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Executives

William McComb - Chief Executive Officer and Executive Director

Andrew Warren - Chief Financial Officer and Executive Vice President

Analysts

Grant Jordan - Wells Fargo Securities, LLC

Robert Drbul - Barclays Capital

Kate McShane - Citigroup Inc

Mary Gilbert - Imperial Capital, LLC

Robert Ohmes - BofA Merrill Lynch

Jennifer Black - Jennifer Black & Associates

James Chartier - Monness, Crespi, Hardt & Co., Inc.

Janet Kloppenburg - JJK Research

Carla Casella - JP Morgan Chase & Co

Edward Yruma - KeyBanc Capital Markets Inc.

Liz Claiborne (LIZ) Q2 2011 Earnings Call July 28, 2011 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Liz Claiborne Second 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 cannot 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 second quarter 2011 Form-10Q to be filed with the SEC. In each case, under the captions 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, 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 a non-GAAP basis. EBITDA, adjusted EBITDA, and adjusted EBITDA, excluding foreign currency gains and losses and adjusted EBITDA margin 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 GAAP results are available in the tables attached to the earnings release and slides 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 second 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 morning. Thank you for tuning into our quarterly earnings report for the period covering April through June 2011, our second fiscal quarter. Joining me on this call is our CFO, Andy Warren. Today, we will provide commentary on this morning's press release, which summarized our result. We'll follow our traditional process of speaking with the assistance of support slides, which are now being webcast, and which will later be posted on our corporate website in the Investor Relations section.

I'll be providing my perspective on the overall results, followed by a review of the quarterly comps and I'll address the initiative that we've undertaken to the de-risk the Mexx turnaround followed by some comments on our adjusted EBITDA guidance for both 2011 and 2012. And then Andy will provide an in-depth review of key operating and balance sheet metrics for the quarter. Finally, I'll provide some segment-leveled performance detail before wrapping up with Q&A.

First and foremost, let me say I'm very pleased with what's happening in the business from a sales and consumer perspective. We saw a comp trends across the Direct Brands that were in line with or even better than our projection. Kate Spade continues to outperform its competition, Lucky Brand is truly turning around, posting strong traffic gains and growth in virtually every product category. The key call-up there is the return of the women's business, supported by strong product news in denim. We also continue to see positive momentum at JCPenney on the Liz Claiborne brand across their stores. The creative direction of Juicy Couture is now well on track, foreshadowing an expected improved trend in fourth quarter and a return to positive comp growth in 2012. Our focus on international expansion is in full force at both Kate Spade and Juicy Couture, where we have made important progress during the quarter. Our adjusted EBITDA for the quarter was up $14 million versus second quarter last year, and we remain on track to achieve the previously guided adjusted EBITDA of $100 million to $120 million for the year. We have inventory now going in the right direction, investing at Kate Spade, bringing inventory levels back in line at Juicy Couture, and well-controlled and still in line at Mexx Lucky Brand jeans and Partnered Brands. We're also managing our cost even more aggressively. In June, we announced the plan to close our last remaining company-owned distribution center in the United States. And we'll be converting that heavily fixed-cost base into a variable model, working with to-be-determined service providers. With this initiative as a centerpiece, we will be undertaking a $25 million additional cost out from our corporate infrastructure and support areas, reducing the forecasted 2012 SG&A level and providing a strong hedge to achieving our 2012 adjusted EBITDA guidance of $180 million to $220 million. We continue to feel good about the traction of our Mexx turnaround as well. We're seeing positive growth in wholesale orders in Europe through year-end, supported by good sell-throughs at retail. In Europe, we saw the first positive quarterly direct-to-consumer comp since 2006 during this quarter with improved margins. In Canada, we showed improved conference versus first quarter. We've also made very good progress towards closing some money-losing retail stores in Europe as part of our plan to manage that business to a minimum break-even adjusted EBITDA in 2012. I must point out that very strong negative foreign currency impact on some key reporting metrics at quarter end. We've seen this in past quarters, but it must be understood. Andy will isolate out some of these impacts, particularly in the latest 12-month debt balance and in earnings per share for the quarter. Offsetting the positive consumer storyline this quarter is the ongoing burden of our debt profile. So I have to say right here and now, that we remain very focused on managing it down more than ever, in fact. Andy will show that the debt balance increased this quarter largely due, as I said, to foreign currency exchange rate fluctuations as well as the acquisition of the Ohio Distribution Center, an obligation under our synthetic-lease agreement that has been in place since early 2001. We now plan to exit and sell this facility in 2012.

But one of the most critical steps is the measured deleveraging of the company, as discussed at our April 28 Investor Conference, where we said we're actively assessing and considering the optionality within our Partnered Brands segment, where we have some high-value license agreements as well as some cleavable brands. I won't provide any specific updates on those options today, except for you to note that we have several irons in the fire here, and expect to make announcements to address the debt levels by year end.

So turning to Page 4 of the slide deck, you'll see the second quarter 2011 direct-to-consumer comp sales numbers including April, May, June and now month-to-date, July through last Saturday, the 23rd of July. I've said that we expected comp declines in direct-to-consumer sales for Juicy Couture in the U.S. in the second quarter. These results are in line and slightly better than we had expected. Lucky Brand has shown some favorable trend. The marketing, the in-store merchandising, the product offering, is now working. The team has figured out what the consumer wants. We're looking forward to a strong fall as well, with some very solid new product programs in place. Kate Spade continues to shine, comping double digit comp growth a year ago as well. And as I said before, we saw a good comps at Mexx Europe and Mexx Canada. Like Lucky Brand, the team at Mexx is much clearer about their consumer and they've learned what product both men and women are responding well to. And this quarter, women's made the difference in the comps. All in all, this is a very good chart.

So now, even with the green sprouts that we're seeing at Mexx, back at our investor conference in April, we talked about more aggressively and definitively reducing our shareholders' continued exposure to losses as the turnaround progresses at Mexx Europe. Since that meeting, we've begun exploring the idea of bringing in a financial sponsor to take on a majority ownership position of Mexx globally, a process that has been rumored about in the media lately. We're currently working with a few very qualified, experienced financial sponsors on doing just that. At this point, it would be premature to highlight the specifics of a possible transaction, but our goal would be to recruit the best possible firm to partner with current management to maximize this brand's potential, which we believe is significant especially with the right partner and under the right structure. We see reducing our stake to a minority ownership position that diminishes the risk, but enables us to participate in long-term growth potential. Also important is maintaining continuity: Continuity of management, continuity of product vision and direction, continuity of marketing positioning, all of which now have traction and are clearly working. The goal here is to derisk our company significantly by eliminating the uncertainty of the timetable to profitability of Mexx. We would hope to announce the definitive partnership in the near future. I won't comment any further including during Q&A today on any of this until we have an official announcement about the transaction. But in the meantime, you should know, we are running the global Mexx business as ambitiously as ever and focusing on efforts to bring it, as I said, to minimum breakeven adjusted EBITDA in 2012 regardless of the outcome of this possible strategic alternative.

Turning now to Page 6. We're reaffirming our adjusted EBITDA targets for both 2011 and 2012. Kate Spade and Lucky Brand are stronger than we had thought previously, Juicy Couture is a little softer, Mexx is generally on track and we have some pressure in Partnered Brands on the DKNY Jeans business and Monet, all netting still within the range. Our 2012 target assumes global Mexx at minimum breakeven adjusted EBITDA, to be achieved operationally or through a transaction like the one I described that neutralizes the operating performance of the business in our P&L. The 2012 plan remains achievable in our view, although one would have to say that there a lot of uncertainties in the markets around the world, and that question still exists about the impact that they may have on the consumer. All of that makes visibility into 2012 a little more challenging. We're dialing up our cost out plans as I indicated as a hedge. With the adjusted EBITDA in this range, we would then expect to deliver positive adjusted earnings per share. Let me now turn the call over to our CFO, Andy Warren, to review the operating and balance sheet metrics in greater detail. Andy?

Andrew Warren

Thanks, Bill. Turning here to Page 7 of the slide deck, you'll see an adjusted P&L for the quarter. We again included a column that shows second quarter 2010 results as reported back in August of last year. This column presents those results, along with the discontinued operation's 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. Starting at the top of the schedule, you see adjusted net sales grew by 3%, even with the embedded decline and reported Partnered Brands sales that comes with the model change from year-ago, which we haven't yet anniversaried. Adjusted gross margin rate for the quarter was up 220 basis points to 51.8%, even in the face of increased commodity costs. We saw improvements in Partnered Brands and International-Based Direct Brands, while US-based Direct Brands were down just slightly. There were no surprises to speak of in terms of commodity prices. They definitely pressured our going in margins, but these increases were anticipated. Adjusted SG&A was up $5 million for the quarter, driven largely by new store openings and FX. SG&A, excluding the impact of foreign exchange fluctuations, was $12 million with $302 million. Adjusted operating loss for the quarter was $15 million, improved over last year. Coming from a loss of $43 million in 2010 to a loss this year of $28 million. Adjusted EBITDA came in line with our beginning of the year business plan, at positive $6 million, a $14 million improvement from second quarter of last year. Adjusted EPS is negative $0.34, was adversely impacted by $0.04, primarily resulting from the weaker dollar and the foreign exchange losses associated with the de-designation portion of the Eurobond. Excluding unrealized foreign exchange adjustments, adjusted EPS was a negative $0.30 for the second quarter, which compares to negative $0.28 last year and analyst expectations of negative $0.32.

Turning to Page 8, I want to emphasize the foreign currency exchange impact across these metrics. Receivables were down versus a year ago to $176 million, that's down 8%, down 12%, net of FX at quarter end. As in the first quarter, these declines are driven by the Liz Claiborne licensing model change in Partnered Brands as well as decreases in the U.S. wholesale channel at Juicy Couture and Lucky Brand. Inventory was up nominally by $6 million, which is up 2% in total, but net of the foreign currency exchange impact, it's actually down 2%. We made great progress at Juicy Couture whereas first quarter inventory to Juicy were up year-over-year by 38%, at the end of the second quarter, they were down 9% versus last year. The only place the inventories grew in fact, was at Kate Spade, which is needed to fuel their global growth in sales and the distribution we continue to realize. The total debt line increased to $769 million, clearly the stand-out metric on this page. Of that reported number, $68 million of the increase is related to an increase in the outstanding Eurobond debt due to the foreign currency exchange at the quarter-end versus last year. We will speak more to this year-over-year change later in the presentation.

The latest 12-month cash flow from the continuing operations is now $31 million. The sizable change versus a year ago reflects 2 major factors: The LTM second quarter 2010 number includes the $167 million tax refund that we received in March of last year, is part of the net operating loss carry-back extension; and $24 million, refunded to Li & Fung, associated with moving the Liz Claiborne brand out of our sourcing agreement as we initiated the JCPenney and QVC license partnerships. And finally, capital expenditures on an LTM basis were $85 million, excluding the $28 million purchase price for our a Ohio Distribution Center under our previous synthetic lease. Our full year 2011 CapEx is budgeted to be between $75 million and $80 million, again excluding the purchase of the Ohio Distribution Center.

Let me now review some bridge schedules, these are important P&L and balance sheet metrics. On Page 9, you see our 2Q 2011 adjusted net sales bridge. We posted growth in both direct brand segments, $43 million in the U.S.-Based segment, primarily driven by positive comps across Kate Spade and Lucky Brand's full price, outlet in the e-commerce channels, and $15 million in the International-Based segment driven by wholesale growth, e-commerce growth and the positive impact from foreign currency change, partially offset by decreases in store sales coming from many of the doors we're planning to close as discussed earlier. That $58 million of Direct Brand reported growth was partially offset by the Partnered Brands segment through the change to a licensing business model to a Liz Claiborne brand. In total, resulting to 3% increase and adjusted net sales to $552 million. On Page 10, you see the adjusted gross margin bridge. We saw a margin expansion of 792 basis points in Partnered Brands, driven by the impact of the business model change for Liz Claiborne brand in addition to having exited the money-losing outlet in Liz Claiborne international businesses. Domestic-Based Direct Brands saw a margin decline of 164 basis points, driven largely by inventory clearance and higher product costs in all 3 brands. In the International-Based Direct Brands, it was up 26 basis points. The resulting total company adjusted gross margin rate was up 220 basis points, despite increased cotton and raw material price inflation. SG&A, shown here on Slide 11, was up $5 million. While corporate expenses were down, increased investment in the Investor-Based Direct Brand segment showed a slight increase in total. We continued to invest in e-commerce and marketing, as well as the combined expansion of the Juicy Couture and Kate Spade retail platforms by 35 doors globally. Adjusted SG&A, excluding foreign exchange, was $302 million, down $7 million versus last year. Importantly, beginning this fall, we will be implementing additional cost reduction throughout our corporate infrastructure totaling $25 million on annualized basis. The DC closure plan that Bill discussed is a major part of this cost reduction effort. We continue to drive process efficiencies, and given the external uncertainties in the markets around the world, we are looking to provide extra assurances to assist us in achieving our stated adjusted EBITDA goal for 2012.

Turning now to Page 12, you see our inventory chain schedule. As I said, before, reported inventory was up 2% for the second quarter of 2010. On a constant-currency basis, it was actually down 2%. Partnered Brands is down $30 million to $27 million. Again, reflecting the changes in the business model and the closure of the Liz Claiborne Europe branded outlets and international businesses. Globally, Mexx inventory is reported as plus 12% to $100 million. Excluding foreign currency change, the inventory is actually down 1%. E-commerce manages this business with very conservative inventory planning. In our Domestic-Based Direct Brands segment, we posted an inventory increase of 15% to $188 million. But unlike last quarter, where we reported big increases in Juicy Couture and even Lucky Brand, those brands have brought down the inventory levels significantly. Juicy is now down 9% in both units and cost year-over-year, and Lucky Brand is clean, both having sacrificed gross margin in order to get there. Kate Spade is a net investment for us in inventory, and should be, given its current global growth trends. We believe that the actions we've taken to clean the inventory and reduce product inflows during the back half at Juicy Couture will deliver meaningful improvement in the second half. But at the total segment level inventories, we will continue to be up year-over-year to support the Kate Spade's growth.

Page 13 shows our debt bridge. The change in year ago includes capital expenditures of $85 million for general corporate purposes and $28 million related to the purchase of the Ohio Distribution Center under our previous synthetic lease. The $85 million includes approximately $66 million for new retail store openings, all store refurbishments and wholesale door investment over the past 12 months, $14 million transmission technology and $5 million for what we broadly call maintenance. Again, we have budgeted $75 million to $80 million of capital spend for fiscal 2011 excluding the amount spent for the purchase of the Ohio warehouse facility. It's important to note that embedded in the $139 million year-over-year debt increase are approximately $51 million of cash used for streamlining initiatives, and $29 million of expenditures to fund discontinued operations, business that have either been shutdown or sold. Both of these are structuring-related and therefore would have much less of an impact under our next 12 months debt roll-forward. The reported debt balance at quarter end is up $68 million due to the impact of the foreign currency exchange rate fluctuation 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. As Bill said, we have several irons in the fire to meaningfully reduce debt and our goal is to achieve a debt balance at the end of this year that is below year-end 2010, excluding any additional potential foreign currency pressure.

Before I move on to the next slide, I want to discuss an important change to our convertible bonds. At our annual shareholder meeting this past May, we received approval to issue additional shares, which now permit us to settle any bonds that are converted in cash, stock or any combination thereof providing us with maximum financial flexibility. Previously, we're required to settle the par value of any conversions in cash. And remaining amount in cash or stocks, resulted to a cap. Page 14 shows the status of a bank credit facility. At the end of the second quarter, our calculated borrowing base is $314 million with a drawn revolver of $140 million and letters of credit of $35 million, resulting in availability of $139 million. Finally, Page 15 shows a GAAP loss from continuing operations walk from the second quarter of last year to this year. We are providing this walk since the raw numbers belie real progress made over the past year. As you can see, we realized year-over-year improvements of $15 million in reduced adjusted operating loss, and $24 million in reduced streamlining expenses. Negatively impacting this line however, were $27 million in unrealized FX, and $30 million in expenses related to the planned closure of our Ohio DC. That concludes my financial metrics summary. I'll turn the call back over to Bill to review our segment results.

William McComb

Thanks, Andy. Here on Page 16 of the slide deck, you'll see the operating metrics for the Partnered Brands segment. This is the last quarter where the comparisons to year ago are affected by the model change, and that's a bit apples to oranges. Sales for the segment were $91 million for the quarter and adjusted EBITDA margin was up 4%, significantly improved from last year's minus 6%. Adjusted gross margin was also up from 35% to 43%. As I indicated, the licensing partnerships with both QVC and JCPenney are performing very well. JCPenney is aggressive and opportunistic in their expansion plans and we expecte a strong second half. Our Dana Buchman license at Kohl's is performing well and remains a good source of income in this segment. Shipments of Axcess to Kohl's have now ended as Kohl's launches their Jennifer Lopez and Marc Anthony lines for fall. I will say the Axcess line performed very well there all through the first half. We are forecasting positive adjusted operating income for this segment in 2011, although we have some new softness in our outlet for DKNY Jeans for the back half and we're now seeing some softness in the Monet international business. The DKNY Jeans license ends after 2012 and the cost to us, to run the business next year will drop off dramatically after the fall holiday 2012 product is developed early in 2012. On Monet International, we're finalizing plans to close money-losing retail concession, which drove the softness.

Looking at Page 17, you'll see a summary of key metrics for the Domestic-Based Direct Brands segment. Total net sales for the segment were up 17.7% to $282 million with sales at Juicy Couture, up 5%, Lucky Brand jeans up 12%, and Kate Spade up 64%. Quarterly direct-to-consumer comps were flat at Juicy Couture, up 22% at Lucky Brand and as we showed before, up 77% at Kate Spade. EBITDA margin for the segment was 5% reflecting the still low productivity on a square-foot basis at Lucky Brand. Juicy Couture's adjusted operating margin during the quarter, while positive, was impacted by aggressive promotion activity to adjust down their inventories, which we did successfully. As Andy indicated, Juicy's inventory is now in line and we have taken a very conservative approach to buying for the back half. Adjusted gross margin was down slightly from 55% to 54%. This reflects the promotional activity at Juicy Couture, and final clearance that reduced margins of outlet product from Lucky Brand. A final clearance of goods remaining from holiday 2010. We actually did well in holding these margins, in spite of real pressure in intial mark-ups, reflecting commodity cost increases. The negative impacts of raw material inflation was in line with our forecast. Adjusted gross profit was up $19 million to $152 million.

Finally, in the bottom right of this page, you'll see that the current store count as of the end of June 2011. The chart shows that we now have 128 Juicy Couture stores, up 25 on a past 12-month basis. Most of these doors were opened in the second half of 2010 and of the 25, 14 of them were outlets, 3 of them were international, including Canada and the U.K. At Lucky Brand, we reduced our net door count by 10 stores to 220. Exercising some take-out rights on stores with overly expensive leases or extremely poor productivity while opening a few very highly productive outlet stores. Kate Spade door count was up 5 to 73. On a go forward basis, not surprisingly, Kate Spade will be getting the majority of new door capital, and we expect to open approximately 30 doors over the next 18 to 24 months.

There's obviously a lot going on inside each of the 3 U.S. Direct Brands. As I said, in my opening remarks, I'm very pleased with the creative direction taking place at Juicy Couture. We'll be refitting a dozen stores with a new visual and merchandising package by the end of third quarter. This is the same approach we took at Kate Spade back in mid-2009, that together with great marketing and Debra Lloyd's product direction, turned that business dramatically. We will debut new marketing for Juicy Couture, which was featured in Women's Wear Daily 2 weeks ago. We will be managing our inventory inflows conservatively throughout this year, although we have a gifting program for the holidays and update looks and accessories that we believe will help our sales trend for the fourth quarter. We believe the product for spring and summer during 2012 is really a step forward. I was in London last week when we debuted it to our European partners, and I was very happy to hear their enthusiasm and excitement for the line. It's trend right and very juicy with strong new looks, lots of color, improved fit and quality, more bottoms and very sound merchandising behind it. We've also selected a partner for Russia at Juicy Couture, and continue to see strong sales internationally. In the second quarter, international sales were up 22%. We're working on an aggressive expansion plan for Europe for 2012, and formulating a re-entry plan for Japan, both of which we plan to announce before year-end.

At Lucky Brand, we're enjoying real growth again. The brand has been in test and learn mode and have refined their designs and buys accordingly. The big news here is the return of the women's business, which has been in decline for 3 years. Denim is very strong across the store, with new fit using stretch in women's that have been extremely well received. But the tops are also really working and the expanded presence of tops is driving higher averaging at retail prices and higher units per transaction. Traffic, sales, gross profits and 4-wall profits are all up in our specialty stores and e-commerce sales are also growing 21%. The outlet channel was burdened with heavy inventory levels to clear out remaining fourth quarter products, therefore impacting the margin rate negatively year-over-year in that channel. We anticipate that this situation will change during the third quarter, where we expect that channel margin for outlet to bounce back up. Things to watch at Lucky Brand included tremendous marketing campaign beginning in September, magazines, a fully relaunched website that's been re-platformed to capitalize on learning at Kate Spade. And a return of our accessories line in-store with design elements that have tested very well. At Kate Spade, we continue to see growth in all the product categories. Across our direct-to-consumer channel, we saw handbags up during the quarter by 74%, small leather goods up 59%, apparel up 143%, footwear up 74%. We also have a very strong licensed-tech business, which has strong sales on Apple.com, in addition to the business that we do in our own stores and on our own website. We're opening 2 Kate Spade stores in London during the third quarter, 1 in Sloan Square and 1 in Covent Garden. We're also opening another store in Brazil, these are all run internally by our team. Our partner JV business in Japan is remarkably healthy in spite of the tsunami-related contraction in Japan. In fact, their comp store growth for the quarter was up nearly 10%. We also announced last month from Kate Spade New York that we've formed a joint venture with E-land, 1 of the best vertical banded operators in Mainland China. Together, we believe we will build a very large Kate Spade brand there. The first stores under the venture will open by the end of first quarter 2012. And finally, we've chosen a partner to launch the brand in the Middle East later this year and we're evaluating partners for both the Ukraine and Russia. I can truly say that we have the management team to create a vision and the underlying operations and systems now at this US-Based Direct Brands. For the first time altogether to appreciate the simultaneous growth in sales and profitability that we expect next year in this segment.

Turning to Page 19. Sales in the International Direct Brands, which is the global Mexx business grew 9% to $178 million. Total sales in Europe were 11, up 11% and in Canada up 6%. Direct-to-consumer comps were up 4% in Europe and up 2% in Canada. This segment still posts a negative adjusted EBITDA, only slightly improved versus year ago. This relates to a still money-losing retail division in Europe burdened by some expensive leases and oversized stores. Adjusted gross profit was up slightly despite significant commodity pressure on our initial mark-ups, delivering adjusted gross profit of $95 million for the segment. Year-to-date, adjusted gross margin rate for the European business is actually up 357 basis points. In the bottom right of this chart, you can see that we'd nominally adjusted down the door count, but we are moving forward with closing as many as 70 stores by January 2012. Then, an additional 35 to 40 are likely to be closed in the first half of 2012. In total, then our goal by mid-2012 would be closing 100 to 110 of the money-losing doors that we talked about back at the April 28 conference. And doing so, on a net-cash-neutral basis across the plan, when considering the impact of working capital benefit from the sell-off of inventory.

Turning to Page 20 of the slide decks. We expect back-half orders in the wholesale for Mexx Europe to be up 11%. Growth in core markets like Germany and Russia range from up 15% to up 30%. In the home markets in Benelux, where our retail fleet still have the most impactful exposure to the consumer, the growth is slower. This supports our thesis that these large expensive stores that would require significant capital infusion to clean up and motivate new traffic patterns, are better off being closed altogether. We believe that doing so will strengthen our franchise and wholesale businesses. Our e-commerce business remains a high-growth channel, up 84% year-to-date. In Canada, we announced that Lloyd Perlmutter has joined the company as CEO of Mexx Canada. Lloyd has deep experience in all regions of Canada, having served as President of GAP Canada for nearly 8 years. There are real growth opportunities in this market, and I'm looking forward for that division to begin evolving its positioning and tapping into these opportunities. So, that concludes our prepared remarks for today's call. Now let me go ahead and open up the phone lines and take a few of your questions.

Question-and-Answer Session

Operator

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

Robert Drbul - Barclays Capital

But then, couple of questions, for you. First, on the Lucky business, can you give us an update on the outlook for the wholesale business in the second half. I think you said, first half wholesale was down at the Analyst Day because of, sort of a weaker Q4, but -- in weak spring, but -- and what's the wholesale outlook there?

William McComb

The wholesale business is actually -- like our retail business, it began to perform very well at retail. And that always has an impact on forward-looking orders. I think the biggest call out on wholesale though, as it relates to 2011, would be a stronger return of accessories, which was newly added in April as really a fall build in wholesale. So we expect that, that the accessories business will begin to strengthen. But I would still say a conservative outlook on wholesale. Dave and his team -- they're really rebuilding the assortments and they're applying the learnings from our retail stores to the department stores, and the department stores are in fact, receiving very well that knowledge and that insight, and they're applying it and they're seeing the success. I think that, that's going -- what we just saw in second quarter on what we just reported, and the numbers that we're seeing at retail, will benefit the 2012 wholesale outlet for Lucky more than it will at the back half of '11.

Robert Drbul - Barclays Capital

And then, on Kate Spade, I think you said 30 doors -- additional doors over the next 18 to 24 months. Can you give us a frame for the back half of this year or sort of what you expect -- what other stores you expect to open on this one for 2011?

William McComb

Gosh, I don't have the list in front of me. It's conservative, most of them has been opened. But in the first half of '12, the next crop will come. So I don't really have much meaningful -- 4 or 5 -- maybe 6 at the most.

Robert Drbul - Barclays Capital

Okay. And then my last question is on the Partnered Brands, when you look at a lot of the changes in terms of -- especially the royalty side, what's the profit drag on that segment, given a whole lot of the changes that have been going on there?

William McComb

I don't know what you mean. What do you mean the profit drag?

Robert Drbul - Barclays Capital

Which -- I think it was a break-even this quarter and when you look at -- when you think about the royalty business or the...

William McComb

Well, I really -- the only guidance we've given you is that we expect positive EBIT in the segment for the year. So I would just keep that circled and that's the outlook.

Robert Drbul - Barclays Capital

Okay, and then I guess get one more if I could. The -- when you look at the 2011 and '12 EBITDA guidance that you have out there, are the management bonus incentives in line with those public targets?

William McComb

Of course. Absolutely. Absolutely. That's our compensation plans. First of all -- look, this is probably too long to get into, at the end of a conference call, but the division heads are all incented around the operating profit levels that they deliver in their business. And the NEOs are tied to the enterprise goals, which are in fact -- both a cash flow metric, as well as an earnings metric. So yes.

Andrew Warren

And Bob, let me just to add to that. All of our plans including the brand plans are all at quantitative. So they're all financially and quantitatively driven.

Operator

Your next question comes Kate McShane of Citi Investment Research.

Kate McShane - Citigroup Inc

Thank you for the update on the Mexx store closures to come. I just wondered how does the 100, 110 store door closures breakdown, is it all at Europe or are there Canada stores that are going to be closed as well, and what is the ultimate size of the door footprints for Mexx?

William McComb

Okay, and this is just picking up on a conversation that we had on April 28. So perhaps some of my comments assumed that conversation first. This is just Mexx Europe. And out of the, what -- I want to say 6,000 points of distribution that Mexx enjoys in Europe, 172 doors are what we call company-owned 4-wall retail stores as opposed to 4-wall retail stores that franchisees own and operate, and by the way do very well with. And these are now, after our closures in the U.K. and Italy and Spain and some in South of France, these are doors that are in otherwise good and core markets for us but they are legacy leases in many cases 10,000 to 12,000 square feet with, what I would call, minimal capitalization in terms of look and feel. And they're -- I think it's fair to say dusty and old. I think this is a case where -- because of the situation in the business in the last 5 years, we have not been able to allocate an appropriate level of capital to keep up or refresh and make them dynamic. But the biggest statement that I made there was the size, they're too big. And it's not a noble goal at this point to get these returns. So the first time we talked about that was in the webcast Q&A at the April 28th Investor Conference. And so today's update basically leaves you with the message that we're doing very well against that plan that we had talked about the then. Anticipating to be closed by January of 2012, 70, another 30 to 40 to go in the first half and that would net us down a remaining 50 to 60 that are, if you remember the quartile analysis that we showed in the Q&A on the 28th, they are today, money-making doors in good location. And that is a project that is very important to the company regardless of what happens with the strategic partner. If we go the route of bringing in and doing a transaction, which as I said, we would look to announce in the near future, that will -- it'll just help that partnership move along. And if transaction doesn't take place, it would be a very important step for us to de-risk the business. In Canada, Kate, we will continue to operate just over 90 stores. And Canada is completely separate from that discussion about real estate.

Kate McShane - Citigroup Inc

Okay. And just -- a little bit more to drill down on the leases of those doors that you're closing, how many have leases that are expiring or are very close to expiring and how many are -- have a longer time on their leases?

William McComb

It's irrelevant, because what I'm telling you is, you should know that as I said, we've been -- it's such a fragmented picture, you couldn't characterize it in 3 simple buckets, but what you need to know is that we anticipate 70 actually being closed, regardless of the terms on the lease by January, and another 30 to 40 by the end of the first half of next year, all told, about 110 doors, cash neutral. That's what you need to know.

Kate McShane - Citigroup Inc

Okay. Can you give us a little bit more details -- just switching gears, about some of the weakness that you saw in DKNY and Monet during the quarter. What's the outlook for these brands over the next couple of quarters and what's the end result of the DKNY, of license ending in 2012?

William McComb

Well I -- for us, I mean actually, we are approaching what I'll call an 8, 9-month window of where the wind-down then begins. Because as I said, in my prepared remarks, we -- once we design and sell in fall holiday 2012, at that point, the cost structure of the business on our P&L goes down dramatically. I can't make any comments for DKI. I know that this is a really important business line for them and they're looking to create continuity and strengthen the brand. Again, we've just seen different kinds of fluctuation in that zone over the last 3 years, starting in fall of 2008. It's a price-pressured zone, it's very promotional. The brand has great consumer power. We have done some things to -- in the license with DKI's permission that had been helpful to our situation, such as opening a large size line with Lane Bryant, and that is a very successful initiative at retail. And that said, some of the department stores are soft right now. And so I don't have any -- I won't break out any granularity around specific numbers. It's not keeping me up at night, you should know that. I'm just -- I like to be pretty transparent in my remarks and call out, pluses and minus, minuses -- the important measure still is the positive EBIT that we continue to project for the segment for the year. And in spite of the little headwinds there and some headwinds. Monet International, believe it or not, Monet has had for years a big concession business in France, in Spain and parts of Germany. And we're going in and changing that model out, to sort of buffer the risk and that's taking place right now. Again, not a major nick to the business, just something worth calling out.

Operator

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

Jennifer Black - Jennifer Black & Associates

I have a couple of questions on -- some on Lucky and some on Juicy. I wanted to know why do think Lucky slowed in July as far as your comps?

William McComb

I'm not so sure, it's really...

Jennifer Black - Jennifer Black & Associates

I mean, if they're good comps.

William McComb

Either are good comps. And you have to remember July is a month where the first 2 weeks, you're in final clearance of spring and then you have a whole week reset where we bring fall in. I will tell you, it -- I don't want to get into a conference call on week, month-to-date July, but the trends in July just actually just sends this last week, with the fall set-up, they are tremendous. We are seeing very high full-price of all 3s of our merchandise and very high like a-thousand-basis-point increases in gross margin. And speaking to the topic that you know best, Jennifer, it's the product line there and the innovations in women's denim that's really driving it. The stretch businesses are -- they're incredible. So -- and that's just, we're in 1 week. This week's comp is kind of -- I harked in you back to January, which is a month that is a lot like July. If you recall, we had soft comps for the first 2 weeks in January. We didn't for the first 2 weeks of July, by the way, but softer relative to the other 13 weeks that you were looking at. And then bang, January 19 when the floor set went up, the big double-digit numbers hit again, and it's kind of what we're looking at right now. So I haven't looked at July at all as a waning or a softening, it -- in fact I look at and see -- and this is always the risk of talking about a week's data on fall but I see another inflection point there, especially as it relates to margin. So getting a lot of positive e-mail trails from Vernon California, the team is really excited about fall.

Jennifer Black - Jennifer Black & Associates

Great, and I wondered how many outlets you're going to open, I think you're underpenetrated there?

William McComb

Yes. It's about 10. It's 10.

Jennifer Black - Jennifer Black & Associates

Okay. And is denim -- is the composition of your denim, is it all now, with stretch? This new floor set?

William McComb

Oh, is the composition -- the assortment for fall reflects the introduction of the use of stretch in a number of the bodies and new SKUs, some of the new products. So yes, the store, as Dave had called out at the Investor Conference that, celebrating the denim roots, and reminding the consumer that, what we're really all about is a denim lifestyle. You see that clearly in all the merchandising, and all the marketing in the windows and in the assortments and buys, but it's -- there's a lot of innovation and a lot of newness in there now.

Jennifer Black - Jennifer Black & Associates

Looks great. Okay, so I have another question about Juicy. I wondered if you've gotten reads on LeAnn's product as far as holiday accessories. I think she was going to have an impact there and is there anything that she's affected at all that's currently in the stores?

William McComb

Look, like I said, we have a tremendous gifting program, which she was able to impact in the holiday buys. Items that she fast tracked in for summer were items that sold out, that had very high full-price sell-throughs, and sold-out. Our issue has been with the, still long lead times that we have in the development calendar at Juicy, and it's been frustrating, but it's the way that the business works. We've been saying all year that it's really spring that she really impacts, and having been in London, the reason I just made the comment about me being in London and watching our very solid partners over there, our partners from the Middle East, from Greece, our specialty wholesale distributors there who know the brand very well, watching them see the product was, it was great. And I will just tell you that's the real first read I have, and we'll see how numbers look. I'm a big believer that wholesale always follows retail though that wholesale will build more slowly than the retail business. But the brand is, I think you're going to all be excited about Juicy for spring and LeAnn's touch. And moreover, like I said, by the end of September you'll see in a dozen stores, just like we did at Kate Spade in April of 2009, we're going to roll out what we're calling the re-couturing of the Juicy stores and it is exciting. It is new and fresh and everything else.

Operator

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

Robert Ohmes - BofA Merrill Lynch

Couple of questions for you. The first question, if you look at the Domestic Direct Business and the profitability you saw in the second quarter, can you just help us think through what level of -- is it you need even a higher level of comps to get that adjusted EBITDA margin for domestic direct up, or was it -- you have some inventory clearance that pulled it down, so if you're mentioning the Lucky comps, look like you're turning strong as you move into fall. What level of comps do we need to see across direct to get some margin leverage in that business. And maybe related to that, I don't know if you could share with us in the second quarter, if there was significant variance between what the outlet stores were doing versus the full-line stores given there was some clearance going on, that's my first question.

William McComb

Okay. So, the biggest effect of all, to answer your question, is the inventory clearance. Bottom line, to achieve what we did, and you all have called out in all of your reports, what we have alerted you to at the end of the first quarter call was a high inventory position at Juicy, and we cleared that. And we got it done and it cost us margin. Similarly at Lucky, we liked our margins and our comps, and specialty outlet was hurt by a high going in inventory position resulting from clearing products -- the need to clear products. So I will tell you that, it is inventory clearance and margin realization that we saw in second quarter, that'll be a big driver of flow-through in third quarter. And my comment about Lucky is the following. Lucky went from peak dollars per square foot productivity in '06 and high 600s and as we opened new stores and as we drifted in our product direction, that productivity came, it fell to the low 300. We're going to comp our way back up, we did this with Kate Spade, when Kate Spade had a similar situation. It's productivity was in the low $300 a square foot. And it's now on its way toward $800, $900 a square foot. I call it out because the longer-term answer to your question beyond just third or fourth quarter is, that this segment has its tremendous opportunity for earnings flow-through, margin flow-through by the Lucky fleet actually performing and we're well on our way with the kind of comps that we're looking at now. We want to see that compound obviously, but for third quarter and fourth quarter, the call out would be not having to clear as much inventory, higher, richer, full-priced sales. Andy, anything to add to it?

Andrew Warren

Yes. Rather the combination also of second quarter as you know is a light-retail quarter. So that, plus the fact, we're definitely getting some sales productivity. We definitely anticipate a higher EBITDA margin in the second half relative to last year. So combination of cost structures, cleaner inventories, margin profile, all that should yield a better EBITDA margin in the second half.

Robert Ohmes - BofA Merrill Lynch

Got it. That's helpful. And just my second question, and last question is, Bill, can you just -- it sounds like the de-risking of Mexx is already going well. You got the number of doors that you think you're going close up, so why de-risk Mexx with a financial sponsor if you're already on track to close a large chunk of the money-losing stores. It sort of seems like you'd be sharing the upside with someone else, when you could keep it all to yourself. Can you sort of help us through the thinking on that?

William McComb

It's simple. You have to put risk adjustments on things, and there's still a lot of moving parts in that Mexx business. I am very confident that, that we have a management team, a product strategy and a brand equity that has the potential to -- for our shareholders to enjoy great value creation. I have to say, even with us doing the activity around retail the way we did, I have to say, it is not a straight, or unbumpy road, or a clear path to profitability. So it just comes down to my view that our shareholder has continually taken a lot of lumps in funding the business to get where it is. And at the end of the day, if we do a transaction like that, it would be based on our view of what the appropriate risk-adjusted return profile would be for our shareholder. So whatever we do will be the right thing for the shareholder, we talk to them a lot, we happen to know what they want and we're running the project accordingly.

Operator

Your next question comes from Edward Yruma of Keybanc Capital.

Edward Yruma - KeyBanc Capital Markets Inc.

Can you talk about -- just a general outline, in terms of how you think about leveraging. I know you talk about potential announcement for the back part of the year, but other target leverage metrics you want to get or kind of what type of cost structure we're thinking about this?

William McComb

Yes. We stated historically in our current -- cost is still around 3:1 debt to EBITDA leverage ratio. That's where we want to be for lease adjusted. There are things, as Bill and I said in our prepared remarks, a lot of irons in the fire that we're going to be able to meaningfully reduce debt, between now and year-end. Our goal is to have year-end '11 debt less than year-end '10. And that gets us a long way towards the stated goal of 3:1 of adjusted leverage.

Edward Yruma - KeyBanc Capital Markets Inc.

Got you. And Bill, I know you've talked about the momentum at Kate Spade for some time now, it looks like you're starting to tick-up store openings. How do you think about the longer-term growth of that division and kind of what store comp could look like over time?

William McComb

Well, I mean, we have an excellent long-range planning process, which we bet we go back into at the end of August and September. And that's where we get very granular on, in market-by-market, what our distribution strategy will look like. And -- so I'll get an update there. The visibility that I have now, which I wanted to provide in the prepared remarks was that we have about 30 as the number between an 18 and 24-month. I think it skews a little more toward 18 and 24 months but about 30 doors. So there's a lot wide space out there. The wholesale business is very healthy. We're extremely selective of where the business goes and how it gets presented but we're using it. And the capital-efficient way to fill in some wide space and it goes about saying we have very high double-digit growth over 50% year-to-date on katespadenewyork.com. And we like that. And so, we keep doing things with that, to shake up our own thinking about how much capital do you need, how many brick-and-mortar stores versus a very successful direct business. So for right now, the best way to think about it, as it relates to the U.S., is 30 new ones between now and the end of 2012 and then a very aggressive international footprint growth. I mean very aggressive.

Operator

Next question comes from Mary Gilbert of Imperial Capital.

Mary Gilbert - Imperial Capital, LLC

I wanted to follow-up on Mexx, and is one of the reasons to enter into a partnership, the need for additional capital? And what would that capital be used for?

William McComb

Well, I'm not going to make any more comments on the Mexx process. I said that I wasn't, and I'm not. I wouldn't jump to the conclusion that, that's about more capital. It's about de-risking, that's what it's about.

Mary Gilbert - Imperial Capital, LLC

Now with the planned store closures that you have, will that essentially take EBITDA, if EBITDA was down -- it was negative $70 million or so last year, would that sort of put you at break even EBITDA just from shutting down those stores?

William McComb

Yes, at Mexx. Yes. At minimum.

Mary Gilbert - Imperial Capital, LLC

Yes at Mexx, sorry. Please be specific.

William McComb

That's why I said, at minimum -- we would -- the business would then be, EBITDA break-even. So that you look for unilateral moves that you can make in management to get the business there. Now, don't forget we have a wholesale business that's growing double-digits. And so cleaving off the biggest loss-producing pieces, even at the time when overall comps are growing, the point is -- we've diagnosed that in those, call it 110 doors, even good double-digit comps aren't going to drive the earnings profile that we deserve. And we have bigger concerns about the collateral damage to the brand equity that these under-capitalized and oversized stores have. So that's really the call up there, but yes, to your modeling question, as I said, one of the advantages of unilaterally doing it is that it helps assure a minimum, break-even adjusted EBITDA from that division globally next year.

Mary Gilbert - Imperial Capital, LLC

Okay, globally. All right, so not just for Mexx here, which means there's still loss in that business because, I guess there's an infrastructure in place and you need to get the revenue growth to offset that's fixed cost structure?

William McComb

That's right. And then relates back to the question that Robby asked, which is between break even EBITDA, nobody's playing for that, right? You look for really strong good margins on an EBIT basis. The timetable to getting to that is what makes us say an additional initiative of de-risking is definitely worth the consideration, hence the strategic alternative process that we're talking about.

Andrew Warren

And it's obvious Mary, but it's worth saying that the notion of getting global Mexx to break-even EBITDA next year is a meaningful driver of 2012, total Liz EBITDA being dramatically improved versus '11. The loss this year going to 0 is a big improvement year-over-year or next year.

Mary Gilbert - Imperial Capital, LLC

Yes, yes, that makes sense. Okay, that's helpful. And then also with the JCPenney business, JCPenney has made comments that the Liz Claiborne brand, for them, is running double digits ahead of their plan. And so with that, I wondered if we could get any updated metric from the size of that business and sort of where they are in terms of reaching the sort of $1 billion revenue number that they talked about reaching, I think they said near 3 or 4.

William McComb

Right, you know what, I will pass your question to Mike Ullman, because I really feel it's their responsibility at their Investor Relations group to answer those questions. They manage the retail phasing component of that. I can and will continue to say what I said on the call, which is the business is doing very well. Well, this is clearly, it is an incredible fit with their stores and their consumer profile, and most importantly of all, it's driving new users, new high-value purchasers into their store. But Mike, I'll let him know that you've asked the question and I think he gets those questions on his calls, I don't hear all of them, I hear some of them, I read the transcripts and this is an area, there's usually some Q&A. So you can probably find answers there or I'll make sure that I'll pass on your question.

Mary Gilbert - Imperial Capital, LLC

Okay, great. And then with regard to the 220 basis-point year-over-year improvement in gross margin, we know that again, we had clearance out of Juicy and Lucky really adversely impacting that number. And then also the raw material impact -- what was the raw material impact in the quarter?

William McComb

It's -- you can't really isolate it out as a phenomenon. I mean, I can tell you that sort of -- our going in, sort of company-wide -- the kinds of numbers that we saw and that we forecasted were in the 15% to 20% range. And our business models accounted for that. And so we had headwinds there but we have always said that we were doing lots of different things, we didn't have just apples to oranges in the product, in some cases we took price up. And we had opportunities for higher full-priced sell-throughs to get the higher-margin than relative to some of our competition. And I've always maintained that in the price zones that we are in, you have a few more levers to protect against it in terms of your product execution than the players that are selling T-shirts for $12.

Mary Gilbert - Imperial Capital, LLC

Okay, Bill, I had one final question and that is, when you look at those 3 Direct Brands, and we look at last year's EBITDA of $100 million, in there I imagine that Lucky, since it was in sort of turnaround mode, was either slightly negative or marginally profitable, and that Kate Spade was small, but growing rapidly, and that the big piece in their was Juicy. Is that the right way to look at it? And then when we're looking at just the growth of the underlying business, this year with a huge turn in margins at Lucky, continued very strong full-priced growth at Kate Spade...

William McComb

The answer is, the EBITDA in that segment will be up. That's the answer. That's where you're going. And the only comment I'll make on the first part of your question is yes, it is right to acknowledge that Juicy has big EBITDA. It does. But beyond that, I won't give -- make any other comments or breaking it out, I will say you should be assigned to White House detail, in the White House Correspondents group because you ask some good questions.

Operator

Your next question comes from Grant Jordan of Wells Fargo.

Grant Jordan - Wells Fargo Securities, LLC

Most of mine have been answered. Couple of follow-ups. One, you touched on a little bit of margins in the Domestic brands were hit by Clarins, just how much of that just weigh on gross margins in the quarter?

William McComb

I don't think that we have, we haven't isolated it out. At Lucky, you saw it in the channel margin and outlet and Juicy, you'd see across the fleet in each of the direct channels. But I don't have a number for you.

Grant Jordan - Wells Fargo Securities, LLC

Should that margin pressure, as it relates to clearing the inventory be behind the company now?

William McComb

Yes. Yes. I mean, I definitively said that.

Grant Jordan - Wells Fargo Securities, LLC

In terms of working capital that's just associated with the Mexx business that you're potentially looking at doing something else with, if you were able to do something with the Mexx business with the partner, how much working capital could you remove from your balance sheet?

Andrew Warren

We're not going to get in the deal context discussion, and that's very much an element that we're working through and thinking through. So it's best not to talk about deal elements right now.

William McComb

But when we would announce a transaction, we would provide clarity around the impact that we saw happening across the P&L and balance sheet.

Grant Jordan - Wells Fargo Securities, LLC

Is it, let's say a deal would also target removing some of the working capital investment that you have?

William McComb

Oh well, listen, at minimum. We would need a working-capital neutral situation. I mean, period, end of statement. And it will be better than that.

Grant Jordan - Wells Fargo Securities, LLC

Last question. There continues to be a lot of add backs on the EBITDA line in terms of the streamlining initiatives, when should those go away?

William McComb

Well, it's important to highlight on the adjustments -- the $42 million of streamlining adjustments. Only really $7 million of that was traditional streamlining that we've highlighted. But there'd be people reductions, restructuring of operations, as we continue to drive down the SG&A line especially in Partnered Brands and corporate, their cost associated with doing so. The remaining piece of the $42 million, the $35 million was either a combination of the pension liability, that we booked. We booked the withdraw liability for the pension. That's paid over time so it's a non-cash item today. And also it's write-off of the DC equipment, also non-cash. So important to clarify that, of the $42 million only $7 million was really today, cash. Looking forward, we've not quantified it specifically we had said that, we will -- still have some restructuring cost especially with our continued focus and need to drive down our total SG&A. But I had said that it will be less than last year, so we will continue to see less year-over-year restructuring costs, but still having some us we drive down our total SG&A.

Operator

Your next question comes from Carla Casella of JP Morgan.

Carla Casella - JP Morgan Chase & Co

Just a couple of additional questions. One of them was on the working capital -- your expectations as you go into the third quarter. Do you expect to reach the full-volume based availability under your revolver, and what do you expect the swing to be in working capital?

William McComb

Well, we're absolutely entering the third quarter as a time that we have absolutely expand our borrowing base calc as well as our need working capital. Without getting into specifics, we probably will go above the 350 thresholds. At the same time though, we'll -- I'm comfortable with what our ABL structure is and what our availability will be throughout the course of the year. It's just like last year, last year, the -- we went over the 350 limit and we probably will this year as well, but again it's all about that availability, and I'm comfortable that our availability is okay.

Carla Casella - JP Morgan Chase & Co

Now, when you look at last year, you used about $100 million in this peak quarter, use of cash or working capital, should it be similar to last year, or are there certain items that would make it of greater use this year given the growth in Kate or -- I'm trying to understand the balance between the growth in Kate and the reduction inventories at Juicy?

William McComb

Yes. It's -- there's certainly is a mix there. There will be additional inventories. But when the day's done, and there will be less streamlining cost, there will be higher EBITDA. So that will certainly play into a lower drawn revolver balance. As far as working capital. It would probably be a similar amount of utilization from a working capital growth perspective as we build for the holiday season. But again, important to note that less cost on -- less cash cost on streamlining and assume the higher EBITDA will help the drawn revolver component of that.

Carla Casella - JP Morgan Chase & Co

Okay. And then it looks like your -- the days payable, increased. I'm wondering did you -- were you able to get better terms with some of your vendors or could that just be a temporary timing issue?

William McComb

When the day is done -- one thing I had talked about in the past -- a couple of years ago when we were going to an ABL, we talked about the need to eliminate all of our trade LCs. We did that as you know, over the course of the last 18, 24 months. I said then that our step 2 focus would be on trying to extend some of the payable terms. We're working through that now in a very constructive way with all of our vendors. So, no specific call ups other than, step one was the LC reduction, step 2 is trying to get more competitive on our payable base.

Operator

Your next question comes from Janet Kloppenburg of JJK Research.

Janet Kloppenburg - JJK Research

Just a couple of questions for clarity. A lot of my questions have also been answered. Given that this announcement on the Mexx stores closings is relatively new and much more detailed than it has been. I'm just wondering was that always contemplated in your EBITDA goals for fiscal '12 or is there some opportunity for that number to come in better now that...

William McComb

No. In fact, what we said back when we provided that range in February on a forward-looking basis, we said that it assumed that net at global Mexx would be at EBITDA 0. And the logical outcome from that when we built that model -- one of the things that we already had an eye on internally was the fact that there was this containable fire, so to speak, in this cluster of stores. And so, we had -- what was a desk-aisle analysis, showing 6.5 of the 10 desk aisles have been very negative. And so, when we built that out, that model and identified the 180 to 220 range, we said that we will assume Mexx adjusted EBITDA globally at break-even. And then went about the process of -- the pick and shovel work of working on it. We gave you all the first peak into this notion in other words, other than the broad umbrella statement, at minimum, we would be adjusted EBITDA break-even. Our goal, is EBIT break-even in the global business. Okay? And so initiative number one, gets you to, at minimum, the EBITDA 1. So it's not new here and it's been a part of where we've been, the interesting thing is -- what you're getting at is that, that the impact back on EBITDA, adjusted EBITDA guidance for 2012, wouldn't change once we announced a Mexx transaction. What it would do is, how can I say it -- it would take a way to sort of runaway risk that we've seen in previous years of certain things not materializing in line with our expectation. Even though I'm more confident about that business than ever based on what's happening over there -- you see?

Carla Casella - JP Morgan Chase & Co

I do. One other question is, it's pretty clear that Lucky's margins are set at stage to go higher here as the full-priced business gets so much better. In terms of Juicy, I know that inventories are very much in line now, Bill. But I think we're still in a transitional period here in the third quarter. So I'm wondering should we be expecting the operating margins and the gross margins at Juicy to improve in the next couple of quarters or is that still a situation that's a little bit vulnerable?

William McComb

Gosh, I would tell you that we very -- we both conservatively modeled gross margin and conservatively modeled inventory, okay? And that's just because the product isn't awful, it's just -- it's not as fresh and new and as exciting as what you'll see in spring. And so, you're not going to see a collapse in margin. It's not going to get worse than what we just saw in second quarter, that's for sure. I think at fourth quarter, what you'll see is margin's a little better. You'll see margins begin to drift up. And -- my bigger concern honestly is the degree to which we can, that we even have much upside, I don't think we do, because we've managed inventories so carefully. So that's one of the decisions that we took coming out of last year that we want to see -- with an inventory now being cleaned, we want to see -- we don't want to make the mistake that happened last year, so inflows have been managed down very carefully. Now you could push me and say, with you Bill, that would mean that you probably have some gross margin upside but we've assumed -- we've been conservative on comp, conservative with inventory and conservative with the gross margin in our models, all through 2011.

Carla Casella - JP Morgan Chase & Co

Okay. Great. And in terms of Mexx's business, with the comps being positive, do you feel like the design and merchandising team there was making headways and they're just constrained by their real estate or do you feel like there's a lot more work to do there in terms of getting the brands, product turned around?

William McComb

No. That's what's been frustrating, right. It's -- you look at some of these numbers and say wow, they're really off their rails but in fact when you look inside the channel, I mean, they have outstanding e-commerce growth that I talked about on the call. And that traction is still, with what I'll call an overall low-level of traffic to the side. But their conversions, their margins, their upselling -- we're seeing it there, and the wholesale accounts are buying the way that they are in the core market because the product is really selling. I'll tell you Mexx is doing, it's doing extremely well in Russia. It's doing very well in Germany. The wholesale business is really showing that there's a consumer connection. Now, within that, I'll tell you that it's been a journey for the merchants, just like at Lucky. They had their whole first round of learning and it's not that different in Kate Spade too. They have their V1 and then their V2, and then their V3. Lucky is clearly in a V2 headed for a third version. Mexx is squarely in the middle of their V2 right now, meaning, they learned a lot from their fall and spring assortments that have played into fall. And -- so the learning is never over, but I would not at all characterize it as a lot of work to be done. In fact, I think that the reason that there's such traction with the strategic alternative process with multiple sponsors is that there are such green sprouts, and the connection between the potential and the brand equity and the product vision that they have now, it's working.

Operator

Your next question comes from Brian Nigel of Hedge Eye Risk Management.

Brian McGough

It's Brian McGough. Two quick questions. I guess, a bit bigger picture. One is that, Bill, I was wondering if, as Ron Johnson left to go join JCPenney, which I guess happened in about a week at the Board level at least. I think you haven't had a conversation with him about either your business or just about what the transition would look like?

William McComb

No. That -- I continue to work, sort of every day and hand and glove with Mike, and with Mike's team, and when Ron is officially on board. I will officially start to work with Ron as well.

Brian McGough

I guess a little bit along those lines, I'll probably push a little bit, sorry. But, when you look at your transition over the past 3, 4 years, I mean, it's been a tough one and it's great to see the stock up here today. It's the first time it's happened in a while. I'm happy about it, a lot of people are happy about it. You don't want to go through anything like that again, I know that. When you look at your biggest customer that could potentially have, it really changed that, I don't know it might go great, it might be really sloppy, no one knows, how can you manage that in advance to help, I'll say de-risk your model in the wholesale side.

William McComb

You're speaking about the transition between Mike and Ron?

Brian McGough

Yes, I mean, not as much the individual, of as much as the organization is going through.

William McComb

Yes. Look, fair point. I mean, what I will tell you is that we have a tremendous position of strength because we have it at the retail level with their consumer. And I do have some visibility into what their plans are. I think in my prepared remarks, about 45 minutes ago, I said they are acting -- they are responding to the success on a forward-looking basis, very opportunistically. These are not people that are asleep at the switch by any means. They understand and they are feeding the beast. So I mean, I have a view of what you're doing in the next year on the business, and it's very ambitious. And I just -- do I see that management change and all of the things that happened in management changes disrupting it. I will tell you that I have always said that, I -- even if the business only performs contractually at minimum, our position there is solid. But I think there's no chance that we're only going to perform at minimum. I think that the success is -- it's not 1-year old, the success goes back to our launch of Liz & Co. in the spring of 2007. And -- so we've been building that Liz franchise for 4 years. That said, the traffic gains that they are seeing, that Mike has publicly spoken about, I don't -- I'm very careful not to step on his toes, or their IR department's toes, by releasing information or giving insights that aren't first shared by them. That incremental traffic and the basket and the trade-up and the market share that they know that they're getting was the whole aim of this. So, I just -- I think that this is so right in the camp of what Ron Johnson cares about. He cares about great brands, and great store experiences. And I just think that there's going to be seamlessness to this, so -- and so your question's, what can I do to assure it? Listen, I mean, you're probably asking other questions as well inside of that. I just know that we have a very vertical relationship with them. And it's not me to Mike, that's the least important part of it. Our people are working as vertically-integrated parts of their merchandising teams every day. And I can tell you the experience has only been, like drinking from a firehose since this thing launched. We've been increasing our plans, moving up 2 to 3 seasons, launches of things, chasing, and doing very well. So we go into the -- a management change there, I'm very confident that silly things aren't going to happen.

Operator

Your final question comes from Jim Chartier of Monness, Crespi, Hardt.

James Chartier - Monness, Crespi, Hardt & Co., Inc.

Can you detail what the components of $125 million cost savings initiative are?

William McComb

It's $25 million, not $125 million. It's $25 million. And we said that it's virtually all coming out of what we call the corporate center and the majority of it is, of or relating to, the closure of the Ohio DC. And outside of that, it's bits and pieces and none that I could call out yet because we've just begun it. And so on the next call, we'll be able to look back and tell you what it is. But we always talk about what we're doing with cost and we're at a point where having moved a lot of functions into the businesses. If we want to take the prudent step of turning the Corporate Center down another step. And the Ohio DC in that model is the majority of that piece.

Andrew Warren

And Jim it's safe to say that, though we're not going to provide any specifics other than has Bill said, but DC being a major piece, we certainly would not have come out with this $25 million additional reduction commitment if we didn't have line aside to it and there's very strong belief that we will achieve that over the course over the next 6 months. So, no specifics now, other than Ohio is a big piece of it, everything will else will come later.

James Chartier - Monness, Crespi, Hardt & Co., Inc.

Okay. And then you announced a new CEO in Canada in the quarter. Can you tell us what the opportunity is there and what his initiatives will be?

William McComb

This is a very experienced, very bright, very dynamic visionary product guy, retail guy. He has very -- I loved this breadth of experience across Canada. We're based in Montreal, we have a very strong, strong East Coast business. I want to strengthen it across all regions. This is called succession planning. I think I had a lot of sidebar questions from people like, would this have anything to do with the Mexx transaction, has absolutely nothing to do with it. This is me, running the business, like I said as ambitiously as ever. There are -- look, the Canadian market's going to see a lot of change in the next 3 years, and I think there's an opportunity to get a jump on it. There are lot of American or US-based companies that are planning to move north, Target's one of them, Ann Taylor's going to grow up there. You see a lot of the competitors in our price zone, expanding up their and I want to get a little more aggressive up there. And that's what this is about.

James Chartier - Monness, Crespi, Hardt & Co., Inc.

Great. And then just DKNY, will that be reported as a discontinued operations next year after you just shut down your operations in-house?

William McComb

No, the rules of disc ops are, that when the license ends, and rolls off it's actually not a discontinuation because it's in the license and it's planned. All right. Thank you. That was a long call. Thank you all for dialing in. I look forward to talking to you again in October.

Operator

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

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