Consumer retail, particularly apparel and women’s fashion, is beyond my usual investment preferences, but recent headlines for Liz Claiborne (LIZ) suggest the stock is undervalued. Other than appreciation for stylish clothes, I am at a loss in evaluating the merits of Liz Claiborne’s various brands - Liz Claiborne, Lucky Brand, Juicy Couture, Katie and Jack Spade, among others. Apparently, I have a tin ear for discussions of brand positioning and buying trends. However, I do know about cash generation and Liz Claiborne’s cash flow statements speak volumes, including a hint about whether the recent proposal to spin off the Mexx brand can get Liz Claiborne’s ship back on course.
Liz Claiborne has been consistent if nothing else. The company has reported net losses in four of the last five years. Investors had apparently become tolerant of the red ink, in part because the company’s operations had been a consistent generator of cash. That is until the company reported the March and June 2011 quarter results.
Granted, operations had burned up $90 million in cash in the third quarter 2010. However, by the year-end 2010 net cash flow from operations was positive, largely on adjustments for non-cash operating expenses such as depreciation. Favorable changes in working capital, such as inventory depletion, also helped generate cash. The big boost came from an increase in taxes payable in the final quarter of 2010, allowing the company to forego the cash payment in favor of a liability on its balance sheet.
However, in the first half of 2011, the ugly truth of unprofitable operations appears to have caught up with Liz Claiborne. The steep losses from the company’s Mexx brand and weak growth in its other flagship brands have left the company with real operating losses and nowhere to go for cover.
Working capital accounts, which have often yielded favorable cash flows, appear tapped out so to speak. Liz has run up a bill with suppliers, sending accounts payable at the end of June 2011, to the highest level since 2006 when sales were over 40% higher than today. Inventories are stretched thin to approximately three months' production, suggesting the company will be hard pressed to conserve anymore cash by dragging out materials orders. The accounts receivable well may have also run dry. Collection efforts have left only thirty days worth of sales in accounts due from customers.
Investors have been particularly distressed over the company’s failure to turn around the Mexx brand. Yet reaction has been mixed to the recent decision to sell Mexx off to a joint venture in exchange for $85 million in cash and 19% equity interest. The deal is expected to remove the floundering Mexx results from the company’s income statement - a figure that management had disclosed as near $25 million annual losses before depreciation, interest and tax charges.
Unfortunately, pruning off Mexx from the rest of the company may not be enough to rescue Liz Claiborne. In the twelve months ending June 2011, the company reported a net loss of $259.5 million on sales of $2.5 billion. Earnings before charges for depreciation, interest and taxes were $39.4 million. Adding back the $25 million loss that might have been attributed to Mexx would still not bring the company back to the black or even restore positive cash flows.
As interesting as a cheap stock might seem, I believe LIZ is best left hanging on the sales rack, at least until the company finds a way to increase profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.