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Executives

William McComb – Chief Executive Officer

Michael Scarpa – Chief Operating Officer

Andrew Warren – Chief Financial Officer

Dave McTague – Executive Vice President, Partnered Brands

Analysts

Jennifer Black – Jennifer Black & Associates

Virginia Genereux – Merrill Lynch

Brad Stephens – Morgan Keegan

David Glick – Buckingham Research

Liz Claiborne, Inc. (LIZ) Q1 2008 Earnings Call May 13, 2008 10:00 AM ET

Operator

Good morning everyone and welcome to the Liz Claiborne’s first quarter 2008 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 copy write material. Therefore please note that it cannot be recorded, replayed or transcribed with out Liz Claiborne’s permission.

(Operator instructions)

Also please note that there will be a slide presentation accompanying the prepared remarks. The slides and earnings release can be accessed at www.LizClairborne.com in the Investor Relations section. There are separate links to the slides for web cast 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 as per 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 2007 annual report on form 10K under the heading Risk Factors and in the company’s quarterly report on form 10Q which will be filed today with the SEC.

Also please note that during this call and in the accompanying slides and press release net sales, EPS, net income, operating income, operating margin, gross profit, gross margin, SG&A and SG&A as a percent of sales are presented on both GAAP and non-GAAP basis. A reconciliation of adjusted results to the actual results is available in the tables attached to the earnings release and slides captioned Reconciliation of Non-GAAP Financial Information.

The Company believes that the adjusted results for the first quarter 2008 and comparable 2007 period and the adjusted results for fiscal 2008 represent a more meaningful presentation of its historical and estimated operations and financial performance such that it provides 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.

William McComb

Thank you. Good morning everyone. Welcome to our first quarter fiscal 2008 earnings discussion. Joining me here at headquarters for the call are Andy Warren, our CFO, Mike Scarpa, our Chief Operating Officer and our Executive Vice President of Partnered Brands, Dave McTague.

As Elsa just pointed out this call once again will be assisted by PowerPoint charts that are available on the website. Some of the data that we will present and discuss can be better seen and understood by using the charts. After the web cast they will be posted at our Investor Relations site by the end of business today.

You should have seen in our press release this morning that our adjusted earnings netting out the one-time restructuring charges were stronger than analyst consensus projections. The results include the positive impact of a 28% sales increase in our retail based direct brands, a significant reduction in Partnered brand and corporate expenses, an extra week compared to the year ago period and discreet tax items.

On a GAAP basis we took significant charges as planned last year in exiting businesses and reducing our corporate overheads. You’ll see that we are diligently executing our strategy here. We are following through on cost reductions and right sizing initiatives at corporate and at Partnered brands while successfully reinvesting in direct brands capabilities including talent in headcount, marketing, retail store expansion and systems.

We are watching our inventory very carefully and we are managing during these very uncertain times to maximize our cash flow while still focusing on developing our strengths for the longer term which include increasing product and design focus and retail capabilities. I think the results today highlight those principles.

Generally speaking I like the growth and vitality that we are seeing in the direct brands. I like what I’m seeing from the consumer in reaction to our new Kate Spade stores. We are very happy with the continued buoyancy of Juicy Couture and traffic at Lucky brand has been solid all through the first quarter in spite of the significant inventory shortage in denim throughout the first quarter. Something that I will speak to later.

In the Partnered brand segment Kensie, DKNY Jeans and Monet all performed very well with double-digit revenue growth. I’m equally encouraged by the work internally here with our design teams and our design leaders for the spring 2009 re-stage on the core Liz Claiborne Women’s and Claiborne Men’s lines as well as the launch of the new DKNY Men’s Better Sportswear Line. A lot of news, a lot of excitement and there is a lot of excitement and anticipation for our department store customers for those initiatives as well.

While I am pleased with these areas we clearly need to get after our operating margins more aggressively. Some of this will be achieved through ongoing cost management and some through the sales productivity improvements that we believe will come with the merchandising and assortment plans that we have in the brands.

The most significant call out, however, is Mexx. Although the Company is undergoing significant cost rationalization, traffic at our retail stores and overall operating margin were significantly off plan in this first quarter and while we have seen our competitors decline in some of these European countries Mexx is under-performing the market overall. I’ll discuss where we stand on that particular turnaround and how we are thinking about it a little bit later in the call.

Visibility into the second half is no clearer now than it was a few months ago. Department store receipts are down overall and we expect a highly promotional environment. While we intend to control the controllables, store traffic, department store receipts and mark-down activity are the wild cards with this consumer environment.

Our business plans do remain intact and our internal goals and incentives have not changed. However, with the reduced visibility into the back half we are taking down the range of adjusted earnings reflecting guidance for the fiscal year on an adjusted basis now of $1.40 to $1.60 per share, down from the $1.50 to $1.70 range we had originally guided.

So overall I think we will perform very near current analyst consensus projections for the first half. That means we are expecting a very light second quarter given the calendar shift, the current retail trend at Mexx, probably most importantly our historical seasonal shipping patterns in wholesale during the second quarter and the anticipated level of department store promotion activity. It could be a zero adjusted profits quarter.

Overall, we are progressing. We see improved cash flow from operations. We’re stoking the momentum of our growth brands. We are in the midst of re-launch plans behind our core Liz Claiborne and Claiborne labels and we are attacking the cost structure even further to improve operating margins across the business segments.

So those are the big picture themes. I’d like Andy now to dive into the financials and walk you through the results specifically.

Andy?

Andrew Warren

Thank you Bill. Good morning everyone. Before I launch into a detailed review of our first quarter 2008 financials I’d like to take a moment to clarify the components of our Company’s adjusted results.

These results were adjusted to exclude the impact of expenses resulting from our previously announced plans to streamline our operations of both 2007 and 2008 and the results and losses on disposal of the discontinued operations.

We believe that these adjusted results provide a much more meaningful perspective on our operational and financial performance. We will now go to the slides and I will walk you through our first quarter financials.

Slide 3, titled 1Q08 Adjusted PNL Summary. Overall adjusted sales increased 3% versus last year. Important to note, sales were positively impacted by foreign exchange rates which increased net sales by approximately 5% during the quarter and the inclusion of a 14th week compared to the first quarter of 2007. We achieved significant sales increases across our direct brand segment with total sales up 28%. At the same time re-sales erosions in our Partnered Brand segment with sales down 17% versus last year. Later in my remarks I will provide deeper guides into these segment results.

I will also hold off on discussing SG&A costs until the next slide. You will see adjusted operating income for the first quarter was $42 million compared to $40 million last year. Operating margin was flat year-over-year at 3.8%. While we anticipated this low result we are extremely focused on improving this critical metric through continued cost productivity and enhanced gross profit flow through.

Adjusted EPS is $0.28 compared to continuing ops EPS of $0.15 in the first quarter of last year. Higher operating income, reduced shares outstanding and $8 million of discreet tax items all contributed to our 75% EPS growth.

Slide 4, titled Adjusted SG&A Bridge. One critical element of our turnaround plan includes the significant deployment of resources to support long-term growth. This means that achieving real cost productivity in some areas and redistributing these cost savings to meaningful growth opportunities. On this page you’ll see our SG&A bridge from 1Q07 to 1Q08, highlighting the cost reductions and our re-investment levels. We have reduced costs in both our Partnered Brand segments and corporate overhead. Cost reduction initiatives in both these areas totaled $42 million in the quarter.

To support the build out of our direct brands we re-deployed over $37 million in retail expansion, critical people, retail infrastructure and marketing. The acquisitions of Narciso Rodriquez, the launch of our licensed Usher fragrance, as well as foreign exchange rates all contributed to our increased SG&A spend across the company. We are extremely focused on right-sizing our general and administrative costs while investing in our future growth drivers. We have already achieved our $150 million cost reduction goal for 2008. We are now executing upon the remaining $115 million SG&A cost out commitment by 2010 which we outlined last year. Again, we are extremely focused on achieving this commitment as well as realistically pursuing other cost out opportunities.

As a reminder, on our fourth quarter conference call we outlined the incremental re-investment of cost savings spanning 2008 to 2010, i.e. reducing costs to fuel future growth. Of the $265 million cost plan savings approximately $175 million will be re-invested in the direct brand segment. Specifically in marketing, retail infrastructure and G&A support.

Slide 5, titled Direct Brands Q1 performance. We are very pleased with the strong sales growth in our direct brand segment in the first quarter especially given this very challenging consumer and retail environment. Total sales for the quarter were up 28% to $620 million. Up 19% excluding the impact of foreign exchange rates. While gross margins were flat across this segment our SG&A investments led to a decrease in operating margin. As we outlined in the last slide, these critical brand building investments in infrastructure, retail expansion…we opened 103 stores since 1Q07, and marketing. We invested over $22 million in 1Q08. All will continue to support and fuel future growth for this segment. Juicy Couture had an exceptional first quarter exceeding our already robust expectations. Total sales across all channels and categories were up 58%. Comp store sales rose 15% with strong performance across both full price and outlet stores.

Lucky retail accounts were a bit soft for the quarter down 5% but in line with other specialty retailers. Our results were partially impacted by out-of-stock inventory, but we have already worked quickly to resolve. Bill will elaborate more on Lucky’s performance later in the call.

Kate Spade which we are now comping for the first time on this call had a positive first quarter expanding sales 44% and increasing their retail platform to 18 stores since the first quarter of last year. We are particularly pleased with their outlet and international results. While overall comps were down 2% we believe we made significant progress in laying a foundation for future growth.

Global sales for Mexx were up 20% for the quarter, up 5% excluding foreign exchange and down 5% if we exclude the impact of the extra fiscal week in the quarter. Retail accounts were down 13%. Mexx Europe had a very challenging quarter with retail accounts down 18% offset by wholesale performing well. Given Mexx Europe’s difficult performance especially in March, we are forecasting their sales and operating margins conservatively for the remainder of 2008. Mexx Canada accounts for around 18%. These results were primarily the result of a late start to spring as well as product issues particularly in Women’s apparel.

Moving on to slide 6, titled Partnered Brands Q1 Performance. As expected total sales for the first quarter were down 17% to $478 million. There were a couple key factors contributing to this difficult result. First, the Liz Claiborne and Claiborne brands continued to under perform with sales down significantly for both. We believe hiring Isaac Mizrahi and John Bartlett to redefine and re-inspire these lines are the right action. But they will not impact results until the spring of 2009. In the meantime we are planning the remainder of 2008 conservatively especially given the challenging macroeconomic and retail environment.

Second, closed brands from our strategic [inaudible]. We expect to completely unwind the Sigrid Olsen brand and Dana bridge business by the end of Q208 with the majority of shut down activities occurring in this first quarter. As a reminder, we announced this past January that we will be launching the Dana Buchman line at Kohl’s in the spring of 2009. It is very important to note, however, that we did have a few very solid bright spots in this segment. Liz & Co., the DKNY Men’s jeans business and Monet which all grew sales in the first quarter of 2008.

Operating margins grew 230 basis points year-over-year reflecting the impact of our cost initiatives with savings in both manufacturing and distribution processes as well as improvements in inventory management. Similar to our direct brands margin this result is far below our long-term goals. Continued cost reductions and improved gross profit through better designs and supply chain management will allow us to significantly increase our margins in this segment.

Slide 7, titled 1Q08 Balance Sheet. This is a snapshot of our key balance sheet metrics. Our business continues to generate very strong cash flow from operations. Our successful management of working capital and realized cost savings support our projecting cash flow from operating activities at $350 million for fiscal 2008, an increase of approximately $75 million versus last year. Given the tough environment we are very, very pleased with the cash result.

We ended 1Q08 with inventories down 18%. Down 22% excluding the impact of foreign exchange rates. My next slides provide a detailed inventory analysis. Capital expenditures were $193 million for the last twelve months. Most of this capital spend were dedicated to the addition of 103 specialty and outlet stores. We are forecasting total capital expenditures of $210 million for fiscal 2008. Our total debt-to-capital ratio was 40.3% compared to 25.7% last year. This increase reflects several factors. The impact of the year-end 2007 goodwill impairment which added approximately 630 basis points, foreign exchange rate of our Euro to debt which added another 210 basis points and capital expenditures, share repurchases and acquisitional entertainments over the last twelve months.

Moving on to slide 8, titled 1Q08 Inventory. On our third quarter 2007 earnings call we committed to thoughtfully and aggressively liquidating inventories to put in place tight internal controls to manage inventories throughout 2008. We ended the first quarter with inventories down 18% compared to 1Q07 despite foreign exchange rates increasing inventories by $24 million. Direct brands inventory increased in line with our expanded retail footprint but we remain extremely focused on managing Partnered Brands product in flow and reducing ongoing levels.

Now we will provide an overview of our brand highlights and initiatives.

Bill?

William McComb

Let me walk you through the direct brand segment brand-by-brand to discuss what we are seeing and what is coming.

Let’s start with Juicy. Juicy’s strong revenue growth came across all product categories and channels. The comps were strong in both our full price and our outlet formats. In the wholesale channel the brand continues to be a top 3 contemporary vendor to Neiman Marcus, Sacks, Nordstrom and Bloomingdales. Going forward we have many initiatives in 2008 planned to excite the Juicy customer. We will be opening 25 retail stores and 16 outlets this year. We have mentioned the New York City 5th Avenue store which we think can generate in excess of $15 million in revenue. That will be opening towards the end of August.

We have plans to increase category penetration across the line with our wholesale partners and we are going to re-launch the www.Juicy.com website during the third quarter of this year. We are very excited about that initiative. With the re-launch of the site the consumer will see Best-In-Class creative building highly emotional content, more interactive branding elements to build the online Juicy community like fashion blogs from Pam Ingela and a richer, more expansive product assortment than what they can get now. We will also make increased marketing investment behind the brand online.

Let’s slip over to Lucky brand. At Lucky double-digit revenue growth during the quarter was driven by the addition of 38 new stores and 8 new outlets in the last year. The negative comp for the quarter was largely self-inflicted. We are seeing a positive trend in denim in all the businesses and Lucky saw solid traffic this quarter. Unfortunately our end-of-year denim promotion oversold the inventory and combined with cautious first quarter inventory planning we were chasing the denim that we needed with stock not returning on core styles until mid-March. When the inventory arrived store-by-store we saw sales rebound and it lifted the total shop. So we like the impact as well that we are seeing from handbag and jewelry in the stores and at wholesale.

We have talked a lot on previous calls about expanding high growth potential categories coming this fall including a focus on Women’s tops, on fashion denim and on accessories. We continue to expand the franchise opening between 20-25 specialty stores this year and 15-20 outlets. We are confident from the consumer research which continues to mount that we can make these stores even more productive in terms of same store sales growth. I’m patient with the comps on this brand for several reasons. For one we have strong consumer research that validates the relevance of the brand itself. That very research is also guiding us to what our consumer wants. I am also very bullish on the executive team at Lucky brand which includes a new leader in design, a new marketing Vice President, a new world-class planning and allocation executive, scores of veteran Lucky professionals and a leadership duo that includes Liz Munoz as President who has been a design and merchandising leader at the brand from the start and Kevin Bailey who brings deep operating retail and brand management experience. This group is only getting started and they have got a lot to work with there.

Let’s flip over to Kate Spade. Kate Spade is equally brimming employees for growth. Craig Levitt joined as Co-President and COO partnering with Deborah Lloyd to lead the company. The brand is growing beautifully in wholesale again with a strong presence at Bloomingdales, Nordstrom, Lord and Taylor and in Asia through partners. We opened 18 additional stores and outlets since acquiring the brand and we are happy with their performance and the consumer response. The fall and holiday lines have received rave reviews by our key wholesale partners but the true re-stage of the product is yet to be seen. Deborah began with the brand in November and the impact she and her team are having will be seen in the spring 2009 line.

Now that both of the co-Presidents are resident at the brand they are leading their team, developing the priorities for category and international expansion and reviewing the retail expansion plan door-by-door and concepting the future of the Jack Spade men’s line.

Okay so let’s now talk about Mexx. I realize many of the analysts that cover our business lack first-hand knowledge of the brand outside of the small brief exposure here in the U.S. The Mexx brand is very strong in Canada and we run a very proven and successful retail operation there under the Mexx name. In Europe the company is a turnaround story in and of itself. You’ll recall that we have over 500 retail stores spanning western and Eastern Europe that we operate ourselves or in partnership with third parties. The brand has been suffering from product misses and a fragmented marketing message for a few years.

In addition the company has been run for years at a low EBIT margin which represents a very significant opportunity. The new management team there has take significant action to launch a new brand image this fall, a new streamlined product aesthetic based on its contemporary, effortless European heritage. That product comes to market this fall as well. They have also taken actions recently to cut costs including an announced exit from the U.K. and other dilutive regions, closing down unprofitable wholesale distribution, all while focusing expansion efforts in eastern Europe where the brand is growing and performing extremely well. We continue to aim for a 500 basis point improvement in the retail profit margin but turning comps are now the key to getting that done.

I have said that we acknowledge the challenge ahead of us on this brand but we like the geography, we like how the consumers view the brand in its core markets and we believe we can stage a brand and financial turnaround at Mexx.

So that is what is happening in Direct brands. Dave why don’t you talk about Partnered Brands?

Dave McTague

Thank you. Allow me to begin by restating the reality of the retail environment. Department stores are promoting heavily, conserving their open to buy and managing their inventories carefully. Consumers are seeing significant discounts in all stores. The fall department store environment will continue to be tough especially on our declining brands. We are carefully watching our exposure to order cancellations and mark-downs.

In terms of our own orders the fall Liz Claiborne collection which reflects a continuation of the past few seasons’ design approach came in under a conservative plan. So as we navigate the market this year there are two major areas of focus for us here at Partnered brands.

The first is all about pushing our momentum brands forward. This includes Kensie, DKNY jeans, Monet and Liz & Co. all of which posted very good results here in the first quarter. These growth initiatives include adding product categories and licenses under the Kensie name, expanding the Missy, Juniors, Men’s Denim and Men’s Sportswear lines under the DKNY brand and it includes accelerating the Money global expansion. These four brands account for nearly 30% of the Partnered brands segment sales up from 16% a year ago on continuing operations basis.

The other path we are pursuing is the staging of 2009 re-launches on our declining business which include Liz Claiborne, Claiborne Mens wear and the Kohl’s businesses. These initiatives have been announced previously and we are now fully developing product, brand, marketing and partnering strategies for all three initiatives. For years we have talked about getting better at door level assortments. We have deployed specific initiatives including multiple pilot programs with several of our partners to begin to maximize this sales and profit opportunity including allocating more people resources to merchandise planning and product allocation.

As examples, we are continuing to work with Dillard’s on flow-back execution to fill back into the right product by door style, color and size. We also plan to support Macy’s new “My Macy’s” initiative which includes better vendor data sharing and a new regional organization created to drive same store sales growth by enhancing both better localized assortments as well as store line execution.

We now have a narrower portfolio of brands, a more efficient cost base; we have momentum brands that have clear growth opportunities and now clear strategies that are underway to reverse our declining brands. We are very serious about actively supporting collaborative product planning to maximize sales and profitability. While we won’t claim success in 2008, with careful execution we are on course for significantly improved results in 2009.

Bill?

William McComb

Thank you very much. Okay, I think that wraps the call. At this point we’ll open it up for questions and answers. I think we have the first question coming in.

Question-And-Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Jennifer Black with Jennifer Black & Associates.

Jennifer Black – Jennifer Black & Associates

I wondered if you could talk a little bit and give us some color on how you reorganized your sourcing structure and any comments you have on raw material prices in Men’s woven and leather. Then I have a follow-up question.

William McComb

What I’ll tell you is that we are close to making some announcements that will clarify your first question. What I’ll tell you is with the moves that we’ve made in restructuring the organization around our new strategy we have been quietly analyzing what the most effective and competitive structure is for sourcing. We will have announcements to follow probably in the next month on that specifically.

Mike, why don’t you make some comments on that and then specifically answer what you know about the last question which is specific commodity pricing?

Michael Scarpa

We’ve undergone certain initiatives around structure. We have reorganized the sourcing organization into brand aligned global teams. We have been working very closely with Dave McPhee in the design and product development and merchandise planning group to ensure that we have basically put into place some seamless processes which we think can provide some real dividends as we move forward into the latter part of the year and the beginning of 2009. As far as costing and material costs obviously we have seen inflation hitting. We have seen the appreciation of various currencies that we do business with. Obviously we are looking to mitigate those costs. We are doing that basically by migrating some of the sourcing into countries other than China. Countries like Vietnam, Indonesia, Cambodia, we are also looking at Jordan and Egypt. We have also besides those sorts of activities we have re-looked at some of the design processes and really are looking at a focused approach to the way we are developing fabric and fabric options. We are also putting under the microscope things like SKU discipline and line architecture which we think again will provide dividends for us as we go out in 2009.

William McComb

I would tell you, Jennifer that a clearer statement of how we intend to drive more advantage out of our sourcing organization is probably to be announced in the weeks to come.

Jennifer Black – Jennifer Black & Associates

The next question I have is I wonder if you can talk a little bit about your reallocation of retail stores and how you see the real estate environment both domestically and abroad?

William McComb

When you say the reallocation of real estate I assume you mean some of the closures that we had in the Sigrid Olsen brand? Is that what you are talking about?

Jennifer Black – Jennifer Black & Associates

Yes.

William McComb

There were only a few of those doors that we reallocated. The brand owner is working with our central real estate group that understand locations around the country very, very well and went through and analyzed the fleet of 50+ stores from Sigrid Olsen and identified a handful, and I mean between 5-10. I think around 8 doors that made really good sense and had a very good, compelling location, had the right rent structure with great adjacencies that were on brand and Kate picked up a couple of those. I think it was mainly Kate Spade. That is really it as it relates to real estate reallocation.

We have a very good process where the centrally run real estate group which reports to Tom Fitzgerald works clearly with the brand owners on a 3-year out time line and they basically lock in the locations that are strategically right for their brand. So I would say that played a small role in the expansion efforts that we talked about earlier in the call.

Outlets are included in that as well and I think you have heard us talk a lot about our outlet strategy where in many cases we were, and we are still in the early phase of it, downsizing what were large 15,000 square foot Liz boxes in some great centers in great locations and carving out other mono-brand opportunities there such as a Lucky or a Juicy outlet. When I say carving it out it means a completely separate front entrance and a completely separate free-standing store. Again, taking advantage of a good lease position, a great real estate location, and that is about it. Does that answer your question?

Jennifer Black – Jennifer Black & Associates

Yes except do you see rents coming down with so many retailers closing stores? I’m just curious as to your thoughts about domestic and international rents.

William McComb

Not really. The premium locations, the really great spots…we’ve been pretty committed and we are very, very, very choosy door by door, center by center. This isn’t about getting in a center it is about getting the right spot in the center. We don’t see a lot of movement yet. I think that you are foreshadowing and speculating that it probably will change. It might happen. We’re not really seeing it yet right now and that is because the really good, like I said, there still is a lot of competition for the absolute best locations. We’re still early, early, early in the lives of many of these brands and so our door count is still small and it is critical that these first ones be the right ones and so we are being very choosy.

Jennifer Black – Jennifer Black & Associates

One apparel question, I wonder if you have any comments on the Juicy intimates and do you have any comments? That seems to be really exciting.

William McComb

It is really exciting. Everybody is excited about it. Our own store managers and the wholesale customer as well. It is a great line. It is a perfect fit for the Juicy brand. I think it is just another great example of the power of the brand. When you take it into a category boom off it goes. It is a great fit.

Jennifer Black – Jennifer Black & Associates

Would you foresee opening intimate apparel stores for Juicy or is it way too early to call that?

William McComb

It is too early to call it but we like your creative thinking. Honestly the issue with Juicy is you could take that line of reasoning down a lot of different areas because category by category when we say this growth is coming across all product categories it really is. That in particular could be an interesting one. Probably too early to call but keep the creative ideas coming Jennifer.

Operator

The next question comes from the line of Virginia Genereux with Merrill Lynch.

Virginia Genereux – Merrill Lynch

Let me ask you guys a little bit about Mexx if I could. Did you say, Bill, that wholesale in Europe is performing well and it is retail where there is most of the weakness?

William McComb

No. It is actually wholesale at Mexx is also challenged. I highlighted comps and the fact that a big part of our mix was softness at retail but wholesale has been soft too.

Virginia Genereux – Merrill Lynch

Is it still sort of 2/3 wholesale and 1/3 retail in Europe?

William McComb

It is closer to 50/50.

Virginia Genereux – Merrill Lynch

I think you guys also said that the margin improvement there was really about a lot of stuff under your control and that you didn’t meet comps to really improve. What deteriorated sort of quarter-over-quarter over the last several months?

William McComb

You are right about that. That was really our view. What that meant was we actually had a scenario where we had some room to comp down pretty significantly. We saw really significant comp misses, which you saw on the chart there that Andy presented. It was traffic. We see in the markets in Germany, for example, some real softness and even in northern France in the apparel market in general. Clearly we are getting hit with a less than fair share of it. I think there is a compounded impact of several seasons of product miss. We have talked about re-staging the product and the marketing and positioning of the brand beginning toward the end of July this year. That can’t come soon enough. I think it is going to take some time to build. We like a lot what we are seeing in the product there and the wholesale reaction has been very, very positive to that product. But it will take some time for it to bounce back.

In addition the flow through of cost initiatives which they have undertaken aggressively here in the last five months is yet to come. It will come. We stick to the consumer. We are studying the brand in Mexx’s core market and the brand is a very strong brand. Our execution has been poor and that is what we are fixing now.

Virginia Genereux – Merrill Lynch

It seems to be that Mexx is a big business, $1 billion two or three, and if your margins are off 100 basis points there that is $0.08 or $0.09 cents…is that the reason for the lower view? Kind of Mexx and what it sounded like lower orders of Liz Claiborne by U.S. department stores?

William McComb

The approach to guidance is I think the way we have talked about it I put it into two categories. One we said we have on an adjusted EPS basis a very strong first quarter and yet we are anticipating a very, very light second quarter. There is no question that the Mexx first quarter performance for forecasting purposes we are not being bullish about the second quarter. We are being more bullish about the third quarter. Mexx also has incredibly…their profit flow is always extremely light in the second quarter. So there is no question that Mexx is a big part of our second quarter story on top of the fact that there is a one-week shift we talked about before and we’re being conservative in our planning with department stores.

I think that the $0.10 guidance shift which frankly the analysts said had gotten to in the last month anyway reflects a continued view that we are not out of this yet. The U.S. market is not from a consumer perspective we are not through it. I think all of us are relying on a certain strength still from the third and fourth quarter and with reduced visibility to what is going to happen and knowing that we hear department stores managing their open to buys more carefully we clearly have earnings levers here that we can pull and we have a business plan that we are executing but our Monte Carlos and scenarios are down $0.10 on each end. On the high end and the low end. So it is a combination of both of those impacts.

Andrew Warren

When I think about the year and I think about our plans where we are doing very well is we are doing very well in cost out. We are doing very well on inventory management. We’re doing very well on getting through the brand [inaudible] and those are brands that are important for us to not have on the portfolio and to simplify. That all has gone well and continues to go well. I think the areas of challenge for us clearly is Mexx retail and even though we planned Liz down conservatively especially in the fall of 2008 the environment is slightly worse and that creates some pressure as well.

So there are some areas that are going very well and on plan, even exceeding our expectations. There is a couple of spots that are difficult.

Virginia Genereux – Merrill Lynch

In terms of Liz and the orders there you came out of the fourth quarter saying we provided a lot of mark-down support in part to maintain our space in advance of this Isaac Mizrahi stuff for spring 2009. What is your confidence level if back half orders were softer? What is your confidence level that spring 2009 orders won’t take another step down for Liz and the John Bartlett stuff?

William McComb

I think it is all in the perceived execution.

Dave do you have any comments on that?

Dave McTague

I think to Bill’s opening salvo our visibility in what is going to happen in the balance of this year is somewhat limited. We are managing literally daily on what our execution is relative to orders and inventory management. I think the question is more about real estate in stores going forward. Everyone has an intention to support these brand initiatives in 2009 and quite frankly I wish we could do them in fall 2008. I think it will probably be collaborative planning as it always is. We’ll look to be in doors that we can run a profitable business. In light of the fact that the retail community continues to accelerate mark-downs, in some cases goods are on the floor only a week and they are executing mark-downs to try and stimulate some customer traffic. We don’t have control over those things but what we do have control over is intelligent planning as we get into spring 2009 and the number of doors that we want to be in. I think that it is as much about where we want to be as working closely with our retailers.

William McComb

I think it is fair to say too that the department stores want news. They want marketable product. That is the story going into both the John Bartlett line and the Isaac line. I think we can count on a lot of marketing support from edit and magazines. A lot of buzz about it.

Virginia Genereux – Merrill Lynch

Andy, how much more do you guys have in re-structuring charges? At what point do you violate any debt covenants? The equity base has shrunk here a lot.

Andrew Warren

Yes. There are two points there. First we are working through the re-structuring plans and the $[inaudible] of restructuring costs in the first quarter it is a large number. It is related to lease terminations, continuing to pare down our work force. As we shut down brands and shut down some of our unproductive stores there is costs associated to that.

There will still be some of that happening in the second quarter probably in the range of $40-45 million of re-structuring costs as we really continue to accelerate those actions. I anticipate the second half being much less so with regard to those kinds of costs as we execute the plans and get some of that behind us.

With regard to the covenants there are two covenants. The fixed charge ratio and the leverage ratio. For the first quarter both are fine. We feel very comfortable with what our ratios are and where those covenants stand today. As we project out [inaudible] testing we look at that and monitor it very carefully and feel comfortable.

Operator

The next question comes from the line of Brad Stephens of Morgan Keegan.

Brad Stephens – Morgan Keegan

Can you first of all give us an idea of how much the extra week benefited you from a sales and earnings standpoint? Secondly, the SG&A and up 8% year-over-year is that the kind of run rate we should look at for the year or will there be fluctuations going forward?

Andrew Warren

On the first one it is about $90 million of net sales. Call it about $0.02 of impact that extra week. Regarding SG&A there is no question that we want to continue to invest in direct brands despite the difficult environment. The opening of stores that meet our target thresholds, the continuing investment in infrastructure, the continued investment in marketing. Yes, we do plan on continuing those things as we invest in the future. We are extremely focused though on executing the remaining $115 million plus of cost out that we committed to. A lot of plans in place and detailed executions going on today. So I think there will be some further offsets of some of that investment in the direct brands portfolio. I have no intent of slowing down our investment there as we continue to invest in the long-term growth opportunities.

William McComb

We have said that we have another $100 million to go in cost out between now and early 2010 and when we talk about accelerating that is the number we plan to accelerate. We had said that when we take the cost out that we have achieved today plus that additional cost out it totals approximately $265 million. To answer one of the questions you are getting at, all of this we had said in our last call, that all of that $265 million the total direct brands reinvestment would total about $175 million. So there is approximately $90-100 million net reduction that will take place as we execute this strategic plan.

Brad Stephens – Morgan Keegan

Bill, I guess going to Lucky you said there was some self-inflicted issues of why comps have been impacted. When I kind of look at your store base here you are definitely probably past A locations, well into B locations. What gives you the confidence you need to keep going down that we are not at a saturation point on Lucky?

William McComb

You are probably talking about Manhattan which does not reflect the penetration we have in other markets. So, we would actually tell you there are still A level locations we will be looking to expand into. So we’re not 100% there. The other thing I’ll tell you is there are some of what you would call B level locations where with the right size box which Lucky has a very productive box…on average 1,900 square feet with four wall numbers that you have seen that are in the mid 20’s with a range of 20-30 on a range basis. One of the things that happens with Lucky is we quickly penetrate with a very fixed merchandising approach and category approach we have had in the past we very quickly peak to very productive and planned levels of productivity.

Why we pitch the story very, very well about the changes in merchandising assortment, all of our research suggests that is how we are going to end up getting a higher share of the wallet from our consumer. She is wanting to buy more product categories than we are serving in our stores. When I say that we have tops but we don’t have it in a meaningful way. I think you guys have studied how Guess went from a nearly 1:1 tops to bottoms ratio to a nearly 4:1 and with it tremendous growth in their business. That is what needs to happen with Lucky.

In our B plus locations which we do very well at they might be as large as 2,200-2,300 square feet those stores perform very well. So I’m not so sure we feel at this point we are tapping out real estate and more over the real focus at Lucky yes we have expansion plans but the real focus is on comp door improvement and that is back to the consumer and the merchandise.

Brad Stephens – Morgan Keegan

When is the Isaac Mizrahi initial product shift?

Not Identified

That shift is for spring 2009. So it is a February floor set.

Brad Stephens – Morgan Keegan

Is there anything risk as we get into November/December that the retailers just turn off the spicket and say we don’t want to completely fresh floor for February? That could cause some pressure on your guidance?

Not Identified

I think it is too risky for the department stores to do that with the floor and with the inventory in that 6-8 weeks. What are your thoughts Dave?

Dave McTague

We are strategically planning to come into Q1 as intelligently as possible. Our receipt flow by month in the back half of the year is engineered to what we think the consumer is going to be shopping for. It is a little lighter on the collection side. It is more specific key item driven. We are monitoring our inventories incredibly closely as we are anticipating what we think the sales trends will be and we want to come into the season clean.

William McComb

That said that 6-8 weeks that you are talking about is where everybody makes money. We’re pretty critical resource even still and I think that the second week of June when we have holiday resort market it is going to be very important there is product in that showroom that they need to order. That certainly is our strategy. It would be bad timing for that to happen. That is when everybody is making money.

Operator

The final question is coming from the line of David Glick of Buckingham Research.

David Glick – Buckingham Research

Just a follow-up for Dave. Maybe some color on the progress you are making on the new Men’s and Women’s Liz Claiborne and Claiborne lines. Have you had a chance to preview any product? I don’t know if you are far enough along in the development process to preview with any retailers. Any more defined sense of the volume level for the launch here relative to kind of this wind down? Any color on that would be helpful.

Dave McTague

We are in full blown product execution as you would imagine knowing the calendar as well as you do. We are at proto stage right now already for spring. We are quite enthusiastic about it. We have had a few key folks take peaks along the way as we are trying to be very, very collaborative on the John Bartlett Claiborne line. We have had some retailers come in and we have shared literally right off of concept boards and fabric, etc. and sketches as we have with some of the important fashion industry leaders, non-retailers but fashion leaders in press, etc.

All indications are that everybody is very, very enthusiastic. We are moving from a fairly moderate product to a more design focused product with a tremendous amount of quality improvements as well as signature details, etc. You know better than anybody we are going to be very aggressive in product innovation here.

So far so good. As the months move forward we will probably quietly bring a few other folks in along the way. We also don’t want to ruin the surprise effect of our launch strategy in the August market for jewelry and handbags and then obviously ready-to-wear in September.

David Glick – Buckingham Research

So given where you are how do you evaluate the launch year on a relative volume basis for the launch year versus the wind down year that we are in? Is it too premature to start to think about that? Any insight would be helpful.

Dave McTague

I think we are going to be very conservative. Obviously we think the new product is going to perform better but we’ll plan much more conservatively. To Brad’s earlier question we are going to work feverishly to make sure that our inventory mix and currency coming into Q1 is positioned intelligently by percent of EDI replenishment. Also from a promotion standpoint to make sure we have a good mix of clearance. The unveiling of new shop concept and product I think will be explosive but we’re going to be conservative and assume that we’ll capture most of that growth if you will in the back half of 2009. I think we’ve got to get the new product in front of this consumer and let her vote. We think it is going to be very favorable and we are going to put everything we have got in the arsenal to make sure we are communicating with her from a media perspective and marketing strategies and literally Isaac himself the minute we get past 2008.

Operator

At this time I’d like to turn the floor back over to you.

William McComb

Thank you very much for joining the call. That’s it.

Operator

Thank you that does conclude today’s teleconference.

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Source: Liz Claiborne, Inc. Q1 2008 Earnings Call Transcript
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