Liz Claiborne Inc. Q2 2010 Earnings Call Transcript

| About: Kate Spade (KATE)
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Liz Claiborne Inc. (LIZ) Q2 2010 Earnings Call August 5, 2010 10:00 AM ET


Bill McComb - CEO

Andy Warren - CFO


Kate McShane - Citi Investment Research

Edward Yruma - Keybanc

Bob Drbul - Barclays Capital

Mary Gilbert - Imperial Capital

Omar Saad - Credit Suisse

Chi Lee - Morgan Stanley

Jim Chartier - Monness, Crespi, Hardt


Good morning, everyone and welcome to the Liz Claiborne Second Quarter 2010 Conference Call hosted by Chief Executive Officer, Bill McComb. After the opening remarks, we will be taking questions.

This call is being recorded and it 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 and the second quarter 2010 quarterly report on Form 10-Q being filed today with the SEC, in each case until the captions Item 1A: Risk Factors and Statement Regarding forward-looking Statements.

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 sales, operating income or loss, operating margin, interest expense net income or loss from continuing operations, and EPS are presented on both a GAAP and a non-GAAP basis.

Reconciliations of the 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 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 the call over to your host, Mr. McComb; please go ahead sir.

Bill McComb

Thank you well good morning and welcome to our second quarter 2010 earnings call. We will follow a standard format today presenting with the aided power point slides which are available via the webcast and Andy Warren our CFO is joining me to discuss the results leaving plenty of time at the end for questions and answers. Here is the copy of the agenda as usual I will start with my perspective on the quarter and Andy will review the overall income statement, balance sheet and cash flow results. I would then walk you through the segment level results and discuss our view of the second half we will then get to your questions.

So referring to this morning’s press release, our second quarter results generally followed the path that we described during the last call. adjusted operating losses we in line with what we guided we posted very strong balance sheet metrics overall adjusted SG&A came in lower than expected, we saw continued growth and profit expansion at Kate Spade, Juicy reported single digit negative comps. This was driven by the month of April when promotions were curtailed versus last year resulting in positive adjusted operating profit.

We also experienced some challenges in the quarter that were greater than what we had expected the last time we spoke with you. Next Europe put even more than forecasted pressure on the overall reported gross margin and earnings as old merchandise was cleared. Losses in Liz outlets were worse than expected which contributed to the decision announced last month to exit that business.

And aggressive action at Lucky Brand Jeans to clear inventories also held back expected improvements in total company gross margin. But we’re successful in giving our stores a very clean start for the second half; we’ll discuss all of that later. My view of the direction for the second half remains unchanged. On our May conference call we outlined that the second of the year would bring a shift in our profit profile as key strategies and partnered brands and Mexx Europe begin to unfold on the retail sales floor.

In fact if you re-read our second quarter 2009 conference call transcript, you’ll see we called out that these two segments were what kept us up at night leading us to make significant leadership and operating model changes in both. It's a year later now and we’re projecting that these segments will account for more than 85% of the adjusted operating income swings that we'll see in the second half of 2010.

Thus they are both moving in the right direction, the key factors causing this swing in the second half are for partnered brands the introduction and flow of licensing revenue with JCPenney and QVC. Recall that last year we provided substantial discounts on our final shipments of Liz Claiborne goods to traditional department stores and that depressed gross margins. Also in partnered brands our licensed DKNY jeans brand had significant year-over-year improvement forecasted for this year from increased shipping based on fall and holidays orders already received.

At Mexx Europe we are looking for same store sales to return positive by fourth quarter 2010. As the price value of the merchandise improves and the merchandise mix shifts in favor of previously under penetrated categories like outer wear and sweaters which carry higher AUR’s. Gross margins are expected to improve substantially as a result. While improvements in partnered brands in Mexx Europe will account for the will account for the vast majority of the adjusted operating income swing that we expect for the second half. Domestic base, direct brands are already making good money and will post healthy increases as well. At Lucky Brand Jeans, the first half was an earnings wipeout due to inventory clearance.

But the second half will benefit from the numerous merchandizing and operational initiatives that the new team has put in place. We expect to start to generate improved same store sales trends in our full price retail stores as well as better gross margins. For Juicy and Kate Spade we expect two more quarters of continued solid performance.

It is worth calling out that Kate Spade is now beginning to contribute a more meaningful level of operating profit dollars to the direct brand segment. All rolled up were projecting positive adjusted operating income for the second half of this year compared to the adjusted operating losses last year. In terms of adjusted EPS we are excluding the impact of Liz outlet losses from this year's numbers and we expect third quarter adjusted EPS to be flat to slightly negative and fourth quarter adjusted EPS to be positive. While the debate surrounding the outlook for consumer spending, unemployment and the overall US economy is in the headlines everyday. And the apparel industry confronts cost of goods and inflation and margin pressure. Our view of the second half takes all of this into consideration.

Even with these headwinds we believe that we have enough room to improve against last years results and deliver positive adjusted operating income. So looking forward reflecting the re-basing of the Liz Claiborne brand the elimination of its outlet sales from our 2010 results. We expect reported adjusted net sales to be down in range of 9% to 14%. We see adjusted gross margin improvement of more than 500 basis points led by a significant uptake in Mexx Europe and partnered brands adjusted gross margins.

Adjusted SG&A of approximately $675 million as we annualize the partnered brands model change including the exit of outlets as well as annualization of previous cost-out initiatives across the corporation. All together contributing to an adjusted operating income improvement of approximately $80 million for the second half compared to 2009.

More importantly I think is that during these quarters we expect to see concurrent improvement that we haven’t seen in our efforts to date as we've restructured this company.

Three years of work on the portfolio, on resource allocation, on channel mix, on talent and leadership, on systems and sourcing, on inventory and inventory systems and on cost structure are beginning to yield an improve the earnings picture. And while we know that there will always be external challenges like cost of goods, vendor capacity, consumer frugality and lumpy demand or traffic patterns. We feel that we are turning a corner now. We believe our operating platform is sound. Our marketing is pointed and compelling and our product offering is on target and what's more we believe that we have substantial growth potential in each of these brands across product categories, channels and geographies.

So, while we feel good about the potential for second half improvement we are also realistic. We still have a long way to go and a lot to prove. But from our perspective we're at critical inflexion point. We believe we are on the right track and looking forward to the future.

So, now Andy Warren is prepared to walk you to the second quarter results in greater detail. Take it away Andy.

Andy Warren

Thank you Bill, and good morning everyone. I will start today by walking you through the second quarter adjusted results and our key financial metrics. Slide five compares our actual operating performance, I can see operating assumptions that we previewed with you back in May on our first quarter conference call. Overall our financial results were inline with our expectations.

Adjusted net sales were down 16% year-over-year compared to our assumption of 10-15% decline for the sales bridge laying out these top line trends late in the presentation, the adjusted gross profit fell short of our operating assumptions but still improved by our 200 basis points versus the 300-400 point improvement we discussed in May.

I will walk you through the more granular view of adjusted gross margin trend by segment in a few slides, but in summary this lower margin versus expectation was driven by both Lucky and Mexx Europe 2Q inventory liquidation strategies, we continued over deliver on our cost productivity commitments with total adjusted SG&A down year-over-year another $37 million and $15 million less than the SG&A assumption discussed with you in May.

We have continued to reduce our full year adjusted SG&A assumption based upon this positive second quarter cost trend. Adjusted operating loss of $48 million was within the range we discussed in may or the adjusted EPS of negative $0.19 was favorable compared to our expectations, this adjusted EPS includes a non-cash FX translation gain of $0.13 per share, relating to the de-designation portion of the Eurobond hedge as well as the benefit of a higher normalized tax rate related to the composition of the global results by tax jurisdiction.

We continue to make impressive balance sheet progress for the quarter with total inventories down 20%, accounts receivable down 35% and total debt reduced by $128 million, lastly we ended the quarter with significant credit facility availability of $195 million, needless to say we remain highly focused and continue to be very successful in managing cash and de-leveraging the company. Slide 6, speaks for itself you can see this quick snapshot of our second quarter adjust P&L versus our 2Q09 performance.

Slide seven is the summary of our key balance sheet measures let me highlight a few important metrics. First accounts receivable and inventory we are down 35 and 20% respectively. Both declined significantly more than the 16% sales decline I just discussed. Reflecting our intense focus on managing down day sales outstanding and increasing inventory turns. Secondly total debt was reduced significantly by $128 million and 18% decline year-over-year.

We ended the quarter with $590 million versus $780 million in total debt. A huge accomplishment, but lastly capital expenditures were $61 million for the last 12 months, this year we have planned our capital expenditures to be approximately $90 million compared to $73 million in 2009. As we expect to open approximately 25 additional retail, and outlet stores globally.

On slide eight, we bridged the 15% year-over-year adjusted net sales decline. Department brand segment drove approximately 55% of the second quarter sales decline. Primarily due to the Liz Claiborne brands hiatus from department stores. As we have outlined before the Liz Claiborne brand was planned with no second quarter shipments to department stores as we transition the business model for our launches at JCPenney and QVC.

International based direct brands declined $26 million year-over-year. This decline was largely driven by Mexx Europe wholesale rationalization. Fewer doors and reduced open to buys, slightly offset by 6% sales increase at Mexx Canada. Domestic based direct brands and net sales declined $11 million. This decrease was attributable to comp store declines at Lucky partially offset by strong increases across all channels at Kate Spade now onto the next slide, we have broken out our second quarter second quarter adjusted gross margin trend by segment. Overall adjusted gross margins increased 203 basis points year-over-year. Domestic based directly brands. Juicy, Lucky and Kate Spade combined. Had a healthy adjusted gross margin of over 55%.

Up 209 basis points versus last year, excluding Lucky our margins were negatively impacted by their inventory, liquidation strategy. This segment would have realized an adjusted gross margin increase of over 500 basis points. Partnered Brands adjusted gross margin was up 208 basis points, to 37.8% driven by the exit of the Liz Claiborne brand from department stores.

In the second half of this year the JCPenney and QVC royalties will help to further expand margins. International based direct brands or Mexx business had adjusted gross margin down 149 basis points versus last year. Well Mexx Canada realized very healthy adjusted gross margins of 61% growing by 390 basis points. Our Mexx Europe business was down 460 basis points. Mexx Europe was also liquidating old inventories in order to maximize the impact and value of Thomas Grody's new fall product arriving in stores later this month.

Gross embedment across all of our segments continues to be a key imperative for 2010. We accelerated our gross margin expansion in the second quarter and are forecasting over 500 basis points of adjusted gross margin improvement for the back half of the year driven by Liz Claiborne business model shift to a licensing model and hire overall proportion of retail sales with cleaner inventories.

On slide 10 our year-over-year second quarter adjusted SG&A trend, reflects our continued highly successful cost productivity efforts. With adjusted SG&A down another 10%. We have dramatically reduced cost in Partnered brands and corporate overhead which contributed to approximately 51% of this total year-over-year cost reduction. We’ve also significantly decreased expenses at our international based direct brands, nearly driven by continued expense reductions at Mexx Europe.

We continue to benefit from the innovation of the many cost reduction efforts, previously executed upon last year and are always looking for opportunities to drive cost productivity and realize SG&A efficiencies.

On to the next slide, we continued to thoughtfully reduce inventory levels with partnered brands and international based direct brand total inventories, down 52 and 31% respectively compared to 2Q09.

We have dramatically lowered our aged inventory levels across all segments in order to support our new global product launches and drive margin expansion in the second half. Prior season inventories were down 74% for partnered brands, 48% for international based direct brands and 50% for domestic based direct brands.

As a company we are focusing on key metrics and measured the efficiency of our inventory management now more than ever. Although we have successfully reduced inventories year-over-year for eleven consecutive quarters including this quarter. We have begun to invest in currencies and inventories especially in our Juicy, Lucky and Kate Spade brands.

Now to support our back half sales and gross margin expectations, to support this domestic-based direct brands combined current inventory levels were up 22% in the second quarter.

Now let's review our total company debt. We remain highly focused and committed to de-leveraging the company throughout 2010. We'll continue to utilize 100% of our free cash-flow to reduce debt. I have walked you through on our availability calculation on prior conference calls. So, today on slide 13 I will simply update you on the numbers.

At the end of the second quarter our availability was robust to $195 million. Remember we no longer have any financial coverage covenants and our minimum availability threshold is $45 million. Our actions continue to be focused on keeping the total availability high enough to meet our needs in any economic or operating scenario, based upon our current forecast and operating assumptions we are very comfortable with our forward-looking availability forecast. Now on slide 14, Bill just previewed with you our second half key financial expectations. So now I will take a deeper look at these operating goals and assumptions providing more details and basis for this forecast for this forward-looking framework we have adjusted out the direct sales, gross margin, costs and operating losses associated with the Liz Claiborne branded outlet stores for the second half, we are assuming that the majority of these stores will remain open to the year-end holiday season.

Our third and fourth quarter adjusted results will exclude the performance. We are of course committed to exiting these stores as quickly and inexpensively as possible and expect the meaningful operating losses associated with this business to be fully eliminated in early 2011, when this action is anticipated to be completed. Okay, let's discuss adjusted nets sales we are expecting total company second half sales to be down 9% to 14%. The primary driver of this reduced sale expectation is the Liz Claiborne brand move from traditional wholesale model last year to JCPenney and QVC licensing partnerships this year, additionally adjusting out all of the second half Liz outlet sales coupled with reduced Mexx Europe wholesale revenues plus the weaker Euro FX impact all contribute to this year-over-year sales decline.

Second we are assuming a robust 500 basis point adjusted gross margin improvement in the second half, this is mostly driven by the Liz Claiborne brand model change also given our very clean inventories we are projecting at lower mark down rate across all of our segments. There are however two factories putting real pressure on a better gross margin trend.

The first is sourcing inflation. Cotton prices are higher and reduced Asian factory base in experiencing increased utilization the second is freight cost, the supply demand relationship for both air and vessel transportation has shifted significantly this year creating greater pricing pressures as previously thought. Both of these inflationary impacts have been factored into our adjusted gross margin forecasts.

Our global sourcing initiatives are focused on offsetting as much as these pricing pressures as possible. Therefore we believe this forecast is 500 basis point gross margin improvement is achievable. Third we continue to be based lined and reduce our total company cost outlook. Our second half adjusted SG&A forecast is now approximately $675 million; we exclude the direct Liz outlet costs. Add this to our first half actual of $664 million and a revised full year cost expectation is now $1.34 billion. This improvement and total cost assumption from our May earnings call is driven by our continuing efforts to drive and realize better cost productivity across all of our global platforms as well as the benefits of the weaker Euro.

There are two important assumptions baked into the second half $675 million SG&A forecast. One we are increasing our combined marketing spend as a percent of sales at Juicy, Lucky and Kate Spade to just over 4%. We fully believe in our new fall and holiday product lines and ad campaigns the teams have created. Therefore we want to raise consumer awareness and drive traffic. And two given our Mexx cost base our total company SG&A fluctuates significantly with changes in the Euro FX rate. We are assuming a second half, 1.26 Euro to Dollar exchange rate which is flat to the end of 2Q.

Lastly the net of these sales gross margin and SG&A assumptions. Is a second half improvement in operating income of approximately $80 million versus last year? All of our efforts to date, right sizing the portfolio increasing our retail capabilities building powerful brands and teams and re-based on our global cost structures are beginning to pay off.

Yielding the significant year-over-year of income betterment. Well we are not providing specific third and fourth quarter guidance today. We are forecasting quarterly sequential opt income improvement. In the third quarter we expect a positive adjusted operating income with a slightly negative to break even adjusted EPS. And in the fourth quarter we are expecting meaningfully positive adjusted operating with a positive adjusted EPS.

Remember once we achieved positive net income, the share count to be used to calculate diluted EPS needs to increase to reflect the impact of the convertible notes that we issued in June 2009. That’s it thanks listening and now I will turn the call back over to Bill to discuss our segment results.

Bill McComb

Okay thanks Andy, now for some segment level details. In the domestic based direct brand segment which includes Juicy Couture, Kate Spade and Lucky Brand Jeans. The whole picture is a bit skewed by the actions that we look at Lucky brand to clear old inventories and begin the fall season clean.

The adjusted operating margin for this segment overall is negative 2%. That number was driven by Lucky Brand alone, both Kate Spade and Juicy achieved adjusted operating margins this quarter in the positive single digits. Segment sales declines were driven by Lucky brand as well which posted significant comp store sales decline in dollars despite moving more units than year ago.

Kate Spade again showed strong double digit comp store sales growth. And sales at Juicy were essentially flat over all despite a 7% comp store sales decline which you will see on the next slide was driven singularly by April performance. Take a look, here are the comp’s broken down by quarter. As we said on the May 6, conference call in April, Juicy was up against 30 days of aggressive inventory clearing promotions in 2009 and anniversary 25 days out of 30 with no promotion this year.

Second quarter 2009 also had the clearance of the now exceeded Men’s business of one time occurrence. I am happy to say that May, June and July were all better than April and we think sales on the quarter could have been even better if it were not for late deliveries in April and May, as part of our Li & Fung upgrade Juicy made significant changes to its country of origin strategy and with it brought in several new vendors. The transition was not perfect but I am pleased to say that it looks like the kinks have been smoothed out and from mid June on shipments have been by and large on time and on calendar. We believe this will benefit same store sales for the rest of the year.

The story of Lucky Brand Jeans dub tales with what Dave DeMattei explained back in May. First quarter significant mark downs on overstocked out of season inventory continued into the second quarter coupled with inventories that were planned too low in key women fashion categories. Given that spring and summer orders were already in place, Dave and his team could not affect change to inventory levels or mix for the second quarter and correctly put their focus on getting it right for following holiday deliveries.

While a 31% comp store sales decline in June of 2010 looks alarming. The good news is that the trend improved into July and is improving week-by-week as old inventories are depleted and new fall goods are plowing into the stores. On the comp stores front Kate Spade continues to do very well showing positive comps throughout the quarter with growth in those specialty and outlet channels.

The expansion of the apparel line continues to be a nice plus to the business while jewelry and handbags are competing positively as well, now lets take a look at the businesses specifically, last quarter when Dave DeMattei outlined his view of Lucky brand jeans and his priorities with the brand and an outline to his turnaround he made it clear that he was going to aggressively clean up existing out of season inventory to make way for a revamped product line that clean up process coupled with a plan put in place by our prior teams that resulted in a 40% reduction in women’s fashion inventory with the second quarter is the root cause of the 31% decline in income store sales in June now that these actions are behind us we feel very good about the new look of Lucky Brand jeans, that Dave and his team are putting in place.

It reflects Vintage Lucky of ten years ago and some of the best sellers from recent years as well as shift back towards more novelty pieces in women’s fashion and away from commodity basics which frankly did not work, fall product has been flowing into the store since mid July and will continue to broaden out in terms of items an deepen in terms of stock levels as august progresses, inventory levels would be more appropriate in the second half 2010 especially in women’s fashion goods a new marketing campaign is now in key magazine like Vanity Fair, Men’s Health, Elle, In style, Glamour, Out, Teen Vogue and Lucky combined with outdoor advertising in both New York and LA, for the first time ever a 24 page mailer from the brand will be going to 400,000 targeted Lucky brand jeans hassled in mid August with the goal of re-imaging the brand and driving traffic specifically to stores, these and other initiatives put the brand building blocks in place to ensure that third and fourth quarter will look nothing like second quarter that’s not to say that all will be perfect immediately at Lucky, the team has made real improvement in everything from product to marketing to operations to inventory management with an initial focus on improving their 194 price stores.

But they will learn more and refine the business further once they begin to get the consumer feed back on the new direction, what has been accomplished at Lucky’s since Dave's arrival in January is tremendous. The list of actions and changes is long, but let me run you through a couple of them; the product is really great and invokes some the best vintages Lucky style. The leadership team has been completely rebuilt adding more vertical retailing experience scenarios like merchandising, design, planning operations, marketing, e-commerce, and visual merchandising. Lucky brand has done a better job partnering with Li & Fung with new vendors totaling 50% of the base, leading the way to broader assortments of woven and knit in both men’s and woman.

Creative director Patrick Wade quickly said in motion the creation of the national advertising campaign pulling logos and original art work from the Lucky brand archives and shooting fall and holiday merchandise head to toe. The images are magnificent, perhaps more significantly Dave and his team have initiated the top 60 program implementing the focus on the top 50 specialty stores and the top 10 outlet stores that account for a majority of the brands profits today.

These stores all have been getting new fixtures marketing inventory and assortment upgrade our rebuilt field staff and intensive selling training and focus. The early read on fall goods hitting stores since mid July a couple of weeks here, is very positive. To put in perspective comp store sales declines have slowed, reversing the trend from meaningful double digit decline to single digit declines in the last two weeks of July compared to the first 2 weeks of July and this is without re-launched accessories which will hit stores in late August.

This improvement in trend is continued in to august, with woman's fashion leading the improvement, leaving us feeling cautiously optimistic about the outlook for the second half 2010. We will share more at this strategy at Lucky unfolds. Kate Spade continues its expansion and healthy growth with nearly a solid year under our belts in apparels and a growing hand bag and jewelry business. This brand continues to learn react and roll out. Going forward the team is focused on expanding the marketing campaign which we feel is working on all levels. Increasing the roll of both social media and E-commerce which today enjoys one of highest penetrations of all of brands.

You will see the apparel line continue to broaden with sweaters and bottoms adding to the dresses and blouses. We continue to roll our digital merchandizing upgrades across our fleets and will do so in outlet Mexx. One area of new found focus is improved brand consistency across all channels. Uniting wholesale and retail and even re-launching the Kate Spade website early next year as it grew flagship reflecting all of the elements of a flagship brick and motor retail store. We are also excited about the launch of Twirl a new fragrance developed and launched in partnership with our licensee Elizabeth Arden. As this brand expands we see many avenues for growth.

Interest from partners and virtually every international market have appeared and we are focused now on greater expansion in China as well as Brazil. The joint venture in Japan is posting growth. And consumer is receiving the re-launched extremely well. Jack Spade also appears to be a real opportunity for us. We now have three stores open and growing wholesale business. And we anticipate opening up five new doors in the next year in developing a sizable direct business via E-commerce as well.

Moving on to Juicy Couture, on the last call we said that we lapped a year of significant cut backs in wholesale sales. We see that stabilization in the total sales number. In retail we anniversary the second quarter 2009 discontinuation of the Men’s business which held back comp store sales this year in the quarter. But like Kate Spade, Juicy has many avenues for growth. In the past quarter we announced Erin Fetherston as a guest as a guest designer and you will see her work beginning in fall 2010. We are opening a total of approximately 20 new retails doors this year. Three quarters of which would be in the back half. We are also re-launching the e-commerce side, now under our full control as the licensing agreement with Neiman Marcus direct has expired. By bringing it back in house we will treat it as a stand alone flagship just as we were doing at Kate Spade when its site re-launches next year and for the first time offering the consumer than on the web for full line of Juicy that’s available only in our own retail stores.

We anticipate significant growth and we will resource this as one of the brands top priorities. Bird while still small is expanding its distribution in whole sale opening at Nordstrom this past month. There are several initiatives for retail that will drive improved comp store sales this fall. They include heavier buys and sweaters and outer wear, tighter deliveries increased marketing spend and new visual merchandizing strategies in the retail stores.

And finally, we are introducing new kids categories internationally as well as launching a new fragrance globally in September, also through our partner Elizabeth Arden the fragrance is called Peace, Love & Juicy Couture and will be supported by a very fresh marketing campaign.

Our marketing investment will be up versus year ago as well which we believe is essential to keeping the brand visible and to strengthen traffic which has been erratic. In partnered brands yet another quarter of transition as we remain in between the old wholesale model and the new licensing model for the Liz family of brands.

As I indicated earlier the outlet business drove a higher then expected loss as it did in the first quarter driving the operating margin story that you see here. Going forward we were optimistic about this segment with the closure of this outlet the restructuring of Liz International, the launch of Liz Claiborne and JCPenney and Liz Claiborne New York and QVC and the losses at DKNY Jeans we now have a stable healthy partner brand business.

While the new Liz Claiborne product for fall is beginning to flow now, the official JCPenney launch takes place in September the stores will spend august selling through Liz and co. and integrating the new marketing and visuals in store and then the full marketing campaign will began in early September. So as we move deeper into fall you will see category expansion to over 30 categories in the store including home, we continue to see in the second quarter how strongly this brand resonates with JCPenney shoppers under the Liz and co label giving us confidence the Liz Claiborne label will perform very well in these stores.

QVC launches tomorrow at 11 pm we are excited with the marketing and merchandising plans and the air time that they scheduled for the brand. Based on the reactions we heard from investors and analysts who applauded this decision, I probably don’t need to dwell much on the rational for existing the Liz Claiborne outlet business here. Simply put in addition to eliminating a long standing P&L drag it allows us now to fully focus on the licensing model for this brand.

Here’s the game plan, in terms of the leases we’re accessing the optimum exit strategy lease by lease to determine if sub leasing or lease termination is the best way to go for us, we’ve been receiving numerous inquiries from interested retailers since the last conference call, the goal of our lease negotiations is to achieve as cash list and exit if possible from these properties by the end if 2010. On the inventory front we are working with experienced liquidation operators, the goal here is to execute an orderly and profitable liquidation by January 2011, our last product deliveries to the stores will be in December 2010, lastly our support organization downsizing will be complete by the end of third quarter 2010, at this time we cannot discuss estimates of cash restructuring charges while these negotiations are all taking place, we incurred $7 million of non-cash impairment charges in the second quarter and may incur additional non-cash charges in future periods.

At the same time we'll be reviewing options for our Liz international business which has been a loss producing business unit for many years. Our objective is to eliminate losses which are minor compared to those of the Liz outlet business. We aim to have this done by fourth quarter. At Mexx the results continued to show what we believe is trough earnings. While the Canadian business was largely flat X currency, the restructuring of the European business continued.

As with first quarter problematic product in Europe marked by poor fit and lousy price value drove very poor conversion in the stores. Mark downs receipt impacting gross margin. But the bright spots have began to show, traffic remains pretty good, good enough that improved conversion alone would drive meaningfully different business results. For third quarter new product is now beginning shift to retail with dramatically improved styling, fit, sizing allocations inventory plans and overall price value? Thomas Grote is expressing confidence in the out look as product samples and merchandising plans for future saving to get better and better.

Two of the three regions are posting growth in wholesale accounts as new retailers are making buys in each selling period and some are cautiously returning. The eastern European accounts in Germany are reacting very positively, in the cold region of Benelux in France where the brand was once strongest we are still seeing net declines as the wholesale accounts are still scaling back or exiting based on first quarter results, and only a few new accounts have picked up the line.

Across the regions whole sale orders for fourth quarter 2010 are up slightly to 2009. The first non-negative quarter trend in years. On the retail side we’re encouraged by the performance of the new metropolitan casual store in Cologne, shown here on the slide. The store opened just 10 days ago volumes are tracking at about 50% higher than benchmark stores without any advertising or promotions. The store was opened in the middle of sales period with only full price merchandize. But this hasn’t held it back. Internal and external perception of the new store concept is fabulous.

Potential franchisees as well as mall developers are very enthusiastic about it. The store appears much more rich, modern and cool. It looks unique but it is very accessible and inviting. Indeed as I said earlier in the call this is the time of concurrent execution for us. Thomas Grote and his team have made the same kind of progress very broadly speaking that we see happening at Lucky brand. There is renewed strength in the organization cutting across e-commerce, merchandizing, design, store operations and visual merchandizing and sourcing.

And here is how we see how we see next two quarters playing out. The product re-designed and completely re-merchandized with an elevation of quality and fabrication and improved value for the money. In September a new marketing campaign begins. A campaign that has been well received by wholesalers when previewed. At this time we also begin to traffic building local market PR campaign as well.

We will be refreshing existing retail stores beginning in September with marketing images, fixtures and window displays. And we then expected to start seeing positive retail comps by October for all of fourth quarter. While we see only slight improvement in the third quarter operating loss for Mexx Europe. We see a much greater swing in the fourth quarter driven by sales and gross margin improvements.

So that’s the plan, time will tell, in conclusion we have some very experienced leaders now in place long enough acting as teams in a high performance mode with their executions now coming to market. And while I remain as cautious about the consumer as I have been for the past year, I believe we can achieve the profitability swing that we are describing and achieve the traction with the consumer that we are predicting in the second half of this year and that we get the longer term pattern improvement for the overall company.

Before we go to Q&A, I want to revisit our performance spring work and reiterate our minimum goals for 2012. We continue to work with these thresholds in mind, when we begin 2010 we expressed the theme for the year stretching to break even but our strategic comparative has always been to have tangible evidence that our strategies are working and to exit 2010 with momentum interaction towards these 2012 goals.

We believe that we are positioned to do just that given a positive swing of approximately $80 million in operating profit in the second half. While the first half losses were deeper then we expected given the need to cleanup the cobwebs, Lucky and Mexx Europe and to spend six months with no significant retail presence for the Liz Claiborne brand. Our view for the second half has not changed since we opened the year with a stretching to breakeven theme. We know our story is not a simple one and we want to thank you for bearing with us as we transform this company into an enterprise with sustainable operating profit models and strong leadership.

We look forward to delivering improved results. And with that let me take your questions. Let's open the mikes for questions.

Question-and-Answer Session


Thank you. (Operators Instructions). Your first question is from the line of Kate McShane with Citi investment research.

Kate McShane - Citi Investment Research

On your sourcing comments for the second half of the year you said you incorporated that in the gross profit margin guidance. I wondered if you could talk about pricing and what level of higher prices you may be implementing as a result of these higher sourcing costs. You also mentioned freight costs and air freighting. Are you air freighting? And if so, why are you air freighting and what brands?

Bill McComb

Okay, look you know well there are many levers that we can pull to manage the cost of goods equation and we’ve been working on all of them all year long, this isn’t something that’s just crept in the last 3-4 weeks, its something that its a trend that we saw starting at the end of last year, I think the point is that there are many variables in gross margin and therefore there are many trade-offs that can be made, its in the iterative process, for example materials mix can be altered in the design and development process to hit price and margin goals that makes sense for the brands, also the merchandise mix can even be managed around price points so in other words price increases can be taken without shocking the consumer by adding more units into different price brands, I think what I am getting at there is the reliance on very strong social engines in our businesses more across functional teamwork, more across functional leadership and very iterative back and forth reconsideration of the decisions that are being taken.

Another area that can be addressed is of course country of origin to manage labor costs in addition factories are very responsive to the changing cost dynamic and they are doing free booking of production at favorable prices where we are able and willing to do that in order to ensure that their business needs are met, another gross margins factor is freight as you mentioned and we can and have been adjusting freight up and down versus ocean mix to manage cost frankly we would be all ocean Kate 100% if our business model afforded that. But with changing management teams in both design and merchandising and especially at Lucky Brand jeans but additionally changes that we’re made in design at the end of 2009 going into 2010 at Juicy, meant that in some cases we were of calendar and in order to have product in stores that was right and met our criteria from a merchandising perspective, we were a little off calendar and needed the air.

The area is really only a speed to market lever if you will or tool to enable an off calendar delivery on time. I would also have to mention that Li & Fung has been a really good partner in helping us to navigate this process. One other element has been to introduce a level of competition between vendors competing bids if you will on different production lots, has been I would it's been very helpful. And in terms of raw materials procurement were really focused on the problem areas which do differ by brand. And in some cases we have required our teams to take grace positions on problematic raw materials areas right up front. For summit leather, for others its cotton and other still are synthetics. So in the same way that were pre-booking factories we are taking grace positions on raw materials. Hope that answers your question.

Kate McShane - Citi Investment Research

Yes, it does. Thanks very much. You should also mentioned that you were increasing your marketing spend as a percentage of sales 4%. I was wondering what that was up from?

Bill McComb

It's up from about 3.

Kate McShane - Citi Investment Research

Okay, great. Then my final question is on the JCPenney launch of the Liz brand you had mentioned on today's call and previously that you will be in 30 categories, including home. I just wondered if there was a timeline in increasing that number of categories over the next 12 months.

Bill McComb

Its actually gets that will be at over 30 by October, most every thing now is launching most of the big changes from what was in the old model to the new model will be taking place in the next 6 weeks. As they said you think are trickling into stores right now and if Septembers really the full blast launch. I think home is delayed versus that by I want to say I think its 6 to 8 weeks you could ask of course Mike Ullman who controls these decisions ultimately. But really it is in slow trickle other than the transition period in the month of August and then the launch of home in the fourth quarter. Otherwise it is full up.


Your next question is from the line of Edward Yruma with Keybanc.

Edward Yruma - Keybanc

Hi thanks very much for taking my question. Can you talk a little bit more about the financial impact of JCPenney transaction? How much of that is beneficial to your back off outlook, I am not just speaking about the removal off losses but the actual accretive impact and how do we think about that building for the remainder of the year and the into next?

Bill McComb

Unfortunately I can't give you kind of clarity I think you want. We I know it's an area of mounting frustration for those of you that have great models and deep analytics. We haven’t broken out; we’ve given you the components of what builds, what contributes what we would report as profit on it remember.

It's is a mix of a minimum of the sales, the percentage of sales and then a sharing of gross profit. But what I really can’t give you any split out if you will in the partnered brands mix or number. I think it's fair to say that this is going to; first of all, we all know its building off of already a well established predicate a business that has continued to perform and continue to succeed all the way through second quarter. Liz and co. was a very strong performer at JCPenney.

Arguably the strongest apparel brand that they have got and so there will be, the business is going to continue to build and build. I think that Mike in his analyst meeting two months talked about the building and building, season on season and year-over-year. But I don’t think we can give the kind of granularity you are looking for on that yet.

Andy Warren

And we are not quantifying that but as you mentioned not only are we replacing thickened loss from last year but it is still accreted to our margins and bottom line given the fact that we have very little costs against that royalty rate. So, it's very to not only our margins but our bottom line given the very structure of that deal.

Edward Yruma - KeyBanc

Got you. Could you remind us how much of a drag the DKNY Jeans has been on the Partnered Brands business? Was that a meaningful part of the loss? I guess I'm just trying to really understand the profit makeover of Partnered Brands, particularly now that you have decided to exit outlet.

Bill McComb

I think we had said that this was a license that had made money for us and been a profitable it’s a great business it’s a terrific brand. The factor that changed was beginning in that horrible fourth quarter 2008, the mark down rate of that zone in that tier 2 department store who went from roughly on average then giving category numbers not just DKNY jeans, mark down rates of around 85% to roughly a 100. And you know we are right there with CK and other brands comparable. And they all suffered from the same markdown rate increase, when that markdown rate went up on average to that level we were the one squeezed, we have fixed licensing terms with our partner and the department stores were getting their margin because that’s the way the business works and we were the one that got squeezed to negative.

So, we were really talking about a phenomenon that begin in fourth quarter of 2008 and continued though pretty much though the second quarter of 2010 and we said that, that the stage has been set with a change in product, a change in merchandising and importantly some changes in the distribution mix.

In terms of dimensionalizing, obviously we haven’t put specific numbers out can't, won't but it was we I believe the words that we used in the last two quarters the conference calls was it was meaningful Edward that I called it out, if it weren’t I wouldn’t have brought it to your attention but I would say it was added to worse it was running around but ahead of the same level that was out while it was running.

Andy Warren

And I would just elaborate on that it's Andy, clearly it was dilutive and a meaningful loss as Bill said and all the things you've done around cost around product and a distribution around growing the top line we absolutely have changed the profit profile of the business for the second half of this year as well for next year so we really have turned that corner of that business quite significantly in last six months.


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

Bob Drbul - Barclays Capital

I guess, Bill, the first question I have is, when you look at the results for the first half of the year versus where you thought they would be at the beginning of the year, I think the statement that you made was, you really haven't changed your second-half outlook at all. My question to you is, the environment seems a little bit more tenuous than it was six months ago. So when you look at the back half of the year do you think that your results are going to be totally irrelevant to the environment that seems to be little choppier now?

Bill McComb

Well not at all but I mean not to pat ourselves on the back but I will take you through the last two quarters that the outlook that we had we did not assume a robust environment and well many people were getting ahead of themselves in February and March we talked about choppy, rough, unpredicted traffic numbers in malls especially for the specialty concepts. So all I will tell you is I think we were conservative and we were cautious. The numbers in the forecast and the environment that we were describing is in no way what we would call a robust consumer environment. We are calling it a tepid and lumpy consumer demand profile out there, the good news is that we know and we’ve see in our numbers that she still is buying and she is choosy.

There is a value orientation you see in the comp numbers that came out this morning you know the value players are, they are showing some of the biggest comp improvements. But we are what we as Andy said we are expressing confidence in the story that we are telling you here, it is by no means relying on something positive. We were always cautious another words about the environment and obviously I think Andy and I both describe that are model and structured, operating model improvements, that partnered brands also that really bake in and contribute to this back half swing to profitability that we are describing.

Bob Drbul - Barclays Capital

Got it, okay. Then, Andy, on the SG&A results for the second quarter, and I guess my question is when you look at the adjusted numbers going forward, are all the streamlining initiatives around some of these transitional businesses, like the cost cutting, is that all complete or is there is still more to do around the SG&A for the back half?

Andy Warren

Yeah the vast majority of that has been done and we certainly have over achieved even our own expectations of how we’ve been driving cost out and cost productivity. With that being said quite frankly we talked about it and continue to drive it, I still think there are opportunities for us to get cost out and to drive you know fixed cost and variable cost productivity across the business. But that the vast majority of it and the cost associated with achieving it are now behind us.

Bob Drbul - Barclays Capital

Then one final question that I have is just on the Mexx business, come September/October will there be entirely new product from Thomas and his team in the stores at that point in time, when you look at that fourth-quarter positive comp that you are discussing?

Bill McComb

Absolutely, yes. And that’s why I didn’t say that we are calling a positive comp in September. We said comps will turn positive in October and that’s because our new product is flowing, there is that clean out period. The inventories are very low though. As the start of inventories to start from what I will call pre Thomas are not high.


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

Mary Gilbert - Imperial Capital

I've got a couple of questions. First of all, how should we look at the magnitude of the QVC business and how it is expected to build this year and then going into next year?

Bill McComb

It is another, I know it is another area of frustration because we have been given revenue projections. I mean at least you had Mike Ullman speaking publicly about how sees the business from their number retail perspective. It QVC, they haven’t gone public with it, and it would be not my place to do that from Mike, George to talk about how big he thinks the business can be.

What I can tell you from as a partner, they have done a magnificent job with product, it is beautiful, it is positioned and it positioned magnificently it really is a Liz, Claiborne, New York collection line and it still stands from apparel into home. Their direct merchants they know these lines aren’t wide and broad. They are narrow and deep so they speak, but they have allocated significant marketing and programming time and dollars to it.

And I think it is a, we are going to wait and see what we, of course there are, we have minimum, that I can’t speak to because it is part of the confidentiality contracts that we have with them. But they are a very committed partner. And let see, you can tune in to touch tomorrow night at 11 pm which is one of their hottest telling time pods by the way and that’s when you will see the launch and you will see Sky who is the spokesperson for the brand on TV and we are really excited about it.

Mary Gilbert - Imperial Capital

How would you view the seasonality of the QVC business? Because I wondered if it was a type of program where you are selling in pieces and you have like special events like it is an event driven is it an event driven business or is it more of a year around sustainable business? How do we view that?

Bill McComb

Totally as a year around sustainable business growing quarter-on-quarter, and within that the irony of what I just said everything in QVC is event driven because the events are the actual selling windows. But in terms of a different way to get out of this, they it's a year round business and it is programmed and scheduled as a year round business.

And the only time will tell right because the ultimate readers and reactors are the direct marketers, these are people that can track to the ten second time pod of a selling pattern in a window that’s otherwise five minutes of selling what was working and then they chase it and follow it and so as masters of that domain I know that they will anniversary and repeat what's working and try and experiment with new and different things. And again these are, you know it's tough because these are things that Mike, George could speak to with a little more clearly then me.

Mary Gilbert - Imperial Capital

I had a question for you on the sourcing model. Because of the dynamics that we are seeing with increased labor cost going on in China, with the freight challenges that you talked about earlier, how do you see that model evolving over time to meet more just-in-time demand? As sales velocity takes place and you have reorders, do you see that transitioning maybe more towards just speculating here towards Central and South America or how do you view that?

Bill McComb

I am not going to give you an answer that is going to light the world on fire. If it is logical and incremental is what has always driven that. So right now in this particular crisis new countries are activating and becoming apparel centers but there isn’t going to be some crazy giant Quakers or shift I mean there has been more steadily over the last ten years, more and more vendor activity in Central and South America but I doing see western hemisphere shipping the scale significantly on the far east and moreover I think the real answer to your question is what’s happening right now is all supply demand natural free market invisible hand, the wealth of nation’s, positive reaction in supply an demand.

We all a year ago were cutting inventories and cutting capacity and the vendor and raw material community responded we are now ahead and we are back in as an industry expanding inventories and doing more buying and were in a little bubble here and so I actually think that it will course correct. But thank you very much Mary we need to move on to the next.


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

Omar Saad - Credit Suisse

A couple questions. First, I wanted to just get an update, for those of us who might not be as in tune with it, on the outlet side. The decision to close out the business, I mean, we are hearing from a lot of the companies in the sector that the outlet is a channel that is outperforming and it is a low cost channel from a rent and CapEx perspective. Help us understand why you think it wasn't working for the Liz brand and the brands you had in there and any other brands you have had in there that led to the decision to close it out?

Bill McComb

Let me clarify we would amplify with vigor the comment that you made about the outlet channel. It is the momentum channel, everyday it gets more important in everyone’s business model increasingly we’re able to do it in a brand right way, and we don’t look at it as true off-price. The value is calibrated it has a different offering then for a certain percent of the assortment than what we have in our stores.

It's completely brand right, and by the way it’s a very important part of Lucky, Juicy and Kate Spade future. And we said that in Mexx by the way, and but the Liz story is a different one and its one that I mean we’ve chronicled and you followed, I think in a very articulate way what the peril has been. Point number one, we have not had the fundamental asymmetry and value that I think is the predicate for success and outlet.

The primarily channel that the consumer has been able to Liz Claiborne has been so value oriented that the difference between outlet pricing and primarily channel pricing haven’t been such an eye popping value, traditionally you will hear Steve Tanger, you will hear the folks at Prime or at Chelsea. When they talk about their best clients, they’ll say they deliver an everyday value of 35 to 70% of regular prices.

That asymmetry, that GAAP has not existed for years between our Liz Claiborne outlet stores. The other thing that I want to tell you is that our fleet itself was originally built and conceived for a brand that was about $2 billion meaning the number of doors and the size of those doors. I mean that when I landed here our door we had 150 doors averaging 15,000 square feet.

Today it's 87 and we had cut the average down to about 9,000. And by the way we were able to productively re-purpose some of those assets to get us comfortably in the business at Juicy, Lucky and Kate Spade. And that was the right asset re-deployment. But what we found was that, that there was this consumer dynamic which reflected by the way in traffic.

We had incredibly high conversion rates, and have them today in the stores conversion, 20% to 22%. Our problem is getting consumers over the lease buy and I spoke at lengths about that in our last call. But add to it the fact that now I am getting to the business model perspective. That, since we no longer, are producing product, designing creating tech packs, placing orders and putting into production. All the way through the supply chain on our own.

For any primary channel, all of the cost of the overhead for that product developed machine we are going to get just the outlet business. Keeping in mind that the model with Penney's is the capital light capital free design and merchandizing support where they actually do the procurement and manage and handle the product. So what I am getting at is unlike other brands including Juicy, Kate's, Lucky and all the others that were neighbors with in and in the malls, there wasn’t leverage for that overhead anymore.

And as we looked forward our best models if we are really honest, even if we were comp-ing positively and getting the right kind of traction in turn. We were concerned that the overhead is so great that the profit level would be very, narrow. And Omar we listen to our shareholders. Our shareholders spoke, they felt that we had made very smart decisions with the Liz Claiborne brand in life-cycle managing philosophically by moving into this capital licensing model and having focused partners that want the brand and that have control from a merchandizing prospective.

In the end it also felt we thought like it was trending into the off strategy mode and for of those reasons and the fact that we felt that because I had given so much air time to this on the last three conference calls, we had begun getting significant numbers of calls from would be sub lease tenant candidates. We realized here that these are great leases and we could move into our restructuring mode here at a pretty economical rate and were in negotiations. So I can't put numbers around that for you now but I think we are going to be able to elegantly move forward and move on. So long winded answer but it's a lot of thought and we obviously given it a lot of air time here but make no mistakes this is not a Liz Claiborne Inc. statement about outlet as a channel on the contrary we have continued to grow outlet in a brand appropriate, brand smart way and we will continue to do that in other parts of the business.


So next question is from the line of Chi Lee with Morgan Stanley.

Chi Lee - Morgan Stanley

Bill, on the Lucky inventories, I know you mentioned H inventories were down 22%, but as we look at the retail selling forward in the stock rooms, can you give us a better understanding of how much aged and carryover inventory really represents of the selling floor today? And what gives you the confidence to you guys are able to really clear through that by the time we get done with the third quarter?

Bill McComb

Well to the detriment of all of the metrics that we laid out before we turn, underneath that negative 31 comp worldwide significantly higher unit volume than year ago. Said differently we are probably cleaner than any full price specialty retail chain, you see go through a transition like this, there is almost and in it for the month of July, there was an inadequate amount of transition inventory so in some ways you could say we got so clean that we were a little too clean but the point of it is I would ask you to in any of these New York stores go in and see the floor right now I think that you’d see that no more than 5%-10% of the inventory is clearance. We’re there.

Chi Lee - Morgan Stanley

Okay, great. Then, Andy, just a couple of questions on the guidance. It seems like there is some inclusions, exclusions in terms of what you guys are looking for into the back half. Can you just give us what the comparable revenue as well as operating income base for the second half of '09 we should be using for the guidance?

Andy Warren

Well a lot of that stuff here we are not actually quantifying that I will say we have decided for obvious reasons to exclude the sales margin and SG&A in assumed operating loss for outlet out of our adjusted results so when we present to you our third and fourth quarter results this will exclude the impact of outlet, so when we think about the sales line, for example the sales being down 9 to 14%. The majority of that not only the model shift from Liz Claiborne to JCPenney and QVC model but also the elimination of the outlet sales. So, we actually will see sales growth out of US reference we will see sales growth out to Canada and so across the board you will see a mix here but really it's going to be the model shifts that is going to drive vast majority of changes especially in the top line.

Chi Lee - Morgan Stanley

Then just below the line for the back half, should we be expecting any bigger swings in terms of the euro bond revaluation, and is that part of your guidance?

Andy Warren

Chi what we assumed right now is our flat FX rate to the end of the second quarter of 1.26, look at this point it's any ones call right I mean the dramatic drop in May and June was anticipated and this dramatic rebound was anticipated either. So, for the sake of the guidance we just assumed really a flat FX rate that of the end of June.


We have time for one more question and that question is from the line of Jim Chartier with Monness, Crespi, Hardt.

Jim Chartier - Monness, Crespi, Hardt

First question. Last quarter you guys gave us what the impact of the Lucky liquidation had on the domestic direct gross margin. Can you give us the same for second quarter?

Bill McComb

Well I did I mean if you go back and look at what I said, we said that you wait you’re asking gross margin?

Jim Chartier - Monness, Crespi, Hardt

Right that’s excluding Lucky what was the how much did the (Multiple Speakers)

Bill McComb

Yeah we, I can't break the number out for you but it, we had the kind of progress that we had forecasted. So in other words we meet our, we had talked about a 5 to 600 basis point improvement across the total company and other than Lucky and Mexx we achieved that, so just use that as your assumption.

Andy Warren

Well I did say in my comment that we had 500 basis points in margin growth for Kate and Juicy, so when you look at the 600 basis point we had at Canada the tremendous margin growth other than at Mexx and Lucky.

Jim Chartier - Monness, Crespi, Hardt

Okay. Then can you tell us how much the outlet business was losing for you guys on an annual basis?

Bill McComb

No we haven’t broken that out.

Andy Warren


Jim Chartier - Monness, Crespi, Hardt

Then the Mexx refreshes, can you tell us what all that accomplishes?

Bill McComb

Okay what you visually saw was one new store opening that is a Greenfield, New Store. We have not yet announced or planned to open a bunch of new stores. Or that would be way putting the cart before the horse. Most stores what we are doing is we are pulling new product in and we have our refresh in terms of.

It's almost like the Kate Spade refresh which is in the 10 to $15,000 range on a per store basis. Some 20-25, not a lot of money, very little. They intend to be White Wall boxes anyway. We put some new fixtures in and we put terrific marketing graphics in and we changed texturing to accommodate the high product turn categories that include folded goods which we didn’t.

We always had goods on hanger only at Mexx, that’s really about it, we are going to then stage it as it goes. We can get a whole lot of improvement in conversion which will drive improvement in profitability total margin and with that we will then sequentially make additional and broader investments and test things.

Jim Chartier - Monness, Crespi, Hardt

Okay. Then the Domestic Direct Brands inventory I believe is up about 19%?

Bill McComb

That is feeding fourth quarter if you the break out that Andy gave showed that aged it down and goods in transit are up and that’s supporting these forecasts for fourth quarter. It's very reasonable.

Jim Chartier - Monness, Crespi, Hardt

Then excluding goods in transit, can you tell us what the increase is for third quarter?

Andy Warren

We are not quantifying that.

Bill McComb

We won't guide that.

Andy Warren

We obviously couldn’t get more current than in transit and a big piece of that is in transit, some of it is not even in warehouse yet. But is on its way and basically we are FOB shipping so take title when it leaves the dock.

Bill McComb

Okay thanks Jim, thank you all very much appreciate your contributions and for calling and listening today.


Thank you all for participating in today's conference call you may now disconnect.

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