Liz Claiborne Q3 2007 Earnings Call Transcript

Liz Claiborne Inc. (LIZ)

Q3 2007 Earnings Call

October 30, 2007 10:00 am ET

Executives

Bill McComb - CEO

Mike Scarpa - COO

Andy Warren - CFO

Jill Granoff - EVP of Direct Brands

Dave McTague - EVP of Partnered Brands

Analysts

Margaret Mager - Goldman Sachs

Brian McGough - Morgan Stanley

Virginia Genereux - Merrill Lynch

Jeff Edelman - UBS

Kate McShane - Citigroup

Jennifer Black - Jennifer Black & Associates

Omar Saad - Credit Suisse

Bob Drbul - Lehman Brothers

David Glick - Buckingham Research

Presentation

Operator

Good morning everyone, and welcome to the Liz Claiborne Third Quarter Conference Call, hosted by Chief Executive Officer Bill McComb.

After the opening remarks, we will be taking questions. 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 prepared remarks. The slides can be accessed at www.lizclaiborneinc.com in the Investor Relations section. There are separate links for webcast and phone participants.

Please note that statements made during this call that relate to the company's future performance 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 morning's press release, as well as in the company's 2006 annual report on Form 10-K under the heading "Risk Factors," and in the Form 10-Q for the third quarter of fiscal 2007 to be filed today with the Securities and Exchange Commission.

Additional information on the results of the company's operations is also available on the Form 10-Q. The company's earnings release is available on its website at lizclaiborneinc.com under Press Releases.

Also please note that during this call in the accompanying slides and in the company's press release, net sales, EPS, net income, operating income, operating margin, and cash flow from operations are presented on both a GAAP and a non-GAAP basis. A reconciliation of adjusted results to the actual results is available in the tables attached to today's earnings release, captioned, "Reconciliation of Non-GAAP Financial Information." The company believes that the adjusted results provide a more meaningful comparison of its performance for the periods presented.

Now, I would like to turn the call over to your host, Mr. McComb. Please go ahead, sir.

Bill McComb

Thank you, Natasha. Good morning, and thank you all for joining us on our third quarter earnings discussion. I am joined on the call here at Liz Claiborne by Mike Scarpa, our Chief Operating Officer; Andy Warren, our Chief Financial Officer; Jill Granoff, Executive Vice President of Direct Brands; and Dave McTague, Executive Vice President of Partnered Brands.

Before we actually begin the discussion, I would like to actually turn the call over quickly to Andy Warren, our CFO, to make a few definitional comments about adjusted earnings. Andy?

Andy Warren

Thank you, Bill, and good morning, everyone. Before we provide third quarter commentary, I would like to take a minute to clarify the components of our company's adjusted results.

These results are adjusted to exclude: one, the impact of expenses resulting from our previously announced plans to streamline our operations in both 2007 and 2006. Two, the loss on sales associated with the divestiture of our Emma James, Intuitions, J.H. Collectibles, and Tapemeasure brands. And three, the non-cash charge associated with the impairment of our Ellen Tracy trademark, one of our brands under strategic review.

These results do, however, include the year-to-date performance of our discontinued operations, i.e. the four previously announced sold brands, since we owned them for nine months. We believe that these adjusted results for the quarter and nine months of 2007 provide a much more meaningful perspective on our operational and financial performance.

Also, in order to facilitate a clearer, more visual earnings discussion, we are introducing slides that are posted on our website at www.lizclaiborneinc.com. These slides are in the Investor Relations section of our homepage under the Events banner. They will be viewed real-time as we present our third quarter remarks, and will remain on our site along with the transcript of this call.

Now, Bill will provide his perspectives on our business.

Bill McComb

Thanks, Andy. Okay, so let's get down to the business at hand and start with an overview, if you will, of the third quarter results. As you should have seen in the press release this morning, we announced that we did make our internal plan for the quarter, but let's face it, these numbers are tough to look at when you compare them to year-ago levels. So even though we met our internal plan, our people here are very restless and eager to move forward with the turnaround as we laid out on July 11.The organization, I have to say, is really embracing the turnaround initiatives. And I'm happy to report that we have successfully accelerated both the strategic brand review process and the cost reductions.

We have also doggedly pursued talent internally and externally and both corporately and in the divisions, putting some incredibly talented people in critical areas. And later, I will discuss what we have accomplished in that area. There's no question that what I called about six months ago the tale of two cities remains the headline even today. We like what we see in the Direct Brands portfolio with a very strong performance at Juicy. We see solid profitability and successful store openings at Lucky; although for the first time in a very long time we are seeing soft comps there.

And it is fair to say we are just getting started at both Kate Spade and Mexx Europe. The fundamentals at Kate Spade are solid. We've really got something to build on there. And sales at Mexx Europe were weak, but the team made substantial progress since July 11, teeing up major change initiatives that will deliver a real turnaround there over a six-quarter period. And in Canada, Mexx posted solid comps.

In your reports over the last few weeks, many of you correctly predicted the weak results in Partnered Brands. The brands under strategic review are softer than forecasted. And clearly, the Liz Claiborne line is suffering from a one-two punch of product issues and the woes of warm fall weather.

In spite of clearly improved fabrication, better quality, and more sophisticated styling, the product line -- and now I'm talking both spring and fall 2007 -- have not achieved the results that the brand has the potential to achieve. And the men's business is markedly off-track, and our overall profits on the Liz Claiborne brand have suffered from cutbacks made early last spring in license categories at Macy's. We will discuss each of those observations later in the call.

In terms of our commitment to delivering shareholder value, you'll remember we began the quarter with $148 million in authorization for share repurchasing, and during the quarter, we bought back 3 million shares. On a macro level, there's no question we're in the middle of a very difficult environment at retail, with declining traffic and consumer concern impacting business across the industry. We intend, as we go forward, to maintain financial flexibility while we prudently execute what we call the Design to Win plan that we unveiled this summer, which I think is worth quickly revisiting before we get further into the call.

Back in January, after I'd just arrived, the first observation many of you will recall that I made centered on our design and merchandising culture. And specifically, I was concerned that we had gotten so big and so busy in managing the growing portfolio that the culture was not emphasizing and rewarding production and design excellence. The big frustration for me, though, was realizing that a lot of the underlying change needed to take place in order to turn that cultural tide.

There were some critical steps we had to take on the road to being a great product company. You don't wave your magic wand and tell people it's time to focus on product. We had to focus our portfolio. We needed to rationalize and redeploy costs. We needed to realign the entire organization structure, putting brand back at the center of everything we did, while integrating disparately managed teams. And once we did this, we were confident that a whole new level of creativity, excitement, brand clarity, and product execution would emerge. And even in this early phase since July 11th, we can say that we already see real momentum in each of these mono-brand companies that we have created with our reorg.

This is some of the thinking that led to our Design-to-Win strategy, which is summarized here on this chart. All of this should be familiar. It is simply a reprisal of what we announced back in July. On the left, there are the five critical initiatives, with the plan, progress, milestones we'll make over the next three years summarized on the right side.

And for those of you that are listening without access to a monitor, these five actions include narrowing our portfolio, aggressively managing costs, committing the resources for growth, developing our retail capabilities, and innovating our supply chain. So when we say we are on track with the initiatives of the turnaround plan, we mean that we are executing in line or ahead on each of these five initiatives, which Andy and Mike and I will review with you now.

Action number one, narrowing the portfolio. We made the decision in July to split the strategic review process into two phases. The first phase was time to deliver an exit of the moderate brand portfolio prior to making any formal production commitments for spring of 2008. This meant finalizing decisions by September 13. I'm very pleased with our team's performance. We were able to announce the Li & Fung deal by that deadline, and we completed the deal on October 4 for the four brands.

Our teams are making equal progress now on Phase II. We received first round bids in early October. We're now conducting showroom and management team meetings with select bidders, which reflect the range of potential buyers. And while some retailers have seemingly pulled back on these brands during the review, taking a wait-and-see view of the outcome, they have not lost their interest in these brands.

We've got strong, motivated management teams working on the process, which we hope to conclude no later than the end of first quarter, ahead of the previously announced second quarter goal

In terms of cost management, Andy, why don't you walk through our progress and approach here?

Andy Warren

Sure. Action two, aggressively manage costs. We remain extremely focused on executing the cost initiatives on 11 July. This initiative calls for dramatic changes in the way we run our businesses and the expense structures we have to support them. On July 11, we targeted general and administrative cost reductions pulling $180 million in the next three years, with $100 million of these savings to be realized in 2008.

We've also articulated that over the next two years, we will eliminate $70 million of stranded costs associated with the brands under strategic review. Lastly, we committed to $15 million of additional cost-out in 2008 to improve our Partnered Brand margins.

As you can see from this slide, we're driving to $150 million of total cost reduction for 2008. We have already executed upon or have solid plans in place to realize approximately $130 million toward this $150 million target.

Key actions completed to date include significant headcount reductions, including at the executive level, and are closing two of our distribution centers. Detailed plans will probably be executed by the end of this year, include additional international staffing reductions, real estate rationalization, as well as further discretionary cuts.

We're working diligently to execute this last $20 million of cost actions in order to achieve our $150 million total 2008 commitment. We're totally committed to achieving and delivering on this promise. Bill?

Bill McComb

Excellent. Thanks. Our third action was a callout on resource deployment. We said talent deployment, marketing investment, and capital appropriation toward our retail businesses were an essential part of the plan. While this chart highlights eight positions that we filled this quarter, there are clearly more in each company and corporately.

Of note, you will recall that we appointed Deborah Lloyd Co-President of Kate Spade. Deborah is a tremendous designer, a tremendous leader, who has taken products at brands like Burberry and Banana Republic, through big and successful transitions. We also appointed at Kate Spade a Vice President of Wholesale, Licensing, and International.

At Juicy Couture, we promoted executives to the Senior Vice President - International position and Senior Vice President of U.S. Wholesale. At Mexx, we have solidified product design team leadership, bringing in some senior people to lead each of the components of the design team there under [Red Gottfried], who began in early January from Nike.

DKNY Jeans, we appointed a Vice President of Design in Men's and Women's and corporately, we appointed, as you remember, a Chief Operating Officer for our Direct Brands and, importantly, a Vice President for Global Tax to drive some strategy there.

In addition, in terms of marketing resources, we have doubled our spend on Lucky Brand, Juicy, and Mexx for the fourth quarter. Kate Spade had already had a solid presence planned for the fourth quarter. This spending is now incorporated in today's forecast. The money is focused on supporting strong in-store events and themes, driving traffic, and using our databases efficiently to fatten the fat cat, really focusing on our very loyal consumers.

The fourth and fifth actions fall squarely under Mike Scarpa's leadership. So Mike, why don't you discuss those?

Mike Scarpa

Thanks Bill. We will invest significant capital over the next three years as we develop best-in-class retail capabilities. We have recently hired a Chief Operating Officer of Direct Brands to oversee this investment with the current focus on two projects. One, implementing a retail planning and allocation system. And two, a retail-centric distribution center.

For our Direct Brands, we are committed to implementing a robust retail planning and allocation system. Mexx Europe went live this month on their new system, and we are anxious to begin to see the positive results we believe the system should deliver. For the US-based Direct Brands, as a first step and a precursor to software selection, we are in the midst of a talent and process review initiative across our planning departments.

This will ensure that we have identified opportunities and deficiencies in our current environment, which will allow for some short-term fixes as we manage through a longer-term system solution.

As for distribution, we are enhancing our internal distribution capabilities by establishing a retail-centric process. This will require investments in new warehouse management systems functionality, changes for physical distribution space, and a fundamental shift in the distribution center processing. We are currently in the final stages of software selection, and nearing completion of our network evaluation.

Once in place, we will have the tools to more quickly react to product and regional trends, with the ultimate goal of improved our dual-level sellthroughs. After rolling this out for our Direct Brands, our next step will be to integrate these capabilities into our Partnered Brands.

We have made meaningful progress toward our goal of providing world-class supply chain capabilities to both our Partnered and Direct Brands with the strategic goal of providing faster, more innovative and higher-quality products to our consumers.

Our approach is multi-tiered, encompassing changes to our organizational structure, processes, and technology. Since our July Investor Conference, we have restructured our corporate sourcing organization into brand-aligned global teams, with responsibility for product development, sourcing, and manufacturing. This fundamentally shifts our domestic and Asia office structures from service organizations to more responsive and cost-effective teams with direct line accountability to a brand.

We are also continuing to reevaluate and reconfigure our Asia office network, ensuring that we are appropriately aligned with our vendor base and sourcing strategy. With this in mind, we have recently expanded our presence in India as we see significant growth in that region.

At the same time, we have made the decision to close our Sri Lanka office, shifting the management of that production to our newly created global teams. We have moved our non-apparel Hong Kong operation to our newly expanded offices in Shenzhen, China. Out of this office, they will be in a position to collaborate more closely with our vendor base, resolve production issues more quickly, and streamline the decision-making process.

With this foundation in place, we are reengineering our product development and manufacturing process for our fall 2008 season. This includes investment in new design base technology, new product development strategies including co-location and direct models, and streamlining global execution activities. All of this has a positive impact on lead time and costs. Bill?

Bill McComb

Thanks Mike. So now, let me walk you through what we see working on each brand and discuss some call-outs that we are addressing as well. Let's start with Juicy. At Juicy, the retail stores are performing exceedingly well, with very strong comps. The drivers on this business fall across the board.

One key area of success is the continued diversification of the product line, which we discussed at the July 11 meeting. The tracksuit line is down to 29% of the assortment in our retail stores. And with that, our accessories and ready-to-wear categories continue to grow. We are particularly pleased with the power of bringing the management team of that global brand under one management umbrella. This business had been managed at times under four group presidents and several presidents then under the group presidents.

We're now seeing new ideas, energy, thinking, and prioritization from the team as a result of the new simplified and cohesive organization structure and these ideas are having a positive impact on the brand plans for 2008 and 2009. And the permission to travel with Juicy continues to be strong, with great results in Asia through our alliance partners.

In the Opportunity category, we continue to bring the results of our assortment and merchandising strategies in our own retail stores to our wholesale partners in the U.S. The more we replicate those strategies, the better the trend in wholesale. Equally important is leveraging the extremely loyal Juicy consumer. And as we have begun to do on Lucky, most of our marketing efforts to date on Juicy have supported [de-brand at-large] and the fragrance. But given the nature of the Juicy consumer, we expect CRM would deliver a high ROI. But we have yet to do any of that on a major scale. So that's an opportunity call-out for the brand.

One of our key appointments that I mentioned was our Head of Juicy International, [Amanda Canon], who is based in London. Amanda is a six-year veteran of the Juicy group. She is now sorting out which markets in Europe will follow our very successful Milan store opening. We're committed to managing the European business out of our Juicy base in London, but have to do work to build and prioritize the market plan there.

We will also continue to hire the right people for our fantastic team at Juicy. And last, worth noting, the comp base at Juicy will change in the fourth quarter going from five stores to 16. We anticipate the comp rate will then drop into the mid to high single digits on that base from a reporting perspective.

At Mexx, we are seeing a dramatic approach by Jeff Fardell, their CEO to reposition their business. It all starts with brand, and the team there spent the better half of this year developing a very crisp, very clear vision to guide the design and creative teams to execute product and store presentation. This new brand vision based on the ideas of European contemporary and effortless fashion will appear full in the fall 2008 product line. Critical open positions in the design leadership team that I mentioned have been filled with very strong people, again leading to the timing of a fall 2008 for the debut of our fully repositioned and rationalized product line.

Equally important at Mexx is the cost reduction initiative. Mexx operates now at a margin that can be enhanced by 500 basis points over the next three years. And since July 11, Jeff's team has identified and initiated specific programs to deliver on that goal. I point this out because it was essential to the thesis that Jeff presented in July on Mexx. And I'm extremely comfortable with their approach and with the progress that they have made.

A part of the cost management plan, which is multi-pronged, is to radically change how the company liquidates its inventory. Borrowing from best practices in both Europe and the U.S., Mexx is now managing excess inventory on a much more timely and less costly basis.

Overall, the major call-out for Mexx is executing this terrific plan that Jeff and his team have identified. A component of that, a critical component, involves significantly improving the planning and allocation function there. We're doing this with both people and systems. It's clearly going to play an important role in the success of their retail strategy.

Let's talk Lucky. A lot is working well over at the Lucky Brand, including strong performance in wholesale. But we don't like the comp performance there this past quarter. We see a company with very solid and attractive profitability, with a strong consumer following. But now that it has an expanded retail footprint, we know we need to start evolving our assortment in order to drive comps.

Jill Granoff, as well as our founders, Gene and Barry, via video on July 11, described the opportunity to alter assortments by store more liberally. It is fair to say our planning and allocation function is not sufficient to optimize comp door performance as it currently stands. So that is a call-out, and one that Jill and the team at Lucky, including Liz Munoz, are working on diligently right now.

Where we have launched new categories, we are seeing great success in driving flow-through, productivity, and new consumer interest. For example, we rolled out jewelry in all of our retail stores after very successful testing. And our kids shop-in-shops they are excellent, as well. Check it out if you want to see a real live example of truly irresistible product.

Jill also called out a major opportunity in our "Tops to Bottoms" ratio at Lucky Brand, where Lucky today is only 1-to-1 versus a longer-term goal of 3-to-1. We will also increase the percent of fashion denim to drive incremental sales, especially in this economy. We feel good about the integration of our holiday merchandising effort combined with our national and in-store marketing campaign. And last, we have some key positions to fill here in the fourth quarter at Lucky, including an experienced planning and allocation leader and a leader of retail and operations.

Kate Spade, I have already addressed two major management appointments there. We are continuing to secure strong real estate, posting healthy comp store sales trends so far this year. We also like the outlet stores and how they're performing. And we are expanding them now from 4 to 13 by year-end. As I said early on, we're just getting started with the major effort on product, visual merchandising and marketing.

Deborah Lloyd has a bold vision, and can't wait to get started there on Thursday of this week. We can't wait for Deborah to start. Our newly appointed leader of wholesale international and licensing is working on a clear, multi-year wholesale strategy that is going to bring measured growth to an area of the business that clearly lost steam in the past three years.

And like Juicy, the international strategy at Kate Spade has never been fully crystallized. Our research indicates strong and positive consumer awareness and brand ratings in markets in Asia beyond Japan, where we have a presence, and Europe. We're developing a plan with market prioritization as the first step for both wholesale and retail.

So now, let's talk about Partnered Brands. We said this segment is posting continued weak results. Sales were down 18.8% versus last year with decreases across the portfolio. We indicated that the brands under strategic review have met some cautious buying patterns by wholesale customers, waiting to see the outcome of the review. In spite of strong and engaged management teams, these businesses brought down our performance.

And consistent with what we have heard from others in the sector, an important component of the change in forecast in Partnered Brands stems from a cautious inventory management approach from our retail partners as we head into the fourth quarter. We have seen order cancellations and reductions in replenishment lines, which are reflected in today's forecast.

The core Liz Claiborne business and Claiborne men's business are not performing to their potential, with decreased royalty income from licensing, further lowering our profitability. The spring and now fall women's lines, which reflected higher quality and design refinement, have not proven to distinguish the brand with this under whelmed Missy consumer.

Our adjusted operating income is down 32% compared to last year, and our segment-adjusted margin is down to 3.5% from 10% in 2006.So what are we doing about it? Back on July 11, I announced that Dave McTague would be joining the company as EVP of Partnered Brands. Dave, who joined us from Nike, has many years in leading apparel brands across channels.

Dave arrived at the end of August, and has spent these first 60 days meeting with our wholesale partners, listening very carefully to their ideas and their concerns. He and his team have been formulating aggressive plans to relaunch both the design and merchandising direction of the men's and women's core Claiborne businesses. His instincts and our lessons learned are driving highly differentiated strategies with strong design direction. And we are close to finalizing that plan.

On a parallel path, this Partnered Brands organization is aggressively managing its cost profile, which was clearly out of check. These initiatives are being captured in the cost numbers that Andy reviewed earlier. Now Dave is a product guy, first and foremost. He's bringing some fresh thinking to brand strategy, to licensing, to SKU rationalization, and to productivity.

I realize we are all impatient, and we're anxious to get this fixed. I do believe that we're on the path and I ask that you stay tune for the details, which are not far from coming.

On top of design and merchandising, we are continuing the cultural and systems changes in Partnered Brands that we discussed in great detail on July 11. And by this, I mean building the sell-through focus capability in substituting what was hard-hitting showroom sales pitches for greater in-depth inventory planning. These are critically important initiatives, which we will be bringing better partnering skills to the table, but they are not enough. They are insufficient without a big emphasis on the design and merchandising plans that are still yet to be announced.

So with that now, Andy will walk you through the details of the financial announcements that we made this morning. And then we will open the line up for questions and answers. So Andy?

Andy Warren

Thanks Bill. Slide 18, entitled 3Q '07 financial summary. For the third quarter, we recorded net sales of almost $1.3 billion and GAAP EPS of $0.33. Adjusted diluted EPS was $0.63 compared to $1.01 last year. Net sales of 3.9% are lower than 3Q '06, primarily driven by decreases in our Partnered Brand segment, mostly offset by growth in our Direct Brand segment. The impact of foreign exchange rates added 2.4% to our total net sales for the quarter.

In our Direct Brand businesses, net sales were $629 million, an increase of $96 million or 18% over last year. This terrific sales increase was primarily driven by strong double-digit growth at Juicy Couture and Lucky across both their wholesale and retail channels. The addition of Kate Spade, which was acquired in the fourth quarter last year, also contributed this net sales growth.

In our Partnered Brands businesses, net sales were $634 million, a decrease of $147 million or 19% as compared to last year. This anticipated decrease was primarily driven by lower sales in our strategic brands, as well as in our Liz Claiborne and Claiborne brands.

The closing of our Crazy Horse and CITY Unltd. brands also contributed to these reduced sales. These decreases were partially offset by the launch of Liz & Co. and Concepts at JCPenney.

Adjusted operating income for the third quarter was $118 million or 9.1% of adjusted sales, compared to $174 million or 12.7% of sales last year. Breaking this down by segment, Direct Brands adjusted operating income for the third quarter was $95 million or over 15% of sales, compared to $90 million or 16.9% of sales last year. The inclusion of Kate Spade reduced this third quarter operating margin by 40 basis points. This is consistent with the expectations we shared with you at the end of last year that Kate Spade would be slightly dilutive in 2007.

Juicy Couture had another outstanding quarter with a double-digit increase in operating income, albeit with a slightly lower operating margin as a result of the increased spend on brand-building initiatives. Negative comp store sales for Lucky and Mexx also contributed to the lower operating margins for Direct Brands.

Partnered Brands adjusted operating income for the third quarter was $23 million or 3.5% of sales compared to $84 million or 10% of sales last year. This decrease in profitability is consistent with our expectations, and is primarily driven by higher levels of retailer support and the deleveraging of their expense structure as a result of reduced sales.

Many of the initiatives we discussed on July 11 and are being aggressively executed upon today are aimed at reducing divisional and corporate overhead to right size our total cost captured and to meet our operating profit goals. Cash flow has remained very strong and on forecast, with $326 million derived from operating activities over the past 12 months.

We've also repurchased approximately 3 million shares for $100 million during the quarter, and have approximately $48 million remaining on our share repurchase authorization. This takes our total repurchase for the year to $182 million or approximately 5.3 million shares.

Our total debt-to-capital ratio increased to 32.2% compared to 26.4% at third quarter of '06, primarily reflecting: one, the impact of the share repurchases; two, our retail expansion CapEx spend; and three, acquisition-related payments over the last 12 months.

Slide 19, entitled Third Quarter Inventory. Total inventories increased 7% to $726 million compared to last year. $23 million or 4% of this increase was due to foreign exchange rates. Our Direct Brands inventory increased almost 20%, which is directly in line with their sales and retail growth.

Although Partnered Brands were more successful this quarter in aligning their product inflow with sales outflow, the soft wholesale environment in September drove the 10% year-over-year inventory increase. We are very focused on managing down our inventory levels. Inventories for 2Q '07 were up 12% versus the 7% this quarter. We have put in place [actions] for the rest of 2007 to both reduce the inflow product and thoughtfully liquidate current inventories. Therefore, we are forecasting flat fourth quarter inventory levels with last year.

Slide 20, entitled Adjusted Full Year 2007 EPS Guidance. In today's press release, we revised our previous 2007 guidance for sales, adjusted operating margin, and adjusted EPS. To reiterate, this guidance excludes the impact of costs associated with streamlining initiatives. It also excludes the potential impact from the acquisitions or accelerated divestitures.

For fiscal 2007, we're projecting net sales to be down low single digits compared to last year, adjusted operating margin to be 6.8 to 7.1%, and adjusted EPS to be $1.70 to $1.80, reduced from our prior range of $1.90 to $2.00. This reduced adjusted EPS guidance is primarily reflecting the lower performance of our brands under strategic review.

To elaborate, as you can see from the slide, our revised guidance reflects: one, a $0.04 decrease due to the early sale of the four brands under strategic review; two, an $0.11 decrease due to lower profits from our other brands under review; and three, a $0.04 decrease to the higher fourth quarter marketing spend in our Direct Brands in order to support the top-line growth in 2008.

In total, $0.15 of the guidance decline is due to our brands under strategic review. Our 2007 guidance for the brands that are not under review remained essentially flat as compared to the guidance we provided back in July, the Direct Brands being better by $0.08, offset by Partnered Brands being down by the same amount.

Lastly, slide 21, entitled Forward Outlook. On July 11, we provided the preliminary fiscal outlook for 2008. We remained very confident that the strategies we outlined then and discussed in great detail today will drive sustained improvements in our operating and financial performance next year and beyond.

But July 2007 outlook did not assume a robust economy, but it also did not assume the challenging retail and macroeconomic environment we are now facing. Economic uncertainty, warm weather, and low levels of mall traffic have all contributed to weak sales in the second half of this year. Despite this backdrop, the financial framework we presented to you in July remains our compass for decisions around resource management, cost reductions, and capital allocations.

We are currently performing a detailed analysis of our businesses including the continued assessment and need for additional cost reduction opportunities beyond those outlined today. We will continue to monitor the external environment throughout this fourth quarter and assess its impact on next year. We're not therefore confirming our previous guidance for 2008, but will provide an updated outlook in the first quarter of next year. We are very committed to managing the capital of our company to maximize and deliver long-term shareholder value.

I would now like to open the call up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from Margaret Mager of Goldman Sachs.

Margaret Mager - Goldman Sachs

Hi, Bill, could you talk about what is going on at Lucky, in particular with your same-store sales there and what would be our expectation as you look forward on that business? Do you think it is just a temporary phenomenon that same-store sales have turned down, or do think they will rebound soon? If you could speak to the drivers and the fixes, if you will.

And then on your cost reduction programs, I think you talked about reducing 700 to 800 off of your headcount. Can you just give us an update on where you stand on that number and where the big chunks of headcount reduction have come from? Thanks.

Bill McComb

Sure. We will go ahead and we are going to break those up into two separate questions. And we will start with Lucky. And, as I said and outlined, first and foremost, I think it's clear to say, yes, we believe Lucky will comp positively again, and it is a very strong franchise. I'm going to let Jill Granoff direct some very specific comments to answer your question again around the drivers of positive comps.

Jill Granoff

Hi, Margaret. This is Jill. Look, like most retailers, we were disappointed in Lucky's comps in the third quarter at negative 2%. We do believe this is in large part due to the unseasonably warm weather and the declines in mall traffic. Virtually all of the decline in comps was due to traffic. Our conversion was actually up. The good news is, if you look at total consumer demand in Q3 in our retail stores for Lucky, actual sales in our retail stores in Q3 were up 15%. And on a full-year basis, they were up 20%.

So, we do believe that the consumer demand for Lucky is very healthy. That said, we know the importance of driving comps in order to drive both productivity and profitability. And we will be taking the following steps to see positive comps in Q4.

First, we are looking to really enhance the assortment. We will have a much more giftable assortment in Q4 beyond the core denim. We will have a very strong program in knits, especially sweaters, which we believe are very giftable. As Bill mentioned, we will also have jewelry, which has performed very, very well at wholesale. We will now have this in all of our stores at retail. And we will also have kids rolling out to a 90 additional stores on a shop-in-shop basis . And we believe that all of these will drive incrementally.

So, we feel very good. We are looking for positive comps in Q4 as well as continued momentum into next year. Just one last comment. We have some marketing initiatives in place to ensure that we drive better performance. We have our first ever national ad campaign which will reach 25 million consumers, regional and national publications, men's and women's. We also have some very targeted CRM initiatives. We have a bounce-back promotion which will kick in early November. We have a strong program for Black Friday. And we will have a holiday mailer going out in December. So, we take this very seriously, and are hopefully taking all the appropriate steps to see renewed comp momentum in Lucky.

Bill McComb

And the only other thing I would add, Jill -- Jill is all for test and learn. And one of the things that Liz Munoz, who is our President out there, is doing with her team is beyond the immediate term, Margaret, pushing our thinking about evolving the assortment. And categories like footwear and outerwear are areas that we have a big interest in testing, even in a slightly larger box from a test perspective, to really push the limits on the Lucky concept. So, I think you should hear there is a lot going on out there, and I think we feel confident that this is a company that is going to be able to comp positively for a long time to come.

The second part of your question, Margaret, dealt with the cost reductions, which Andy talked through earlier in the slide deck. And one of the things you should have noted in that slide deck was that the initiatives from a headcount perspective, we've identified and executed those moves. Andy, why don't you give an update specifically to Margaret's question?

Andy Warren

Margaret, it's Andy. So far, we have actually taken action and already eliminated 800 positions. So, that action is already complete and behind us. To answer your question about the buckets where the cost is coming out, it is mostly in the Partnered Brands area as we right size that cost structure. Corporate has been an area of a lot of rethinking over the cost structure. Mexx, as they go through their turnaround plan has done a lot of cost-out and rethinking of almost all elements of their cost plan.

And then at the executive level, we have done that as well. And Mike has taken a lot of actions with distribution centers and supply chain. So, I would say really, it is across the board, except for Direct Brands, where -- that is where our investment is, across the board, we have taken some very aggressive cost actions.

Margaret Mager - Goldman Sachs

Okay. And if I could ask just one more question about your '08 outlook, where you said you will give updated guidance on your next conference call. Is that because of the economic environment, the uncertainty surrounding the externals, or is there something about the internal picture that is preventing you from speaking to that at this point?

Bill McComb

No, I think it's driven by the impact of the macro-environment. That's it.

Margaret Mager - Goldman Sachs

Okay. All right, well, we will hope for some cold weather, and good luck in the holiday season.

Bill McComb

Well, it is cold here in New York this morning, so we're hoping that that's representative. Thanks Margaret.

Margaret Mager - Goldman Sachs

All right, take care. Good luck.

Bill McComb

Thanks.

Operator

Thank you. Your next question comes from Brian McGough of Morgan Stanley.

Brian McGough - Morgan Stanley

Hey guys. Thanks. It's Brian McGough. I have a couple of questions for you, one on SG&A and one on your real estate. On the SG&A side, we are seeing SG&A grow materially higher than sales, or at least that gap is pretty wide between the two, which implies that you guys are taking your lumps now and you are investing in your brands, which is exactly what you said you would do, Bill. There's not a lot of companies out there who are actually doing that.

I was hoping you could shed a little light on just what are your expectations as to when those investments are going to start to show up in high revenue? Is that going to be an '08 event, '09 event? And I guess regardless of when it happens, I was hoping from a philosophical standpoint, if sales don't hit your plan, what do you do? Do you invest more capital in order to get the sales where you want them to be, or do you shift gears and start to cut costs out of the model in order to drive EPS?

Bill McComb

Okay, I got you. First of all, we we're not suffering from a lack of sales at Lucky, Juicy or Kate Spade from a growth perspective. Mexx is clearly the revenue trend in the third quarter from operations excluding foreign currency -- it was down. So, I would answer your question by saying our view about marketing is that the marketing investments are very much focused on building these brands to full potential. Kate, Lucky and Juicy are all down in their S-curves. They have strong brand awareness. But, for example, at the July 11 presentation, Jill presented that the Lucky Brand on an aided basis have awareness in the 20% range. And there is a ton of long-term upside potential by driving that aided awareness level up.

Our team is following a nice balance in how they're deploying dollars between big, awareness-generating campaigns and tactical support for new store expansions and fattening the fat cat, as I said, by building transaction size with current shoppers. That is something, Brian that we measure as we go through the calendar year. And there are components of the marketing plan where it's easy to demonstrate return on investment. Those were the transaction associated with them. And the national spend, obviously this is the subject a lot of interesting work in the advertising industry. It's harder to measure it directly. But we believe that the advertising budgets are in fact going to drive the growth. And if we don't see it, we're going to make our change.

One of the places where we have made a big change right now is on the Liz Claiborne brand. We did spend money on the Liz Is campaign, and I have to tell you that we haven't felt good about the return on investment that that campaign generated. And so we have pulled back on that dramatically, and we're rethinking the dollars that are deployed on the Liz campaign right now.

So I hope that that answers your question. What you are hearing is, we intend to prudently execute the plan. And that does mean, (inaudible) to know what elements of the marketing mix work, to track it, and change as we go. Andy, what would you like to add to that?

Andy Warren

Just to elaborate on that, Brian, for a second. There's no question your call-out around our investing now and for '08 is absolutely right. We're looking to launch 100 additional stores this year. There is clearly some launch costs associated with that that we are incurring now. Bill talked about the marketing investments. And your call-out about additional cost actions, it is something that we are always taking a hard look at. Even after this last round of cost reductions, we are always re-baselining what we need, what we have, and where we're going. So, definitely an ongoing effort and a commitment to all of you that in 2008, we're going to constantly reassess our cost structure.

Bill McComb

And the one thing I would add is, Andy pointed out that in addition to the base $100 million that we said we would execute by the year end this year, we went further already to take action on eliminating stranded costs, what would be stranded costs associated with the brands that are in our strategic review process. So, I think that that just demonstrates what Andy is talking about.

Andy Warren

Absolutely.

Brian McGough - Morgan Stanley

Okay. Great. Thank you. Then just one question on your real estate. Now, at least relative to everybody else's, overall retail business is doing really well. There is a lot of other guys out there who aren't, and they're wondering why their retail business is not doing well. And they're looking at traffic, their organization and their product, and they're just kind of wondering why, when the reality is that they just have a lot of stores in the wrong locations. I'm wondering in the time you have been there, Bill, how much time have you and has the organization spent really looking into your huge portfolio of stores? I think over, what, 1,300? And are they in the right locations? Is that the right number of stores, or should that number be higher or lower?

Bill McComb

I will tell you. I mean, this has been the subject of two previous calls. Jill Granoff, when she began a year ago running our direct-to-consumer group, which basically was our retail organization, she spent a significant amount of time and made some strong recommendations in early January around rationalizing site. And if you remember in that first call that I was a part of, we made the announcement that we were closing many of the one- or two- or three-off concepts. And those doors in particular were unproductive.

As it relates to fleet assessment in our ongoing brands like Lucky, Juicy, Kate and Mexx, Mexx has just come off a significant fleet analysis, and the actions that they will be taking are incorporated in their 500 basis point improvement plan. And when I say I'm really happy with the specificity and clarity of the plan that Jeff has, that real estate rationalization is but one component of it. On an ongoing basis, I think that as you pointed out, our organization is in a different place than many other retail-based companies.

And our brands are earlier in their S-curve. We aren't by any means at the point of asymptotic growth. And I will say that Jill runs a very, very, very detailed data-based real estate review team meeting every month. And our site selection criteria, the criteria around adjacent tenants, around premium malls, that's what drives the site selection strategy for each of those three Direct Brands that -- Kate, Lucky and Juicy.

So, that said, Jill did say that the overall traffic was, traffic in malls was down for third quarter. It's down now. And it definitely was a driver of the soft comp at Lucky. In terms of the Liz outlet, we announced that we have an outlet revitalization strategy that we're embarking on now. And that is a significant change in our outlet philosophy . You'll remember we're going from specifically Liz Claiborne brand outlets, shopping down boxes that were 15,000 square feet in, frankly, many department stores to single brand, i.e., not going to have Sigrid Olsen and the Moderate brands.

It's just going to be Liz Claiborne, and it's going to have the highly appealing visual presentation look of the best of breed outlet. And many of the curve downs or chop downs are allowing us to open single-brand concepts for our Direct Brands. So we're using some of that premium space for some of our premium brands, while at the same time reducing the footprint size at Liz Claiborne boxes so that they are much more productive.

Brian McGough - Morgan Stanley

Great. That is awesome color. Thanks, guys.

Operator

Your next question comes from Virginia Genereux of Merrill Lynch.

Virginia Genereux - Merrill Lynch

Thank you. Let me ask, I look at the segment disclosure at the end, and your revenues exclude discontinued operations, but adjusted operating income includes it? Is that right?

Bill McComb

That's correct.

Virginia Genereux - Merrill Lynch

Okay, so if I -- the margins are actually -- that $4 million of profit this quarter will be gone next year.

Andy Warren

That's correct. That's right.

Virginia Genereux - Merrill Lynch

How much are the brands under strategic review losing this year? Or I think in July, Bill, you guys said that margins there were negative low single digits.

Bill McComb

That's correct. We said $800 million in revenue with a low single digit operating margin as a basket.

Virginia Genereux - Merrill Lynch

So, if I look at your point as a basket. If I look at Tapemeasure and J.H. Collectibles, these businesses that you just sold to Li & Fung, generated a 10% margin this quarter . I know third quarter is everybody's most profitable wholesale quarter. I guess there's a big mix there where some other brands are losing a lot more. Is that right?

Bill McComb

You know what, I would just go back to your own opening line there, which is third quarter is the most profitable. I wouldn't make an assumption about a distorted profitability of those brands versus the total basket. I mean, frankly, if those brands, if that were a representative profit margin, they may not have been in the strategic review.

Virginia Genereux - Merrill Lynch

Can you help us think, when are you going to exclude all the businesses from the pro forma income statement. All the $800 million will be excluded only when you have --?

Bill McComb

When we make an announcement that we have completed the strategic review, and the disposition of those assets are clarified.

Virginia Genereux - Merrill Lynch

Okay. And if I look out to next year then, if I think about -- you all said that you have $150 million in cost savings. Is that on a 12-month basis? I mean, is it $38 million in SG&A savings per quarter? Or is some of that already -- for calendar '08, or is some of that already in the '07 numbers?

Bill McComb

The full year '08 number.

Andy Warren

That's correct. There's really two answers to that. One is we actually pulled the $150 million cost out by January 1st. That is our commitment . Secondly, some of that cost savings is being realized now, because we jumped on it hard and we got a good, aggressive move on it. So some of that is going to be realized this year. All of it will be realized on January 1st of next year.

Bill McComb

But the component that will be realized this year is included in today's forecast.

Andy Warren

No question.

Virginia Genereux - Merrill Lynch

And can you tell us how much incrementally it is to calendar '08?

Andy Warren

Well, we're still working through that right now. There's no question it will be significantly incremental, but specificity is not really known right now.

Virginia Genereux - Merrill Lynch

Okay, so the majority of the 150 is coming next year?

Andy Warren

Absolutely.

Bill McComb

Yes.

Virginia Genereux - Merrill Lynch

Fair to say.

Bill McComb

That is the way we would tell you to think about it.

Virginia Genereux - Merrill Lynch

Okay. And then you'll also be giving up the 20, $30 million or whatever of losses -- you'll be getting those back that the discontinued businesses, that the brands under strategic review are losing, right?

Bill McComb

That's correct. Depending on the timing, but yes, that is certainly within the goal.

Virginia Genereux - Merrill Lynch

Okay, right, exactly. And then the question, Bill, is you guys are going to invest incrementally more, and then you're going to have -- I guess the other question is how your wholesale business trends. And can you give us a sense, Bill, for how exposed you'll be if Macy's and Dillard's, say, were last year, I think, $1 billion in sales? Can you give us a sense for how big those two retailers will be for you in calendar '08?

Bill McComb

You said Macy's and --?

Virginia Genereux - Merrill Lynch

I said Macy's and Dillard. I think in your K disclosure, you said Macy's was $800 million of '06 sales, and Dillard's was $215 million, thereabouts. So those two guys were $1 billion. And they are going to be down some magnitude this year, big magnitude, and then --

Bill McComb

Yes, I think that we don't have a revised forecast versus what we talked about in the Q&A on July 11. But on that we indicated that in '06, that represented about 16% -- this year just about 10, and next year in the single digits. And I'm speaking about Macy's. And I don't have the Dillard's number or forecast with us. But the answer to your question is significantly reduced exposure with the elimination of the brands under strategic review. That would be the nature of that.

I will tell you that there is not much new to report with regard to our business at Macy's versus the last two calls. We have continued to take the approach of careful receipt management. And we are focusing on selling through. And I think that Dave has brought some detente to the table and some great relationships, and has been listening and is taking action.

Virginia Genereux - Merrill Lynch

That's great. That's great color. And then lastly, if I may, I'm surprised that Juicy comps aren't a little higher, Bill, even. I know that you commented that Juicy's comps will flow probably to mid to high singles in the fourth quarter. But the store base is still so young there, so I wonder -- even though the base is getting larger. So I wonder, is there a dynamic where you are comping against the store at the mall at Caesars Palace -- do you know what I mean?

Bill McComb

Yes, yes. There is that kind of effect where the dollars per square foot in this small comp base is astronomically high.

Jill Granoff

We're up actually against 33% comps in Q4 last year. And obviously the forum shops is in that base. As Bill said, that store has just been an incredible success. Sales per square foot of almost 5,000. So it is kind of hard to anniversary that. We feel very strongly about Juicy's performance to go forward into Q4 and beyond, especially with the broadening of the assortment and again a giftable program, and some targeted marketing and advertising initiatives.

Bill McComb

But, even every incremental door we are opening, the performance relative to the whole fleet is very, very strong.

Virginia Genereux - Merrill Lynch

And Jill, to your point, if you sort of tiered stores by like mall or environment, the comps would probably be stronger. Would Juicy be comping double digits, sort of, I mean, like for like?

Jill Granoff

Many stores are comping double digit. Our productivity levels are way in excess of 1,000 a square foot. So on a like-for-like basis, you'll see many doors double-digit comping. I think the big issue, really, is how much more can we grow out of that form shop store? And then last year, I think we only had four or five stores in the comp base.

Virginia Genereux - Merrill Lynch

Thank you.

Bill McComb

Thanks Virginia.

Operator

Thank you. Your next question comes from Jeff Edelman of UBS.

Jeff Edelman - UBS

Hi, I just have, really, one question. That is you're doing a lot of investment in terms of new stores and marketing, but you really don't have the product right, particularly at Mexx. Aren't you putting the cart before the horse?

Bill McComb

I think that that is not true, what you just said about putting a lot of money in marketing and store openings. Mexx is going through a state of rationalization right now. And we haven't been exactly totally transparent with the dynamics of that. And what Jeff is doing from his plan, as he executes his plan, Jeff will provide more transparency into some of the details.

But Mexx is the only one that I would argue that the product isn't right. And Kate, clearly, there's an opportunity with product, with visual merchandising. Deborah is going to get her hands on that business, and has a lot of great ideas. But that business is comping very well, and the consumer is voting that they like the product. And at Lucky and Juicy we again, we're not calling out a product issue on those brands.

Jeff Edelman - UBS

Thank you, Bill.

Operator

Thank you. Your next question comes from Kate McShane of Citigroup.

Kate McShane - Citigroup

Good morning.

Bill McComb

Hi, Kate.

Kate McShane - Citigroup

There was a brief comment that I just was hoping to clarify. I think you said, Bill, that you had seen some cancellation of orders. Was that just for the Liz Claiborne brand, or was that for the brands that are selling in department stores right now?

Bill McComb

It is across the entire Partnered Brands lineup. We are seeing that retailers are taking a very cautious fourth quarter inventory position, and our forecasts that are in the numbers today in today's forecast reflect reduced replenishment lines and canceled orders. And it includes all the brands in the strategic review, as well as those that remain in the Partnered Brands ongoing portfolio.

Kate McShane - Citigroup

And what are you seeing or what are you hearing in terms of inventories at department stores? They're cautious on Q4, but is that because of the buildup in inventories today?

Bill McComb

Dave, why don't you take that?

Dave McTague

I mean, even as Jill had said, Kate, the obvious external macroeconomics, including the traffic decline, clearly it is not a conversion issue. It is getting people into the stores. So the inventory is there. They need to get more people in the stores. Based on current turn rates, they're just being very cautious about influx of new inventory and on order. I think that is, candidly, intelligent of them. And we're going to work through that with them very carefully. We're working to improve assortments with them at a door level.

And consistent with Direct Brands, we're looking for the giftable segment of fourth quarter that -- we are not seeing declines there, teeing up the things that will be giftable, and key item drivers that will also be consistent with the marketing plans that they have to drive customers into the stores.

Kate McShane - Citigroup

That's great. And then I wondered if you could give us a little bit more detail on Liz & Co., since it was one of the better performing brands in the Partnered Brands. How did the brand perform when you look at it on a quarter-over-quarter basis? And how much growth was from increased floor space of the product, or just new product extensions from quarter to quarter?

Dave McTague

That business, as Bill has stated several times, we are certainly not committed to letting that business get ahead of the customer. This customer is leading this business for us extremely well. We're not disclosing the specific size of this business. However, the plan we outlined on July 11 assumed a very strong and growing JCPenney's business, and a business that has sustainable growth over three-year and beyond.

Quarter-over-quarter, we're very pleased. And we continue to work very closely with them on not only content, but presentation and enhancing that sell through.

Bill McComb

We're not going to give numbers. But just qualitatively, we're getting growth from the core as well as new category extension.

Kate McShane - Citigroup

Okay. That's helpful. Thank you.

Operator

Thank you. Your next question comes from Jennifer Black of Jennifer Black & Associates.

Jennifer Black - Jennifer Black & Associates

Good morning. Bill, my first question would be, do you have a new merchandise team in place at this time at Mexx? And if you don't, are you close to hiring? Can you just give us a little bit of color?

Bill McComb

Yes, I said twice in the presentation we have an entire new design team at Mexx, all of the leaders are new. [Red Gottfried] brought them in. And the team is extremely strong. And as I said, their product will be in full swing in the fall 2008 line. They have dropped a capsule into fall '07, and we will see how that performs, called Black is More Than a Color. It's the basis of the marketing campaign and the store windows right now. But it is a tiny part of the assortment for fall. They will impact spring a little bit. But the latest hires, Jennifer, just started in August. The head of men's and the head of women's under Red just began in August.

Jennifer Black - Jennifer Black & Associates

Okay, so when would we start to see an impact as far as product?

Bill McComb

I'm saying fall '08.

Jennifer Black - Jennifer Black & Associates

Okay, fall '08. And would you say the biggest competition in Europe, because I don't really know -- are they stores like Zara and Mango?

Bill McComb

It's a combination. On the more premium end, it is Esprit head-to-head. And then peripherally, the environment of H&M and Zara and Mango have definitely begun to change the traffic patterns. And so we definitely compete there as well. And Diesel is another brand that we compete with.

Jennifer Black - Jennifer Black & Associates

Okay, that's helpful. And I don't think you brought up Villager at Kohl's. Do you have anything to say about Kohl's as a channel of distribution for you?

Bill McComb

Yes, we do. Dave, do you want to take that?

Dave McTague

Yes, absolutely. We're clearly committed to building our business at Kohl's and helping them execute their strategies, but also doing it in a way that doesn't compound channel or partner conflict. We have a great business with them. We look forward to continuing our business growth with them in the future.

Bill McComb

Yes, I mean announcement is probably to come in that category. But I think Dave summarized our thinking well there.

Jennifer Black - Jennifer Black & Associates

Has the line done well -- the Villager line?

Bill McComb

No. I mean, the Villager line is not far off lately where Crazy Horse was at Penney's. It historically has done well. Right now, it's not a shining star for us. There was clearly an opportunity to improve that strategy, and do something that is on strategy for them, as Dave said something that doesn't augment channel and partner conflict.

Dave McTague

Yes, and the Axcess label which resides in the updated (inaudible) space for them, actually, is doing quite well and we are pleased with the results there.

Jennifer Black - Jennifer Black & Associates

Great, and we could possibly see some other things happen at Kohl's is kind of what I'm thinking?

Dave McTague

I think you're right, Jennifer.

Jennifer Black - Jennifer Black & Associates

Thank you very much and good luck.

Bill McComb

Thank you.

Operator

Thank you. Your next question comes from Omar Saad of Credit Suisse.

Omar Saad - Credit Suisse

Thanks. Good morning.

Bill McComb

Hi Omar.

Omar Saad - Credit Suisse

Hi, Bill and Andy, I wanted to talk about the Liz Claiborne brands. You made an interesting comment about the Liz Is campaign and how you kind of didn't think that you were getting the return on investment there, and you pulled away from it. And now that Andy has been there for a while, I wanted to get his thoughts around the Liz Claiborne brand, what it stands for, how consumers relate to it, what the opportunity is, and where it’s place in the world could potentially be? It's obviously got kind of a long heritage, and perhaps you're kind of rethinking the positioning of the brand -- or not. I just wanted to kind of get your updates there.

Bill McComb

I am just going to redirect at Dave. I think --

Omar Saad - Credit Suisse

Dave -- I'm sorry.

Bill McComb

That's okay. We've got some new guys at the table. So I will point that to Dave. As I said, Dave is close to completing a fundamental change in designing merchandising strategy. So Dave, why don't you opine on your views of the brand?

Dave McTague

Clearly, as Bill has alluded to earlier, the brand position clarity of this Liz Claiborne product and consumer is probably the most important thing that I have been working on to understand and clarify. Currently, this Missy consumer who is completely uninspired in department stores, we're completing our specific initiatives around that product content with very specific design and merchandising initiatives, specifically around aggressive product improvement.

So, as I said, we are in the process now of completing that internally. To expand upon that, approaching the brand as one lifestyle brand driven by three specific pillars, which is product creation, which is all about content because let's face it, the product wins; demand creation, which is about marketing, as well as consumer interface and driving throughout our organization that we have literally seconds to capture this customer when she is on the floor; and product presentation, which hopefully, if we have that content presented properly and driving through these marketing initiatives, learning from our partners in Direct Brands and partnering with our retailers, we think that we have a compelling story.

The customer is out there. She loves our product. She loves our brand. And she's literally waiting for us to bring her more and better. So that is what we're focused on with a lot more detailed to come in the near future.

Omar Saad - Credit Suisse

Okay. If I think about the Liz Is campaign, it seems to me kind of to be this very broad -- Liz Is kind of a broad, casual brand. Do you feel like it needs to be focused more, or is it just augmenting it or --?

Dave McTague

No, I completely agree. My opinion on that is that the Liz Is campaign with the timing of the Liz & Co. launch sent the wrong message. Candidly, Liz Claiborne is a fantastic brand. And as you will see for 2008 with our marketing strategies, number one, we're moving a significant amount of our marketing spend to that consumer experience. Let's face it, there is not enough sales help on the floors to even help these consumers when they are in the store. So we're going to put a lot of energy there. And then, from a branding perspective, we will focus on product in a very unique and compelling way. So again, a lot more to come. And we're quite excited about it internally as we're building this out.

Omar Saad - Credit Suisse

And Bill, if I could ask a question about morale of the company, especially in the brands that are under strategic review, it looks like a lot -- that is probably the biggest single component of the guide down. And it's obviously -- the environment is difficult, and retailers are cutting back on orders.

But hearing different things out there, could you comment on how focused employees are at the company, given a lot of the change that they are undergoing right now, and what your sense is for how people feel about things internally?

Bill McComb

Well, I am incredibly proud of and pleased with the environment right now. This is tough stuff. A lot of tough medicine has gone into the last six months of announcements internally. But, I have to tell you something. People here are actively engaged. They are personally involved. 800 people don't get announced as leaving, especially at a culture like this, which is a very warm, collegial, family-like company, without it having a serious impact on how people feel.

But people are, I will have to say, very future forward. They are embracing the change. I think that some of the changes came directly out of the mouths of our own people in terms of directing us to be more brand centric, and wanting to make people more accountable, and wanting our corporate center to be, I will say, smaller with greater divisional power, but united under a given strategy and a given leadership structure.

So, for all the takes, there have been some good puts that have added back reason to engage. I am incredibly impressed with the team and the leadership that we have on each of the strategic review brands. These are people that are simultaneously working hard on product and keeping their brands and their lines moving forward.

I can tell you that the Ellen Tracy line, I think has had the two best showrooms, I hear from customers, since Linda Allard left the business. And I look at the management team there, and I say, a great example of people that have said they're really committed to their brand and their business, and they're going to just carry on and carry forward. And they're doing that, and they're leading the strategic review process beautifully. So, I could never say, and I shouldn't be giving the impression that all is jolly and great. If anything, what I worry about it is just the fatigue of the team. This is a lot of change. And all of our people are working extremely hard on all of the elements, on compelling business plans for next year; on downsizing; in some cases, upsizing; putting the right talent in the right jobs. The focus on product and design has really kicked in. And so there's a lot of change.

But bottom line is, do I sleep at night? Yes, I do. We've got good people here and they are motivated.

Omar Saad - Credit Suisse

Okay. Thank you. And one last quick question. On the prAna brand, did you open a store in the quarter, or did you have plans to open a store? I thought I heard something along those lines?

Bill McComb

We opened two stores. At the time we announced the strategic review brands, we said that we were going to continue executing their business plans. One is outside San Jose, and one is in Boulder. And they actually open in the fourth quarter. And so we're continuing the plan that we had for that brand.

Omar Saad - Credit Suisse

Okay. It sounds like you're going to have to take a bit of a special -- a page from your Direct Brand component, at least for prAna and the time being, as you are operate it as one of these brands under review, mixing in the specialty, your owned specialty as well as the wholesale component?

Bill McComb

Yes, well, there is no question that the thesis, which is a very strong investment thesis behind prAna is the next chapter and wave of growth, is about a retail presence. And we had secured some great, great, brand appropriate real estate. And we didn't think that it was in the, I will say, a new owner's best interest for us to not proceed with that.

Omar Saad - Credit Suisse

Okay. All right. Thank you very much.

Bill McComb

Thank you, Omar.

Operator

Thank you. Your next question comes from Bob Drbul of Lehman Brothers.

Bob Drbul - Lehman Brothers

Hi. Good morning. Two questions, please. The first one is on the Partnered Brands, you talked about cancellations that you had. Can you quantify the level of cancellations, and maybe talk a little bit about the disposition plans? Tying that together, can you just give us an update on the outlet business and sort of how that is trending and if a lot of that inventory will go into the outlets?

Bill McComb

We can't. We certainly give dimension around order cancellation. The impact of it all has flowed through our today's forecast. So you see it in the numbers on the screen there in what Andy reviewed. With regard to the outlet business, Dave, I'm assuming we have different outlet businesses. So, are you talking about outlet as an aggregate or are you talking about the Liz outlet business and the flowthrough product on that side?

Bob Drbul - Lehman Brothers

Both.

Bill McComb

Okay, well it was -- the comment about order cancellation had to do with all the brands under strategic review. And some of them don't flow-through an outlet. And Enyce is one of those examples, where we don't have an outlet business on Enyce. Dave, do you want to just categorically answer that question?

Dave McTague

Generally speaking, the Liz outlet business is similar to Partnered Brands, in so much as some of the content is from our Phase I disposition and sale. We will be phasing out of some of that content as we move towards this singularly focused Liz Claiborne experience and environment. So, the sales and profit will be accelerated based upon timelines germane to those deals. But generally speaking, we're looking forward to '08.

Bob Drbul - Lehman Brothers

Okay, and then as you look forward on the Liz Claiborne brands specifically, or even Partnered Brands, when you look at the '08, the spring '08 outlook, you thought that business could be stabilized as you go through and execute your business plan. Is the expectation for spring another decline for the Liz Claiborne brand, or do believe you can still manage through what you are seeing in the trends there?

Bill McComb

The July 11 model actually accounted for another reduction in Partnered Brands. What I can tell you is, that that at Macy's, for example we see receipts coming in just at about the fall 2007 level. So fall to spring being flat, spring to spring being down, and that supports almost exactly the model that we put out on July 11. So I would leave it at that.

Bob Drbul - Lehman Brothers

Great, Good luck. Thank you.

Operaor

Thank you. Your next question comes from David Glick of Buckingham Research.

David Glick - Buckingham Research

Good morning. Most of my questions have been asked and answered. I was wondering if, Bill, you could give us a little bit of color on the gross margin across the brands in Partnered Brands and Direct Brands, just some color? And obviously, you had sounded like the Partnered Brands were below last year levels and Direct Brands were favorable to the mix. But I just wanted to get some sense where you saw strength and where you saw weakness in the gross margin?

Bill McComb

Well, I would tell you, the big glaring spotlight is going to go on Mexx, because we have called out that there is an opportunity on total margin at Mexx, and that includes gross margin. I will tell you that your characterization is right that there is strength in Direct Brands and softness in Partnered. And the big flat areas in Partnered have been -- I think we have been clear on what they are. I think it is important to note that like we said, early last spring, we called out a reduced royalty receipt on the Liz business, and that is hurting overall margins. But I think that you got it, the margin story. Andy, any additional color there?

Andy Warren

Yes, I will just elaborate with two quick points. And the Partnered Brands world, as I mentioned, we're going after cost very aggressively. And that's not yet reflected in the third quarter results, and it will certainly next year. Also, there is the retailer support that we have, more so than anticipated, that is now reflected in our numbers.

On the Direct Brands side, part of the dilution is not only the store openings, but also the emphasis on marketing investment and spend. That is diluting that as we invest for '08. So they're two different stories, but both of them yield, I think, better margins and better performance in the coming quarters.

David Glick - Buckingham Research

Okay, great. And just one last quick one, at the risk of beating a dead horses on the Liz Claiborne brand. Just to ask a direct question -- do you still have commitment for spring 2008 from all your major department store partners to continue carrying the LIZ brand?

Bill McComb

Absolutely, yes. Any additional comments, Dave?

Dave McTague

No.

David Glick - Buckingham Research

Great. Thank you very much.

Operator

Thank you. We have time for one more question. Your final question comes from Brad Stephens of Morgan Keegan.

Brad Stephens - Morgan Keegan.

Good morning. Looking back at your presentation, you referenced an $0.08 increase due to the strength in the Direct Brands. But yet, you talked about maybe some weakness at Lucky and at Mexx. So can you kind of reconcile that? Are you holding your earnings expectations for those flat? Are you taking those down, and Juicy is offsetting it, or just a little more color, please?

Andy Warren

Sure, but a couple of thoughts, one, part of the over-delivery is at Juicy. And they had again a terrific quarter, great results, great flowthrough. So, that is helping us relative to our view on July 11. Also, we did have some better profitability than we expected out of Mexx for the third quarter relative to our July view.

Bill McComb

Yes, it is all relative to plan, right?

Andy Warren

It may not be, at least in Mexx's case, where the brand is going to be and what those financials are going to look like next year. But clearly the performance of both Juicy and Mexx were better than we thought back on July 11.

Brad Stephens - Morgan Keegan.

And then I guess for your fourth quarter view, if you are confident that -- three months later or four months later from your July analyst day, that these are running $0.08 above plan, how conservative -- or what is baked in for your fourth quarter view for a consumer environment in those Direct Brands that are trending so well?

Andy Warren

We're projecting a similar kind of comp store performance fourth quarter that we had in the third quarter. We are baking in this additional marketing investment that we talked about earlier in the fourth quarter to help shore up our '08 performance. So net-net, a similar comp store performance with additional marketing spend forecasted for the next three months.

Bill McComb

All right. Thank you very much. Okay. Thank you all for joining us this morning, and thank you for your comments. We look forward to talking to you again. Thanks, Natasha.

Operator

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

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