Liz Claiborne: Not Much Upside On A Stand Alone Basis

| About: Kate Spade (KATE)

Shares of Liz Claiborne (LIZ) saw a noticeable intra-day spike on Friday on a buy-out report. While shares saw a little pull back near the end of the session, they ended the day 13% higher.

Buyout Report
According to unnamed sources Liz Claiborne held talks with several private equity firms last summer to go private. Apparently the company has shopped itself around for a price of $20 with several private equity firms including KKR & Co, Permira Advisers LLP and Warburg Pincus LLC.

The source also noted that the company is currently not contemplating a deal or sale as it has almost ended its major restructuring efforts. In 2011 the company sold its Mexx and Liz Claiborne brand. It now focuses on brands like Juicy Couture, Kate Spade and Lucky Brand. As a result of divesting the Liz Claiborne brand the company will be renamed as Fifth & Pacific Cos, effectively the 15th of May.

The reports of possible buyout propelled shares higher. On Friday shares closed 13% higher to $13.36 after trading as high as $14.32 during the session. A possible deal around $20 per share would value the company at $2 billion.

The financial statement of the company are hard to understand. Revenues have been falling in each of the last 4 years as the company has been divesting some of its best-known brands.

The company sold its Liz Claiborne brand to J.C. Penney in 2011 for $288 million. It also sold Mexx to the Gores Group LLC for $85 million in cash and a 18.75% equity stake in the merged venture. Despite all the divestures the company holds a $200 million net debt position.

The three remaining brands reported net sales of $1.52 billion for 2011, during which they reported an operating loss of $96 million. The loss is entirely attributable to a goodwill impairment totaling $97 million. Excluding impairments the company essentially breaks even before interest rates and taxes. Fortunately the year 2012 has started strong for the company. For the month of January it reported comparable sales growth of 29% for Lucky Brand, 30% for Kate Spade and a 8% decline for Juicy Couture.

At today's closing price, the company is valued at roughly 0.9 times revenue. A reliable price-earnings ratio is hard to make as the true earning power of the company remains yet to be seen.

Investment Thesis
Shares of Liz Claiborne hit highs close to $50 per share in 2007 before the financial crisis resulted in a decline of consumer spending which has hit the company hard. After divesting some of its best known brands to streamline the company and reduce debt the company has a future once again.

Shares have seen a remarkable recovery already from lows of $2 in 2009 to $13 at the moment. Any meaningful further price appreciation has to come from a quick buyout as the company needs more time to justify a valuation of anywhere near $20 on a stand alone basis.

The buyout rumor represents a good profit taking opportunity for investors who have bought shares over the last couple of years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.