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Executives

William McComb - Chief Executive Officer and Executive Director

Andrew Warren - Chief Financial Officer and Executive Vice President

Analysts

Robert Drbul - Barclays Capital

Kate McShane - Citigroup Inc

Unknown Analyst -

James Chartier - Moness, Crespi, Hardt

Liz Claiborne (LIZ) Q1 2011 Earnings Call April 27, 2011 4:30 PM ET

Operator

Good afternoon, everyone, and welcome to the Liz Claiborne First Quarter 2011 Conference Call, hosted by Chief Executive Officer, Bill McComb. [Operator Instructions] This call is being recorded and is copyrighted material. Therefore, please note that it can not be recorded, transcribed or rebroadcasted without Liz Claiborne's permission. Your participation implies compliance with these requirements. If you do not agree, simply drop off the line.

Please note that there will be a slide presentation accompanying the prepared remarks. The slides and 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 afternoon's press release, as well as in the company's 2010 Annual Report on Form 10-K, and its first quarter 2011 Form-10Q being filed tomorrow with the SEC. In each case, under the captioned Item 1A. Risk Factors and Statement Regarding Forward-Looking Statements.

Also, please note that during this call and in the accompanying slides and press release, 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 a 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 securities analysts, investors and other interested parties in the evaluation of companies in this 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 first quarter 2011 and 2010 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 afternoon. Thank you for dialing in to our conference call for the first quarter 2011 earnings results. Today's call will be abbreviated, given that we'll be webcasting tomorrow from our Investor Day here in New York City where we'll talk in greater length about the brands themselves. During this call, I'll provide some perspective on the first quarter and our CFO, Andy Warren, will then give a detailed analysis of financial metrics. I will wrap the discussion with the summary of performance in each of the segments.

So turning now to Slide 3, Perspectives. Our adjusted EBITDA, excluding unrealized foreign currency losses for the quarter, was negative $13 million, right in line with the outlook we provided in March of minus $11 million to minus $17 million. Now that our business SKU is direct to consumer, having a first quarter that separates January from the holiday period disproportionately pressures the earnings during this period. Longer-term, we'll change our actual fiscal calendar. We are, today, reaffirming the adjusted EBITDA guidance we provided earlier this year as well with $100 million to $120 million guided for 2011, and $180 million to $220 million guided for 2012, all, of course, excluding unrealized foreign currency gains or losses.

While we remain very focused on executing brand plans, that you'll see in greater detail tomorrow at the Investor Day, we plan to continue our focus on strengthening our capital structure. You saw a first step of this earlier in the month with the successful tendering of a significant portion of the Eurobond and a simultaneous issuance of our new $220 million Senior Secured Notes with an 8-year maturity.

As we manage the maturity profile of our long-term debt, we'll also focus on actually reducing long-term debt as well. In terms of sales performance, in general, we're seeing the impact of the timing shift from March 2010 to April 2011 of the Easter holiday, as well as the continuation of trends seen earlier in the quarter in the businesses themselves.

So turn to Slide 4. This includes continued outstanding performance at kate spade across all product categories, channels and geographies, with direct-to-consumer comps up 44% in March and exceptional performance as you can see here, again, in April. It includes gaining momentum of Lucky Brand Jeans where we see strong full-price sell-throughs of spring assortments, every delivery, in fact, getting better and being received even more strongly by the consumer since the January 15 floor set that first appeared. To remind you, February comps were up 12%. March comps, even with the Easter shift as you can see here, were up plus 1, and we see strong sales now continuing into April with a double-digit comp growth trend.

We anticipate the challenging Juicy Couture comp trend that I called out back in January to last through the first half of the year into fall 2011. The April gain that you see here is from the Easter shift. We expect the underlying traffic to remain tough. I am, however, very excited about the vision and product in the pipeline that I'm seeing from LeAnn Nealz and her still early days in the role of Creative Director and President of Juicy Couture. Those of you at the conference tomorrow will have the chance to meet LeAnn in person and hear her vision directly.

At Mexx, we remain encouraged by the progress in rebuilding the European wholesale business. Orders for the fall and early fall seasons were up 14% combined. We continue to see an up-and-down comp profile in our company-owned stores in Europe. That being said, April has been looking very good. We now remain very focused on improving the direct-to-consumer profitability, and this includes closing some store locations that are just not working. We'll have more to say on this during our second quarter earnings results discussion in late July.

And finally, Partnered Brands, we're still on track to generate positive adjusted operating income. We're pleased by the current successes as forecasted of the license business models at JCPenney, QVC and Kohl's, as well as the ongoing Curve fragrance brand licensed to Elizabeth Arden. By closing the Liz Claiborne New York outlets, we've eliminated a significant amount of operating loss from the P&L going forward.

So with that overview, let me hand over the call to Andy Warren to give you a detailed review of financial metrics. Andy?

Andrew Warren

Thanks, Bill. On Page 5, you'll see an adjusted P&L summary for the first quarter. There are 3 things to keep in mind as I walk you through the schedule. First, as Bill mentioned, with the strong direct-to-consumer retail base we now have, this quarter suffers from a January that is largely holiday clearance; second, March is negatively impacted by the Easter shift to second quarter; and third, declines in the U.S. Wholesale business at both Juicy Couture and Lucky Brand.

Also on this page, we added a fourth column, reflecting our first quarter 2010 results as reported back in May of last year on our first quarter conference call. The second column presents the first quarter 2010 including the discontinued operations accounting impact associated with the closure of the Liz Claiborne New York outlets, as well as the exit of the Liz Claiborne international concession business.

In terms of net sales, you'll see a 12% net sales decline that is mostly driven by rebasing the Liz Claiborne family of brands to a licensing model. Adjusted gross margin rate for the quarter was up 607 basis points to 52.4% even in the face of increased commodity costs. We saw improvements in each of our business segments, the largest from Partnered Brands. Importantly, the 2 direct brand segments also realized improved gross margins despite the pressure from significant cotton price increases. While we had growing margin pressure from those increases, we also realized higher full price sell-throughs, which more than offset those pressures.

Adjusted SG&A was flat for the quarter, but down $20 million versus what I reported to you last year. The SG&A rate increased due to the lower sales base from the Partnered Brands and Mexx segments. Adjusted operating loss for the quarter was flat to last year but better by $7 million versus the previously reported view. And adjusted EBITDA came in the range we guided at a $13 million loss. This adjusted EBITDA loss was in line with our beginning of year business plan.

Adjusted EPS of negative $0.56 was adversely impacted by $0.15, resulting from the weaker dollar and the associated translation of the de-designated portion of the Eurobond. Excluding unrealized foreign exchange adjustments, EPS was up $0.06 for the first quarter compared to last year.

Turning now to the balance sheet on Page 6. Receivables were down $49 million at quarter end from a year ago, also reflecting the model change in Partnered Brands, as well as decreases in the U.S. wholesale channel at Juicy and Lucky. Inventory was down as well by $9 million to $304 million, a 3% decline. In a few moments, I'll provide more commentary on inventory.

The total debt line increased to $714 million, which includes increased borrowings under the revolving credit facility, as well as a reported $26 million increase in outstanding Eurobond debt due to foreign exchange. The last 12-month cash flow from continuing operations is now $45 million, the sizable change versus year-ago reflects 2 major factors.

The most current rolling period no longer includes the $167 million tax refund that we received in March of last year as part of the net operating loss carryback extension. And the LTM first quarter 2011 number includes $24 million refunded to Li & Fung associated with moving the Liz Claiborne brand out of our sourcing agreement as we initiated JCPenney and QVC license partnerships.

And finally, capital expenditures on the LTM basis were $88 million. Our 2011 CapEx is budgeted to be between $75 million and $80 million for the year.

Flipping to Page 7. You can see an adjusted net sales bridge from the first quarter 2010 to first quarter 2011. As I said before, the greatest change in the adjusted net sales line for the quarter was the change in the business model for the Liz Claiborne brand. In total, resulting in a $58 million shift in the sales base to the migration from a wholesale model to licensing model.

International-Based Direct Brands, specifically a negative comp for the quarter for Mexx at both Canada and Europe. Both the sales volume down an additional $16 million, which is mostly offset by sales growth in the U.S.-Based Direct Brand segment. Kate spade was up big across all channels and Lucky direct-to-consumer comps increased as well, while total Juicy sales were down.

On Page 8, you'll see the same bridge for adjusted gross margin. All 3 business segments realized margin rate expansion for the quarter. For Domestic-Based Direct Brands, the rate was up 86 basis points to 55.1%. For International-Based Direct Brands, the rate was up 285 basis points to 51.3%. And the Partnered Brands rate was up 1,470 basis points to 46.5%, reflecting Liz Claiborne brand model change, as well as realized gross margin improvement with the licensed DKNY Jeans business. The resulting total company adjusted gross margin rate was up 607 basis points, despite increased cotton and raw material price inflation.

Page 9 shows what's up and what's down in adjusted SG&A. Overall, total SG&A was flat at $314 million for the quarter. We draw significant cost reduction in both Partnered Brands and Corporate, totaling $21 million, and global Mexx was down another $3 million versus last year. Offsetting these expense savings was increased investment in the Domestic-Based Direct Brands segment and e-commerce and marketing, as well as the combined expansion of the Juicy Couture and kate spade retail platforms by 35 doors globally. For the first quarter alone, we increased our combined e-commerce and marketing spend at Juicy, Lucky and kate by $8 million versus last year.

Going forward, we are driving further cost reductions at Corporate, Juicy and at Mexx Europe that we expect will further reduce SG&A. We therefore expect to report a reduction in total company adjusted SG&A for total year 2011 versus our reported 2010.

Turning now to Page 10. You see our inventory change schedule. As I said before, inventory was down 3% versus the first quarter 2010. The reduction in Partnered Brands, down 64%, again reflects the change in the business model and the closure of the Liz Claiborne New York branded outlet and international businesses since the first quarter 2010.

Globally, Mexx inventory was down 11%. Mexx is managing the inventory levels very conservatively, which is one driver of the 285 basis point adjusted gross margin improvement. In our Domestic-Based Direct Brands segment, we continued to reduce the overall year-over-year increase versus both the third and fourth quarters of 2010, but we still had too much inventory at the end of the first quarter of this year.

On our year-end 2010 earnings call, I highlighted that I was comfortable with the inventory levels at both kate and Lucky, but that Juicy was and still is over-inventoried. I'm confident, though, that the actions we took at the end of 2010 to reduce product inflows and methodically liquidate excess inventories are panning off and that we will see an improvement by the end of the second quarter and a meaningful improvement in the second half.

As we look forward to the rest of year, you will continue to see year-over-year increases in Domestic-Based Direct Brands inventory levels in order to fuel Kate's significant global top line growth, as well as to support Juicy Couture's e-commerce and retail store expansion.

On Page 11, you'll see a summary of our debt balance. The change from a year ago includes $88 million of capital expenditures. This includes $71 million for new retail store openings, old store refurbishments and wholesale door investments; $10 million for information technology; and $7 million from what we are broadly call maintenance. Again, we have budgeted $75 million to $80 million of capital spend for fiscal 2011.

The current debt balance also includes a $26 million increase due to foreign exchange impact on the Eurobond. As the euro varies relative to the dollar, we have numerous places in our P&L and balance sheet where we see a meaningful impact and this is one of them. You'll also see in this page a net $54 million of other increases, largely representing the net impact of discontinuing operations, deferred financing fees and principal payments under our higher DC capital lease, offset by sale proceeds of property and equipment.

Finally, cash flow from continuing operations partially offset some of these increases by reducing debt by $45 million. It's important to note that embedded in this $123 million year-over-year debt increase is approximately $90 million spent to fund discontinued operations, businesses that were either shutdown or sold, and cash restructuring costs. Both of these are mostly non-reoccurring, therefore, will have much less a negative impact on our next 12-month debt roll forward.

Turning to Page 12. This chart highlights our successful high yield notes offering in Eurobond tender, both of which closed in early April just after the first quarter ended. We issued new $220 million Senior Secured 8-year notes with a coupon of 10.5%. The notes are secured by a first priority lean on the Juicy, Lucky and kate spade trademarks.

We have secured the Eurobond tender at a discount and issued the new notes with the goals of materially extending the average weighted maturity profile of our capital structure and maximizing financial flexibility, as well as to decrease the amount of our euro-denominated debt. We are very pleased with the market response to both of these transactions.

Importantly, the notes offering also permits the future issuance of additional notes secured by the same collateral to refinance, if necessary, the remaining outstanding Eurobonds.

Turning now to Page 13, titled Bank Credit Facility. At end of the first quarter, our calculated borrowing base was $297 million with a drawn revolver of $129 million, resulting in availability of $139 million. Remember that our first fiscal quarter is seasonally our worst from a cash flow perspective, so this drop in availability from our year-end $240 million was fully expected and planned for.

That concludes my summary of the financial metrics. I'll turn the call back over to Bill now to review our segment results.

William McComb

Okay. Thanks, Andy. Looking now at segment results, in Partnered Brands here on Page 14 of the slide presentation, the change in the sales line primarily reflects the rebasing of this segment in line with the new operating models, which now favor licensing. The operating margin was nominally above 0. The profit flow-through was just now beginning to show in this segment and as I indicated earlier, we expect positive adjusted operating income in this segment for 2011. Sales were strong at JCPenney, QVC and Kohl's. And as expected, adjusted gross margin was up significantly to 47% versus 32% last year.

In the Domestic-Based Direct Brands segment, gains at kate spade and Lucky Brand's direct-to-consumer sales were offset by declines at Juicy Couture and by a reduction in wholesale sales for Lucky Brand Jeans, which also drove the erosion in the adjusted operating margin as well for the segment.

Juicy Couture sales were down 1% overall for the quarter. Here, you see strong international growth, offsetting declines in the U.S. wholesale channel. At Lucky Brand where we saw a plus 4 comp for the quarter in direct-to-consumer, wholesale sales were down significantly, reflecting that product in 2010 was not effective, therefore, wholesale partners planned their buys down measurably for the quarter.

Kate spade saw sales up 72% for the quarter with growth coming evenly from all product categories. And as Andy discussed, segment adjusted gross margin was up 86 basis points to 55% even with the cost pressures of cotton and other commodities, and adjusted gross profit up $10 million versus 2010 to $142 million.

Turning now to Page 16, international-Based Direct Brands. Here we see adjusted gross margin up 285 basis points in the quarter to 51%. Adjusted operating margin, however, was down 18%. Canada saw soft comps for the first time in a while due to the Easter shift in March, but also a soft quarter for the marketplace overall with mall traffic down, generally speaking, as well. And comps in Europe were down 6% overall.

Our outlook for the year at Mexx Europe is largely what we described. We like the pace and character of improvements in wholesale. We think our execution continues to improve, delivery after delivery, and roughly half of our retail stores are making money. We continue to make decisions based on our operating goal of breaking even in the global Mexx business in 2012, and that now includes making selective store closures where required in the retail side of the business to achieve that.

Finally, turning to Page 17. Tomorrow's Investor Day meeting will give us a chance to describe our vision and key initiatives at Juicy Couture, kate spade, Lucky Brand and Mexx. And importantly, to meet the management teams themselves. Here is the agenda for the meeting. As you can see, the plenary session will be webcast beginning at 9:00 a.m. We think that this will help your ongoing research efforts on our company and very much look forward to the day.

So now with that, let me go ahead and open the call up for questions and answers.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Bob Drbul of Barclays Capital.

Robert Drbul - Barclays Capital

I guess a couple of questions that I have. First, on the Mexx side of the business, can you just comment a little bit more about traffic, conversion, sort of what you see in the stores? And when you talk about being in the position for selective store closures in 2012, is there a rough number that you could sort of talk to in terms of what you think might need to be closed and where you see opportunities?

William McComb

Well, I'll give you a couple of very sort of rough statistics. First of all, the trend has sort of continued as we've described it, which is, linking up and down and minus the March Easter -- March, April Easter shift, one of the patterns that I think you got to hear us on is that, in general, after we went in and did a quartile and then decile analysis of the stores, the number one factor that we found that would correlate to core performance versus good performance was size of store. So I know tomorrow at the conference when Thomas is here, we'll talk about it a little bit more, but generally speaking, we're not get too detailed about it until we've actually done some work on this, which will be by the, I would say, during the second quarter earnings call at the end of July. But this is one way to put it, roughly half the stores are making money and half of them are not. And within that, 25% of the stores are making very good money and 25% are losing a lot. So the logical conclusion is to go in and do some restructuring on the ones that aren't. And as I said, the number one correlate to the difference is size of stores. The stores that were very, very big, multi-floored, generally speaking, have rent structures and lease structures that just aren't going to work for us. And so I think that, that's the best way to characterize it right now. Now I know that, that leads to all kinds of specific questions that even tomorrow we won't answer just because we need to just to get the work done, which are, how much do you need to reserve for store closures? Generally speaking, you're going to see it's not any one specific market. It's more about size of box, age of store, and appropriateness of the store format.

Robert Drbul - Barclays Capital

Great. My second question is, John, the Juicy business. So do you think that this first quarter comp result, do you think it gets worse from here as the year progresses or where do you think that could bottom out? And you talked about anticipating a positive impact on the business by holiday. What gives you sort of, at this point in time, can you just give us what gives you the confidence around, what exactly you're seeing and sort of how we should expect that to play out?

William McComb

Yes, well, tomorrow, I'll actually be in the plenary session talking about the Juicy brand. And LeeAnn will be there and LeAnn will lead the discussion and the breakouts. And one of the things that we'll both talk about is, when we get it right, we get it really right. A lace dress that I'll show tomorrow, it was the cover feature of the spring 2011 catalog, had a 98% full price sell-through and it went in 2 weeks. The Juicy girl, the Juicy woman still loves the Juicy brand. I've said that our execution has been stale. What gives me a lot of encouragement is the innovation and change that LeeAnn's team has already brought to the table starting holiday. Spring will be magnificent but there's a lot in fall and even holiday that's going to start looking better. Do I think that it's going to get any worse than first quarter? No, I don't. But in a sober way, I said I would project that second quarter looks like first. And that's how I would model it if I were you. I would think about it that way. I showed you back on Page 4 of the slide deck that the March comp was like -- was down 17 and month-to-date through Sunday, through Easter Sunday, Juicy's been running up 15. And we've had some very nice sell-throughs, and I'll say, sort of whole-store impact during this month of April. So there are a lot of bright spots in Juicy. I mean, a lot of it has to do with what I know -- where we know the consumer is on the brand and where we know the softness in execution, which more than anything is, like I said, innovation is what will turn the juices back on.

Operator

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

Kate McShane - Citigroup Inc

I was wondering if you could talk a little bit more about the different levels of success you're having between Lucky wholesale and Lucky retail.

William McComb

Well, Lucky wholesale is lagging, right? And so I'll try to put it like this. I mean, the retail, I'm very happy, that's my characterization, very happy with how Lucky has done once our spring reset was done on January 15. We've just seen steady increases. We're seeing it across men's and women's. We're seeing it in tops and bottoms. The denim business is back to hitting very high metrics that we haven't seen in 3 and 4 years in terms of weekly dollar volume in women's. The new products and the innovation that will really be discussed in detail tomorrow is it's really working. And all that said, none of that is well featured at wholesale yet. Wholesale lags, as I described a few minutes ago, not surprisingly, the 2010 execution, 2010 was a transitional year up until holiday and holiday didn't fare so well. And so they didn't give us the big fat 10 that we needed. Also, Dave took down the number of doors that he was distributing at as a part of what he's called his wholesale reset. And so wholesale is running about 9 months later in its transition than retail. It's an important part of the business. We think it's a great way to reach a good segment of customers, and but we think that there's no reason why what we have and are seeing in our retail stores won't eventually work its way into wholesale. It's just going to be little bit more delayed.

Kate McShane - Citigroup Inc

Okay. And just one follow-up question on that point. It's more of a function of the retailers. I know you said Dave reduced the number of stores, but retailers ordering less because of what happened at the end of 2010...

William McComb

That's right. All through 2010, not just the end, yes. Retailers buy off-trend, as do we, and they want to see it start to work. By the way, they care also a lot about what goes in our own stores. And they're very interested in adapting, learning from our stores. So I mean, we've got a lot to talk about. I'll tell you, the back half of the year has some just unbelievably exciting accessories changes, which I talked about for a year now. And they're -- we said that they would creep in, in April, and we look forward to it in the back half. And the wholesalers are very excited about that because it was a very big business and they'd like to see that come back. But the product had to be right.

Kate McShane - Citigroup Inc

Right. So it isn't really a matter of then that the product for the whole -- the product being offered to the wholesalers, is that different from what is being sold in your stores?

William McComb

No, no, no. Exactly, no.

Kate McShane - Citigroup Inc

Okay. And then my second question is about price increases. I know you were able to manage your gross margin very well with more full price sell-through and also the change in the model with Liz Claiborne. But in terms of price increases for the fall, can you talk about what we could expect to see from Liz brand?

William McComb

I don't think anything will jump off the charts as an apples-for-apples visible price increase. There are places in the line where the team has been able to do it and they've done it carefully. But not having a business that's structured like some of the more consumer packaged goods, like Hanes or Levi's where they repeat a SKU season-on-season on season-on-season, and we have more apples-to-orange comparisons on that. Better full price sell-throughs, it has and will be a positive for us. I think we've got a tailwind from that, that I would anticipate throughout the year on a versus year-ago basis. So that's going to help. But I mean, we've been -- listen, like everybody out there, the going-in margin pressure is significant. And we've said that since the second quarter of last year and, frankly, that's our assumption. Peter will talk tomorrow that, that's the headset we got for 2012 as well. And Peter will talk specifically about how our brands, overall, are adjusting to this. And price increases are there, it's just -- it's not in an easily reportable way SKU-to-SKU.

Kate McShane - Citigroup Inc

Okay, thank you. And then my last question is on kate. Was there any notable change or additional distribution in the kate spade wholesale model this year -- this quarter?

William McComb

Craig will talk to it tomorrow some more. Nothing -- no call outs. No big major new account. The numbers that we showed on these charts for our own retail is actually comp. So by definition, it's increases in the last year-over-year in doors that have already been open for over 12 months. And what we're seeing is, what we are seeing in our own comp, our wholesalers are seeing too. Productivity is exploding. And yes, we are cautiously adding wholesalers, but we remain about 75% retail at kate spade. And so, no, there hasn't been any seismic shift. And some people say, "Gosh, why don't you just go put it out everywhere you can get the distribution." I'm really proud of our team. They're really very cautious in managing the brand on the wholesale side to not just take every dollar they can get. And we had done that on Juicy. We probably let that get bigger than it could be long term. And so at kate, we're just managing it very carefully. But virtually, the entire business is moving in a rapidly growing pace at kate spade.

Kate McShane - Citigroup Inc

Okay, thanks very much.

Operator

The next question comes from William Royer of Bank of America Merrill Lynch.

Unknown Analyst -

With regard to the strong performance through the first 3 weeks or so of April in Juicy, was this performance in line with what you were expecting? Or is this a little better than you guys had anticipated?

William McComb

It's a little better than we anticipated. Now, I don't want to get anybody overly excited. I mean, I just want everyone -- I want to go back to how I answered Bob's question. I want you to think about and model second quarter of Juicy like first quarter. Could it be better? Yes, because I'm going to say it again tomorrow, what's not sick about the brand is the consumer traction and the consumer awareness and it's desirability quotient, the brand equity metric. It's incredibly strong. But I just -- I don't think that there is enough meaningful change through the mix until fall begins to call it any different than we just saw it in the first quarter. But to answer your question honestly, yes, April has been faring significantly better than we thought.

Unknown Analyst -

Okay. And you talked about the second quarter of this business, that maybe we should think about it looking like the first quarter. I'm wondering if you guys are expecting that when LeAnn's product is on the shelves in the fall, whether we're going to see kind of modest increases or if this going to be a more dramatic kind of V-shaped rebound?

William McComb

Well, I've learned to not talk about those V-shapes, because, look, while I watched

Dave DeMattei's team at Lucky in July, August and September get ready for holiday and then what they were doing for spring, we were all very, very encouraged. What you have to realize though is, is that it takes a month or 2 or 3 for the consumer to say -- I mean one of the things that Dave and I were talking about today about Lucky is they're now actually -- they're able to metric through their database at what repeat traffic is looking like. And in the month of April the percentage repeat business has gone up, month-to-month repeat, has gone up dramatically. Very interesting. And it's exactly how kate spade unfolded when it really turned. I think that I am expecting to see a healthier holiday than we had this year with the business that is nominally up over a year ago. But I would really hold your horses for thinking about a much more aggressive growth story on a comp basis in spring of next year. And I'm just really encouraged with the creativity. I mean, this is a brand with a very clear handwriting and they have just re-unleashed that. So there's some really smart things that they've done.

Unknown Analyst -

Okay. And then just one last one for Andy. In terms of your excess capacity under your revolver, it was $94 million at the end of the year. Would we expect that this is the low point that we'll see as you guys are reporting quarterly for the rest of the year?

Andrew Warren

Yes. This is, as I said, first quarter is our worst from a cash flow perspective. So it will stay at about this level, second, third quarter, as we look through working capital. And then the year-end, of course, it goes up quite a bit, like it did last year.

William McComb

Third quarter is always a pressure point. So third quarter could look close to this.

Unknown Analyst -

Okay. I'll leave it that. Thank you.

Operator

Next question comes from Matt McCloskey of Imperial Capital.

Unknown Analyst -

So, since Liz Claiborne brand really seems to be exceeding estimates, is it possible for JCPenney to purchase it early maybe this year?

William McComb

Well, I mean, I've had a lot of people ask that question. I mean, never say never. Is it possible? It's not accounted for or provided as a mechanism in the contract and it's not precluded. So I mean that would be a question that I would aim towards Mike Ullman at JC Penney.

Unknown Analyst -

Okay. And could you estimate the size of that business in retail revenue?

William McComb

I don't want to do it because it's another -- it's a great JCPenney question. I just -- I've sort of, now that I've got these incredible vertically integrated license deals at Kohl's and Penney's and QVC, we sort of have an agreement and a policy with our partners that we'll let them answer the questions about the retail side of their business.

Unknown Analyst -

Okay. And for Mexx Canada, would you mind talking about kind of the weakness that you saw there over the quarter? And also relative to other brands in Canada, would you rank it maybe first tier, second tier, third tier?

William McComb

What do you mean by tiers, you mean the change?

Unknown Analyst -

No, I'm talking about the quality of the brand as opposed to...

William McComb

It's a top-tier brand, no question, in every way. I mean, first of all, take a $225 million retail sales base, equivalize it in U.S. dollars in Canada, is like the Banana Republic is in the U.S. It's a very big business. And I love meeting Canadians and talk about brands that they know and grew up with. Mexx is at the top of the list, it really is. The market was off. The market was off in first quarter. It was soft. Mall traffic overall was soft. We don't have good, solid, robust third-party data, but we have the Canadian market is very close and you hear chatter about how the malls are doing. And our sense is that we kind of are right in line there. I don't have any big merchandising or pricing callouts to give. Our team has really scrubbed it. They feel really good about their product and their execution and their marketing. There was a point a few years ago where they had a couple of really soft quarters, this is kind of looking like that. But in general, we feel -- I mean, look, it's a very profitable division, it's a very well-run division, great talent up there. And I'm not too concerned that it'll basically be on track for us.

Unknown Analyst -

Thank you very much. And lastly, could you talk about the status, please, of re-licensing the Axcess brand?

William McComb

No, I don't have any news updates. We've shown it by request to 3 different players and we're talking about it right now. And these are people that go back and do research and compare it to other things, and we'll see where it goes.

Unknown Analyst -

All right. Well, thank you very much.

Operator

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

James Chartier - Moness, Crespi, Hardt

Andy, could you tell us what the gross margin for Domestic Direct Brands was excluding Juicy, so we can have an idea of what the improvement was at Lucky and kate?

Andrew Warren

No, Jim, we don't do that. We only do it in total segment terms.

James Chartier - Moness, Crespi, Hardt

Okay. Last year, you guys broke it out excluding Lucky. So I just thought maybe you'd do it again this year.

Andrew Warren

Yes, there are some callouts there that's given where Lucky was and how promotional they were last year, but we really want to stick with our segment reporting cadence.

William McComb

It really -- it was because Lucky went to -- everything went to deep clearance and markdown in the second quarter. We actually don't have that phenomena into Juicy. And actually Juicy's margin structure is, it's more normal than -- you should think about it as sort of normal. Our Juicy issue is a traffic one.

James Chartier - Moness, Crespi, Hardt

Okay. And then Mexx Europe, was that the primary driver of the gross margin improvement for consolidated Mexx?

Andrew Warren

Yes, it was. And again, without providing any numerical details, yes.

James Chartier - Moness, Crespi, Hardt

Okay. And then DKNY, how did that perform in the quarter?

William McComb

Well, we said that it contributed to margin accretion, very strong margin accretion in the Partnered Brands segment. So on a year-ago basis, we enjoyed good margin this year.

James Chartier - Moness, Crespi, Hardt

Great. Thanks, I'll see you tomorrow.

William McComb

Okay. I think that, that's it. What I'd like to do now is thank you for listening and direct you to tomorrow's either webcast or the meeting live. It will be a great day. Thanks for dialing in.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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