basically what you are trying to do is just reduce the effect of cannibalization, especially in a climate like we are in now, right?

William L. McComb

That’s exactly right. If you stop to think that there are -- that there will be less transactions just in aggregate, what we don’t want to do is dilute -- again, there’s -- a lot of this conversation has been store level productivity. That will kill us. I mean, go back to Omar’s comments about the SG&A -- to get the right way to think about SG&A and direct brands, yes, we are making $25 million of smart cuts as a part of this $100 million. I don’t want to do $200 million in direct brands -- I want to grow the sales number and I want to do it through all the smart merchandising and recognition of the value-centric consumer that is out there.

And wholesale can be dilutive and also as we have said, that some of the promotional practices that we’ve seen in the last year have been really rough on the profitability in this segment.

Mary Gilbert - Imperial Capital

That makes sense. So when are we going to be able to affect the assortment to be differentiated enough and then sort of reduce the cannibalization effect? Is that 2010, later in 2010?

William L. McComb

Well, it’s the teams -- honestly, the teams are working on it right now. I think that that’s a big part of the spring markets, so spring 2010 is a big part of it. So thank you, Mary. Thanks for your questions. I think I want to be mindful of the time because we are past the hour timeframe and there are a couple more queued out there, so go ahead, Melissa.

Operator

Our next question comes from Robert Drbul with Barclays Capital.

Robert S. Drbul - Barclays Capital

I’ve got two questions, really -- the first one, Andy, when you look at the debt levels, are there any targets that you could share with us, either for the end of the third quarter or the end of 2009?

Andrew C. Warren

Bob, we don’t provide guidance on that but clearly --

William L. McComb

Less is more.

Andrew C. Warren

Yeah, I mean, we are -- as I said, we are so focused on generating as much cash as we can through operation activities and all that going to deleverage the company. We do -- we are getting into our better cash flow half here, the second half so we do anticipate further debt reduction between now and year-end. But I won't quantify it for you but I assure you it’s one of our key priorities and strategic imperatives for the next six months.

Robert S. Drbul - Barclays Capital

Okay, and then the second question that I have is when you look at the Juicy business and the Lucky business, with some of the opening price points or lower price point initiatives for the back half of the year, is there a number in terms of average unit retail declines that you see happening in both of those businesses? I’m just trying to understand how that should play out from a dollar sales perspective with the $99 jeans and what you are doing at lower price points for Juicy?

William L. McComb

Well, I’ll tell you that Lucky Blue Jeans at under $99 -- and by the way, I said that 50% starting in October, 50% of the inventory would be at $99 or less. So I won't get into anymore -- I won't divulge anymore of the specific price points but we have spent -- the team at Lucky has gotten very, very smart about the denim competition, about that consumer, and they are implementing I think the first time a really well differentiated good, better, best strategy but the answer to your question on the denim is that yes, the AUR will definitely come down but we have data at Lucky on what happens to unit movement when denim is promoted at under $100 and I can tell you the uplift is significant.

So the model really accounts for, from a profitability perspective, we see enhanced total store productivity driven by important lifts in unit movement, and it’s to be seen in this kind of marketplace how that math will work out. I mean, I’ve conceded that I think that in general, the market may be surprised by the level of unit movement up-tick -- will it really offset the price, the AUR declines? TBD. At Juicy, it’s a little bit like what I just said about Lucky -- I mean, to be honest with you, people walk into the Juicy store and they are looking to spend a lot of money and when items are below $90 or below $99, they move. They move, they move, they move. And our data all this year shows that and so we look at full price sell-through at different price points and we feel really good about the unit movement supporting the higher turn to support a profit level there.

Robert S. Drbul - Barclays Capital

Thank you very much. Good luck.

Operator

Our next question comes from Jennifer Black with Jennifer Black and Associates.

Jennifer Black - Jennifer Black and Associates

Good morning. I wondered if you could -- I have a couple of questions I am going to ask one at a time. Can you talk about Liz and Co and J.C. Penny’s -- we haven’t really heard anything about that. And also Claiborne Men’s and John Bartlett. That’s my first question.

William L. McComb

Okay, Dave.

David McTague

So relating to Liz & Co., we continue to be extremely pleased. You are all aware of J.C. Penny’s comp store reporting and although we don’t go to the detail level of what those results are, we are far out-performing the competition as well as store sales. We continue to be extremely pleased across the board in ready-to-wear, in handbags, small leather goods and accessories, and we’ve been expanding in other license categories with test-and-go strategies in everything from sleepwear to swim, et cetera. So we are very enthusiastic about that business.

Relative to the Claiborne by John Bartlett, that business similar to the reboot and relaunch of the Liz Claiborne business, is in that start-up mode. It has been a challenging business. The men’s business at large as you know, whether it be at Macy’s or Bon Ton, [Belk] or Dillard’s, has lagged women’s wear fairly significantly. And we are continuing to work closely with the retail community on a growth strategy there.

Right now, we are primarily distributed with Bon Ton in the Midwest and we are having average results right now.

Jennifer Black - Jennifer Black and Associates

Okay. All right, well, my next question is are there any brands that you would shelve or sell? We haven’t heard anything about Monet and I just wondered what your thoughts were.

William L. McComb

Well, Monet is on fire. I mean, I just sort of politely said in my comments that on one hand in partnered brands, that our business is in total at Kohl’s and Penny’s and Monet are doing extremely well and no, I mean, we are done with strategic reviews. Honestly, we are. So no, not looking to shelve anything else.

Jennifer Black - Jennifer Black and Associates

Okay, and then I also wondered if you are having your retailers come to you to partner on product and I am not talking about special makeup -- I’m talking about actually partner with say Juicy or Lucky?

William L. McComb

Tell me what you mean by partner, because I mean -- I think the people at Juicy and Lucky would say that’s what we are doing right now, but I can tell you’ve got something different in mind, so tell me what you mean.

Jennifer Black - Jennifer Black and Associates

What I mean is to design a line specifically for a retailer, not just a color change but -- an explicit difference in the product.

William L. McComb

No, I mean, just to be honest, not really. All during my tenure here, I mean, we’ve done different kinds of strategic reviews. We’ve look at changing models. The Dana deal with Kohl’s was a really important and smart deal for us, which by the way is doing great -- a lot of what Dave said about Liz & Co. you could say about the Dana Buchman model but I wouldn’t say that in the last year or six months with all that’s gone on that there’s been a newfound interest to do something like what you’ve said. In fact, I would say there is less talk of that.

This whole notion that I said about wholesalers putting their head down in the sand and getting very risk averse, that’s really what is happening. They are looking for the tried and true, they want to buy off the line. The level of do customer things for us, we’re not hearing a lot of that.

Jennifer Black - Jennifer Black and Associates

Okay. I just have one short one and then one bigger one -- the Nordstrom sale, you had lower price points at -- you know, with Juicy and I was just curious to know if that was a good event for you, because it looked like it was.

William L. McComb

No, it was not and I won't make any other comments on it.

Jennifer Black - Jennifer Black and Associates

It was not a good event?

William L. McComb

I would not make any other comments except to say no.

Jennifer Black - Jennifer Black and Associates

All right -- interesting.

William L. McComb

We don’t appreciate those kinds of promotions.

Jennifer Black - Jennifer Black and Associates

Okay. And then lastly, in lieu of his reality TV show and now the QVC venture, how does Isaac Mizrahi prioritize his time, where does Liz fit in with the mix and can you speak as well to Tim Gunn? Thank you.

William L. McComb

Well, in terms of Isaac, it’s super clear, right? I mean, he has -- first of all with Isaac, I can’t help but laugh but say that I could divide his time up and it would add up to 200%, because that’s how he is, sort of super-human. But he’s got a super, super effective model and our model with him, you’ll remember all the way a year-and-a-half ago Dave co-located his merchandising and design team in Isaac’s atelier over on 10th avenue and that was frankly to be able to eliminate a lot of transportation wasting time. But we are extremely comfortable with the deal that Isaac did at QVC. We feel great about it. We think it’s great for our brand -- as goes Isaac, so goes us. We feel good about him. We feel good about QVC. I think our retail partners have in tier two, have a ton of respect for QVC and they understand the power of that shopper and the amount of airtime that Isaac is going to get, my view is the more Isaac is on TV, the more his involvement with our brand will be that much more magical and so from a -- you know, it’s the fourth -- we believe QVC is the fourth dimension of retail. It is sort of incremental and by the way, there isn’t a lot of overlap between what he is doing there and selling there and what he is doing and selling for Liz Claiborne from an item and pricing and product category perspective.

Tim Gunn, I mean, no comment. Tim is a workhorse here. He works like crazy, not only in his core job running our design union, which is our color trend lab and color trend forecasting group and just in general trend and design resource group, but he is working with the brands. He has spent a lot of time recently with the Kate Spade business out in stores that we’ve opened in the last 14 months, hosting events that host Tim Gunn, we see as our brand ambassador, we see a lift in store productivity that lasts beyond just a four or five-week period. So he puts the stores on the map and it’s great. He plays a great role that way.

So that’s it.

Jennifer Black - Jennifer Black and Associates

Okay, just going back to QVC for a second, will he -- I know this hasn’t been talked about but will he sell possibly on a different segment the Liz Claiborne line? I mean, will there be anything --

William L. McComb

No, no -- I mean, no. That’s -- we don’t own Isaac’s company. That’s a deal that he did with that company and the good news is that there is a very nice halo effect to us but that -- that’s it. And the contracts themselves do the appropriate differentiation from a price point and product category perspective and no. At this time, QVC isn’t including Liz Claiborne by Isaac -- totally different.

Jennifer Black - Jennifer Black and Associates

Okay, well you were really excited about all the personal appearance and so I’m wondering how much time these guys have.

William L. McComb

Well you know, good question. I mean, I think enough. I think enough. I mean, the role that they are playing in terms of PAs is good and yet it isn’t -- but make no mistake; we don’t want you thinking that Isaac is spending 30% of his time in the field doing PAs. And by the way, he’s on QVC on a completely different day part. It’s 12:00 a.m. to 2:00 a.m.

Jennifer Black - Jennifer Black and Associates

I understand. Okay. Thank you very much. Good luck, you guys.

Operator

We do have time for one final question. Our final question comes from [Chi Li] with Morgan Stanley.

Chi Li - Morgan Stanley

Good morning, guys. If I am interpreting or if I have got your gross margin guidance down right, it looks like third quarter is expected to be down in the neighborhood of 200 basis points with the fourth quarter being up at the high end of about 350, and this is versus last year. Can you just help us explain what your assumptions are behind the drivers of the guidance?

Andrew C. Warren

Clearly, Chi, the fourth quarter improvement -- you are talking about versus last year, right?

Chi Li - Morgan Stanley

Exactly.

Andrew C. Warren

Yeah, because we said the third quarter would be flat to 2Q this year and up 100, 200 basis points in the fourth quarter. So the fourth quarter trend is really driven by the -- we have a very different inventory position going into this holiday, a different pricing structure and also the benefit of [Lian Phung], so the fourth quarter increase versus last year is clear and we feel very good about that.

You know, on the third quarter, it really comes down to the promotion levels. You know, the third quarter last year was actually quite healthy for us. We had very good comps at Juicy. We had great sell-throughs in a lot of our brands and this environment is just a different promotional cadence, so therefore a different margin structure.

So there’s no question we’ll have some margin erosion versus last year in the third quarter but clearly margin enhancements in 4Q.

Chi Li - Morgan Stanley

And can you help us understand to what sort of magnitude [Lian Phung] will actually have on that fourth quarter assumption?

William L. McComb

No, I don’t think that we have -- I don’t think that we have felt comfortable yet to actually parse that out. I do think that we owe you a discussion on a going forward perspective like in 2010 on what kind of impact it has. It’s very different in each of the -- for holiday, very different based on how quickly or swiftly we made changes to sourcing partners but the point is it’s a real effect. I don’t think that we’ve felt comfortable yet for fourth quarter actually providing any guidance around the net effects, the netting of any of those different forces.

Andrew C. Warren

But it’s very real.

William L. McComb

It’s very real and will be very real for next year.

Chi Li - Morgan Stanley

Okay, and then I just have one last question on SG&A specific to the $25 million that is coming out of MEXX because my sense, and correct me if I’m wrong, is that MEXX in terms of cost restructuring has probably been a little bit more challenging than some of the other operating segments. So can you help us get a little more confidence in that $25 million, if you break it out by bucket? I know you called out store rationalization as a potential lever but how much of that will actually contribute to that $25 million in savings?

William L. McComb

I actually think that there is a -- small. Let’s just go straight and say it’s a small part of the $25 million. There is a tremendous amount of administrative back office distribution related type costs that are wacky and out of line and with the deleveraging that we’ve seen, they are just that much more out of line and they are very gettable -- they are very gettable and I don’t think by any stretch of the imagination that’s where the line ends at MEXX. The business is over 50% SG&A and it’s a business that’s 50% wholesale and yes, we’ll get there through sales productivity but there’s a significant realignment to be had, I think even post the 25 when Thomas and his team get their hands on the business.

Chi Li - Morgan Stanley

In all the cost restructuring efforts that you guys have done thus far in MEXX, I mean, have you found it challenging from a labor market perspective to actually execute them in a timely manner?

William L. McComb

Yes and no. I mean, we work very closely with the works council that is real strategic partners to the management team. I’ve had a truly a transition management team over there since September of last year and they have been a very important and core part of the actual strategic implementation.

You know, it’s different in Europe. It is a little harder. I think the bigger issue has actually been though getting the right permanent European based management team cohesively working off of a turnaround plan as opposed to all this transition stuff that we’ve been working through. That really the strength of Thomas and his whole team, which includes the folks that are there at MEXX now and the team members that are joining, I think they are going to really be able to get their arms around this and get it done.

I mean, the goal of the team over there since this business went from turning a profit that while it didn’t have the best operating profit margin rate, it was good to losing a lot of money, the sense of urgency from the works councils and the labor force over there, they want to save the brand. They want the brand to stick around and so they have put their skin in the game with us and we are greatly appreciative for it.

Chi Li - Morgan Stanley

Great. Thank you very much.

William L. McComb

Okay, folks. Well, this was a long call. Thank you for your interest and your attendance and for your questions. We look forward to talking to you again. Thank you. Thank you, Melissa.

Operator

Thank you. This does conclude today’s conference call. You may now disconnect.

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Source: Liz Claiborne F2Q09 (Qtr End 7/5/09) Earnings Call Transcript
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