Liz Claiborne Inc. Q4 2009 Earnings Call Transcript

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Liz Claiborne Inc. (LIZ) Q4 2009 Earnings Call February 23, 2010 10:00 AM ET


Bill McComb - CEO

Andy Warren - CFO

Thomas Grote - CEO, Mexx


Edward Yruma - Keybanc

Bob Drbul - Barclays Capital

Ben Rowbotham - Goldman Sachs

Kate McShane - Citi Investment Research

Spencer Hill - Credit Suisse

Chi Lee - Morgan Stanley

Mary Gilbert - Imperial Capital

Jennifer Black - Jennifer Black and Associates


Good morning everyone and welcome to the Liz Claiborne fourth quarter 2009 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 re-broadcasted 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 the prepared remarks. The slides and earnings release can be accessed at in the Investor Relations section. There are separate links to the slides for webcast 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 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 2009 annual report on Form 10-K under the captions Item 1A, Risk Factors and statements regarding forward-looking statements being filed today with the SEC.

Also, please note that during this call and in the accompanying slides and press release, net sales, gross profit, gross margin, SG&A, SG&A as a percentage of sale, operating income, operating margin, income or loss from continuing operations and EPS are presented on both a GAAP and a non-GAAP basis. Reconciliations of adjusted results to the actual results are 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 fourth quarter and full year 2009 and 2008 represent a more meaningful presentation of its historical operations and financial performance, since they provide period-to-period comparisons that are consistent and more easily understood.

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

Bill McComb

Thank you. Good morning, thank you for dialing into our 2009 fourth quarter and year end conference call. To reiterate what Julian just said, we are webcasting a presentation as an aid to our remarks today and this presentation will then be made available on our website in the investor relations section.

Here with me today is Andy Warren, our Chief Financial Officer as well as Thomas Grote CEO of Mexx who is in from Amsterdam. Mexx Europe was our biggest drag on profitability in 2009, that’s why I’ve asked Thomas to join us today to share his insight. Thomas joined Mexx in October of 2009 and has hit the ground running with the team and a plan to turn around and rebuild the Mexx business in Europe.

So, here is flow of the discussion today, you can see we have got an awful lot to cover. I’ll make some remarks to put the year in perspective, Andy will review the results of the fourth quarter and I’ll then discuss the results by segment and then we’ll turn it over to Thomas who will comment on his vision for Mexx Europe and his turn around plan there. And finally I’ll walk you through our key priorities and operating assumptions and goals for 2010.

So before we dive into the detailed discussion on the quarter and year end results, I want to take a moment but 2009 in perspective. As we exited fourth quarter of 2008 you recall that our number one priority was making sure that we have the liquidity necessary to continue moving forward with our business plans. Our existing loan agreement was due to expire in October of 2009, so at the height of the credit crunch, we needed to renegotiate that facility. And as a result of the increased liquidity risk we were facing, our stock sold off dramatically hitting a low of the $65 in November 2008.

At the same time consumers were retrenching and we saw a double digit declines in comp store sales in all of our direct brands. And then in the midst of the economic melt down we were attempting to re-launch the Liz Claiborne brand in our legacy department store channels. Department stores like everyone else in retail we're reacting to the short changed economy by discounting heavily in fourth quarter 2008 with reduced inventories well planning receipt down substantially for 2009.

It became clear early in the year that we have to act quickly and aggressively to take more extreme measures on our cost structure even after two previous years of restructuring and that we’d have to adapt our brand strategies to deal with the economy, in essence we focused then on three major priorities.

Priority one, securing adequate liquidity and emphasizing cash generation, we were able to secure an asset back loan agreement in January of '09 in a very difficult environment we then drove a cash is king culture across the company placing intense scrutiny on our receivables, payables, inventory, capital expenditures and our fixed and variable expenses in order maximize cash flow. Throughout 2009 we worked closely with the bank group to secure less restrictive amendments to the ABL as our financial position improved quarter-to-quarter.

The second priority, reassessing the organization and our expenses resulting in yet another round of restructuring with even deeper cost reductions and move to make more of our ongoing cost structure variable versus fixed and strategically rethinking some of the internal capabilities such as our approach to sourcing.

And priority three, rethinking brand execution, realigning the product offer in the second half to adapt to the new consumer demand patterns and price value sensitivities. We are strengthening our brand positioning and in some cases making needed management and or distribution changes to addressed areas of the business that we are not moving in the right direction.

Page four, so in that context I have to say that we accomplish some remarkable things last year even in the midst of this great recession, while the operating loss with significant given the demand shock, we took some radical steps to write the ship and insure a path not only to profitability, but towards achieving our vision of honing strong brands that can grow for years to come.

Time back to our three key priorities for 2009, our accomplishments include number one, securing adequate book liquidity. We managed a large group of 17 global lenders each with varying points during a period of great uncertainty in the credit markets to achieve the required liquidity to run the business. Beyond operating measures to generate cash, we left no stone unturned. We tirelessly lead lobbying efforts in Washington D.C. for the net operating loss carry back extension to five years.

A campaign that ended in victory when Congress passed the measure on November 6th, and as you will hear today the passage of this legislation further transforms our liquidity situation, and now enables us to begin restructuring our banking facility with terms we believe will be more favorable. Andy will discuss this more during his remarks.

Number two, we assessed our organization and cost structure. One of the biggest steps we took was exceeding our own sourcing offices in Asia and partnering with Li & Fung across the portfolio. This enabled us to move from a fixed to a variable cost structure around this capability. It also brought us focused management in Asia of our vendors and our processes thereby intensifying efforts to expand gross margin. We also took a hard look at our distribution infrastructure. We now have one major distribution center in the U.S. down from a peak of 10 DCs [ph] in 2006. I'm proud to say that our people managed these transitions flawlessly.

All in all, our adjusted net cost reductions are more than $250 million; spend every brand, every function and the corporate center.

Number three, adapting our brand strategies to the new normal. In a year full of headline making events for us, the biggest headline came in October 2009 when we secured long-term partnerships with J.C. Penney and QVC for the Liz Claiborne and Liz Claiborne New York brand in the United States and Puerto Rico, two progressive large scale direct marketers that have agreed to clear commitments in the years ahead.

This critically important strategic move eliminates both the debilitating losses and the volatility inherent in our legacy model and gives the brand highly visible distribution for the millions of women that what to buy from the brand. At the same time we pursued new product initiatives in our U.S. direct brands based on learning from holiday 2008 and spring 2009.

These product initiatives drove fourth quarter ’09 adjusted profitability at Juicy, Lucky, Kate Spade and Mexx in Canada. Last but not least the new leadership we attracted to Mexx Europe and Lucky brand jeans probably says the most about the direction we're taking the company.

Both Thomas Grote Couture at Mexx and Dave DeMattei at Lucky are recognized achievers from specialty retail that surround themselves with extraordinary retail talent. We're already learning from these leaders and their influence on all of our businesses will be profound and transformational.

So page 5. With these achievements we enter 2010 in much, much stronger shape as a company and while I'm not providing specific earnings guidance for the year, I am able time say we will see significant improvement in the company’s annual earnings profile by year end 2010.

Moreover with 2009 and the changes we made behind us we're now entering the next phase of the LCI turnaround. This is the phase that’s truly about execution. From 2007 through 2009 we went through multiple reassessments and restructuring. As a result we're now in a position to establish a framework for 2012 threshold goals.

These goals have been vetted by our board of directors and will form the basis for management performance reviews and compensation going forward. There are three key adjusted goals. First achieve EBITDA margins of 10% plus by the end of 2012; second, generate $600 million or more of accumulated operating cash flow from 2010 through the end of 2012 and third, deliver 2012 earnings per share of at least $1.

This is not a forecast or guidance. We can and will strive to beat those goals but we have identified these as thresholds to which we will held accountable. To that end I believe 2010 puts us on a path to get there but before talking more about the priorities in operating assumptions for 2010, Andy Warren our CFO will now walk you through the details of our fourth quarter and full year 2009 results. Andy?

Andy Warren

Thank you, Bill and good morning everyone. I'll now walk you through the fourth quarter adjusted results and our key financial metrics. As you can see on slide six, our results were very much inline with the operating assumptions that we previewed with you back in November in our third quarter conference call.

US comps were roughly flat overall with Kate Spade outperforming and Lucky underperforming. While October and November comps were both much better than the first nine months of the year, December was a challenging comp months where gross margins were more robust. Bill will elaborate on our comp performance and sales later in the presentation.

We continue to over deliver on cost activity commitments with total SG&A down year-over-year another $32 million. Operating profits sequentially improved versus the third quarter 2009, increasing $18 million. Strong gross profit expansion mainly in our domestic based direct brand segments drove this improved result. In a few minutes, I will walk you through our fourth quarter gross margin trend by segment.

Balance sheet progress was also significant. Inventory was down 31%, accounts receivable down 22% and very importantly our ABL borrowing were down $167 million with total debt reduced by 86 million. Lastly we ended the quarter with significant $ABL availability of 222 million. As you heard from Bill, we started the year with liquidity concerns and despite a very tough credit and operating environment we were very successful in managing cash and reducing debt through out the year.

Moving now to slide seven, let me quickly walk you through the adjusted income statement. Sales decreased 15% across the fourth quarter 2008 primarily due to decreases in our Partnered Brands segment and declines in Mexx Europe. Gross margins increased by 270 basis points versus 4Q08 and SG&A was down 8%. The next two slides provide more details around these important trends.

Adjusted operating loss was $15 million which was $18 million better than our third quarter 2009 loss of $33 million. Operating margin decreased year-over-year to a negative 1.9%. Lastly adjusted EPS from continuing operations was a loss per share of $0.18, compared to a loss per share of $0.04 in the fourth quarter of last year.

Our fourth quarter gross margin is presented on slide 8. Overall gross margins dramatically outperformed our expectation as outlined on the third quarter conference call. We estimated then that gross margins would improve 200 basis points from the third quarter to the fourth quarter of 2009.

We actually grew margins over 400 basis points driven by improved retail performance, less wholesale markdowns and the benefit of more effective sourcing. Domestic based direct brands Lucky, Juicy and Kate Spade combined had a very healthy gross margin of over 58%, up 426 basis points versus last year. These strong results were driven primarily by the mix shift to be more predominantly retail than whole sale as well as successful merchandizing strategies we deployed in the fourth quarter.

Partnered Brands gross margin was up 375 basis points. This result was driven by a greater percentage of higher margin LCNY products at outlets as well as our dramatically reduced inventory levels leading to less marked down dilution.

Looking forward, an even better news for Partnered Brand segment is that the JCPenney and QVC deals will serve to further strengthen the gross margin trend in 2010, especially in the second half, as we are aligned with JCPenney via gross profit sharing model and with QVC via net sales licensing fee model.

Conversely, international-based direct brands, our Mexx business had gross margins down 566 basis points versus last year. While Canada maintained healthy gross margins, our Mexx Europe business was down approximately 660 basis points year-over-year. Both Bill and Thomas will provide perspectives later in the call on the drivers of this decline and our actions to reverse the trend.

Gross margin improvement across all of our segments is a critical goal for 2010. The brands have granular plans in place to improve gross margins, to enhance merchandizing strategies, retail execution and improve sourcing initiatives.

On slide 9, our year-over-year fourth quarter SG&A trend reflects our continued highly successful cost productivity efforts with SG&A down another 8%, down 11%, when you exclude the impact of foreign currency exchange rates. Throughout the year, we attacked the cost line in every function at every business. We reassessed every organization into aggressive actions to drive for real cost productivity. This is a tremendous effort to not only reduce costs but to also reengineer legacy processes throughout the company.

As you can see on this slide, throughout all of our 2009 conference calls, we have significantly reduced cost in our Partnered Brands and international-based direct brands segment and have dramatically reduced our total corporate overhead. At the same time throughout the year we redeployed resources to grow our domestic based direct brands.

On previous calls we outlined investments that we had made in our retail stores and infrastructure in order to capitalize on the great potential these brands have going forward. Given the tough environment however we are also looking for cost efficiencies at Juicy, Lucky, and Kate in order to reduce expenses without taking away from the consumer experience these brands offer and that’s what you see here in the fourth quarter with an $8 million reduction year-over-year and our domestic based direct brands SG&A.

The efforts and focus on controlling the controllable throughout 2009 was truly amazing and we will benefit from these costs going forward. For clarity, let me highlight that in 2008 our adjusted SG&A totaled just over $1.8 billion. We ended 2009 with SG&A of $1.45 billion and as we outlined in the third quarter conference call we plan no more than $1.46 billion in total SG&A for 2010.

I will now let slide 10 speak for itself. But let me highlight just two important metrics. First, cash flow from continuing operations over the last 12 months was $224 million. Despite the difficult environment and our negative earnings we still generated an enormous amount of cash flow in 2009.

This strong cash flow includes $100 million of total tax free funds throughout this part year as well as a $75 million associated with the Li & Fung sourcing agreement. Secondly capital expenditures were $73 million for last 12 months. As we had outlined on previous conference calls, we significantly scaled back our 2009 capital expenditures, versus the $194 million we invested in 2008.

Looking forward to 2010, we have planned our capital expenditures to be approximately $85 million. We expect to open approximately 25 additional retail and outlet stores globally.

On the next slide, we continue to aggressively and thoughtfully reduce inventory levels, both international and domestic-based direct brands inventories down 20% and 24% respectively compared 4Q ’08, reflecting reduced inflows and improved management liquidation of excess inventory during the quarter. Partnered Brand inventories were down 50% in the quarter, as they also managed inflows and reduced ongoing levels especially for the LCNY wholesale product.

These inventory levels will continue to decline over the next year as we liquidate current LCNY wholesale inventories and migrate to a new JC Penney and QVC models. We manage inventories aggressively and strategically throughout 2009. We are mindful that 2010 may be a different story but we continue to receive some written capital of benefits from the Liz Claiborne model transition in 2010. We also plan to drive sales and gross margin opportunities going forward, specifically in our domestic-based direct brand retail and outlet stores.

Moving now to slide 12, we successfully reduced total debt for $86 million versus to fourth quarter 2008 to $658 million, as you well know one of our critical financial and strategic priorities to de-leverage the company. We are highly focused on paying down debt and plan to continue this trend throughout 2010. We utilize a 100% of our free cash flow to reduce debt and planned no share repurchases or acquisitions in the near medium term.

I’ll walk you through our availability calculation of prior conference calls, so today on page 13 I'll simply update you on our numbers. At the end of 4Q our availability was a robust $222 million. Our actions are focused on keeping on availability high enough to meet our needs in any economic or operating scenario. Based on our current forecast, operating assumptions and the expected timing of the receipt of the tax free fund, we are accountable with our forward-looking availability forecast.

We have already begun discussions with our key banks; we've earned [ph] the potential of timing and structure of our refinancing of our AVL [ph] revolving credit facility. As a result of our improved liquidity profile and a stronger bank market, we believe that we will be able to refinance this facility with improved terms and including a longer tenure.

Lastly, on page 14 highlights the significant 2009 tax refund of $167 million we expect to receive by the end of this first quarter 2010. This refund will greatly enhance our liquidity position and further deleverage our balance sheet as we plan to use the refunds to pay down debts. This important Federal Tax legislation increase the carry back period for net operating losses from two to five years for losses incurred either in fiscal year 2008 or 2009. We're proud of the role that we played in the passing this American Recovery and Reinvestment Act of 2009. Bill and myself and our tax team led the retail coalition (inaudible) efforts and putting an intricate role in the campaign, meeting with congressional leaders and cabinet members to advocate the legislation. Thanks for listening and I'll turn the call back over to Bill, to talk about the segment results.

Bill McComb

Thank you, Sir. Okay slide 15, titled domestic-based direct brand fourth quarter performance. We saw good news with these brands. All three of the business, Juicy, Lucky and Kate Spade were profitable in the quarter on an adjusted basis. We deliberately pursued margin rate and margin dollars in these brands; given lower overall traffic patterns in malls and street locations.

Lower inventories and fewer promotions provided the offset yielding higher gross margins. Adjusted segment sales declined year over year by 3%. The wholesale channel drove the majority of the sales decline as our retail partners contracted inventory. Juicy wholesale shipments were down year-over-year plus overall our average unit retail prices across the brands were planned down as we widened the number of consumer choices at opening price points.

For the segment adjusted operating margin was up over 500 basis points and adjusted gross margin was up 426 basis points almost twice what we had projected. Here we see the benefit of Li & Fung in some cases and the integral role that merchandising is now playing in these brands to engineer better profit and turn profiles.

So slide 16, recent comp store sales, during our last call we showed you the monthly comp trend on the U.S. direct-based brands from August to October. As you can see here December was a tougher month in terms of the actual comp dollar metric due to a much lower inventory base and fewer promotions but as you saw before we achieved the profitability on all of these businesses and exceeded our profit forecast.

At Lucky brand we were way too conservative on inventory. The lower price denim offering at $79 and $99 blew out very quickly with most stores being out of key sizes and styles way too early. This is clearly attributable to a still maturing merchandising function at that division something that Dave DeMattei has already addressed with big steps in surviving [ph] in early January. The inventory situation of Lucky will dog us through first quarter 2010 where we are still too light on key sizes and key styles.

The comps in January were improved in all three brands especially important comp gross margin dollars in January are much improved year-over-year as we discounted less to clear through the goods. Regarding month to date February trends we are seeing similar comp store sales numbers as you see here on this chart in January and again still higher gross margins.

Page 17, this should be the last time you see a fourth quarter that looks like this in the Partnered Brand segment. As you know this was a transition quarter for the segment. We transitioned our Liz Claiborne product from our brands legacy department stores a very clean exit I might add and continue a slow climb to profitability in the Liz outlets as we moved to a full design for outlet product model.

Overall, segment sales were down 29% and the adjusted operating margin was negative 7.8%. We saw improvement in adjusted gross margin however across the brands up 375 basis points. Beyond the Liz Claiborne brand we generated a significant loss as well from the DKNY Jeans license during the quarter. We have another three years as licensee and apart from the current loss profile we liked the brand a lot and have certainly been very successful historically with the brand. We are working now to reduce the loss going forward but it's likely to stay under pressure throughout 2010 in light of the continued mark down pressure in that zone and our licensing terms which are fixed.

In terms of the outlet business, as the mix of goods have shifted in favor of the new product direction which carries higher prices and gross margins than what we call the old clearance good. The combined AUR in gross margin is rising in the outlet stores. With all good now at less than 16% of the mix, we have largely worked through our inventory of what we call liquidation-aged Liz. This means we should be able to perform much better with the cleaner 2010 in this channel. As new merchandise strategies hit the stores starting next month, we think we will make significant progress this year. Traffic needs to improve and we believe that it will in time as our visual merchandising and product offers deliver.

Page 18, this chart depicts the progress that we have made in addressing the business models and profitability of this segment. As you can see we believe we fixed the model on the core Liz business of wholesale. We are also very excited for the launch with JCPenney and the LCNY launch and QVC in August of this year. On the positive side the Monet business and our better accessories and apparel businesses at Curve [ph] continue to drive. We anticipate Kensie will swing from a modest loss last year to modest profitability this year.

On the work in progress side in Liz international the real estate transfer or closure through out 2010 of the 46 Liz outlets in Canada as announced in January will eliminate a loss produced or once the Liz assignments have been approved and completed. We are implementing improvements in our go-to market model for the remaining Liz International businesses and we are entertaining opportunities for further expansion of the Liz brand globally via licensing, an initiative that could offer real upside for 2011 and beyond. And finally the Liz outlet business is conservatively planned to loose some money this year but significantly less than 2009 and is now on a path toward profitability in 2011.

Page 19, international-based direct brands fourth quarter performance, so Mexx as you read in the press release this morning, this business had a significant negative effect on our quarterly corporate results. Once again I have to note that we have two very differently trending business within Mexx, the Canadian franchise posted an adjusted operating margin of 8% while comps were down for the quarter 7% there with pricing adjustment similar to what we made in the U.S. based direct brands. The Canadian business had healthy adjusted gross profit margins of 53%. The business which is mostly company controlled retail continues to post worldwide profit margin in the 25% range.

At Mexx Europe it’s a different story, it’s a story of major product miss while we waited for our new CEO and his team to arrive our interim team comprised mostly of Americans designed products that just didn’t work in Western and Eastern Europe. That on top of operating weaknesses prevalent throughout the company drove an adjusted operating loss of $44 million, a negative 31% adjusted operating margin.

So rather than hear me talk about the path forward, let me instead introduce the new Mexx CEO Thomas Grote, who will share what he has seen since arriving on October 1st, what his vision is and why he joined the company in the first place. Thomas?

Thomas Grote

Thank you Bill. Hello and good morning to everybody around the world. Just to introduce myself I am Thomas and I enjoyed more than 20 years of experience in the textile apparel business mainly we with Esprit Holdings Ltd. but also with companies such as the In-Wear group from Scandinavia.

I hold several management positions in product development of women’s and accessory products as well as in global sales and marketing functions. After having taken over the position as global chief operating officer in 2003, I was finally promoted in 2005 to run the entire Esprit brand as the brand president.

I decided to leave Esprit in early 2009 to take a new challenge with the restructuring of the Mexx business. Now you might ask why Mexx? For me, actually I would describe it like this. Mexx for me is one of the real world diamonds in the international apparel business, simply one of the most underutilized brands in the apparel lifestyle sector across Europe with excellent brand values specially in Central and eastern Europe, a well known and appreciated brand with the very unique I call it metropolitan casual heritage, just and that is a negative with an outdated business model.

So consequently, as Bill contacted me I was actually blown away by the idea to polish this roll diamond. Let me put this in a different perspective. I would describe that Mexx today is still an excellent and clean brand with an high appreciations amongst consumers and the trade community across Europe and Canada.

But as an outdated business model with what I call a sort of ivory (inaudible) design, not really linked to the consumer and market needs and actually, I can't say differently with a lousy product execution. That’s finally the real major reason I would say it’s the over shading problem that our sales productivity declined so dramatically over the last five years.

It will be my mission and the mission of my team in the future to implement a real sharp and market driven business model with an outstanding product performance which is consistently improving and start creating the metropolitan casual lifestyle brand in the affordable lifestyle segment.

We are convinced that it takes some time to fix the fundamentals in 2010 but we feel comfortable that we can strike for breakeven in 2011 and our plan is actually to grow the brands in the next five years beyond a $1 billion top line with a double digit healthy EBIT to go with it.

I will now guide you very briefly through the major strategic and operational changes of the Mexx business in the future which will give you a little bit of an idea how we want to achieve this. First is product development and again I would like to underline that this is really the major problem of the group.

If you look actually in Mexx Canada’s business, you see that this is quite a profitable business already today and Mexx Europe is really way behind it. Most important change moving forward is actually change the whole business model from a functional organization to a divisionalized and fully vertically integrated organization across the whole value chain.

With a principle of, I call it one hand responsibility, each product segment such as Women, Men use or accessories will be run by one individual experienced business manager in charge for all product relevant functions; design, production, product management, merchandised management for our own retail stores. You can see in this chart, it is actually reverse our former functional setup. This organization I know is a proven success model. We are right now in full speed to assemble the right team executing our strategy.

Key functions such as global product director, product division managers, chief designers for women accessories and men have already been filled with market experienced people with proven track record. Nevertheless we of course implemented already a new organized design research, clearly fixed the target group to design for, implemented a new line architecture in all segments. Focus in all activities will be on target relevant design, consumer driven and high quality products in our segment. That is really one of the major weaknesses of the Mexx brand today.

Secondly let me talk a little bit about the brands. Even though the brand has great awareness and high values in most of our markets, I think we saw an urgent need for a new, fresh and modern and unique corporate brand identity and a consistent and distinct image language to develop Mexx even further to a personalized loved brand. The new communication platform, ME&XX is a fabulous and recognizable slogan owned by us because it's actually consisting of our name.

Various marketing activities playing with our XX and new photograph style will enhance our brand identity and its all about showing consistency here because in the past we have been shaking from left to right which actually will stop now.

In terms of distribution policy for me, multi-channeling is the key. We are a brand and want to be strong as a high street retailer to leverage on our real good located store network. We have actually stores in the best locations in the world. Just we need to work in our productivity as well as using growth of the e-commerce sector which is by nature a very much growing sector and we have to build strong alliances again with good financially sound wholesale partners.

Since we want to leverage on our high brand awareness, our growth activities mainly will be focused on our core markets in Germany and Benelux where we think our brand is the strongest. And the growth potential in these two markets is significant and we have also quite a good infrastructure in place.

Number three, retail. As I said in our retail distribution, we have quite a well good located store network. We will clearly focus on improving the sales productivity as a result of our product improvement initiatives. Further on the introduction of a business oriented visual merchandising with clear volume table items display and a monthly in store and window communication plan will be added.

In connection with more consumer need based merchandise planning approach, we feel enabled to close step by step the productivity gap between us and the good performers in the market or in other words, we just have to manage to go back to the level Mexx had already in 2005 where our productivity per square meter was actually in the group of a better performance.

For e-commerce, basically in June we will launch our new e-shop with a new corporate Mexx look and a totally new assortment strategy. The store will be built as the biggest Mexx offer around the world to attract more consumers to come. The e-shop is a very important part of our business model targeted to a three digit million business long term.

Presently special focus will be to improve our conversion rate and increase the rate of repurchases. Still our store has roundabout 1 million visitors every month, which underlines basically the attractiveness of our brands. We are still lacking the good assortment strategy here.

So going forward, everything we are going to do will be loyal to our positioning as a metropolitan casual lifestyle brand offering a typical informal refined smart casual look taking the inspiration from the life in a vibrant international metropolis.

On the chart you see that our positioning is exactly in the middle of the market where we feel quite comfortable and as we execute in the right way I think this will be a successful unique positioning. We are not clearly steady and smart and we are not clearly fitty [ph] and smart and we are not a typical spot of casual brand so we like unique positioning in this price segment which we feel is really a niche in the market if we execute well.

Just going to page 28, for just to make it clear we have summarized our whole business model in this value of permits which describes the Mexx as our brand but our future communication platform will be ME+XX. Our vision is design to excite and our mission is to create the metropolitan casuals lifestyle brands.

Just to summarize what our future is all about, we have fantastic well known brands just lost relevance because of lousy product execution and the lack of clear communication. I really can't say different lousy product execution. Our answer to that is live up to our vision, design to excite, give the consumer exciting products for which are actual and right to the trend and offer high value for money and desirability.

On top of that, we want to take care of our refresh brand identity which will also give us a unique and distinct look versus competitors and develop substance to our new personalized communication platform ME+XX and use our existing multi-distribution channel network in the right way. So, finally I am convinced that my team can develop Mexx to the metropolitan casual lifestyle brand in the affordable sector. You can just see on this chart, a little flavor of the world where we are moving it.

So just enjoys the little flavor of the new brands images for spring, they are photographed in a total new and unique style and just enjoyed a little bit.

Finally I would like to thank you and basically later on I am sure we will be open for Q&A and I think shouldn’t have let much about the pictures, I think picture say more than words.

Bill McComb

Yes, those that aren’t watching the broadcast as Thomas have included some visuals of products and marketing here. Very good Thomas.

Thomas Grote

It will be difficult via audio for me to describe everything but it’s a total new style and a total new identity.

Bill McComb

Excellent, well look this is an audience that will appreciate more of your time in the future and we will hear more from you as you roll out your plan in the mean time you bluffed us with a very clear message product, quality and value. As we look forward corporately I will say that this is going to be a year of execution and a break through performance. We have made so many changes to our business and now we are in the process of executing against these opportunities with execution as the theme my key priorities for 2010 center on further revolving our corporate cultures, systems, processes, compensation towards achieving excellent as a retailer, this will allow greater control over our brands and our destiny as a corporation.

Our whole sale business is clearly still very important to us but we had made significant investments in building a store base, our mission is to drive sales productivity, higher margins and a greater return from those assets. Developing our e-commerce platform and how we speak to consumers is also important as the digital word has destined to grow and take share from traditional channels of distribution. We have got great brands and products that consumers want but we must evolve and improve how we bring them to consumers, so this too will be an important cultural shift for our company.

Other major objectives for 2010 include executing that seamless transition of the Liz Claiborne brand. The people that have been working that have been working very closely with JC Penney and QVC are terrific and I have full confidence in a very successful launch with each partner this fall. Gaining clear traction in the next European turnaround that Thomas just discussed I think the clearer signs will come first in the retail business as full price sales improve, same-store sales turn positive and traffic begins to increase. Whole sale will likely lag retail as the department store and specialty store customers will move a little more cautiously given the weak performance over the past few years and of course the further strengthening of the balance sheet overall by reducing debt even further.

Turning the page 37 on fiscal year 2010 operating goals and assumptions, as you can see on the slide we are planning sales down overall approximately 10% adjusted gross margins up 600 basis points or better year-over-year, adjusted SG&A at no greater than $1.460 million, all netting to a stretched goal of break even adjusted operating income for full year 2010. We have a plan that stretches to break even but given the uncertainty of Mexx Europe performance and the timing of that turn around the year could result in either a modest adjusted operating profit or a modest adjusted operating loss.

Important to know pro forma for the Partnered Brands new business model sales are expected to be flat for the full year. Remember the first half no longer includes shipment of LCNY products to department stores and in the second half we shipped from a wholesale selling model to a licensing revenue model with the new JC Penney and QVC deals in place. So that effects reported sales.

Our U.S. direct brands or our gross segment, we see sales increasing low single digits overall driven by increases in retail single digit comp store sales growth and 25 to 30 new stores offset by decreases in wholesale. The focus here will be retail execution and productivity and you can certainly expect gross margin and operating income expansion.

For Partnered Brands, we see a breakeven adjusted operating performance for full year 2010 back half waited clearly. Keep in mind that our Liz Claiborne launch at JC Penney and Liz Claiborne New York launch at QVC occur in August. So, we have a void in the first half and we’ll only have five months of profits from this new business model. Important to remember this new business model will result in decreased reported sales but improved gross margin. At the same time outlet, Liz International and DKNY Jeans remain challenged each of which we're addressing right now. Lastly international-based direct brands where Canada has planned as an healthy business with sales adjusted gross margin and adjusted operating income increasing year-over-year, Mexx Europe will be our greatest variable in the 2010 plan, I can say clearly enough.

We still see Mexx Europe business loosing money but narrowing some of the loss in the second half of 2010, you heard Thomas say that he is not satisfied to loose money and he is pushing his team to change this sooner rather than later. Mexx Europe is the biggest risk to our current 2010 outlook but perhaps our greatest long-term opportunity as well.

Page 38, 15 shifting channel mix, so you just heard our thinking on the year, this next slide shows the impact of the channel mix shift to retail on the quarterly flow of sales. I think of very important primer year. As you can see in 2009 retail was 44% of our total sales and in 2010 we expect retail to be 53% of total sales. On the left you can see shifting retail mix in terms of sales by quarter well on the right it shows the changing seasonality of our sales.

Both sets of data here help us to explain why we expect the first half of 2010 to be challenged and why we expect to see those losses reversed in the second half of 2010. It also makes clear why we expect higher gross margins in 2010 as well as a higher SG&A rate even though we expect actual SG&A dollars to decline all of this reflects a greater mix of retail sales.

To further add to the second half trend we have Mexx Europe and Lucky with new leadership teams and their impact will not be evident in our results in to the second half of 2010. We also have as I said several times that business model transition of the Liz Claiborne brand and LCNY to JCP and QVC respectively and a strategic shift out of wholesale by Juicy.

On page 39, first quarter 2010 operating rules [ph] and assumptions. So with all of that in mind here is what you can expect in the first quarter, we currently anticipate reported sales down approximately 20% to 25% given what I just discussed. Adjusted gross margins to be up 200 to 300 basis points year-over-year, adjusted SG&A at approximately $345 million to $355 million all netting to an adjusted operating loss of approximately $55 million to $70 million and a loss per share of approximately $0.45 to $0.55 on an adjusted basis.

With the back drop of full year operating goals and assumptions and changing mix shift you just heard you can understand our business is change dramatically and our result in 2010 will reflect some of these important developments. First our mix of retail is increasing dramatically to 50% in the first quarter of 2010 versus 36% in the first quarter of 2009. This shift is amplified in light of the business model change for the Liz Claiborne brand. We're currently not shipping the department stores Liz Claiborne New York product as we did in first quarter of 2009.

Second, the seasonality of the retail business is such that January clearances are a big drag on first quarter profitability if you would hear to a December year-end calendar as we currently do. Retailer's fiscal year-end is typically January for this reason. Add the drag of Mexx Europe, a cleansing of inventory at Lucky as the new management team re-merchandizes that concept and reduced wholesale shipments for Juicy and we're looking at a significant loss in first quarter 2010.

Let me also clarify, the reduced wholesale shipments for Juicy is not new trend in the first quarter 2010. This decrease started in the second quarter of 2009 when we explained our view on wholesale for our domestic base direct brands.

You will see in the first quarter of 2010, the full and final annualization of this important strategic move towards retail where we can control our own destiny and as you may recall we believe that in times of economic contraction, wholesale can be dilutive reducing productivity in our own stores and adding undue margin pressure through promotional practices.

Throughout 2009, we reevaluated our wholesale strategy ensuring that door-by-door, we've the right partners with the right assortments at the right receipt levels with as much differentiation as possible. So, our path to improve profitability is now much, much more solid. I've outlined for you today the steps that we've taken to secure a long-term viable business model going forward and with that let me open the line up to your questions.

Question-and-Answer Session


Thank you. (Operator Instructions). Your first question is from the line of Edward Yruma with Keybanc.

Edward Yruma - Keybanc

Can you talk a little bit about how long it will take you to wind out of the existing inventory and when you expect all of your new products to be fully in place.

Thomas Grote

All the restructuring activities are in full process. I think, to be honest, what we can influence on our product development is products starting from September October onwards. Then we can start making really the difference. Right now we of course, in our day to day business we are trying to operationally manage as good as we can. But to have a really new products on the floor, that will be let’s say the fourth quarter of this calendar year roundabout yeah. Does that answer your question?

Edward Yruma - Keybanc

Certainly and in terms of taking additional costs out of Mexx, what are your initial impressions around the cost structure there and is there more opportunity to take cost out?

Thomas Grote

Yeah first of all, I think we went through an extensive exercise of taking cost out over the last three to four quarters actually and I think that we have not that much potential to take further cost out to be realistic. I think we have an imbalance in our waiving of costs.

We have way too much costs sitting in administrative functions and not enough in the product development. There we will start a re-shift. So I'm aggressively assembling really the quality people who allow us to develop the right products as well also from the technical execution down to the right design for the market and we will continue streamlining our so called back office function. That is in full process.

Edward Yruma - Keybanc

Great and one last question Bill. You spent a little bit of time talking about the new management at Lucky and some of the inventory issues. Can you talk about other changes that they have in process to stabilize that business?

Bill McComb

Yeah, its really fantastic. I just spend a couple of days with them in California and then going to spending sometime later today in the field with Patrick Wade who is the creative director. Its merchandising. It’s a great brand. Its got a great positioning. It doesn’t have the challenge that Mexx in terms of, it hasn’t had such a fall from grace.

It needs to tweaked and the team is incredibly professional. This is a wonderful brand. So I think its going to be really a very strong implementation of merchandising and by that I mean the product categories, the line architecture. I talked for three years almost about cracking the code on top while continuing to refine and do even better with Denim which by the way we've make great progress on in the last three years.

So, its going to be the look and feel of the stores, the shop ability, the commercial ability of the product, the marketing positioning, store ops, it’s a lot of things. We're going to bringing Dave DeMattei onto a call like this probably this summer probably when we report our second quarter.


Our next question is from the line of Bob Drbul with Barclays Capital.

Bob Drbul - Barclays Capital

I've got a couple of questions, first on Juicy and then just a little bit more on Lucky. When you look at the performance of Juicy and Lucky, December into January, the first question is on Juicy. When we look at the outlook for this year on the business, what do you really think are going to be their main drivers? Is there a new product and can you maybe just talk a little bit more about the leadership transition going on there and then on the Lucky piece of it, with the $79 and $99 jeans, do you feel that’s the right price point for 2010 and sort of how do you think about the pricing side of the business as we enter this New Year?

Bill McComb

Okay I am going to sort those into two separate questions. Juicy, first of all, as I said for Lucky, we saw a successful mix shift in the consumer choices at opening price points and a focus on gross margin, partly through Li & Fung and partly just through the enhanced merchandizing effort in that business.

As we go forward, we're looking at enhanced gross margin on a versus year ago basis all throughout the year. We're looking at more seriously or heavily weighted line architecture around product categories that have a higher turn. It’s a business that’s all about innovation. So this is a very wonkish thing to sit and talk about at the end of day.

It’s a business that’s all about staying relevant. Its about creativity. Its about imagination. And to that I'll turn to your question about the organization. There is a management change. I assume you are asking the question about the founders. Pam and Gela are in year three of a three year contract that we disclosed and talked to the press about a month ago.

They are moving to what we call non-operational roles but they are still associated with the company's brand. This is something we prepared for three years ago as we said as the business gets bigger and bigger and bigger, the company’s reliance on day-to-day input from the founders is not something that we think is a good thing in the long run.

What we want is we want them to help us steer the brand, keep it relevant through always be closely affiliated with it. The company has a big and very strong management team. We've been building it for four years. Pam and Gela were expanding it before Liz bought the company. After Liz bought it they were active in adding the resources.

It’s a company that grew very quickly and we have gotten to the point where I think the biggest change coming in terms of management is the actual real implementation and reorganization around merchandizing and that we'll be naming a creative director in the weeks and months to come, probably in the weeks to come I would say.

That will be a magnificent and very strong contributor to the creativity and imagination and passion that the brand shows and feels in the store. So I think at the end of the day I can give you lots of deep causal drivers of improvement in the business as the year goes on but it is really, it is about the creative overlay there that I think makes most difference.

With regard to Lucky, the $79 and $99 price points were introduced as about 50% of the overall consumer offerings. It is definitely not the place to park the brand. Its a place to open the brand and so what you saw us do in the fourth quarter that worked very well was innovate strongly on the high end. So we introduced or reintroduced Lucky Legends at the $129 price point and we were very successful with that.

It is a significant value when you look at the fabric and when you look at the embellishment in the product. But we flanked it with the opening price points of $79 and $99 and yes Bob, we do in fact think that as a strategy for pricing in Denim is the way to go. One of the things Dave has needed to do though is reduce the number of consumer choices, we had way in terms of inventory management, our side scales have not been right and so how we have been allocating product stores has not been good and more over we have had way too many consumer choices within a given style, too many different wash treatments for example on a given set and when you look at the grade, its too complex and after taking a first path at actual what the consumer wants, there is a obvious and clear rationalization to be had within this framework of 79, 99, I believe its 109 and then 129 and we like that a lot and I think now the key is to buy behind this adequately and properly.

Bob Drbul - Barclays Capital

Great, and if I could just ask question to Thomas too. Thomas, I think you mentioned that you think things could improve in the fourth quarter for this year. Was that necessary comment about an opportunity for fall orders or more or less on the retail store side?

Thomas Grote

Our biggest potential to improve is of course in our retail business because that is directly straight into our hands, we can buy into it, we can plan for it and we can show directly results and I’m expecting nothing else than a good comp store development for the fourth quarter. In wholesale the real situation is that the brand actually lost over the last two-three years significant portion of wholesale distribution. Don’t worry we will get this distribution back, I just cannot tell you how long this will last because basically its big key at counts for example in Germany and Netherlands have voted you out, you need some time to gain back the trust they have to see that your collection development is under control, that your quality level will significantly improve and as time goes by.

I think we have a strong sales force out and we will collect them one after the other but this cannot be done in four weeks you will not get everybody back on track. So wholesale I expect from 2010 onwards that also here we go for a double digit growth but I don’t expect magic things now for fall to be realistic.

Bill McComb

Thomas you have said already a significant amount of time with the principles of all the really important major accounts and those such…

Thomas Grote

We know them all.

Bill McComb

You know them all the sessions have gone well at the end of the day they want to see the product and they want to know that its going to perform.

Thomas Grote

They don’t want to have me they want to have strong products and strong performers and that is what I think we have to do our homework and believe me we day and night starting to fix the things and the really the issue is fixing the product to product and then we will come out with market relevant product and if I read the lists from different studies about brand awareness and brand attractiveness basically in Central and Eastern Europe I see lots of companies behind us which have weaker values than we are but selling double as much as we do.

So I think I don’t see reason why we shouldn’t gain back that business if we do our product job right this I unfortunately I am the very un-patient guy believe me but this unfortunately takes a little bit time to fix that all. So I can't make early promises that the turnover goes through the roof in quarter four this will not be the case although I expect improvements.

Bill McComb

And to that and then lets get back to the questions we have Mexx conservatively planned, clear improvement just a math itself suggest that they will show clear improvement but it certainly a crazy case built in to our base case here. Okay so next question.


Your next question comes from the line of Benn Rowbotham with Goldman Sachs.

Ben Rowbotham - Goldman Sachs

I was hoping you could talk a little about the 2012 targets. The 10% EBITDA margin forecast how does that breakout across Mexx the domestic direct business and partner brands?

Bill McComb

I mean the first thing Benn is, it's not guidance. And I wouldn't call it a target. I would tell you it's a threshold goal. So what I'm trying to do there is I have a peak inside, management thinking. These are floor goals, these are threshold goals, so I'm not going to breakout it by segment, I'm not going to give you any, I'm not going to portray it as an operating plan. If I were to portray it as an operating plan, maybe we would be higher on a metric, maybe it would breakout differently by segment, I'm not going to comment.

I want you to know that many of you ask okay, so you've been under such intense pressure of restructuring and reconstruction, where are you headed and it's still too murky to be able to lay down a three year plan with tangible guidance. I would never suggest that we're ready to do that yet. But I think what is important is to draw a line and stand and say, this is an operating framework that we're going to make choices around the business on. So, that's all I can say, but I hope what I just gave you is helpful. I mean many of you ask for some kind of a basis of how do you guys think about these things, and that's a roll-up for you.

Ben Rowbotham - Goldman Sachs

No, I understand there is a lot of moving pieces here. And then just if I may on the Partnered Brand side, how conservative do you look at the breakeven target for an extra for 2010? What do you need to see within the outlet group in order to get there and on a pro forma basis would, if you had a full year at the JC Penney deal, would you be fully profitable there?

Bill McComb

Well, if we are saying that in this full year which has a first half of no shipments of LCNY and a start up of basically just five months of the new model at the two that as a segment it will be breakeven. What that means is we are portraying that the DKNY jeans business will continue to post a loss, you saw that on that one slide that had the pluses and minuses. The Liz International business we will improve that position but we’ve conservatively forecasted that it’s still in a loss position by year end but by 2011 in a profit position and that while we are trimming the size and magnitude of the outlet loss significantly, it too is still in the red for the year.

So I would portray it as a cautiously built business model or forecast or plan and we are very driven to get to that breakeven in this segment this year. It's on a full year 2011 we expect real profits from the segment. Real profit because we will have a full 12 months of the new model but also because we will be doing significantly better on each of the other three drags on that business.


Your next question is from the line of Kate McShane with Citi Investment Research.

Kate McShane - Citi Investments Research

Just a question on the Liz line launch at JCPenney in August what can you expect to see happen at the store. How will we see transition out of Liz & Co. into the new brand? And on a related note is there an opportunity to license the Liz & Co. brand almost nothing new for JCPenney?

Bill McComb

First of all, I wouldn’t quickly draw the conclusion that it's not being used by JCPenney. They have got rights to it, they have access to that label. At this point, I think that most of the questions you asked should be pointed to our partner Mike made some very important comments, Mike Ullman on his call last week indicating that the importance and centricity of this re-launch for them to their overall store concept. They are a fantastic partner, they are very committed to it. It is going to play a huge role in their Fall campaigns in marketing, a big part of the thinking here wasn’t just eliminating the financial volatility of our legacy model, but moreover it was about being a centerpiece of a strategy.

So, I think you are going to see the kind of amazing but broader scale store execution that you see from Penney's when they really get their arms around the launch, they execute unbelievably well, I think you are going to see a lot of marketing impressions. I think you are going to see new labels and signage, I don’t think its going to be radical at all. Liz & Co. is successful, let’s not forget. One of the things that got us to this announcement in this deal is the three years success of Liz & Co. and these people aren’t foolish, they are not going to take the model and throw it out of the window.

So, I think that there will be some branding migration but part of what they bought into here is a heritage that we are proud of and they are proud of, and in the mall traffic war which Penney’s really plays more significantly and then Kohl's which has many more off centers, they are going to use this Liz Claiborne brand to lure consumers to that end of the mall, to the end of the mall where the Penney’s is. And they are going to I think you will see a lot of the Liz Claiborne name in their stores, but excellent product execution and very strong marketing would be the answer, but I would continue to point those questions to them because at the end of the day, you're asking questions that definitely are relevant to how Penney's operates and what their operating strategies are.

Kate McShane - Citi Investment Research

It's clear from the chart on slide 27 that Mexx is uniquely positioned but I wondered if you could give a little bit more context like who your main competitors are and where the potential next customer that you hope to gain traction with is shopping with currently?

Thomas Grote

Actually, if you look on that chart, what we are actually doing is nothing else than bringing Mexx back to its original successful positioning, just dressed in a new modern CI. One of the issues of the brand has been in the past, I personally knew Ratan, the founder of that group, and I was intensively watching the brand out of the view as a competitor.

Mexx was always in Europe in connection with brands called InWear which is a more feminine city oriented brand with brands like a Esprit which is more of the sporty, casual brands, and we are more the city casual brand, something in between which we call metropolitan casual because this is an expression which nobody uses and only quite unique for us.

I think this is a very relaxed look and actually if you talk to retailers, big retailers like Peek & Cloppenburg, like Carousel [ph], this is actually something which is missing in the market if it is well executed and Mexx was very good, mid of the 90s, beginning of the 2000 in executing this positioning and was productivity wise very successful, believe me, and something must have happened in the company after the owners have left the company, because Ratan was a real product guy. And I think if I look into the buys and everything, a lot of good product, people which I personally knew from the past and I would say that is more than 3,4,5 handful of people out of the first and second layer of the organization and the third layer left the organization and the whole quality approach and quality mission in that company got lost.

And then some people said, okay, how to correct that, and they were I would call it fooling around with the positioning. Some wanted to make it authentically sporty, roughly casual. So the design was a little bit linked to more or less Abercrombie or American sportswear casual.

Then somebody thought, oh, no, it must be very much city oriented and the line looked suddenly like Jil Sander, but executed with lousy fabrics and then you know the result. So I think the positioning is not the issue or the real core problem. Mexx had an excellent positioning. We are just going back to that and now I'm only interested in executing the right products for our target group which is an ageless women, which is the modern women, which could be potentially between 20 and 50 years old.

That's actually excellent that we can have a wide stretch in our target group so we can address quite democratically a lot of people. And for me, the only issue we have, it took me actually 10 minutes to position this brand right and everybody in the company is agreeing with that.

Now the only issue we have or what we have to do day and night is executing the right value for money proportion in the product and then I don’t see any arguments which would stop us. But if we don’t do that, let’s put it in a negative way, if we don’t do that, we will also not make it.

I think positioning is to me always over estimated. Reality is that with the assortment in the mid of the market in this affordable segment where we are, you need to attract somehow seven out of eight women and that will have consequences in your fits, in your style, and I can tell you, if we think that our suits should be so aspirational in measure that only whatever Hollywood celebrities or models can fit into it, then something is wrong, because we also have to dress women with slightly problems on the hip.

So our positioning is very much what it used to be up to 2003. Let’s put it like this. So we do nothing else than going back to it and believe me if you put your nose inside of the company, I think the people are saying, oh my God, thank you very much, we're going back to the old route, fantastic. So now we can start working again.

Bill McComb

Amen. That’s exactly what we wanted.


Your next question is from the line of Omar Saad with Credit Suisse.

Spencer Hill - Credit Suisse

Hi, this is Spencer Hill here for Omar, Credit Suisse. You've talked in the past about how the difficult environment was a major obstacle in the Liz Claiborne turn around. Even though you are able to get the product right and get the right talent in there. I was hoping you talk about maybe the lessons you have learned from the experience as they apply to Mexx, if there are just issues, obstacles, at Mexx beyond just getting the product and brand positioning right to get this brand back to profitability.

Bill McComb

Well, I’m sorry, but I don’t think we're going to give you what you want. I think that Thomas is going to tell you, this is really – yes, okay, there are some operating things, the fundamentals in the business. This is all about product. Thomas, you want to make a comment?

Thomas Grote

I can tell you again, if you ask me, I have everyday, thousands of operational problems. A lot of things went wrong in the company. That’s for sure. There is a lot of work behind that but the great asset is the brand is clean and believe me it's just a product execution issue.

There is nothing negative that we did such as a damaging campaign or whatever. I think if you are meeting trade people out of the European community to (inaudible) they all like the brand, they love the brand. We just need to refresh it and then offer the right product.

Bill McComb

Now the only thing that I would add Spencer is in thinking about how you ask that question. The first page of Thomas’ deck showed new divisionalization. I would tell you that, I believe I said in the last call, I wish that we re-centered our direct ace brands more quickly on merchandising. This is something that on day one Thomas did. I'm talking about of course strong design.

Many of the companies at Liz Claiborne Inc. who’ve been a wholesaler historically, there was a very strong culture orientation to design and sales, showroom wholesale sales and many have just a fundamental profit making discipline in merchandising, have had to be built, added, retrofitted into all of these companies of ours. And what you're hearing and seeing from Thomas which by the way is exactly what you're going to hear and see from Dave DeMattei is that grounding everything through merchandising is job one.

And so I think it’s a lesson learned. That said, what you're hearing this CEO at Mexx say is the answer and the cure is product, product, product. One of the tactics to make that happen is this divisionalization structure and so that would be a lesson learned that I would offer.


Your next question comes from the line of Chi Lee with Morgan Stanley.

Chi Lee - Morgan Stanley

Thomas, you mentioned that one of the opportunities at least in near term would be exiting unprofitable wholesale doors within the Mexx distribution network. Can you give us a sense of how many doors are actually still unprofitable and how quickly you can exit?

Thomas Grote

First of all, the dilution in sales, which you see presently, does not only come by surprise. Though actually in the first month, we carried already some deals and contracts with clients, which of course have a negative top line impact first, but are long-term strategically the wrong assignments.

We will go in the future with a clear strategy. I will repeat this multi-channeling strategy. We have our retail distribution which is fully managed on our own. We are renting the stores. We are our own destiny. We are merchandizing it by ourselves. We own the inventory, we own the operations, everything.

The second kind of direct to consumer business is e-commerce which we aggressively will also move forward and the second thing within the wholesale area, we have several types of businesses. One important thing for the future is our franchise model. Partnership store model or franchise model which actually to the outside is a store which is a free standing Mexx mono-brand store but run by an independent entrepreneur and here we have still round about 200 stores in place.

European wide, we had already once 300 [ph] and a lot of these clients went the south during this period and some were also in wrong locations. And what I'm talking mainly about is also deals with key account clients so we have deals with some key account clients, which I simply had to stop because economically this was nonsense. And we are reestablishing now a clear partnership model which goes to exact clear economic and economic framework. The retail I guess a good margin where you can live with and certain services which have now been in place and then we hopefully successfully can run a franchise stores. And the key account business in the core markets, we more or less lost over the last three years due to non performance, that’s the reality and we now have to gain back the trust with these people and show performance in the future and then I think since they all didn’t like to lift us out because they like the brand and there are not that many brands in this mid-priced segment to perform, so it's up to us to come back into these clients.

Chi Lee - Morgan Stanley

And would your expectation be that you could largely clean up then that wholesale distribution be it through franchises of through key accounts by the fall by the time you really get the new product in place.

Andy Warren

Yeah I would say our distribution to a high degree to 85% is cleaned up already. We still have some contracts in place which strategic good stores where our focus is on now bringing these people through the valley and moving the productivity up. So I don’t think that we will need to do major clean up work in our distribution. I would put in the other way around. We need to build new distributions.

Bill McComb

That’s exactly right.

Andy Warren

So there is not that much to clean up anymore. Actually the last distribution is actually we have most of our franchise stores are in quite decent good locations so there is not that much we have wrong location basically the wrong location has been closed over the last 6 months.

Chi Lee - Morgan Stanley

And if I could just squeeze in one last one then Tom as you reviewed the owned retails portfolio do you feel the current portfolio is optimal then for what you need go forward?

Thomas Grote

Yeah, optimal world I can not paint but I would say that our owned retail store network has also been cleaned up over the last 12 to 18 months, 24 months already. I think what is left is actually stores in very good locations to 95% I think there is not any store which we urgently need to close because its far away from being profitable. I think we own stores at best locations of Amsterdam and (inaudible) Frankfurt this (inaudible). It just believing me the productivity we achieving in these locations is way behind market standard. So again and the conversation rate as well, if you were properly to analyze the KPIs of our retail distribution, you know exactly that our assortment must be the major key driver of our negative development because we have a conversion rate which is below the competition.

Our traffic numbers are of course quite okay. The traffic numbers would allow us actually to double of business. If you would have a top conversion rate in the market, yeah and to be honest if I read in our P&L 2005 this was actually the case. So we lost due to not meeting consumer's demand in whatever ---

Bill McComb

They are coming in they are looking and they are not buying. So that’s the opportunity. Okay let's keep going because we are almost 90 minutes and I don’t want to cut anyone off. Julian.


Your next question is from the line of Mary Gilbert with Imperial Capital.

Mary Gilbert - Imperial Capital

Good morning, I thought may be I would focus on some of the financial information. Could you please go over some of the cash requirements for this year and how we should look at working capital previously we are expecting cash generation from working capital, how should we look at for this year, like to get the D&A number I was using something in the 150 range, what about cash restructuring and will there be any cash taxes away from the refund that you are currently getting whether its foreign taxes or state taxes.

Andy Warren

Okay its Andy, a couple of answers there, with regard to the working capital we talked before during the JCPenney announcement that we expected some foreign capital benefits to come from our winding down of LCNY wholesale product, a lot of that we got done in 2009 as part of the benefit we achieve last year but we do expect some of that to occur in 2010 as well.

Converse to working capital we do think that it will be usage of cash as we reinvest in some of the inventories specially in the Juicy Lucky case so I think working capital of us is one of the big driver of cash flow the last couple of years, I think its going to be more neutral as we go through 2010. With regard to cash, with regard to taxes, clear the refund is a huge win for us and we expect to get that refund in the next four to five weeks. Beyond that there are a lot of tax nuances as we specially compare international results especially in Canada. We will not be in a tax paying position in Europe and in the U.S. probably not giving some of our deferred tax positions.

So I think tax then net to about zero beyond the tax refund. I talked about the capital expenditures. We are expecting forecast in roughly $85 million of CapEx in 2010 and in interest cost will probably a little less in areas as we are obviously paying down debt and much of that outstanding revolver debt. We expect less interest cost as well. So net to net there'll be some a lot of good guys in there are highlighting the tax refund and we also expect to net to about zero with CapEx being $85 million.

Bill McComb

Let me add that we would not be expanding we would not be in the $25 to $30 expansion in 2010 without that net operating loss carry back. So we are grateful for that because I would like to go back to tapping opportunity and growth.

Andy Warren

One other comment I want to make is you asked about restructuring costs we have gone through a lot of restructuring in the last couple of years for example we ended 2008 with about 15,000 employees globally we ended 2009 with about 11,500. So a lot of our hedge lifting I tell you is behind us we still anticipate some restructuring costs 2010 as Thomas and Dave continue to rethink some of the structures and organization as we drive for cost productivity price will be much-much less of a cash utilization in 2010 as it has been a last couple of years.

Mary Gilbert - Imperial Capital

Okay so like $5 million to $10 million?

Andy Warren

I would say a little more than that I mean its from a different board in the last couple of years but a lot of those kind of ideas we had around restructuring is still being that didn’t work through. Look you have heard me say before I am a believer that cost productivity is ongoing process so we are looking at ever day opportunities to continue to rethink our cost structures and so that created opportunities for cost our but also cash expense and restructuring side.

Mary Gilbert - Imperial Capital

Okay and then am I looking at D&A correctly in sort of a 150 change range?

Andy Warren

Yes that’s right.

Mary Gilbert - Imperial Capital

Great okay yeah so you should particularly with the refund but I was trying to see what cash would look like excluding the refund for a moment. And I think it looks okay. Also I wondered on the Juicy business if you could talk about the wholesale business because clearly you have been working our and I just wanted to make sure going through the commentary on the call with overall strategy you are not exiting it but rather shrinking or could you just go over that again please I just wanted to understand the statement.

Bill McComb

What I would say is that two things we aren’t shrinking it any more we took some big steps with our partners in second and third quarter of last year that I wanted to point out that we're annualizing fully in first quarter 2010.

Wholesale plays an important part of the brand. We stop and we say we wanted to be accretive, not dilutive. How do you make it accretive? Well, wholesale that distributes in regions, areas to reach a consumer that we can’t reach is point number one.

A tier distribution, to be in brand enhancing environments with a collection of adjacent brands that add and live to the brand impression is another and there are still many, may doors that we're in. What I think you're going to be hearing from us on future calls is that the burg line is an opportunity for us as well as other new product launch areas that we are looking to put there. Wholesale can be a venue to launch new and important element to the business that our four walls can’t afford.

So, we got some tough intimates at that first in wholesale. We then took it to retail. There are few other areas like that from a product innovation perspective that we will talk to later in the year. But no there is definitely a mix shift that I called out for first quarter that really is the animalization of a shift toward retail in mix but not in what I would call an exit of wholesale. I wanted to just make sure that you all were, in the spirit of transparency on these calls that you were thinking about the first quarter in the guidance or the direction that we gave for the business with that as a key factor.

Mary Gilbert - Imperial Capital

And would you say going forward it’s a much more differentiated assortment?

Bill McComb

Well, that certainly is what we're working on and we’ll give some more color there. Look some elements of the business, the center core accessories are, you almost can’t over distribute that part of the business. We see no dilution on that. It’s the track suit that we're wanting skinny down in the stores on the apparel side and make the fashion more relevant and a bigger part of the assortment. Okay, so we better get to the last question Julianne.


So our final question is from the line of Jennifer Black with Jennifer Black and Associates.

Jennifer Black - Jennifer Black and Associates

I have just a couple. What your international plans are for Juicy, Lucky and Kate and it does look like you're getting some attraction at wholesale with Kate on the apparel side. And also I wondered on with Juicy if you're going to cut back the number of SKU's because of the changes that you're making? Just any comments around that would be great.

Bill McComb

Okay, well first of all Kate is absolutely on fire in all channels and all product categories. Totally came together, revised handbags, apparel. The apparel launch was very successful. Jewelry continues to mid growth on top of its launch year in fourth quarter of 2008.

In Japan, we have a reformed a joint venture in Japan converting our distribution agreement there which has been successful and a very important part of the brand, creating big heritage in Asia. We converted it to a joint venture to really accelerate the growth in that market and that brand in Japan has actually defined the market trend there. So it's doing very well.

But each of those brands have an expansion strategy. Juicy is expanding throughout Europe. Primarily we opened one store in London. We'll probably open another one later, one or two more within the next 18 months and we're expanding wholesale on the continent in Europe.

We've done distribution deals with Juicy and Airport shops with DFS and Central America as well. We have already a well established and very successfully partnership with Lane Crawford in Asia and that relationship is growing and there is a pretty aggressive expansion strategy that we're eyeing for key parts of Asia with them.

Kate Spade, in addition to what I talked about in Japan, it has a partnership in Asia and they're looking to expand the number of doors there. They are going to be expanding in Canada. So there are, these stories of international growth. There are leaders in each of those companies that spend 100% of their time on looking at what the right model is, whether its partnership or do it on our own or a hybrid and we're looking especially on those two business filling out the world. On Lucky, we're retrenching a bit.

What Dave, wants to do is he wants to focus on his core business and really get and heat up these 250 stores that we have that have big productivity opportunities in North America and then he will sequence international opportunities at the right time.

We do have two partnerships in place internationally, one in the Middle East and one in Asia. There are small scale. It's just literally a couple of doors in each market in each of those two regions and so I would say that it is almost a dormant strategy right now which I think is right what he really seriously focuses on heating up the U.S.

So international, I think that as we get the basics down the businesses, things that we've been working on for three years, I think your going to hear us talk more and more and more about product category innovation and about regions and at Juicy, no I wouldn’t say SKU rationalization is high on the list.

I think that you're going to see in the fall a much bigger presence for woven, for knits, for outer wear and Denim frankly is a big call out too that they're going to put a lot of weight behind. And so I wouldn’t think of it in terms of SKU rationalization. I would think about it as SKU consolidation and making sure that we have a big statement in each of those sub categories beyond (inaudible) accessories which are already very successful.

Jennifer Black - Jennifer Black and Associates

That makes a lot of sense and I guess the only other thing I would ask about is, I'm curious to know how you guys feel about the European economy and just any comments of how looking out over the course of this next year, how do you look at what’s going on in Europe.

Bill McComb

Well Thomas I am going to let you answer the question any thoughts you want to make, yeah so comments on the European economy in the European consumer right now.

Thomas Grote

Yeah first of all I think the spendings in apparel were actually quite stable over the last year. I am not that much nervous about the overall economy if it goes 2% worse or better. I think we have to fix our own problems and then the market is big enough that we can make a difference.

I think that definitely for everybody no tailwind in the economy right now. I think people are really keen on what they spend. The more important is our strategy that we really focus on value for money because people usually in these difficult times focus on value for money and not on buying the most expensive ones or the cheapest ones.

I think they really want to have good value for money. And as a result of that, I don’t read newspapers that much because that just brings me in a negative mood but I think the economy should not be an excuse for us to not perform in the future.

Bill McComb

Yeah, I would just echo that at Juicy. There is so much opportunity as we roll out in Europe, so much opportunity.

Okay, thanks Julian. It looks like that’s a wrap guys for those of you that are still on the call, an hour and 38 minutes into it. Thank you for listening and thank you for questions. We will be back later in the year. Good bye.


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