Liz Claiborne Q3 2007 Earnings Call Transcript

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Liz Claiborne Inc. (LIZ) Q3 2007 Earnings Call October 30, 2007 10:00 AM ET

Executives

Bill McComb - CEO

Mike Scarpa - COO

Andy Warren - CFO

Jill Granoff - EVP of Direct Brands

Dave McTague - EVP of PartneredBrands

Analysts

Margaret Mager - Goldman Sachs

Brian McGough - Morgan Stanley

Virginia Genereux - Merrill Lynch

Jeff Edelman - UBS

Kate McShane - Citigroup

Jennifer Black - Jennifer Black & Associates

Omar Saad - Credit Suisse

Bob Drbul - Lehman Brothers

David Glick - Buckingham Research

Operator

Good morning everyone, and welcometo the Liz Claiborne Third Quarter Conference Call, hosted by Chief ExecutiveOfficer Bill McComb.

After the opening remarks, we willbe taking questions. This call is being recorded, and is copyrighted material.Therefore, please note that it cannot be recorded, transcribed or rebroadcastedwithout Liz Claiborne's permission. Your participation implies compliance withthese requirements. If you do not agree, simply drop off the line. Please notethat there will be a slide presentation accompanying prepared remarks. Theslides can be accessed at www.lizclaiborneinc.com in the Investor Relationssection. There are separate links for webcast and phone participants.

Please note that statements madeduring this call that relate to the company's future performance areforward-looking statements within the Private Securities Litigation Reform Act.These forward-looking statements are based on current expectations, and aresubject to the qualifications set out in this morning's press release, as wellas in the company's 2006 annual report on Form 10-K under the heading "RiskFactors," and in the Form 10-Q for the third quarter of fiscal 2007 to befiled today with the Securities and Exchange Commission.

Additional information on theresults of the company's operations is also available on the Form 10-Q. The company'searnings release is available on its website at lizclaiborneinc.com under PressReleases.

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

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

Bill McComb

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

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

Andy Warren

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

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

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

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

Now, Bill will provide hisperspectives on our business.

Bill McComb

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

We have also doggedly pursuedtalent internally and externally and both corporately and in the divisions,putting some incredibly talented people in critical areas. And later, I willdiscuss what we have accomplished in that area. There's no question that what Icalled about six months ago the tale of two cities remains the headline eventoday. We like what we see in the Direct Brands portfolio with a very strongperformance at Juicy. We see solid profitability and successful store openingsat Lucky; although for the first time in a very long time we are seeing softcomps there.

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

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

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

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

Back in January, after I'd justarrived, the first observation many of you will recall that I made centered onour design and merchandising culture. And specifically, I was concerned that wehad gotten so big and so busy in managing the growing portfolio that theculture was not emphasizing and rewarding production and design excellence. Thebig frustration for me, though, was realizing that a lot of the underlying changeneeded to take place in order to turn that cultural tide.

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

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

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

Action number one, narrowing theportfolio. We made the decision in July to split the strategic review processinto two phases. The first phase was time to deliver an exit of the moderatebrand portfolio prior to making any formal production commitments for spring of2008. This meant finalizing decisions by September 13. I'm very pleased withour team's performance. We were able to announce the Li & Fung deal by thatdeadline, and we completed the deal on October 4 for the four brands.

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

We've got strong, motivatedmanagement teams working on the process, which we hope to conclude no laterthan the end of first quarter, ahead of the previously announced second quartergoal

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

Andy Warren

Sure. Action two, aggressivelymanage costs. We remain extremely focused on executing the cost initiatives on11 July. This initiative calls for dramatic changes in the way we run ourbusinesses and the expense structures we have to support them. On July 11, wetargeted general and administrative cost reductions pulling $180 million in thenext three years, with $100 million of these savings to be realized in 2008.

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

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

Key actions completed to dateinclude significant headcount reductions, including at the executive level, andare closing two of our distribution centers. Detailed plans will probably beexecuted by the end of this year, include additional international staffingreductions, real estate rationalization, as well as further discretionary cuts.

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

Bill McComb

Excellent. Thanks. Our third actionwas a callout on resource deployment. We said talent deployment, marketinginvestment, and capital appropriation toward our retail businesses were anessential part of the plan. While this chart highlights eight positions that wefilled this quarter, there are clearly more in each company and corporately.

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

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

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

In addition, in terms of marketingresources, we have doubled our spend on Lucky Brand, Juicy, and Mexx for thefourth quarter. Kate Spade had already had a solid presence planned for thefourth quarter. This spending is now incorporated in today's forecast. Themoney is focused on supporting strong in-store events and themes, drivingtraffic, and using our databases efficiently to fatten the fat cat, reallyfocusing on our very loyal consumers.

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

Mike Scarpa

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

For our Direct Brands, we arecommitted to implementing a robust retail planning and allocation system. MexxEurope went live this month on their new system, and we are anxious to begin tosee the positive results we believe the system should deliver. For the US-basedDirect Brands, as a first step and a precursor to software selection, we are inthe midst of a talent and process review initiative across our planningdepartments.

This will ensure that we haveidentified opportunities and deficiencies in our current environment, whichwill allow for some short-term fixes as we manage through a longer-term systemsolution.

As for distribution, we areenhancing our internal distribution capabilities by establishing aretail-centric process. This will require investments in new warehousemanagement systems functionality, changes for physical distribution space, anda fundamental shift in the distribution center processing. We are currently inthe final stages of software selection, and nearing completion of our networkevaluation.

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

We have made meaningful progresstoward our goal of providing world-class supply chain capabilities to both our Partneredand Direct Brands with the strategic goal of providing faster, more innovativeand higher-quality products to our consumers.

Our approach is multi-tiered,encompassing changes to our organizational structure, processes, andtechnology. Since our July Investor Conference, we have restructured ourcorporate sourcing organization into brand-aligned global teams, withresponsibility for product development, sourcing, and manufacturing. Thisfundamentally shifts our domestic and Asiaoffice structures from service organizations to more responsive andcost-effective teams with direct line accountability to a brand.

We are also continuing toreevaluate and reconfigure our Asia officenetwork, ensuring that we are appropriately aligned with our vendor base andsourcing strategy. With this in mind, we have recently expanded our presence inIndiaas we see significant growth in that region.

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

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

Bill McComb

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

One key area of success is thecontinued diversification of the product line, which we discussed at the July11 meeting. The tracksuit line is down to 29% of the assortment in our retailstores. And with that, our accessories and ready-to-wear categories continue togrow. We are particularly pleased with the power of bringing the managementteam of that global brand under one management umbrella. This business had beenmanaged at times under four group presidents and several presidents then underthe group presidents.

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

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

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

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

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

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

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

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

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

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

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

Jill also called out a majoropportunity in our "Tops to Bottoms" ratio at Lucky Brand, whereLucky today is only 1-to-1 versus a longer-term goal of 3-to-1. We will alsoincrease the percent of fashion denim to drive incremental sales, especially inthis economy. We feel good about the integration of our holiday merchandisingeffort combined with our national and in-store marketing campaign. And last, wehave some key positions to fill here in the fourth quarter at Lucky, includingan experienced planning and allocation leader and a leader of retail andoperations.

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

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

And like Juicy, the internationalstrategy at Kate Spade has never been fully crystallized. Our researchindicates strong and positive consumer awareness and brand ratings in marketsin Asia beyond Japan, wherewe have a presence, and Europe. We'redeveloping a plan with market prioritization as the first step for bothwholesale and retail.

So now, let's talk about PartneredBrands. We said this segment is posting continued weak results. Sales were down18.8% versus last year with decreases across the portfolio. We indicated thatthe brands under strategic review have met some cautious buying patterns bywholesale customers, waiting to see the outcome of the review. In spite ofstrong and engaged management teams, these businesses brought down ourperformance.

And consistent with what we haveheard from others in the sector, an important component of the change inforecast in Partnered Brands stems from a cautious inventory managementapproach from our retail partners as we head into the fourth quarter. We haveseen order cancellations and reductions in replenishment lines, which arereflected in today's forecast.

The core Liz Claiborne business andClaiborne men's business are not performing to their potential, with decreasedroyalty income from licensing, further lowering our profitability. The springand now fall women's lines, which reflected higher quality and designrefinement, have not proven to distinguish the brand with this under whelmedMissy consumer.

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

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

On a parallel path, this PartneredBrands organization is aggressively managing its cost profile, which wasclearly out of check. These initiatives are being captured in the cost numbersthat Andy reviewed earlier. Now Dave is a product guy, first and foremost. He'sbringing some fresh thinking to brand strategy, to licensing, to SKUrationalization, and to productivity.

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

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

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

Andy Warren

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

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

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

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

Adjusted operating income for thethird quarter was $118 million or 9.1% of adjusted sales, compared to $174million or 12.7% of sales last year. Breaking this down by segment, DirectBrands adjusted operating income for the third quarter was $95 million or over15% of sales, compared to $90 million or 16.9% of sales last year. Theinclusion of Kate Spade reduced this third quarter operating margin by 40 basispoints. This is consistent with the expectations we shared with you at the endof last year that Kate Spade would be slightly dilutive in 2007.

Juicy Couture had anotheroutstanding quarter with a double-digit increase in operating income, albeitwith a slightly lower operating margin as a result of the increased spend onbrand-building initiatives. Negative comp store sales for Lucky and Mexx alsocontributed to the lower operating margins for Direct Brands.

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

Many of the initiatives wediscussed on July 11 and are being aggressively executed upon today are aimedat reducing divisional and corporate overhead to right size our total costcaptured and to meet our operating profit goals. Cash flow has remained verystrong and on forecast, with $326 million derived from operating activitiesover the past 12 months.

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

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

Slide 19, entitled Third Quarter Inventory. Total inventoriesincreased 7% to $726 million compared to last year. $23 million or 4% of thisincrease was due to foreign exchange rates. Our Direct Brands inventoryincreased almost 20%, which is directly in line with their sales and retailgrowth.

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

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

For fiscal 2007, we're projecting net sales to be down lowsingle digits compared to last year, adjusted operating margin to be 6.8 to7.1%, and adjusted EPS to be $1.70 to $1.80, reduced from our prior range of$1.90 to $2.00. This reduced adjusted EPS guidance is primarily reflecting thelower performance of our brands under strategic review.

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

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

Lastly, slide 21, entitled Forward Outlook. On July 11, weprovided the preliminary fiscal outlook for 2008. We remained very confidentthat the strategies we outlined then and discussed in great detail today willdrive sustained improvements in our operating and financial performance nextyear and beyond.

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

We are currently performing a detailed analysis of ourbusinesses including the continued assessment and need for additional costreduction opportunities beyond those outlined today. We will continue tomonitor the external environment throughout this fourth quarter and assess itsimpact on next year. We're not therefore confirming our previous guidance for2008, but will provide an updated outlook in the first quarter of next year. Weare very committed to managing the capital of our company to maximize anddeliver long-term shareholder value.

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

Question-and-AnswerSession

Operator

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

Margaret Mager - GoldmanSachs

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

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

Bill McComb

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

Jill Granoff

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

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

First, we are looking to really enhance the assortment. Wewill have a much more giftable assortment in Q4 beyond the core denim. We willhave a very strong program in knits, especially sweaters, which we believe arevery giftable. As Bill mentioned, we will also have jewelry, which hasperformed very, very well at wholesale. We will now have this in all of ourstores at retail. And we will also have kids rolling out to a 90 additionalstores on a shop-in-shop basis . And we believe that all of these will driveincrementally.

So, we feel very good. We are looking for positive comps inQ4 as well as continued momentum into next year. Just one last comment. We havesome marketing initiatives in place to ensure that we drive better performance.We have our first ever national ad campaign which will reach 25 millionconsumers, regional and national publications, men's and women's. We also havesome very targeted CRM initiatives. We have a bounce-back promotion which willkick in early November. We have a strong program for Black Friday. And we willhave a holiday mailer going out in December. So, we take this very seriously,and are hopefully taking all the appropriate steps to see renewed comp momentumin Lucky.

Bill McComb

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

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

Andy Warren

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

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

Margaret Mager -Goldman Sachs

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

Bill McComb

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

Margaret Mager -Goldman Sachs

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

Bill McComb

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

Margaret Mager -Goldman Sachs

All right, take care. Good luck.

Bill McComb

Thanks.

Operator

Thank you. Your next question comes from Brian McGough ofMorgan Stanley.

Brian McGough -Morgan Stanley

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

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

Bill McComb

Okay, I got you. First of all, we we're not suffering from alack of sales at Lucky, Juicy or Kate Spade from a growth perspective. Mexx isclearly the revenue trend in the third quarter from operations excludingforeign currency -- it was down. So, I would answer your question by saying ourview about marketing is that the marketing investments are very much focused onbuilding these brands to full potential. Kate, Lucky and Juicy are all down intheir S-curves. They have strong brand awareness. But, for example, at the July11 presentation, Jill presented that the Lucky Brand on an aided basis haveawareness in the 20% range. And there is a ton of long-term upside potential bydriving that aided awareness level up.

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

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

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

Andy Warren

Just to elaborate on that, Brian, for a second. There's noquestion your call-out around our investing now and for '08 is absolutelyright. We're looking to launch 100 additional stores this year. There isclearly some launch costs associated with that that we are incurring now. Billtalked about the marketing investments. And your call-out about additional costactions, it is something that we are always taking a hard look at. Even afterthis last round of cost reductions, we are always re-baselining what we need,what we have, and where we're going. So, definitely an ongoing effort and acommitment to all of you that in 2008, we're going to constantly reassess ourcost structure.

Bill McComb

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

Andy Warren

Absolutely.

Brian McGough -Morgan Stanley

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

Bill McComb

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

As it relates to fleet assessment in our ongoing brands likeLucky, Juicy, Kate and Mexx, Mexx has just come off a significant fleetanalysis, and the actions that they will be taking are incorporated in their500 basis point improvement plan. And when I say I'm really happy with thespecificity and clarity of the plan that Jeff has, that real estate rationalizationis but one component of it. On an ongoing basis, I think that as you pointedout, our organization is in a different place than many other retail-basedcompanies.

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

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

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

Brian McGough -Morgan Stanley

Great. That is awesome color. Thanks, guys.

Operator

Your next question comes from Virginia Genereux of MerrillLynch.

Virginia Genereux -Merrill Lynch

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

Bill McComb

That's correct.

Virginia Genereux - MerrillLynch

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

Andy Warren

That's correct. That's right.

Virginia Genereux -Merrill Lynch

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

Bill McComb

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

Virginia Genereux -Merrill Lynch

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

Bill McComb

You know what, I would just go back to your own opening linethere, which is third quarter is the most profitable. I wouldn't make anassumption about a distorted profitability of those brands versus the totalbasket. I mean, frankly, if those brands, if that were a representative profitmargin, they may not have been in the strategic review.

Virginia Genereux -Merrill Lynch

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

Bill McComb

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

Virginia Genereux -Merrill Lynch

Okay. And if I look out to next year then, if I think about-- you all said that you have $150 million in cost savings. Is that on a12-month basis? I mean, is it $38 million in SG&A savings per quarter? Oris some of that already -- for calendar '08, or is some of that already in the'07 numbers?

Bill McComb

The full year '08 number.

Andy Warren

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

Bill McComb

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

Andy Warren

No question.

Virginia Genereux -Merrill Lynch

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

Andy Warren

Well, we're still working through that right now. There's noquestion it will be significantly incremental, but specificity is not reallyknown right now.

Virginia Genereux -Merrill Lynch

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

Andy Warren

Absolutely.

Bill McComb

Yes.

Virginia Genereux -Merrill Lynch

Fair to say.

Bill McComb

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

Virginia Genereux -Merrill Lynch

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

Bill McComb

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

Virginia Genereux -Merrill Lynch

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

Bill McComb

You said Macy's and --?

Virginia Genereux - MerrillLynch

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

Bill McComb

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

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

Virginia Genereux -Merrill Lynch

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

Bill McComb

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

Jill Granoff

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

Bill McComb

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

Virginia Genereux -Merrill Lynch

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

Jill Granoff

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

Virginia Genereux -Merrill Lynch

Thank you.

Bill McComb

Thanks Virginia.

Operator

Thank you. Your next question comes from Jeff Edelman ofUBS.

Jeff Edelman - UBS

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

Bill McComb

I think that that is not true, what you just said aboutputting a lot of money in marketing and store openings. Mexx is going through astate of rationalization right now. And we haven't been exactly totallytransparent with the dynamics of that. And what Jeff is doing from his plan, ashe executes his plan, Jeff will provide more transparency into some of thedetails.

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

Jeff Edelman - UBS

Thank you, Bill.

Operator

Thank you. Your next question comes from Kate McShane ofCitigroup.

Kate McShane -Citigroup

Good morning.

Bill McComb

Hi, Kate.

Kate McShane -Citigroup

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

Bill McComb

It is across the entire Partnered Brands lineup. We areseeing that retailers are taking a very cautious fourth quarter inventoryposition, and our forecasts that are in the numbers today in today's forecast reflectreduced replenishment lines and canceled orders. And it includes all the brandsin the strategic review, as well as those that remain in the Partnered Brandsongoing portfolio.

Kate McShane -Citigroup

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

Bill McComb

Dave, why don't you take that?

Dave McTague

I mean, even as Jill had said, Kate, the obvious externalmacroeconomics, including the traffic decline, clearly it is not a conversionissue. It is getting people into the stores. So the inventory is there. Theyneed to get more people in the stores. Based on current turn rates, they'rejust being very cautious about influx of new inventory and on order. I thinkthat is, candidly, intelligent of them. And we're going to work through thatwith them very carefully. We're working to improve assortments with them at adoor level.

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

Kate McShane -Citigroup

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

Dave McTague

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

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

Bill McComb

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

Kate McShane -Citigroup

Okay. That's helpful. Thank you.

Operator

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

Jennifer Black -Jennifer Black & Associates

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

Bill McComb

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

Jennifer Black -Jennifer Black & Associates

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

Bill McComb

I'm saying fall '08.

Jennifer Black -Jennifer Black & Associates

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

Bill McComb

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

Jennifer Black -Jennifer Black & Associates

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

Bill McComb

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

Dave McTague

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

Bill McComb

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

Jennifer Black -Jennifer Black & Associates

Has the line done well -- the Villager line?

Bill McComb

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

Dave McTague

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

Jennifer Black -Jennifer Black & Associates

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

Dave McTague

I think you're right, Jennifer.

Jennifer Black -Jennifer Black & Associates

Thank you very much and good luck.

Bill McComb

Thank you.

Operator

Thank you. Your next question comes from Omar Saad of CreditSuisse.

Omar Saad - CreditSuisse

Thanks. Good morning.

Bill McComb

Hi Omar.

Omar Saad - CreditSuisse

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

Bill McComb

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

Omar Saad - CreditSuisse

Dave -- I'm sorry.

Bill McComb

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

Dave McTague

Clearly, as Bill has alluded to earlier, the brand positionclarity of this Liz Claiborne product and consumer is probably the mostimportant thing that I have been working on to understand and clarify. Currently,this Missy consumer who is completely uninspired in department stores, we'recompleting our specific initiatives around that product content with veryspecific design and merchandising initiatives, specifically around aggressiveproduct improvement.

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

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

Omar Saad - CreditSuisse

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

Dave McTague

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

Omar Saad - CreditSuisse

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

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

Bill McComb

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

But people are, I will have to say, very future forward.They are embracing the change. I think that some of the changes came directlyout of the mouths of our own people in terms of directing us to be more brandcentric, and wanting to make people more accountable, and wanting our corporatecenter to be, I will say, smaller with greater divisional power, but unitedunder a given strategy and a given leadership structure.

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

I can tell you that the Ellen Tracy line, I think has hadthe two best showrooms, I hear from customers, since Linda Allard left the business.And I look at the management team there, and I say, a great example of peoplethat have said they're really committed to their brand and their business, andthey're going to just carry on and carry forward. And they're doing that, andthey're leading the strategic review process beautifully. So, I could neversay, and I shouldn't be giving the impression that all is jolly and great. Ifanything, what I worry about it is just the fatigue of the team. This is a lotof change. And all of our people are working extremely hard on all of theelements, on compelling business plans for next year; on downsizing; in somecases, upsizing; putting the right talent in the right jobs. The focus onproduct and design has really kicked in. And so there's a lot of change.

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

Omar Saad - CreditSuisse

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

Bill McComb

We opened two stores. At the time we announced the strategicreview brands, we said that we were going to continue executing their businessplans. One is outside San Jose, and one is in Boulder. And they actuallyopen in the fourth quarter. And so we're continuing the plan that we had forthat brand.

Omar Saad - CreditSuisse

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

Bill McComb

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

Omar Saad - CreditSuisse

Okay. All right. Thank you very much.

Bill McComb

Thank you, Omar.

Operator

Thank you. Your next question comes from Bob Drbul of LehmanBrothers.

Bob Drbul - LehmanBrothers

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

Bill McComb

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

Bob Drbul - LehmanBrothers

Both.

Bill McComb

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

Dave McTague

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

Bob Drbul - LehmanBrothers

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

Bill McComb

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

Bob Drbul - LehmanBrothers

Great, Good luck. Thank you.

Operaor

Thank you. Your next question comes from David Glick ofBuckingham Research.

David Glick -Buckingham Research

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

Bill McComb

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

Andy Warren

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

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

David Glick -Buckingham Research

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

Bill McComb

Absolutely, yes. Any additional comments, Dave?

Dave McTague

No.

David Glick -Buckingham Research

Great. Thank you very much.

Operator

Thank you. We have time for one more question. Your finalquestion comes from Brad Stephens ofMorgan Keegan.

Brad Stephens -Morgan Keegan.

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

Andy Warren

Sure, but a couple of thoughts, one, part of theover-delivery is at Juicy. And they had again a terrific quarter, greatresults, great flowthrough. So, that is helping us relative to our view on July11. Also, we did have some better profitability than we expected out of Mexxfor the third quarter relative to our July view.

Bill McComb

Yes, it is all relative to plan, right?

Andy Warren

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

Brad Stephens -Morgan Keegan.

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

Andy Warren

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

Bill McComb

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

Operator

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

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