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Liz Claiborne Inc (LIZ) announced multiple transactions on October 12, including:

  • the sale of the Liz Claiborne and Monet brands to J.C. Penney (NYSE:JCP);
  • the sale of the Kensie brand to Bluestar Alliance; and
  • the completion of the sale of the Dana Buchman brand to Kohls (NYSE:KSS).

These deals, in addition to the Mexx joint venture announced on September 2 (which the company continues to believe is on track to close in the fourth quarter of this year), complete the company's transformation. What is left is a company with three core brands (Lucky Brand, Juicy Couture, and kate spade), and a much cleaner, less leveraged balance sheet. In total, the deals will result in net cash proceeds of $328mm, which will be used to pay down debt. The company guided year-end 2011 net debt to be in the range of $270 to $290mm. Liz also provided pro forma adjusted EBITDA guidance for 2011 and 2012. For 2011, EBITDA guidance is now a range of $80 to $90mm, and for 2012 the range is $130 to $150mm.

CEO William McComb was on CNBC this past Friday discussing the deals. It’s worth taking a listen.

The stock responded very positively to the announcement. On October 12, LIZ closed at $6.84 per share, up 34% from its prior close of $5.10. And it continued to trade up closing on October 21 at $7.91, up 55% from its October 11 close.

This is a very different company than it was on October 11 before the announcement. First, the three brands it is left with are strong, well-recognized businesses. The table below shows same-store-sales for the three brands for the last 6 months. While Juicy Couture is still in middle of its turn-around, Lucky Brand is doing very well, and kate spade is growing at an incredible rate that puts it amongst the best retail brands out there, next to the likes of Coach (NYSE:COH) and Lululemon Athletica (NASDAQ:LULU).

Same-store-sales April 2011 and September 2011

April

May

June

July

August

September

Juicy Couture

(17)%

14%

(8)%

(3)%

(8)%

(11)%

Lucky Brand

1%

23%

24%

16%

10%

13%

kate spade

44%

82%

88%

56%

65%

54%

Source: Liz Claiborne investor presentations

Valuation

At its October 21 closing price of $7.91 per share, Liz has a market capitalization of approximately $750mm. With $270mm of pro forma net debt, its enterprise value is $1.1bn. Based on its 2011 pro forma adjusted EBITDA guidance of $80 to $90mm, Liz is trading at 11.3 - 12.7x adjusted 2011 EBITDA.

However, based on its 2012 pro forma adjusted EBITDA guidance of $130 to $150mm, Liz is trading at 6.8 - 7.8x adjusted 2011 EBITDA.

To provide some context around these multiples, consider where comparables trade based on trailing 12 month EBITDA.

Comparable Company

Trailing 12 Month EBITDA

Coach Inc (COH)

11.6x

VF Corp (NYSE:VFC)

11.9x

Ralph Lauren Corp (NYSE:RL)

11.4x

Lululemon Athletica (LULU)

27.5x

Abercrombie & Fitch (NYSE:ANF)

10.2x

Juicy Couture, despite being an ongoing turnaround story, has a solid revenue base and a loyal customer following. Lucky Brand is performing well, but it should still trade at a discount to Abercrombie & Fitch (ANF) given Abercrombie’s brand awareness and global positioning. kate spade is an incredible growth story, akin to Lululemon and Coach.

Reasonable multiples for the three brands are presented in the table below:

Multiple

Rationale

Juicy Couture

5.0x

Turn-around project that needs to show results before a higher multiple is justified

Lucky Brand

8.0x

Approximately a 20% discount to Abercrombie’s multiple

kate spade

12.0x

In-line with Coach’s multiple, but still well below Lululemon

In the second quarter Juicy made up 42% of sales, Lucky made up 34%, and Kate made up 24%. However, given their respective growth profiles, these percentages are quickly shifting towards kate spade and Lucky.

Assigning weights of 40% for kate spade and Lucky Brand, and 20% for Juicy Couture, the blended multiple for Liz would be 9.0x.

Assuming the midpoint of the 2012 adjusted EBITDA range ($140mm) would result in an enterprise value of $1.26 billion, a market capitalization of $989 million, and a price per share of $10.45, a 32% premium to its current price.

If Juicy Couture gets back on track there is further upside to the story, as the blended multiple would increase. Downside risks include a failure to complete the turnaround at Juicy. Also, if economic conditions worsen, all three brands could be negatively impacted. And, as always with retail, missing fashion trends and becoming yesterday’s news can degrade sales.

Conclusion

Liz is a different company than it was a week ago, and that is why, in addition to the divestitures announced last week, the company is also going to change its name. If management’s revised pro forma guidance for 2012 is correct, the company is significantly undervalued, and there is a reasonable margin of safety at its current level. Shedding businesses so that investors can focus on its three core brands results in more transparency, and, with a less leveraged balance sheet, investors can stop worrying about Liz’s ability to remain an ongoing concern. The most significant risk is the economy, which if it falls into recession could impact growth and pull down 2012 EBITDA estimates.

Source: Liz Claiborne: Shedding Brands, Gaining Growth Potential