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Executives

William McComb - Chief Executive Officer and Executive Director

Andrew Warren -

Analysts

Robin Murchison - SunTrust Robinson Humphrey Capital Markets

Robert Drbul - Barclays Capital

Kate McShane - Citigroup Inc

Mary Gilbert - Imperial Capital

Helena Tse - BofA Merrill Lynch

Jennifer Black - Jennifer Black & Associates

James Chartier - Moness, Crespi, Hardt

Edward Yruma - KeyBanc Capital Markets Inc.

Liz Claiborne (LIZ) Q4 2010 Earnings Call February 17, 2011 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Liz Claiborne Fourth Quarter 2010 Conference Call, hosted by Chief Executive Officer, Bill McComb. [Operator Instructions] 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 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 2010 Annual Report on Form 10-K, under the captioned Item 1A Risk Factors and Statement Regarding Forward-Looking Statements being filed today 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, interest expense, net income or loss from continuing operations and EPS are presented on both a GAAP and non-GAAP basis. EBITDA, adjusted EBITDA, and adjusted EBITDA excluding foreign currency gains and losses are non-GAAP measures that are also presented in the accompanying slides and press release.

The company presents EBITDA measures because it considers them important supplemental measures of its performance and believes they are frequently used by security analysts, investors and other interested parties in the evaluation of companies in its industry. Reconciliations of adjusted results to the actual results are available in the tables attached to the earnings release and slide captioned Reconciliation of Non-GAAP Financial Information which will be posted to the company's website at www.lizclaiborneinc.com in the Investor Relations section after this call.

The company believes that the adjusted results for the fourth quarter and full year 2010 and 2009 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

Good morning, and thank you for joining today's call. Following our usual format, Andy Warren and I will be presenting our final fourth quarter and year-end 2010 financial results as reported in this morning's press release. These results are consistent with the preliminary report that we've issued back on January 6.

I'd like to begin by providing a perspective on our results for the year as a whole, take a quick look at how this morning's announcement compares to the pre-release, and then make some comments on the forward-looking perspective for 2011 and 2012. Andy will then give a full overview of the fourth quarter metrics. I'll provide some commentary on the segments as we always do, and then wrap up with a discussion on our 2011 priorities, and we'll conclude with a Q&A session.

2010 was a year of substantial change and real progress across all of our businesses. We cut our adjusted operating losses by a third, and in the back half, we swung from a significant adjusted operating loss to an adjusted operating profit.

Our balance sheet and cash flow positions remain quite strong at year end. We ended the year with $80 million less in total debt than the fourth quarter of 2009. Cash flow was strong for the year, resulting in bank debt of $23 million at year end, and availability of $240 million under our current bank credit facility.

While those results leave plenty of room for improvement, the underlying operating narratives and brand stories are compelling and speak positively to our future. The Partnered Brands segment is now on track to be profitable in 2011. We expect to accomplish a full restructuring of the Liz Claiborne International portfolio by the end of this month. We closed the Liz Claiborne New York outlets and we've successfully relaunched the core Liz Claiborne and Claiborne businesses at JCPenney and the Liz Claiborne New York label at QVC in August.

The visibility and execution that JCPenney is giving the brand takes us back to the glory days where outstanding floor presence, advertising and all-store penetration drove Superbrand status. Our capital-efficient deal structure is also noteworthy. At DKNY jeans, we were able to stem losses which we saw in 2009 and the first half of 2010.

Lucky Brand Jeans had a year of significant retrenching, burdened by clearance of excess and aged inventory in the first half, and a creative relaunch in the second half. While the comp story was up and down in the final four months of the year, the division has established very strong leadership corporately and in the field. They've built very strong merchandising systems and processes and they've introduced marketing and visual merchandising elements that make the stores more compelling than ever. While the team is still learning what product direction will excite our female target and further differentiate the brand, they're more on track than we have been in the past five years, as evidenced by the most recent trend, which I'll address later in the call.

The Mexx European business truly appears to have traction, as we reported on the January 6 call. And while we continue to see up-and-down comp numbers in our direct-to-consumer business, the wholesale accounts are reporting strong sell-throughs. We're seeing forward orders for spring and summer up measurably over a year ago as the brand begins to roll out more broadly in the strong high-volume department stores and franchise locations in key markets.

The Eastern European business is very strong again. And while losses burdened our overall corporate 2010 results, we have shown that the brand has power when supported with great product and marketing. So I look at 2010 as establishing a successful proof of concept for the relaunched business. In the meantime, the Canadian business remains healthy and profitable.

Our Kate Spade business showed outstanding performance. As I've been saying, we're seeing very healthy growth in every product category, in all channels and in all geographies. While we invested in this turnaround in the early years post-acquisition, even losing money at first, today, the business is very profitable and can no longer be viewed as too small to matter for our company.

The Juicy Couture business flattened out in 2010 in the U.S., while growing tremendously again overseas. The brand has remarkable strength with the consumer as we see in our market research, and now needs an infusion of newness both here and abroad.

Our cost structures again showed progress. We successfully consolidated our U.S. distribution operations into one facility. We made strategic business-related restructuring decisions and closed unprofitable locations at both Lucky Brand Jeans and Mexx Europe, all while continuing to further reduce headcount-related and discretionary spending across the company.

So turning here to Page 4 of the slide deck, you'll see that our adjusted operating results in the fourth quarter were consistent overall with the

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was up 191 basis points, right in line with the range of plus 150 to plus 250. SG&A came in at $354 million, just under the $355 million target that we guided. And adjusted operating income for the quarter came in up $6 million over 2009, right in line with the range that we projected of being flat to up $10 million. In addition to the numbers being right in line, the narratives we provided on January 6 fully described the drivers of the performance in each of the businesses.

So looking forward, we continue to believe the marketplace is improving, but we face a value-driven and promotion-oriented consumer. We must factor that into our thinking about inventories and margin. We also believe that the digital and mobile tipping points are here and as such, we need to be conservative in planning store productivity models and be very aggressive with our e-commerce platforms. While the commodity pricing pressure is real, we're more mindful and concerned about the longer-term state of the vendor community and the inflationary pressures of the wage environment in China.

So looking forward, we expect to see sequential improvement in most of our key operating metrics through 2012. We do anticipate having positive adjusted EPS in 2012. We expect to see productivity improve in our retail stores in all brands and we will continue to manage costs. We will also target gross margin improvement and we will restructure the remaining underperforming elements of the portfolio where needed. We're going to look for more opportunities to pay down debt.

At this time, our fiscal policy regarding no dividend, no acquisitions and no share buybacks remains prudent and justified through the 2012 period.

For fiscal 2011 then, we're targeting an adjusted EBITDA in the range of $100 million to $120 million, compared to adjusted EBITDA of $50 million in 2010. This reflects the current view of our businesses as we continue to work through the turnarounds at Mexx Europe and Lucky Brand, speed the rollout of Juicy Couture globally, while reenergizing the Domestic business and continue to drive profitable growth at Kate Spade and with our licensed Liz Claiborne brand at JCPenney.

In light of where we finished 2010 and our forecast for 2011 and our current view of market conditions overall, we're currently targeting adjusted EBITDA for 2012 in the range of $180 million to $220 million. This range reflects the sensitivity in our overall corporate performance to achieving profitability at Mexx Europe.

Our management and board remain committed to delivering meaningful value to our shareholders. While this target falls short of the goals we laid out in our 2012 threshold framework, we remain focused on achieving the profits and cash flows required to hit those threshold goals as quickly as possible.

We recognize that we have a very diverse and valuable portfolio of brands, and appreciate that there are many different ways to create value for our shareholders over time. Today, our initiatives will be aimed at strengthening these options and asset values over time by improving operations and consumer brand strength.

So now with that perspective, let me turn the call over to Andy Warren, our CFO, to review financial metrics from the quarter and the year end. Andy?

Andrew Warren

Thank you, Bill, and good morning, everyone. I'll start today by walking you through our fourth quarter adjusted results and key financial metrics. You can see the snapshot of our fourth quarter adjusted P&L versus our 4Q '09 performance on Slide 6.

There are a couple of metrics I want to highlight. First, adjusted net sales are down 10% for the quarter, three percentage points better than the variance we outlined during our January 6 pre-release, due to the discontinued operation's accounting impact on our 4Q '09 results associated with the closure of the Liz Claiborne New York outlets as well as the exit of the Liz Claiborne International business. And second, we are now including adjusted EBITDA and adjusted EBITDA margin in this P&L summary page. It's an important proxy for cash and highly relevant for both our equity and bond investors.

Slide 7 is a summary of our key balance sheet measures. Let me highlight a couple of important metrics. First, total debt was reduced significantly by $80 million, a 12% decline year-over-year. We ended the quarter with $578 million versus $658 million in total debt. Second, capital expenditures were $81 million for fiscal 2010, below our previously stated $90 million budget. For 2011, we are planning our capital expenditures to be approximately $75 million, including the opening of 30 to 35 additional company-operated retail and outlet stores globally.

On Slide 8, we bridge the 10% year-over-year adjusted net sales decrease. The Partnered Brands segment drove the fourth quarter sales decline primarily due to the Liz Claiborne brand's exit from Q2 [ph] department stores.

International-Based Direct Brands declined $10 million. This decline was mostly driven by Mexx Europe's negative direct-to-consumer comp, partially offset by an 8% sales increase at Mexx Canada. Domestic-Based Direct Brands increased $25 million. Juicy Couture and Kate Spade both had increased sales for the quarter, while Lucky had sales down 16%, mostly driven by negative direct-to-consumer comps.

On the next slide, we have broken out our third quarter adjusted gross margin trend by segment. Overall, adjusted gross margin increased 191 basis points year-over-year. Domestic-Based Direct Brands, Juicy, Lucky and Kate Spade combined, had a solid adjusted gross margin of over 54%, but this was down 411 basis points versus last year. Kate margins were up significantly for the quarter. This is more than offset by reduced margins at both Juicy and Lucky as a result of significantly higher promotional activity, especially in December, that we discussed on the January 6 pre-announcement.

International-Based Direct Brands, our Mexx business, had adjusted gross margin up 236 basis points versus last year. Both Mexx Europe and Canada realized adjusted gross margin gains for the quarter driven by healthy inventory levels and better product sell-throughs.

Partnered Brands adjusted gross margin was up a very healthy 886 basis points to 43.1% driven by the exit of the Liz Claiborne brand from Q2 [ph] department stores and the full quarter inclusion of the JCPenney and QVC license royalties.

Now on Slide 10, our year-over-year fourth quarter adjusted SG&A trend reflects our highly successful cost productivity efforts, with adjusted SG&A down another 8% year-over-year. We have dramatically reduced costs in both Partnered Brands and corporate overhead, while further decreasing expenses in our International-Based Direct Brands segment. We continue to benefit from the annualization of the many cost reduction efforts we executed upon last year.

Partially offsetting these global expense reductions is an increased investment in e-com [e-commerce] and marketing across the company. For the fourth quarter alone, we increased our combined e-com and marketing spend at Juicy, Lucky and Kate by $12 million versus the last year. Both of these expense investments are critical to our 2011 and '12 operating targets.

On to Slide 11. We continue to thoughtfully reduce inventory levels with Partnered Brands and International-Based Direct Brand total inventories down 59% and 35%, respectively, compared to 4Q '09. I feel very good about our inventory levels for these two segments.

As far as our Domestic-Based Direct Brands segment, while I do feel better than I did at the end of the third quarter, we still had too much inventory at year end. Of the 43% year-over-year increase you see on the slide, approximately 75% of the increase was appropriate investment to fuel Kate's significant top line growth as well as to support Juicy's e-com and retail store expansion.

However, 25% of the increase resulted primarily from our lower-than-planned December retail comp performance. Important to note that our 2011 adjusted EBITDA target takes into account the promotions or liquidations we anticipate to be required to move through these higher-than-desired year-end inventory levels.

Now let's give you our total company debt on Slide 12. We remain highly focused and committed to deleveraging the company. We will continue to utilize 100% of our free cash flow to reduce debt. I have walked you through our availability calculation on prior conference calls, so today on Slide 13, I'll simply update you on the numbers.

At the end of the fourth quarter, our calculated borrowing base was $291 million. And the drawn revolver amount was $23 million, resulting in a robust availability of $240 million. Remember, we no longer have any financial covenants and our minimum availability threshold is $45 million.

Our actions continue to focus on keeping the total availability high enough to meet our needs in any economic or operating scenario. Based upon our current forecast and operating assumptions, we remain very comfortable with our forward-looking availability forecast.

Lastly, on Slide 14. Bill just walked you through our forward-looking operating targets for 2011 and 2012. I'll now provide additional comments and perspectives. We are using adjusted EBITDA as our sole target metric, as it is the best proxy for cash flow and it is also the most relevant financial metric shared by both our equity and bond investors.

For 2011, we are targeting adjusted EBITDA range of $100 million to $120 million. Partnered Brands is targeting a positive adjusted operating profit in 2011. Domestic-Based Direct Brands is targeting to grow adjusted operating income in total in 2011, driven by increases at both Kate and Lucky, partially offset by decreased profits at Juicy, resulting from lower first half traffic and direct-to-consumer comps. Though we expect the Mexx segment to significantly lower adjusted operating losses in 2010, it will likely still be a meaningful profit drag in 2011.

In total, company adjusted SG&A is anticipated to be down again in 2011 as we continue to successfully scour our global operations for all cost reduction opportunities.

Lastly, for 2012, we are targeting a $180 million to $220 million adjusted EBITDA range, which assumes global Mexx achieving breakeven to positive adjusted operating income and results in a positive total company adjusted EPS.

That's it. I'll now turn the call back over to Bill to discuss the segment results.

William McComb

Okay, thanks, Andy. Here on Page 15 of the slide deck, you'll see the operating metrics for the Partnered Brands segment. Comparisons to 2009 are a bit apples-to-oranges, as they reflect the model transition that we've described on the Liz Claiborne businesses. And going forward, we target a positive operating margin for this segment in 2011.

At this time, we've completed the closure of the Liz Claiborne outlet business. By the end of February, we will have completed the closure of the Liz Claiborne international business based in Madrid. We are now focused on tapping into the licensing opportunities that have presented themselves in virtually all regions of the world. We've done a deal in Canada. China, India, parts of Europe and South America all represent regions with licensing opportunities, all to be executed as capital-efficient licensing alliances. We remain very pleased with the performance of the Liz Claiborne and Claiborne's Men's businesses at JCPenney.

Other news in Partnered Brands, Kohl's has informed us that they will no longer distribute the Axcess brand after spring-summer 2011. Their recently announced deal with Jennifer Lopez and Marc Anthony is likely to replace the Axcess business on their store floors. This was roughly a $70 million revenue business for us at wholesale and one that made money last year. Once we took the Liz Claiborne sub-branding off that label, it was destined to be replaced by a proprietary brand inside Kohl's.

The licensed Dana Buchman business continues to grow at Kohl's and is unaffected by the Axcess decision. Dana Buchman remains their polished casual better brand and is consistently featured in advertising.

The Monet business remains profitable and stable. In an effort to improve the earnings profile internationally, we're looking to find licensees or distributorships across Europe and China.

The DKNY Jeans business is stronger, and we expect it will have a positive impact on our profitability this year. The license will revert to Donna Karan Inc. at the end of 2012, and we expect the business will show a profit for us before reverting in 2012.

And finally, the Kensie business is profitable and growing. Macy's has expanded distribution of the brand for 2011, taking us from 145 doors to 225 by fall 2011. This is a business that now has license revenue in denim, footwear, handbags, eyewear, sleepwear and jewelry and more growth opportunity. In fact, later this year, we'll be testing three retail doors with the brand using existing Liz Claiborne Inc. leases.

In our Domestic-Based Direct Brands segment, which includes Juicy Couture, Kate Spade and Lucky Brand jeans, the quarter was marked by poor December traffic, comps and margins at both Lucky Brand and Juicy Couture as I described in full back on January 6. While we saw gross margin increases at Kate Spade and spectacular sales, the impact of the December miss at Juicy Couture and Lucky Brand can be seen here in the operating margin decline from 12% to 7%, and the segment gross margin decline of 411 basis points.

Juicy Couture international, which is 16% of the business today, posted strong growth in the fourth quarter again, up 39%, driven by a growing presence with approximately 120 points of distribution today. The majority of our presence overseas is in the U.K. and Asia, where the brand registers very strong consumer awareness and popularity.

At Mexx, the Canadian business saw a 4% comp store sales increase in the quarter and Mexx Europe posted a quarterly decline of 7%. You'll recall from the January 6 report that the European comp in December of minus 16%, which was driven largely by weather, drove down what was an up-trending comp for the quarter.

Since our pre-release on January 6, we've posted orders for the June-July period with wholesale customers that are up 22% versus year ago. Germany and Austria posted significantly higher increases in orders. This follows a 14% increase in April-May and confirms continued positive selling trends in store of the current collection, as well as a strong positive review of the merchandise for summer by these accounts and our franchisees, so we continue to feel good about the product, the product quality and the price value.

The week-to-week comp trends, however, are very inconsistent. Day-to-day variation ranges from up double digits to down double digits. We like what we see in the newly opened stores in Stockholm and Brussels, and conversion rates in department stores where traffic is already strong is impressive.

The traffic in some of our existing stores remains the challenge. We believe we can continue to see progress as the product continues to improve, but we're looking harder at how to put a stronger ring fence around those losses at Mexx Europe and further accelerate restructuring activities like store rationalization now that we have product that sells.

Let's take a look now at the January comp trend for all four of the Global Direct Brands. First, Juicy Couture has not rebounded since December. In fact, we saw a 13% decline in direct-to-consumer sales in January. Traffic is the driver. Margin in February has improved, and is tracking to year-ago levels now after clearing inventory in January. There have been product misses but moreover, there's a lack of news from the brand. We know our execution is not fresh enough. As a result, we're now planning the year conservatively, assuming tough comps for the entire first half of the year and decreased profitability overall for the year, although this brand remains very profitable even at the plan level.

But we're encouraged, nonetheless, by results from our ongoing brand tracking study, which shows that in the fourth quarter, Juicy Couture had the highest desirability quotient in our consumer research, pulse, among all competitive brands assessed. The desirability quotient is a measure that we track semi-annually for our brands that quantify the desirability of a brand based on the four factors: One, how prestigious they consider it to be; two, how likely they are to recommend the brand; three, how likely they are to purchase it in the next three months; and fourth, how exclusive they perceive the brand to be.

We are further energized by the early peaks that we have at LeAnn Nealz's creative vision. She and her team are updating visual merchandising elements, the color palettes of the stores, plans for windows for the year and most importantly, some really fresh product ideas, which includes focusing the team first on the accessories line, and then with product categories like knits, denim, outerwear and footwear.

Lucky Brand has shown a nice rebound since the holiday. While the early weeks in January remain tough, once the spring merchandise rolled throughout the chain, we began to see nice comp store increases averaging in the mid-single-digits.

For the first two weeks, February is trending in the plus-4% to plus-6% range. The Women's merchandise is selling well. Our focus on denim, marked by the launch of a flared silhouette called the Charlie, has driven a positive Women's denim comp as well. We dropped a catalog in mid-January that supported the merchandise and drove traffic. I think that we're seeing this is business that can really grow. As we get better at hitting the mark with product and marketing, the prospects here are encouraging.

At Kate Spade, the growth just continues. The strong holiday performance has continued into the new year, where we saw a direct-to-consumer comp of plus 96%. It's not a typo, plus 96%. The fall merchandise, which we are presenting this week to wholesale customers, looks tremendous in all categories and is getting great reviews. Again, the January performance since the holiday is strong across all channels, all product categories and in all geographies.

At Mexx Europe, the comps are still lumpy, much improved over December and high volatility week to week. The January comp was down 5%, showing the impact of clearing pre-spring inventory from December, but margin in January was up significantly versus year ago. We would expect the comps to keep improving. In Canada, the Mexx business remains largely on track with a January comp of plus 6%.

2011 will be another year of execution for our teams. We look for expanded productivity in our retail stores at Kate Spade, Lucky Brand Jeans and Mexx Europe. We expect to see the Wholesale business grow significantly at Mexx Europe. It will be a year of freshening the face of Juicy Couture and a year of growth for the Liz Claiborne brand again at JCPenney and QVC.

Across the portfolio, including the Liz Claiborne brand, we're working to expand our international presence. Operationally, we'll focus on protecting margin in our business as we face into the inflationary pressures coming from commodity prices and labor in China. I've spoken at length about the measures we have taken to do so, and they include leveraging material buys across the brands, changes in merchandising assortments and taking price increases where we need to in some categories at levels to hold margin.

We'll be aggressive in capitalizing on consumer migration to mobile and e-commerce with platforms that are now well established operationally and in terms of marketing. And finally, we'll assume that the consumer will continue to be promotionally sensitive and value-oriented, so we'll manage inventories more carefully than last year and plan upfront for smart promotions throughout the year.

Finally, we anticipate improvement in virtually all of our key operating metrics. While we're targeting an EBITDA level of $100 million to $120 million for 2011, and $180 million to $220 million for 2012, the targets in the long-term compensation plans for our senior leadership team and the brand leaders are tied to even higher performance levels by the end of 2012.

Before we open the lines to Q&A, I wanted to announce that we'll be hosting an Investor Day for the financial community on March 31 here in New York City. This meeting will feature a webcast plenary session followed by brand-specific breakout meetings throughout the day. This will be a great chance to meet the teams that I've been discussing, and see and hear more details on our execution and growth plans.

So at this time, let's go ahead and open the phone lines up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Mary Gilbert of Imperial Capital.

Mary Gilbert - Imperial Capital

I wonder if you could talk about the opportunities to potentially rationalize some of the brands like Kensie, Mac & Jac, Monet? And is there any opportunity to take the Axcess brand into a different retailer?

William McComb

This is Bill. Yes. In fact, there are several interested parties looking in that showroom right now. The interesting thing is that while the brand always carried a hangtag and a hanger that registered Axcess a Liz Claiborne company, taking the Liz Claiborne off that label virtually had no impact at all, detrimental to the turns at Kohl's, in fact we had a really good year last year. And all that shows to us is that it's been around for a long time, almost 10 years. And it's actually -- Kohl's has done a great job with it, as have we, and there is brand registration there. So there are other retailers looking at it right now, I don't want to make any promises, and the Dutch certainly factored none of that into our thinking in terms of our numbers. But it's an upside in the product capability that we think is pretty good. With regard to the first part of your question, I indicated in my quote in the press release and my comment here on the call that there's a lot of strategic flexibility and strategic optionality in our portfolio. I will make the comment that, that's only gotten stronger and more viable through the operational and organizational changes that we've made, through the cost structure improvements and even some of the front-end work that we've done on the businesses. I would be misleading you if I said that it's not something that we have looked at or haven't continued to think about, we do. We will -- we are not indifferent when it comes to taking opportunities to delever. I'll make the comment that Monet is a business with a highly accretive operating margin because that's what jewelry is, jewelry has a very great margin. And I think that one of the areas that we have not been nearly as aggressive with because we've been, I'll say, busy on other things, we've kind of let Monet carry on and deliver and be profitable. We're going to clean up the unprofitable part of it, which is international. It hasn't been a huge drain to us, but it's a business that's always lost money from a model perspective. We'll clean that up very shortly and be very aggressive in the U.S. to expand distribution opportunities and to sub-brand to brand. So I'm not going to make any commitments about that we're putting anything up for sale or looking at that right now. But I guess I would say that we're balancing carefully the opportunity to take chunks of leverage and make them go away versus maximize the power and capability of the brands that we've got. Hopefully that's not too convoluted an answer for you, Mary.

Mary Gilbert - Imperial Capital

And then on Kate Spade, in looking at the strong growth that you're experiencing in January, are we seeing this similar -- what are we seeing so far in February?

William McComb

It trucks on with incredible year-over-year performance. Very, very good.

Mary Gilbert - Imperial Capital

How many new stores are planned to be open for each of the brands? Because you said -- is it 30 new store openings in 2011? And could you go by brand?

Andrew Warren

It's Andy, we laid out 30 to 35. We're actually not going to go specifically by brand on that. But to be sure, a big piece of that is Kate.

William McComb

We're only moving forward with a couple at Juicy and a couple of outlets at Lucky, and the balance are Kate Spade. But we're just being very careful about capital spending in retail stores, even on a brand like Kate, because we're in an era right now where it's pretty clear that the direct-to-consumer capability with e-commerce is so big that we're just going to be really careful with that. We can grow, grow, grow, grow, grow without an aggressive store expansion.

Mary Gilbert - Imperial Capital

Can you also talk about further category opportunities at Kate Spade that you've identified that we might see launched? Or how are you viewing that?

William McComb

I would tell you that the unbelievably successful launch of the denim in this last fall has shown us, and has encouraged Deborah to move beyond just the very dressy occasions and the very polished dressy occasions of the dress business at Kate, and actually start creeping further into some of the more casual sportswear side of the business. We're not going to swing it into a casual line, so to speak. But there's a lot to be done there with what I'll call "embellished basics" and "on-brand casual", and there are a number of categories there. But the bread and butter of the business is growing at frankly the same basic rate. So this is a team that has a very smart product strategy for the next few years, even in handbags, and obviously jewelry as well.

Mary Gilbert - Imperial Capital

One last thing on Kate. International expansion?

Andrew Warren

Yes, I've said in virtually all of these calls and commenting on their growth, that it comes multi-channel in every product category and in all geographies. And with that, there's a tremendous amount of interest internationally. We said on the last call that we opened São Paolo, which is a big entry into South America. There's a huge opportunity to be tapped there more broadly. But as well, Russia. The biggest one is obviously accelerating what we're doing in China. I've alluded to the fact that we are, including me, very involved in some big, big thinking about the market of China, and thinking about it more like a primary market like the U.S. and how to be there with relevant sizing and relevant color adaptations and operationally, attacking it more aggressively. In the meanwhile, our joint venture in Japan is amazing and going very well with over 20 points of distribution there, and exceeding the goals of our joint venture.

Operator

Your next question comes from Bob Drbul of Barclays Capital.

Robert Drbul - Barclays Capital

Bill, I guess the first question I have is, from the press release, you talked about the fact that you appreciate that there many different ways to create value for your shareholders over time. Can you elaborate on that comment? And anything that you guys are thinking about or contemplating currently?

William McComb

Very importantly, I said that today, our initiatives remain aimed at strengthening the option value and asset value over time by focusing on the improving operations and consumer brand strength. I had a lot of people say to me a year and a half ago, "Why don't you monetize Kate Spade, and that will help you with your debt." And look where we are 18 months later, we're in a position where, were we to do something like that, the value to the shareholders is dramatically different than even 18 months ago. And I think 18 months from now, it will be that much more, and 18 months later. So I felt it was an important statement. Because, Bob, we're at a time where it's very difficult for this management team to provide meaningful guidance. We talked in early last year, about a framework of goals that we called our 2012 threshold framework, that communicated to all of you a level of aspiration of the kind of and the timeframe of value creation that we as a management team and we as a board intend to create. Yet we're in an environment, as we saw in December, where I regretted the level of guidance that we had out for the quarter, because the volatility of that environment in terms of both the promotion sensitivity of the consumer and the promotion intensity of the competitive environment really made it difficult to deliver on that profit. And while we had executional challenges that affected that as well, more than not, there were market pressures. And so, stepping back for a second to say the board has us incented with comp plans that are more aspirational than the EBITDA targets that we've put out to replace any other guidance that we had out there. So we're taking that off the table, putting this on the table. We remain very focused on significant value creation. And so it's important for me to say that, because we get this call a lot from the analysts and investors who say would you consider the kinds of things that Mary alluded to in the first part of her question, like deleveraging by monetizing smaller and less material chunks of the business and/or thinking about bigger plays and the answer is yes, this is actually a board that because of the turbulence of this particular turnaround and the challenges of multiple moving parts, multiple turnarounds inside an overall turnaround story, where even though we could lay out steady progress that we've made quarter to quarter and sequentially year after year, it's very difficult to be able to say exactly when these elements will hit. What we know about these businesses and this industry is that when you get your act together and you repeat it with a consumer, these things come back very quickly. And we certainly saw that at Kate Spade. It was not long ago that, that division was a big dilution for us. We were losing money because we were investing. And while we were doing it, we were having negative comps on negative comps, and it was a precarious turnaround, post-acquisition. But what you see is when you get it right, you pass right through breakeven and start shooting up to meaningful EBIT levels very, very quickly. And the compounded effect of that, while we've been living with the negative compounded affect, the positive compounded effect can be very rewarding for our shareholders. We don't want to pull the trigger too early on anything. I think more importantly, I've signaled to you in this call that there are -- now that we have traction with some parts of the Mexx business in terms of product with the consumer, it's now easy to step back and say, "Okay. Really, where are the recalcitrant stubborn parts of the business that we want to go put a ring fence around to stem those losses, mitigate that impact corporately and get that asset over the breakeven line more quickly than the natural path that we may be on?" And it's only after having visibility to the kind of traction that we're seeing in the wholesale business, which is -- it's very robust. I mean, to see the wholesale orders increase from the 14% level that we saw in the April-May period, to now 22% up year ago in the June-July. With markets like Germany underneath that, that are up 37%, we're really, really happy with what we can do there. And all that said, I go back to the root nugget of your question, which is to say if I really had my druthers, we wouldn't provide any guidance at all right now. Not because we're not working to deliver the kind of numbers that we laid out for you a year ago in those thresholds. In fact, I mean that still reflects the kind of aspirations I have. But we know that saying to you, "We just can't guide this", that would be -- it would understate the fact that we do actually have a level of confidence around what, minimally, we can do on the business. And that's what we're speaking to now from a guidance perspective. That's a long answer, but there you have it. I'm not signaling any specific transaction at all, other than the fact that we as a board, this is how we think.

Robert Drbul - Barclays Capital

The positive wholesale trends at Mexx. When would you expect those trends that you just talked about to show up on the retail level? And then the question for Andy is, can you give us your expectation for the depreciation line in 2011 and 2012 in the framework that you laid out today?

William McComb

Absolutely. It's a great question that will help you with whatever models you're doing as we migrate from talking about EBITDA into -- or from EBIT and adjusted EPS goals into EBITDA. I'd say the first answer to your question is this. Make no mistake, there are doors in our comp database that are performing at and above the level of some of those wholesale accounts. But it is not homogeneous, it's very heterogeneous. There are some doors that are significantly underperforming, and some doors that are way over performing the average. As a result, we're now actually able to form conclusions about the portfolio of stores in a better way than when your product is not good and none of the doors are actually performing. So I think that's the answer there. Andy, why don't you speak to the 2011 D&A expectations?

Andrew Warren

On Page 28 of the slide deck, by the way, in the appendix, there's a helpful EBITDA walk to give you some clarity on the '09 and '10 numbers. But to answer your question on '11, in terms of D&A being about $110 million as you try to walk from EBITDA to pretax, think in terms of D&A being $110 million, and think in terms of total interest cost including amort of deferred bank fees in prior periods, being about $45 million to $50 million.

Robert Drbul - Barclays Capital

On the Partnered Brands business, when you look at the fourth quarter performance and the operating loss. When you look forward to 2011, what sort of swing would you expect on that line? How can we think about that specific segment?

William McComb

Bob, when you looked at that page and that number, which was -- I showed that the operating margin was improved from negative 7% to negative 3%, what's confusing about that in the fourth quarter, and I said that there were some apples-and-oranges things, what actually made that number a negative as opposed to a positive in this last fourth quarter, was the timing of wholesale shipping specifically in that quarter, from '09 to '10 for Monet, for DKNY Jeans for Mac & Jac and for Axcess, as well as some trailing losses from Monet Europe that put that number into that negative. We would expect next year to see that different. But you will see the Partnered Brand segment, as the segment will be profitable in 2011, which is something that we talked about a couple of times in this call.

Andrew Warren

Meaningful swings, Bob. Next year in 2011 at some of the areas Bill just talked about, Monet international, Liz international, DKNY Jeans. While some of those are better in '10 than '09, they will be meaningfully better in '11 than '10. So we'll continue to see traction in some of those areas.

Operator

Your next question comes from Jennifer Black of Jennifer Black and Associates.

Jennifer Black - Jennifer Black & Associates

I've wondered, first of all, if you could talk about the sell-throughs or early reads on the tops business at Lucky?

William McComb

Well, I snuck and gave you guys a little bit more of a peek than just the January comp that we reported. And the reason that I talked to that, that we're now seeing consistently plus-four to plus-six on a blended basis is that, once we've sort of worked through that holiday inventory, once the new floor sets were delivered for pre-spring and spring, we saw a significant change in all the classifications. So actually, the women's business is now performing positively, and it's coming from both the tops as well the denim business. So that's a very big change than what we saw start in mid-November. Remember, we had traction in September, it flattened out in October, it turned negative in November and December, and now we've popped right back to where we were in September. It's a dramatic enough change in trend that we're feeling more encouraged and we're feeling more like we did in early October. And we'll watch, because we had a catalog, again, that we dropped at the end of January, and it performed like the late August-September catalog. It more than paid for itself in terms of ROI, and it was a driver of traffic and conversion. And it was very much on strategy. The team there has created once again a very strong denim presence. And they featured the new silhouette that we talked about called the Charlie that, Jennifer, I know you've seen in stores and you've asked the Lucky team questions about it because it actually represents an important shift in the women's business. One of the comments that the Lucky team will make, I'm sure in New York in the breakouts when they're actually here on Investor Day, is they'll talk about as they really peeled the onion in November and December on what wasn't working, one of their big discoveries was the fact that the women's denim business just has not kept pace with innovation in materials with stretch that the rest of the market has seen. And the Charlie was a quick-to-market entry using the silhouette flare that's very popular right now. And that's been the focus of the windows and the floor sets. And to answer your question, we're seeing a great conversion and a healthier tops to bottoms ratio as a result. Now all this is -- we're four or five weeks into this more robust trend, and this team is completing a very interesting consumer research project using the same team that Kate Spade used in the early days of reconfiguring their brand to really get at what will differentiate the brand further with women and what will hit the mark, so that we've got this down to a little bit more of a science, to use a word that probably doesn't apply creatively. So we're feeling good and it's looking good.

Jennifer Black - Jennifer Black & Associates

I wanted to know how you feel about the overall European economy. You've commented a lot about domestic and the consumer sentiment there.

William McComb

It's a little healthier than the U.S., but it's similar in that there's a sense that it's responsive to the news and media environment. But generally speaking, it's a healthy enough environment that Europe remains an attractive market for us to expand Kate Spade and Juicy in the short to mid-term, and certainly healthy enough for us to make Mexx a profitable and growing and very attractive asset for us.

Jennifer Black - Jennifer Black & Associates

I was wondering if you could elaborate on the website enhancements for the Direct Brands? Are you planning on having the ability to post customer reviews or find an item in store? And then we also noticed that you're hosting a sample sale for Kate Spade online.

William McComb

Yes to all of the above. In the last 18 months, we migrated to better platforms, both from the front-end demand ware perspective as well as the back-end fulfillment. We have better inventory visibility and flexibility with our inventory to maximize opportunities to keep our inventories in line. And the functionality on the front end, we are making this year, we will be doing lots with mobile apps and mobile capability, and definitely being even more interactive with consumers. So our Facebook fan numbers are building very quickly, and the sizes of these e-commerce businesses are great. One thing that we've obviously been very good at is leveraging a database of loyal customers that we've built in store and fattening the fat cat, so to speak, through outbound e-mails to them. But we're now actually working aggressively in the other direction, which is to use the web to actually drive traffic locally in targeted stores and build store productivity. It's gotta work both ways. It can't just be that we catch the user in a net in a store and then we move their business to online. One needs to support the other. And there are lots of things to do that, and to make the store the kind of -- to build the community values of the store that mirror what we're learning about building community online.

Operator

Your next question comes from Edward Yruma of KeyBanc.

Edward Yruma - KeyBanc Capital Markets Inc.

Specifically on Mexx Europe, I know that in the past you cited fashion and then you cited weather in the fourth quarter. And now you talked about ring fencing potential problem areas. How quickly can we expect this process to take?

William McComb

You know what, I'm just going to stick to the comments that I made in here, which is that we remain with the goal of Mexx being at breakeven by the end of 2012. And that's what we said, global Mexx at breakeven for 2012. And could it go faster than that? Yes. Could it to take longer than that? Yes. And part of my comment back to Bob is, it's very difficult on an operation that big to have the visibility on timing. We now feel that we've actually got a solid proof of concept that the underlying brand awareness and brand equity that attracted Thomas into this job. You'll remember a year ago, he talked about the unpolished diamond. That is real. And that with good execution, we can actually build back the business on a revenue line while having very good product margin. What you heard me say with that is, what we don't want to do is I don't want to have this phenomenon like Liz outlet, where a panel of stores were a drag on our divisional earnings as well as our corporate earnings. I don't want to have that. I want the face of Mexx to be great. We opened a store in Brussels on December 8, and it not only looks great, but it performs with a completely different footprint of productivity. And that says to us, "Wow." The consumer doesn't -- in that zip code, so to speak, doesn't have any -- it doesn't harbor any negative institutional memory on the brand and they give us a chance, and the traffic profile's really good. So we just need to -- I'm not saying we're going to go through and close every store, I'm saying that we just need to look at our store panel and say, "How realistic is it that we can get this negative contributor into the right pocket quickly?" And is a team that has been very good at doing restructuring activities at a micro level and minimizing the cash component of it. And that would remain my goal.

Edward Yruma - KeyBanc Capital Markets Inc.

Within the Domestic-Based Direct Brands, I know you cited roughly 25% of the inventory increase is due to lower sales. And I know you said you talked about promotions and potential closeouts. Just from a timing perspective, how quickly will this piece of inventory be whittled down?

Andrew Warren

It's Andy. When I look at the Domestic-Based Direct Brand inventories, I feel highly comfortable with the Kate number. Even at Lucky where the units are actually up 6%, which is not that dramatic, we feel good about the inventory levels there. It's really a Juicy element of inventory based on the lower December comps. And we think we'll be able to work through that mostly in the first quarter. So really it's isolated to Juicy and the team's working through it in the first quarter.

Edward Yruma - KeyBanc Capital Markets Inc.

And finally, you talked are being committed to right sizing the cost structure. Are there particular pieces of business where you think there's greatest opportunity? And specifically within Partnered Brands, given some of the changes that you've outlined, are there opportunistic costs to that business?

William McComb

I would characterize it like this, I think that there are tweaks in Partnered Brands, and there are tweaks corporately. And this is a team that is constant -- I've never not sat here with a list of three things that I'm looking at and thinking through, and that would be the case right now. And within the brand, we're looking at cost levels in each of the brands, but none that I would call out to you right now. I think that probably on the next call, we'll be further into it and we'll be able to give a little more color around it.

Andrew Warren

For 2010, total SG&A was down $170 million. So we certainly have been very focused and successful in driving down costs, so we'll continue to look at every element. But we certainly won't see that dramatic of a decrease in 2011. But we do, as I say, target, still a decrease year-over-year in total SG&A.

Operator

Your next question comes from Kate McShane of Citi Investment Research.

Kate McShane - Citigroup Inc

My question was focused on the new numbers you gave around EBITDA today for 2012. So it appears that originally your threshold that you had given was about 10% for EBITDA margins in 2012. And today's numbers, it seems like it's reflecting a more 6% to 8% margin. I just wondered what didn't happen for this to be the new threshold for 2012. Is it more on a sales line? Is it more on the margin? And what particular business, maybe, is more delayed in turning around than what you had originally thought?

William McComb

Part of it is the fact that after December, we said it would be a mistake to characterize the overall consumer environment as even and projectable. So part of it is our current view of overall market conditions. If there were one specific business that I would point to coming out of December, we took a step back on the trajectory at Lucky and said it would be prudent for us to be more conservative in the timeframe of the kind of growth that we were forecasting. I really believe this is a business that's got really amazing potential. I think it's priced right, it's premium but not unattainable, and an age-old issue, I've talked about it for three years, the top to bottoms ratio in that store is actually what hinders the productivity. Just getting back to 2007 productivity levels there will put us back on the track towards those goals. And after December, I wanted to be more conservative and put more risk discounting from a timeframe perspective in the '11 and '12 performance there. I'd love to be surprised, I'd love to be delighted. I will say a year and a half ago, we didn't expect Kate Spade to be in the numbers that it's at. It's outperforming its 18-month-ago target. And you know what, until we actually -- when the proof of the pudding is in our hands, then I'll go back to being a little bit more bullish. But I think that it's important to be as realistic as possible, and that's what you got.

Kate McShane - Citigroup Inc

And you had mentioned on the call that you're having a similar team that worked on the Kate Spade turnaround, worked on Lucky's strategy? Can you make any parallels between those two businesses in terms of what kind of plagued the business and what got fixed? You had talked about it becoming more of a science than an art, so I wondered if there were any hard-core examples or parallels you can make between the two businesses.

William McComb

Well, there's no doubt that this is more art than science, but what I'll say is, what the commonality is, is that with Kate, what you had was that you had a business that was great, but it had sort of lost it's way. Its handwriting wasn't as clear, it didn't have such a crisp definition of who their target audience was, and what as a company they were designing to and what they were about from a lifestyle and attitude perspective. And the team that came together, because in a way we re-founded the company. Deborah and Craig came in and in a way took the role over as new founders of the business. And they led a very bright team of people through a cathartic exercise of what are the elements of the brand that have meaning and have traction, what differentiates it, and then going through the exercise of developing a brand book and writing those brand statements that inform every creative decision we make. And once they did that, we looked at our stores and said, "Well, our stores look like a white museum for a handbag, and they ought to look like this 23-year-old's apartment." And we redid, on a shoestring, we redid every store. At the same time, they had been working hard to re-express their product and to bring those creative elements into the product. And now what you've got is you've got a hot house, if you will, of brand discipline. You've got people in every function so clear about what their brand is, they were actually able to articulate it into apparel and into jewelry while at the same time reenergizing the core handbag business and small leather goods in a way that you have seen. And I believe the issue at Lucky is this, Lucky has -- it has an incredibly clear handwriting. It means something, it's distinctive and it's very appealing to a broad base of consumers. The problem that we've had at Lucky is that the treasure chest was overflowing. There were elements of rock 'n roll, there were elements from the 60s popular culture, there were elements of Eastern Asian influences, like Buddhas and even Japanese cultural influences and it was -- different people that came and touched the business had different ideas about what it is that works. And it's not clear to me that we've ever been able to say, to edit that down into a handwriting that is relevant and contemporary and has a clear, direct expression into what the store and the product needs to be. The good news is we wouldn't be trying so hard if the cupboard was bare, so to speak. There's so much to work with to refine and sharpen. At the same time, like Kate Spade, Kate was a very little company, Lucky grew up as a wholesaler and not as a retailer, yet we opened a lot of stores. And we needed to really get our act together, as Kate Spade did, in making the shift from being primarily a wholesaler to a retailer. And so the product that we had in fourth quarter was a great start, but the new team that I put in place January 4, 2010 had exactly five weeks to do that product. We sealed our order profile by the end of February last year. And so five, six weeks of time to master your brand is not enough. They had some good things and they had some things that didn't work. They've learned a lot, they've spent the last year doing this, and I think that they're in the process of codifying the core elements of the brand in such a clear way that I think that they will have the clarity that Kate Spade has about its execution. And frankly, Juicy had -- the beauty of Juicy is we are crystal clear about who she is, where she shops, what she wants. Our downfall at Juicy in the last 18 months, and it started 18 months ago, was the transition from the founders and the management team that we're still building. And frankly, being overly comfortable anniversarying things that just kept working was just not playing that same playbook with fresh and new material. And we've got a creative team there that is absolutely fantastic, and one that you will see at Investor Day, and they'll show you a lot of things. There's a lot to work with creatively in Juicy. And I wanted to comment on the fourth quarter tracking study like I did because the consumer data is just terrific. To have the highest desirability quotient of all the brands that we test against says to us that this brand has all the -- we can deliver on all that potential. At the same time, in Asia, we're seeing comp store, regional comps in Asia of plus 22% on a comp basis. Those aren't our comps, those are the partners that we have over there, like ImagineX, Lane Crawford.

Kate McShane - Citigroup Inc

You had mentioned licensing opportunities for -- the geographic license opportunities that you have. But I know you still have some pretty desirable trademarks in your arsenal. Now it sounds like Axcess, but also something like Sigrid Olsen. Any new thoughts on how you may or may not be thinking about licensing those brands in the future?

William McComb

We're open to it. It's funny, every now and then we get a call from out of the blue, or one of us comes up with an idea and we'll take it out and we'll shop it to somebody. Here's the deal, before I add any more confusion and complexity and priority and expense structure to this place, I have a pretty high bar about what it's got to deliver. If a partner's going to license it, I'm not interested in a license that's going to give me $250,000 in licensing revenue. I'm looking for something kind of material. And so I believe actually, in particular the Sigrid Olsen, I have a lot of heart for it, I think that it could be great. But it's no wine before its time. We're not going to pull a brand that's asleep into service unless it's meaningful, and the same goes for Axcess. There are other new ideas that we're mulling about here that we may talk about on the investor day that are actually worthy of a lot of time and attention, and even financial resource, but the hurdle is high.

Operator

Your next question comes from Robin Murchison of SunTrust Robinson.

Robin Murchison - SunTrust Robinson Humphrey Capital Markets

Not to beat the horse, but a little bit more on Mexx Europe. Is there anything else other than -- when you look at Mexx wholesale Europe, Mexx Canada and then versus the retail locations in Europe, is there anything that might have do with the assortments or the locations in terms of how long they've been there? Or nearby competitive pressure that you would add to your comments?

William McComb

Thomas told you guys a year ago that his cursory review of the leases and the financial components of the leases and the locations. This Thomas is a guy that knows every location in Europe, and I'm not exaggerating. I mean he could look at every one of these leases and have 20 years of experience of knowing, generally speaking, are we on the right corner? Do we have the right adjacency? And while he said a year ago, "Look, like anybody looking at stores, I wish this one weren't two floors, I wish this one weren't so narrow and deep." Aside from those same kinds of goofy things that we would say about any of our stores here, he generally characterized the real estate portfolio as good. And that we, those of us that have been chipping away at this thing called Mexx for few years before Thomas got here, had gone about with other restructuring efforts, eliminating the ones that just looked like absolute no-gos a year into it. And now that we've got product that's turning, yes, he and Jim Nowak, who will also be here with Thomas on Investor Day, they'll talk about how every one of their deliveries has gotten better than the last. I mean, they're not Supermen, they came to them at the brand Mexx, and they too, are learning. There's a good whole learning loop Kate Spade went through. Frankly, they lapped themselves at least once, three full seasons before they knew that they nailed it in merchandising assortment and pricing and that kind of thing. And there's a lot of testing and learning going on. So it just gets better, which is also why I think you see the wholesale uptick. Not only are current sell-throughs getting better in association with improving product month by month, but they're also seeing that we were embracing feedback around what product categories Mexx has even more permission to sell than, say, Esprit would have had, or s.Oliver or Marc O'Polo. And we're tapping into the uniqueness of that feedback. But I think the bigger point is, as you alluded on the call and what I'm getting at with this ring fencing notion is, I think that one year later, a review of the retail stores to actually suggest that there are going to be some stores where the location is good, where the competitive adjacencies are good, where the financial commitments in the lease are decent, but where the institutional memory of the consumer in that area is so entrenched that they just won't give us a chance, and they just won't come in and that good windows alone isn't enough. And if that's the case, we're going to be very practical, as we've done with our whole fleet of stores in the U.S., and say, "You know what, we'll look to do some spot rationalizing." And obviously, those will be the ones that are burdening us the most, even with better products.

Operator

Your next question comes from Robbie Ohmes of Bank of America Merrill Lynch.

Helena Tse - BofA Merrill Lynch

This is Helena Tse calling on behalf of Robbie. Just a quick follow-up on the product newness you mentioned for Juicy. Can you comment on when that newness would flow into stores? And maybe provide any key highlights on that to help re-energize the brand in the U.S.? And then also, how are you thinking about pricing in units just sort of given the sourcing costs, but also concerning the customer price sensitivity?

William McComb

Okay. Really, Investor Day is going to be a great show and tell, and we'll be able to talk with the merchants and LeAnn a little bit more in detail on -- I don't anticipate any changes to our disclosures on Investor Day, but to answer the kinds of questions you just asked, that's what Investor Day is all about. I mean we can really lay out some of those things more clearly. We opened a new store last weekend in Miami Beach, in South Beach, in Juicy. And it was -- LeAnn and Matthew Ellenberger [ph] took a crack right away at letting that store show a lot of new -- first of all, to adapt to the local environment more than a typical store would be, but to put a new color palette and some new creative treatment. And while it's just one, it informs changes that we want to make throughout the year this year, in the same way we did with Kate Spade, without allocating, like, don't think about it as major renovations, but it's paint, its some fixturing and it's a lot of propping and visual merchandising elements that can bring that kind of freshness that -- because at Juicy, the store is a theater, and we just haven't brought enough change to that. The windows will be different, bang, right away. Product, realistically, obviously with LeAnn and Matthew beginning when they did, we're talking about introducing some capsules and changes to collections in the fall. I think she'll play with the tracksuit a little bit in the fall. I think that we will actually -- spring 2012, we will have a fashion show in New York during fashion week with Juicy, and we will debut a new Juicy. We're not changing the handwriting of the brand, we're not altering the DNA, because our research and says we don't need to do that. But what it does say is it'll be a whole new line in Spring 2012. But these guys are working closely with our sourcing leadership here to figure out infusions and fast things that they can push through. And I think that they'll be able to do some good things. I'm just tempering my expectation for the year, and I'm being sober about what I think the first half comps could be.

Helena Tse - BofA Merrill Lynch

A quick follow-up on Mexx Europe. Can you just remind us what the percent breakdown is between wholesale and retail? Is it still sort of like that 50/50?

William McComb

Yes.

Helena Tse - BofA Merrill Lynch

And then for the wholesale backlogs, the strength that you're sort of seeing in spring and summer, can you give us an idea of much of that increase is really gaining traction or entry into new accounts and franchisees versus existing accounts?

William McComb

There's a shift right now in fall. We got new accounts, but they came in with two and four and six doors. And now what they're doing is, we're now getting the benefit. We passed the proof of concept point, and we're rolling deeper through chains, and they're buying deeper, as well as a return. I don't have numbers here that would suggest what the percentage difference is, but the majority of it would be you would classify as new points of distribution. So that could be an account that came in six months ago but now is opening, they're opening the business. I talked on the January 6 call about some really exciting pieces of feedback we've gotten, things like if you index a category average in one account in Germany to 100, we were indexing in the 180s, whereas some other well-known big names were indexing just below 100 in term performance. That's the kind of good news that is early and encouraging, but leading to the kind of 22% increase in the forward order log that I described.

Operator

We have time for one more question. Your final question comes from Jim Chartier of Monness, Crespi and Hardt.

James Chartier - Moness, Crespi, Hardt

Can you just give us a little more color on how you expect Mexx to get breakeven in terms of gross margin improvement, sales growth and then maybe some opportunity to reduce SG&A?

William McComb

The answer in a word would be, "yes," meaning all three. It's all three. I mean again, to hold up our own internal case study of Kate Spade, it was literally all three. The cost out opportunities at Mexx, we've done most of them. There are a few left, and they would be on the real operational side of the business. But it's about productivity. I mean that's what's it's about. It's about goods that sell. A higher mix that sell at full price brings a significantly higher AUR and meaningfully more margin. And then cost base begins -- the formula begins to work.

Andrew Warren

The key thing there is the margin. Nominally better sales, significantly better margin and of course, a little bit more cost out, which the team is working towards, will absolutely get us there.

William McComb

And we said that even with that January negative 7 comp that we posted, which was clearly better than minus 16 in December, the margin profile of that was significantly better.

James Chartier - Moness, Crespi, Hardt

And then can you just give us some color on how you see inventories going forward?

William McComb

I said, and I want to really repeat this, we are going to be much more conservative. I mean, coming out of December, I think that the whole market overplayed their inventory card for fourth quarter. And I think that we realized that when you saw Black Friday look like December 26 used to look like. It was a race to the bottom on pricing by everybody. And I can only assume that, that wasn't just a market share game. It was also an aggressive play to manage their inventory levels down. So, I mean, we let December re-inform some decisions for our whole year this year. And we're going to be really careful. Any other comments you'd make, Andy?

Andrew Warren

Just elaborating on the comment I made earlier regarding inventories. I feel very good about inventory levels, really, except for Juicy. And as I said, they'll get through the holiday overage in the first quarter. But given the fact that their first half inventory buys were at a different level of expectation, they were done before the challenges we had post-Thanksgiving. I absolutely see a higher level of inventory in absolute terms. A lot of it will be more current, a lot of it will be in transit, which is better, healthy inventory. But we'll probably have higher Vs coming out of Juicy for the first half, still, as we continue to manage through more in-transit goods than the comps will probably execute upon.

William McComb

Which is why we've actually suggested that we would expect the same kind of tough comps that we just saw in December and January continue on.

Jennifer Black - Jennifer Black & Associates

And Mexx inventory looks like it's down 35%. Is that going to get better as we go through the year? Can you run the business on that much less inventory?

William McComb

That's what we're doing.

Andrew Warren

That's actually a pretty good level. I mean, they're really focused on margin. And as Bill said, we're seeing that margin enhancement in the first two months of the year here. And we got to focus on margin, drive margin and let inventory be constrained.

William McComb

Thank you very much for joining the call today. Look forward to talking again. Again, the Investor Day on March 31. I think it's going to be an excellent opportunity. Any one of these brands could have an hour conference call with their CEOs in and of themselves. To understand our turnaround story and to get a better sense of what you think the timing could be, I really encourage you to attend and to work through the breakouts after a good two and a half hour plenary session to meet our people. Thank you very much.

Operator

Thank you. This concludes your conference. You may now disconnect.

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