Liz Claiborne F2Q08 (Qtr End 7/5/08) Earnings Call Transcript

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Liz Claiborne, Inc. (LIZ) F2Q08 Earnings Call August 13, 2008 10:00 AM ET


William L. McComb - Chief Executive Officer, Director

Andrew C. Warren - Chief Financial Officer

Tom Fitzgerald - Senior Vice President, Direct Brands

David McTague - Executive Vice President, Partnered Brands

Michael Scarpa - Chief Operating Officer


Jennifer Black - Jennifer Black & Associates

Robert Ohmes - Merrill Lynch

Brad Stephens - Morgan Keegan

Kate McShane - Citigroup

Benjamin Rowbotham - Goldman Sachs

Omar Saad - Credit Suisse

Robert S. Drbul - Lehman Brothers


Good morning, everyone and welcome to the Liz Claiborne second quarter conference call hosted by Chief Executive Officer, Bill McComb. After the opening remarks, we will be taking questions.

This call is being recorded and is copyrighted material. Therefore, please note that it cannot be recorded, transcribed, or rebroadcast 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 2007 annual report on Form 10-K under the heading risk factors and in the company's quarterly report on Form 10-Q, which will be filed today with the SEC.

Also, please note that during this call and in the accompanying slides and press release, net sales, gross profit, gross margin, SG&A, SG&A percentage of sales, operating income, operating margin, net income, and EPS are presented on both the GAAP and non-GAAP basis.

A reconciliation of adjusted results to the actual results is available in the tables attached to the earnings release and the slides captioned “Reconciliation of Non-GAAP Financial Information”. The company believes that the adjusted results for the second quarter and first six months of 2008 and comparable 2007 periods and the adjusted projected results for fiscal 2008 represent a more meaningful presentation of its historical and estimated 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.

William L. McComb

Thanks. Good morning, everyone and thank you for tuning in to hear this recap of our second quarter 2008 business results which we summarized this morning in our press release and in our 10-Q filing. With me here in the room is: Andy Warren, our Chief Financial Officer; Mike Scarpa, our Chief Operating Officer; Tom Fitzgerald, Senior Vice President Direct Brands; and Dave McTague, Executive Vice President of Partnered Brands.

We reported adjusted earnings per share this morning of $0.09, beating expectations and our own earlier forecasted profitability for the quarter, driven by stronger-than-planned direct brand performance and higher cost reduction flow-through. And while the profit margins reflect a company that’s still in transition, we’re seeing leading indicators that we like in the midst of a very tough external marketplace.

In direct brands, we continue to see Juicy Couture growing across all categories and channels. This quarter, Lucky Brand posted a positive comp for the quarter with healthy full-price growth across the line and strong traffic in our stores. At Kate Spade, we expanded wholesale distribution and opened seven new outlets and eight new full-price stores during the quarter and the brand posted strong top-line growth. While we like the new stores and the marketing is getting sharper, this management team's product vision will only begin to hit stores this holiday.

At Mexx Europe, the turnaround is clearly taking longer than anticipated as many of the cost improvement programs that we put in place last year have been offset in the first-half by negative comps and a poor performing wholesale segment. Mexx Canada on the other hand continues to be a very strong performer.

Partnered brands continues its reinvention with strong results on DKNY Jeans and Kensie offset by very poor results on the Liz Claiborne and Claiborne Men's core apparel brands, brands that are on the verge of reinvention from a product and image perspective. Our focus on working capital continues to benefit us, as evidenced by the 26% reduction in inventories year-over-year, and we announced some very important initiatives during the quarter that advanced the turnaround.

You’ll remember we signed a broad fragrance licensing agreement with Elizabeth Arden, streamlining our cost structure while maintaining the ability to launch brand-enhancing favorites on a global basis with a first-class partner. In line with our focus on brand teams as business units, we announced that we incorporated sourcing leadership into the brands’ business units. At the same time, we announced a strong corporate leader for our sourcing development group. Peter Warner joined us on June 21st from Banana Republic and is now based in our offices in Hong Kong. Peter's role is to support the brand-based sourcing teams while leading our corporate technical resources and steering our new country of origin and vendor development efforts. He will also ensure what we call enlightened approaches to information sharing and learning across the brand teams. Ultimately, we think this structure will make us more competitive, more aligned with brand strategy, and easier to work with.

In addition to Peter Warner, we announced three additional key executive appointments: next Monday, Edgar Huber joins us as Global President of Juicy Couture, coming from L'oreal; Beth Reeves joined us just last week as Senior VP of Human Resources, coming in from Lincoln Financial; and Evon Jones joined us last month from Bausch & Lomb as Chief Information Officer.

In this morning's press release and in the filing, we announced that we are narrowing our fiscal year 2008 adjusted earnings per share guidance to a tighter range of $1.40 to $1.60 per share, reflecting the still conservative outlook for the back half of the year. We narrowed the range, given that we’re assuming no improvement in the macro environment, nor any significant improvement in the Mexx retail trend in Europe.

For greater detail on the second quarter financial performance, I would like to hand it over to Andy Warren, our CFO, and let me clarify there the range that we -- that we guided was $1.40 to $1.50 a share, okay? I may not have said that correctly. Andy.

Andrew C. Warren

Thank you, Bill and good morning, everyone. Before I launch into a detailed review of our second quarter 2008 financials, I would like to take a minute to clarify some definitions we are using to report our company’s adjusted results. These adjusted results exclude the impact of expenses resulting from our previously announced plans to streamline our operations in both 2007 and 2008 and the loss on disposal of discontinued operations, as well as the results of discontinued operations.

We believe that these adjusted results provide a much more meaningful perspective on our operational and financial performance.

To further clarify our second quarter results, on page three we show the composition of our partnered brands segment and highlight its evolution since we completed our strategic review process and narrowed our portfolio to encompass the most compelling and viable brands.

This refined portfolio will better enable us to effectively redirect resources to maximize future growth and profitability. The brands highlighted in yellow represent our ongoing partnered brands, the brands that we want to nurture and grow long-term. The other listed brands are those that we have either sold or exited.

We believe references to this ongoing group of partnered brands provides a more meaningful and relevant view of our partnered brands sales activity.

Our reported 2Q financial results include First Issue, Sigrid Olsen wholesale, Ellen Tracy wholesale, City Unlimited, and Realities because these closed or exited brand activities were not part of our GAAP discontinued operations.

Allow me now to walk you through our second quarter financial results.

Slide four, titled “2Q08 Adjusted P&L Summary” -- overall adjusted sales decreased 8% versus last year, due to decreases in our partnered brands segment partially offset by increases in our direct brand segment. Ongoing total company sales, as I just defined in the previous slide, declined 4%.

Changes in foreign currency exchange rates increased net sales by approximately 4% during the quarter.

Gross profit margins were down 45 basis points, driven by higher promotional activity across the portfolio.

I’ll hold off on discussing SG&A expenses until the next slide. On the bottom of the slide, however, adjusted operating income for the second quarter was $21 million, compared to $45 million last year.

Our operating margin decreased year over year to 2.2%. This operating margin is clearly unacceptable and we remain extremely focused on improving this critical metric through continued cost productivity and enhanced gross profit flow-through.

Adjusted diluted EPS from continuing operations was $0.09, compared to EPS of $0.23 in the second quarter of 2007. This bottom line result beat both our internal forecast as well as analyst consensus, largely due to lower total G&A costs and better-than-expected retail performance at both Juicy and Lucky.

Now slide five, titled “Adjusted SG&A Bridge” -- as you have heard me say before, one critical element of our turnaround plan includes a significant redeployment of resources to support long-term goals. This means achieving real cost productivity in some areas and redistributing those cost savings to meaningful growth opportunities. On this page, you see our adjusted SG&A bridge from the second quarter 2007 to 2Q08, highlighting the cost reductions and our reinvestment levels.

We were very pleased with our overall $22 million year-over-year reduction in total G&A spending. We have significantly reduced cost in both our corporate overhead and partnered brands segment. Cost reduction initiatives in these two areas achieved $75 million in savings for the quarter. To support the build-out of our direct brands, we redeployed over $27 million in retail expansion, critical people, retail infrastructure, and marketing. We remain extremely focused on right-sizing our general administrative costs while investing in our future growth drivers.

Slide six, titled “Direct Brands 2Q Performance” -- we were very pleased with the strong sales growth in our direct brand segment in the second quarter, especially given the very challenging consumer retail environment. Total sales for the quarter were up 17% to $578 million, up 10% excluding the impact of changes in foreign currency exchange rates. Direct brand segment operating margin was down 260 basis points to 4.7%. This result was driven -- mainly driven by decreased operating margin performance at Mexx Europe, softer wholesale margins across the segment, and planned SG&A investments.

As we outlined in the last slide, these critical brand-building SG&A investments: retail expansion -- we opened 130 net new stores over the last 12 months; key management hires; and marketing, all continue to support and fuel future growth for the segment.

Juicy Couture had another amazing quarter, exceeding our already robust expectations. Total sales across all channels and categories were up 48%. Comp store sales were up 13%, with strong performance across both full price and outlet stores. Juicy continues to post best-in-class retail metrics. Lucky comps were up 5% in the quarter, a reversal of the negative comp trend we have seen over the past two quarters. Positive comps in our full price retail stores were driven by performance in accessories, kids, and tops. Increased denim penetration at higher price points also drove strong comp performance in our outlet stores.

Kate Spade posted comps down 7% for the quarter. We experienced weakness in our full price stores as we transitioned to the new Deborah Lloyd product, while outlet performed better, with design for outlet product resonating well with consumers. We were pleased with wholesale results. With double-digit sales increases and strong international performance, Kate continues to focus on laying the foundation for future growth.

Global sales for Mexx were up 7% for the quarter, down 7% excluding foreign exchange rates, with retail comps down 2%. Mexx Europe had a very challenging quarter, with retail comps down 7%, as the new product was not enough to offset traffic decline. Mexx Europe continues to be a drag on our overall segment operating margin, as the turnaround is taking longer than expected. Bill will outline our performance metrics and turnaround plans for Mexx Europe later in the call.

Mexx Canada retail comps, however, were up 6%, driven by increased traffic and conversion rates. We continue to be quite pleased with our Mexx Canada business and its long-term growth outlook.

Slide seven, titled “Partnered Brands 2Q Performance” -- as expected, total sales for the second quarter were down 31% to $380 million. Ongoing partnered brands sales were down 25%. Operating margin performance in the partnered brands segment was down 330 basis points year over year to a negative 1.6%, reflecting high promotional activity for both Liz Claiborne and Claiborne brands, as well as our Liz Claiborne outlet under-performance. These negative trends are partially offset by improved inventory management.

As I’ve said before, we remain extremely enthusiastic about the turnaround of these lines by Isaac Mizrahi and John Bartlett but they will not impact our results until the spring of 2009. We continue to plan the remainder of 2008 conservatively, especially given the challenging macro and retail environments.

We are clearly in a critical transition phase for this segment. Bill will describe our margin recovery plan later in the call.

Slide eight, titled “2Q08 Balance Sheet and Cash Flow” -- here's a snapshot of our key balance sheet metrics. We ended 2Q08 with inventories down 26%, down 29% excluding the impact of foreign exchange rate fluctuations. My next slide provides a deeper inventory analysis.

Our total-debt-to-total-cap ratio was 38.6%, compared to 25.4% last year. This increase reflects: one, the impact of our year-end 2007 goodwill impairment, which added approximately 630 basis points; two, foreign exchange retranslation of our Euro debt, which added another 210 basis points; and three, capital expenditures, share repurchases, and [acquisition-related] payments over the past year.

Cash flow from operations over the last 12 months was $254 million. Our cash flow was down $61 million year-over-year, driven by higher streamlining expenses and the impact of the 2008 fiscal calendar.

We continue to be pleased with our working capital management of inventories and receivables and are confident that we will grow total year cash flow from operations to $325 million to $350 million.

Capital expenditures were $201 million for the last 12 months. Most of this capital spend was dedicated to the addition of 130 specialty and outlet stores. We are now forecasting total 2008 capital expenditures of $195 million; $15 million less than our previous guidance of $210 million. Given the tough environment, we have reexamined our spend levels and decided to lower our capital expenditures for the remainder of the year.

Now slide nine, entitled “2Q08 Inventory” -- on our third quarter 2007 earnings call, we committed to thoughtfully and aggressively reduce inventories and put in place tight internal controls to manage inventories down throughout 2008. We have made significant progress, ending the second quarter with inventories down 26% compared to 2Q07, despite foreign currency exchange rates increasing inventories by $22 million. Direct brand inventory increases were in line with its expanded retail footprint, while partnered brands successfully managed in-flow and reduced ongoing levels.

Slide 10, titled “Debt and Cash Forecast” -- we ended the second quarter with $898 million of total debt, down $91 million from the first quarter. This slide is intended to clarify and guide our forecasted year-end debt position. As you have heard me say before, we are very focused on utilizing free cash flow to pay down debt. We ended 2007 with just under $900 million of debt; $587 million related to the Euro bond and other debt facilities, as well as $301 million of outstanding revolver debt. By the end of 2008, we are forecasting our total debt balance to be in the range of $725 million to $750 million, driven by healthy free cash flows, more than offsetting planned capital expenditures and the impact of foreign currency exchange rates. As we look forward, we will continue to utilize our free cash flow to pay down debt and plan no share repurchases or acquisitions in the near- or medium-term.

We are also announcing today that we have entered into a second amendment to our revolving credit facility which matures in October 2009. Given our current financial forecast, this amended deal we believe will provide us with the adequate liquidity and financial flexibility going forward.

We are also currently in active discussions with our banks regarding the timing and tenor of a new bank facility.

Slide 11, titled “Narrowing Full Year 2008 Guidance” -- now that the first half is behind us and we are solidifying our second half forecast, we are narrowing our adjusted EPS guidance range for the full year of 2008 to $1.40 to $1.50, from a previous range of $1.40 to $1.60. This new range reflects our expectation of a continued difficult macro environment throughout the remainder of the year.

We are, as we have been throughout the first six months of the year, very focused on controlling the controllables and managing through this tough economic backdrop.

Lastly, we are providing third and fourth quarter adjusted EPS guidance of $0.37 to $0.42 and $0.66 to $0.71 respectively, in order to properly baseline our expected second half earnings cadence. This split, which is more heavily weighted to the fourth quarter, reflects the ongoing evolution of our business model as we become a more retail-centric company. For comparative purposes, our 3Q07 and 4Q07 continuing operations adjusted EPS were $0.60 and $0.24 respectively.

Regarding this fourth quarter guidance, let me take a minute to explain why our 4Q08 EPS expectation is significantly higher than our 4Q07 actual results. There are many significant drivers, including: one, several brands under strategic review, including Sigrid Olsen, reported operating losses in the fourth quarter of 2007. These brands have either been sold, closed or exited; two, the addition of approximately 120 new direct brand stores will add incremental profits versus 4Q07; three, our lower corporate and partnered brands SG&A cost base versus last year; and four, remember that 4Q07 was negatively impacted by several non-recurring problems which we have addressed, including both the year-end miss in our cosmetics business, which is no longer an exposure for us given our license deal with Elizabeth Arden, and that partnered brands had a big miss in its European division, which is not anticipated this year. Therefore, these factors support why 4Q08 EPS is expected to be significantly higher than 4Q07.

Now, Bill will give his overview of our key financial metrics and brand highlights. Bill.

William L. McComb

Okay. Throughout the past year, we’ve made huge organizational progress -- talent, capability, leadership, team alignment, design and product initiatives that we’ll be springing forth soon, cost structure, brand vision, and long-range planning -- the most important steps in a turnaround like this. Reflecting here on the financial metrics, we have leaned our corporate infrastructure in our partnered brands group with adjusted SG&A in total down $75 million versus second quarter of last year. We also remain on track to exceed the $150 million in cost reductions in 2008 that we promised a year ago.

You can hear from Andy's discussion that inventories and cash flow have been areas of focus for us as well. Our teams have done a significantly better job managing product in-flow and liquidation. We remain on track for the $325 million to $350 million of cash flow from operations in 2008, which is up $50 million to $75 million versus 2007, and we’ve reduced debt in the second quarter, as Andy said, by $91 million versus first quarter of this year.

These are good metrics but as our brand and product initiatives begin to hit going forward, our sights are clearly set on improving the productivity of our current asset base and driving real profit margin expansion. So while we are not counting on a robust economic recovery in 2009, we are setting targets and planning initiatives to achieve further SG&A reduction, operating margin expansion, and enhanced return on invested capital starting in 2009, setting us up to achieve the goals you see here for 2010.

In partnered brands, we are focused on achieving healthy natural margins, resulting from higher full price sell-throughs at current revenue levels to restore profit margins. In time, revenues will build with a healthy business but the mantra to our team is not to focus on building bigger sell-ins initially.

En route to an SG&A rate targeted closer to 40% in 2010, we are planning an additional restructuring in our distribution and sourcing organization, with further reductions in corporate infrastructure and additional cuts in the Mexx operating base. The partnered brands group also has additional streamlining to go, in the range of cuts of 8% to 10%.

All of these are either planned for the back half of 2008 or 2009.

The most important metric for our team is clearly the operating margin. We are targeting an overall operating profit margin of 9% to 11% for 2010. The SG&A initiatives are one driver; the product and brand initiatives that we have routinely described in our direct brands discussions are the other, and clearly the restoration of margin in partnered brands is another.

In targeting an ROIC of 12% to 14% in 2010, we are maintaining a strong commitment to managing working capital and inventory. In 2009, we will focus on improving the four-wall productivity of our current retail base. To that end, we are currently reconsidering our capital spending targets for the business for both 2009 and 2010, and while we plan to provide guidance on the capital budget when we issue earnings guidance in November, we are planning a reduction in the number of new stores we open in 2009 for Lucky Brand, Kate Spade, and Mexx, bringing the forecasted total across all four concepts down by 50%, to some number in the range of 35 to 45 in total, including outlets.

On one hand, we think it reflects an appropriate pacing of growth in businesses like Lucky Brand and Kate Spade that have expanded very quickly in the last year, and on the other hand we think it’s prudent to take a pause with store construction and our overall capital spending level at a time when there’s so much market uncertainty. We see real top-line growth opportunities in our own retail stores in 2009 across the direct brands after opening 23 full price stores at Lucky Brand this year and 23 outlets; and at Kate Spade, 22 full price stores and 16 outlets.

The management teams at both Kate Spade and Lucky Brand have developed new store concepts and they want to learn from those before authorizing the next major tranche of stores, and their goals for 2009 are centered on current store productivity and enhancement.

At Mexx, we are still re-trenching the distribution base overall and with the exception of some expansion in the high growth Eastern European markets, new store growth is not planned. Our Juicy rollout, however, remains unchanged.

These teams are working closely with our real estate group to ensure that we move forward with the best locations but on balance, a plan of new additions for Juicy Couture, Lucky Brand, and Kate Spade would total around 35 to 45 in 2009, and we think that that looks right at this time.

So with the theme of productivity in mind, let me now walk you through the initiatives in each of these brand groups.

Our story in partnered brands is familiar from the first quarter. The retail environment is tough, with traffic reductions in several of our key accounts and outlet stores. We saw performance on Kensie and DKNY jeans in both the first and second quarters, bright spots in a portfolio that shows what can happen when product and brand are right. Profitable growth can be achieved, even in a tough environment.

On the other hand, the apparel product on the core Liz Claiborne and men’s Claiborne lines was subject to significant promotion again in the second quarter. An important part of our overall investment thesis rests with restoring operating profit margin in the partnered brand segment. There are four levers for doing that and I think it’s worth taking a minute just to review them.

First, sell-through levels of the core brands, Liz Claiborne and men’s Claiborne by John Bartlett -- as we get closer to the restage of these two heritage brands, we are ever more the believers in our ability to restore profit margin to the overall segment. As we show the Isaac Mizrahi design reincarnation, which we will be presenting at the September wholesale market in a few weeks, our emphasis in the showroom is not on driving significant revenue growth or growth in receipts for 2009 but instead on assorting the lines very carefully to achieve superior full-price sell-throughs, very important point.

Revenue expansion on these brands is not the first step to bring back profitability. With a real marketing story, editorial support, and clearly stronger merchandise, we believe that natural sell-through rates can more than double from today’s levels, reducing the needs for today’s high levels of promotional spending and thereby restoring profit margin.

The second area is additional cost reduction and partnered brands. We believe that an additional 8% to 10% cut in costs can be achieved.

A third and very important lever is outlet. This was historically a very profitable segment of the company and for partnered brands and remains -- we have 98 Liz Claiborne factory outlet stores, which fell to negative profitability this year. Part of the problem has been product mix in the stores during transition as we stopped selling brands that used to be distributed in these stores, like Emma James and J.H. Collectibles and Sigrid Olsen, and as we are transitioning the merchandise strategy of these stores. We look at outlet as a very important channel for the newly redesigned Liz Claiborne New York line and see it as a significant contributor to margin recovery in the segment.

And fourth, Kensie, Monet, and DKNY Jeans all had major growth opportunities. Macy’s is expanding Kensie’s distribution from around 110 doors to over 400 by the end of 2009. The business has registered triple-digit growth year-to-date, albeit off a small base. And on Monet, we discontinued the Monet 2 brand in an effort to control and limit the distribution of the brand, which has caused a decline this year but the brand is transitioning to a model with fewer SKUs offered more frequently, like every 30 days, all with more elevated product, and we are receiving a very positive reaction from our retail partners to this model.

The core DKNY Jeans business is growing in high-single-digits so far this year and we are very proud of that team’s capability and the traction that brand has with the consumer in a zone that frankly can be tough.

We’ve talked about the launch of the new DKNY men’s better sportswear line which makes its debut this fall and expands more broadly in spring of ’09. Expansion of these growth brands will be an important part of bringing back the margin and partnered brands as well.

Now, as I said, Juicy is continuing to grow in spite of the tough economy. We opened 15 new stores this quarter and saw healthy comps in both full price and outlet. We now have 73 full price stores and outlets.

In our last call, we talked about the To Sleep intimates and loungewear line that we are launching. Today we are in 160 better wholesale doors and all of our retail stores with that line. It’s an emotional category and adds more opening price points to our overall merchandise mix. We will be opening our first new Juicy To Sleep concept store in the latter part of 2008 or in early 2009. Details will follow.

Second quarter also saw double-digit growth in wholesale, with strong growth in our international business, and as we’ve said we announced that Edgar Huber will join us next Monday as Global President of this business. Edgar brings both wholesale and retail brand building experience for L’oreal. This was a very important appointment for the company.

Looking forward, we will open our Fifth Avenue New York City location in early October. We will also relaunch in the third quarter and the team continues to execute its bold strategic plan, which includes its retail expansion, tapping international markets, and launching new product categories.

On Lucky Brand, we’re executing the product plan we’ve been discussing with you. This quarter, we opened 17 new stores. We saw positive comps in both full price and outlet driven by an improved inventory position and growth in the focus areas of accessories, trend right tops, and kids. Denim was also up.

We also saw impressive growth in the e-commerce business as well. We’ve now shipped our fall fashion denim assortment for the third quarter and we continue to focus on the brand’s tops to bottoms ratio, as we’ve discussed.

As we’ve indicated, after opening a significant tranche of stores this year, many still to be opened this fall, we’ve cut back the plan for 2009 to focus on productivity in our current store base. With the product initiatives well-defined and clarity in the management’s teams goals and the consumer opportunity, we want to execute the plan and build comps as the priority next year. We like the cash and capital implication as well for the overall company, so this team is completely focused on their merchandising initiatives and retail metrics and strengthening their brand execution in store.

Kate Spade -- Kate Spade posted double-digit top line growth. Both wholesale and retail segments grew in the quarter, with the stronger wholesale presence in Bloomingdale’s, Nordstrom, and Lord & Taylor. Our comp base still reflects the heritage acquired store base and posted negative comp door growth in those stores, while 15 newly conceived and designed stores were opened. Stores open in 2007 that are still not in our comp base have an average productivity of 20% greater than these heritage stores that are in the comp base, so we like what’s happening with our new stores.

This quarter, the division filled out their management team with the hiring of a Vice President of Marketing and posted positive traction in both e-commerce and international.

The most important initiative in this division remains elevating the product line with the spring 2009 collection, which we are showing now, while improving the marketing execution this fall. As with Lucky Brand, we will be focusing on driving comp growth with the new product line in 2009, reducing our planned store openings significantly for the year.

The growth potential in the newly launched store fleet, which will include another 19 to be opened yet this fall, allows enough growth stimulus for 2009 that the brand can afford to take the time to swallow what it’s built and growth methodically while also expanding in wholesale as well.

And in 2010, we expect to return to a more aggressive store opening plan, with a new product line learning and productivity improvements under our belt from 2009.

At Mexx, we have two very different performing businesses there. Our Canadian Mexx business, which is roughly $260 million in sales annually, and our European Mexx business, which is about $1 billion in sales. The Canadian business is very healthy, registering positive comp store growth this quarter across a base of 92 stores in both full price and outlet formats, and total sales were up 29%, doing well in both wholesale and retail. This is one of our healthiest businesses from a margin perspective as well.

The problem child right now is the Mexx European business, as we’ve discussed. Adjusted for FX, sales were down 12% with a negative comp of minus 7% in the 135 specialty retail stores and outlets. Concessions also posted negative growth. Throughout the first half, we saw declining traffic patterns. The monthly trend has improved over time but even so, traffic continued a downward trend in the quarter, negating the cost improvements that were put into place.

There are several levers to turn this business around. The improved product that we’ve been talking about is shipping to stores right now. The focus of that product improvement has been quality, fit, and aesthetic, all three. The improvements to the positioning will be clear by early September in the windows and in the stores, but we regard these as important first steps, not the total solution. More bold news with moves with product and in-store merchandising are planned for spring ’09 while we study which segments and which geographies of the business can be managed more profitably. The exit from the retail U.K. business is almost complete and the initiatives to improve store operations have begun. Also, we are actively assessing options to improve our sourcing in terms of cost, speed, and quality at Mexx.

We are not prepared right now to get into any detail on the considerations there but we see real savings and speed advantages that are achievable.

As we’ve indicated, this turnaround is taking longer than we anticipated last year but we are confident that the business with strong roots in five core Western European markets and a strong growing base in Eastern Europe. We will take all the right steps to accelerate the turnaround.

So we’ve covered a lot of ground today in this call. You’ve heard our second quarter results, you’ve heard our view for the remainder of the year. As we look forward and manage the macroeconomic challenges, you are hearing a strong focus on productivity and margin expansion. We talked about product, cost, capital, and brand initiative to achieve it. We’re on the verge of relaunching the Liz Claiborne brand and the men’s Claiborne line. We are expanding our fast-growing businesses and partnered brands. We are focusing on completing an aggressive store build-out in 2008, then building same-store sales growth at Lucky and Kate Spade in 2009 behind what we think are very strong product and brand initiatives, and we are continuing the Juicy expansion via product categories, channels, and geographies, while feeding the Mexx Canadian business and significantly retrenching still on the Mexx European business. That’s the plan.

Clearly the next call in November will be a time to talk about our 2009 outlook for the business and provide more clarity around key components of the business.

In terms of upcoming events, with the women’s spring wholesale market in early September and men’s underway this week, we will have an important milestone coming soon. We are particularly excited to reveal the vision and product initiatives behind the new Liz Claiborne New York line and the Claiborne by John Bartlett line. We will be hosting a session here in New York City for analysts to see the line and learn about the plans. Stay tuned for more information from our investor relations group on that event.

So thank you for joining our call this morning. At this time, I would like to turn the call back to Pam to take some questions.

Question-and-Answer Session


(Operator Instructions) Your first question is coming from Jennifer Black with Jennifer Black & Associates. Please go ahead.

Jennifer Black - Jennifer Black & Associates

I have a couple of questions; Red’s goods you said would be fully into stores at Mexx in September. Is that correct?

William L. McComb

Yes, you are speaking of Red Gottfried, the head of design. Correct.

Jennifer Black - Jennifer Black & Associates

Yes, and I just wondered, are there any changes that she has made to the holiday assortment just based on the current environment?

William L. McComb

I think that the answer to that is changes versus the fall assortment, which is shipping now, Red has continued to refine what -- the changes in product execution there. Overall, I talked about changes in fit, changes in quality, and with regard to aesthetic, they reduced the number of SKUs, the line has a clearer refinement to it, and they spent some time with consumers in each of their five core markets to get reactions to the fall line, and they made what I would call tweaks. The overall position and product aesthetic that they have pushed harder to reflects a contemporary, diverse, and true European brand look. And I think that what one of the call-outs or one of the changes from the consumer research was a merchandising one to reflect a slight change in the mix of casual versus city refined. But not what I would call a quantum leap.

Jennifer Black - Jennifer Black & Associates

Okay. All right, I was just kind of curious. And then two, I wondered if you could give us an idea of what we should expect on operating margin goals for the direct brands say over the next year or the next two years; if you could just give us an idea of what you guys are thinking.

William L. McComb

Well, there are a couple of places that we would tell you to turn in what we’ve talked about before. I mean, today what we said is we’ve talked about the overall enterprise in 2010 having an operating profit margin in the 9% to 11% range. We’ve long talked about the long range aspiration for direct brands to be in the mid- to high-teens on an operating margin perspective, so I would just use those two data points really to answer your question. Clearly in November when we come forth with guidance for 2009, we’re going to provide a lot more specifics on the capital budget, more specifics by concept on number of stores to expect next year but between those two guideposts I think would lay the answer.

Andy, do you have anything you would like to add to that, or Tom?

Andrew C. Warren

No, I think that’s right, Bill. I mean, clearly, Jennifer, our 2Q numbers would be most [depressed], just based on the cycle and where we are. We do anticipate better operating margins in the second half, more naturally -- especially as we drive results and comps and cost out. But at this point, as Bill said, we are looking at higher operating margins both second half and certainly ’09 and ’10.

Jennifer Black - Jennifer Black & Associates

Okay, and then I just have two more questions -- Lucky, the new denim launch, how is that going?

William L. McComb

Well, it’s just an anecdotal response because we are not making forward-looking statements in terms of sales in July or August, to answer your question, the new denim launch formally shipped on 7/27 to all doors. We had been testing -- Jennifer, now you are referring to some of the initiatives that we have been talking about really since the beginning of the year where we are increasing the assortment of fashion denim in our overall denim mix, such as the Zoey fit for women and washes that reflect what we like to refer to internally as the Saturday night look rather than a Saturday look -- darker and richer and I’ll say in some ways a more embellished cut.

So the answer is it’s too early to tell. I mean, our consumer reaction from the test, if I can call it a test, it was sort of an early roll, but it was very, very positive and clearly helped with the second quarter positive comp that you saw on the increase in denim side. So we’re happy with it and yet we are just getting started. I think that that team really has a very clear, bright, bold exciting vision on denim.

Tom, what are your comments?

Tom Fitzgerald

I think that’s right. I think the team really launched those two fits as the first foray into the expansion and evolution of the women’s denim assortment, so there’s more to come with a new merchant in place and a relatively new designer. So we are excited about what’s ahead and initial signs are positive from those two launches.

Jennifer Black - Jennifer Black & Associates

Great, and then lastly, the Euro rate you used at the end of the quarter and the Euro debt to convert to dollars, can you speak to that?

Andrew C. Warren

Sure. It was in the second quarter, as you know, Jennifer, especially versus last year the dollar had weakened, so we were at -- let’s call it $1.57, $1.58 on an exchange rate basis. So that’s one reason why if you look at my slide 10, you see that perceived increased debt based on the exchange rate makes our debt look like we have more debt when it’s really more of a translation of the Euro bond.

Jennifer Black - Jennifer Black & Associates

Right, so it’s $1.57 -- okay. Thank you very much.


Thank you. Your next question is coming from Robert Ohmes with Merrill Lynch. Please go ahead.

Robert Ohmes - Merrill Lynch

Thank you. Actually, a couple of quick questions; the first one, I think I might have missed it -- can you remind us, and I apologize again if you went through this -- can you just remind us the outlook for Dana Buchman and the Kohl’s launch and what the plan is with that and how big that business could be?

And then my second question, the -- I think the dollar cuts to the corporate SG&A looked pretty good, pretty sizable but you are hiring a lot of talented people at the same time. Can you sort of help us conceptualize what sort o the fat was that you are cutting on the corporate SG&A side to get these streamlines?

And then the very last question, maybe for Andy, I know it’s a little early and you are not going to really talk about ’09 overall until you report the third quarter but given the growth of the specialty retail, are you expecting a pretty significant seasonality shift so that the -- you know, even further so you should see a lot more of the earnings coming in the back half of ’09 than the front half? Thanks.

William L. McComb

We’ll take it from the top. Good questions. The first thing to know about Dana Buchman, we didn’t talk -- you actually didn’t miss it. We didn’t discuss it in this call because we are still shying away from many of the things that we will discuss in November, which is some specifics on ’09. Dana Buchman launches in spring ’09 at Kohl’s. It’s also a licensed business as you know, Robbie, which means that Kohl’s needs to be the one that talks to you about how big it can get. They are very serious about it. They are a fantastic partner. They have embraced it.

Dave, why don’t you speak to what’s happening internally here in preparation for that launch.

David McTague

Thanks, Bill. Robbie, based on the licensing model, we have deployed a very specific design and merchant team to interface very collaboratively with the Kohl’s manufacturing and merchandising teams, so it’s very much a unique collaboration, unlike what most of the market has seen.

To Bill’s point, Kohl’s can speak to the growth path of that but we are well into and deep into the design phase, proto stage, et cetera, on every category of business. It will be a pillar on their floor as they build into this new updated business that they think is going to be a very good growth vehicle for them. So we are thrilled about it, we have a great relationship with them and stay tuned on the product.

William L. McComb

Okay, next question I think that you asked related to the sources of the cuts that we’ve made from an infrastructure perspective, so we got probably a couple of people that can provide some different color on that. Mike, why don’t you -- Mike Scarpa, why don’t you start?

Michael Scarpa

Sure. From a supply chain perspective, we really looked at two main areas -- one has been our sourcing area and the other has been our distribution network. From a sourcing perspective, the formation of global teams has eliminated a lot of the redundancies that used to take place between our offices in Asia and our U.S. based associates, and we’ve also focused on shifting processes from the U.S. to Asia, and that’s resulted in significant reduction of SG&A in the sourcing group.

We’ve definitely rationalized the distribution network also, closing of two additional distribution centers this year and we are constantly looking for ways to get [inaudible] [on our retailers] a much faster pace at a less expensive cost factor.

William L. McComb

And on the last call and in the last slide deck, Robbie, we provided a netting, if you will of what was happening with cuts, and I think Andy, you did it again this morning, a netting of the cuts with the additions.

Tom, do you want to speak just for a second to some of the capabilities that we’ve been adding in that are shown on that chart on the direct brand side?

Tom Fitzgerald

Yes, particularly at Lucky, we filled some key leadership roles there which the brand had been running vacant on, and we are thrilled with the additions we have made to the team, both in terms of leading stores, leading the merchandising, leading visual. But we made some key hires there.

And then also, we’ve talked about before of building our retail capability, particularly around things like merchandise planning and allocation as we really ramp up our capability there, moving both in terms of people, process, and systems and we have made some key hires in merchandise planning leadership as well to lead our brands and also to lead our transformation effort across all of our brands.

We have a very small team in headquarters really working on process and tool implementation that we are in the midst of. So I think appropriately targeted at the right areas as we look to augment our wholesale heritage and capability with a far stronger retail capability.

William L. McComb

Okay then, Andy, why don’t you address Robbie’s question about the fourth quarter skews?

Andrew C. Warren

For sure, Robbie, when you think about ’09 and beyond, there’s definitely going to be a second half skew here of earnings as we become more retail centric, but just to take that one step further -- as we think about the second half and part of what we announced was the split between 4Q and 3Q, and as we look forward, there’s no question that 4Q would be our richest quarter from an earnings perspective and we see that in ’08 and we see that in ’09 and beyond, so I think the second half skew and the fourth quarter skew is something that I think all of us need to be baking into our models and thinking more explicitly about.

Tom Fitzgerald

I think maybe one thing to add on that, the direct brands, and I think all of our brands but particularly direct brands have tremendous emotional connection and I think a lot of room to grow in terms of gift-ability, which will help key holiday periods throughout the year but particularly around Q4. So I think [not] that’s a good thing but will skew it even a little more as we continue to elevate the giftabilty aspect of those brands.

William L. McComb

Okay. Pam.


Thank you. Your next question is coming from Brad Stephens with Morgan Keegan.

Brad Stephens - Morgan Keegan

First question I have is on the direct brands -- looking at the operating margin performance this quarter, could you give us an idea of how the gross margins performed this quarter? And then maybe just some more color on the retail gross margins there and the wholesale within the direct brands?

William L. McComb

Sure. Tom.

David McTague

One important thing we highlight on page six is this notion of we know about the Mexx turnaround, we know about some of the issues Mexx is having. Clearly Mexx has been dilutive to our overall segment margin profitability and gross margins, so that’s the biggest driver for us. Tom, you can elaborate on the domestic side.

Tom Fitzgerald

Sure. I think we’re not immune to the pressures of the macroeconomic environment and our retail partners cutting back in inventory and the pressure on promotional, on price and promotion. So it’s maybe less so than others but I think that’s -- we’re not immune to that in any respect and we’re trying to counterbalance that with other actions within the brands.

Brad Stephens - Morgan Keegan

So the gross margins in the segment are definitely down then this quarter?

William L. McComb

I don’t think, if you are talking about the three [U.S.-based] brands, there’s not a significant amount of pressure on gross margin. I think it would be fair to say that there’s not a significant amount. There’s some pressure on it, what you hear Tom saying. I think between the two of them, you hear Andy saying that the greatest pressure point on this operating margins is coming from Mexx Europe.

Tom Fitzgerald

From the segments.

William L. McComb

Yeah, at a segment level.

Brad Stephens - Morgan Keegan

So to that, can you give us an idea of where Mexx is at from an operating margin performance, maybe where you expected it to be at the start of the year, and how to think about this going forward, given the initiatives, so we can track the progress of the margin performance in this division?

William L. McComb

We’ve always laid out that this is a business that has historically run at an EBIT margin between 6% and 8%, I mean, going back to the beginning of time, if you will, from when we acquired the business. Our aspiration a year ago was to push this this year significantly toward a double-digit EBIT level and our plans have been set back by the actual traffic and conversion reductions in our stores and even a softer gross margin at wholesale as the European market has gotten tough and as Mexx from a product perspective has not performed for frankly, several seasons running now.

And so if we were to tell you what are we doing, I mean, you go back to that recipe, if you will, that we laid out in the presentation a few minutes ago that there is absolutely no substituting natural margin performance in wholesale and at retail. Productivity of our own stores via product sell-through and the performance in wholesale goes a long way to fixing that EBIT margin.

And additionally, we have -- there are still more infrastructure and what I’ll call segment or geographical portfolio decisions to be made on the business and we are going through those right now and frankly accelerating them.

We don’t have a read yet on product that we just began shipping, kind of like the Lucky Denim that Jennifer asked about. We just began shipping Red Gottfried’s, her team’s new vision for the line and there’s no question that in September, the stores are going to look better, the product is going to look better. It fits better, the quality is much better. But in the interest of full disclosure, I mean, we’re not saying this is the cure. This isn’t a -- it takes a while to sort of bring your consumer back and we’ve done a lot of research there.

But you add those things up and that’s how we are going to bring the margin back there.

Brad Stephens - Morgan Keegan

All right. Thanks for the color there. Two last quick ones -- if you could talk about just geographically within Europe what you are seeing, obviously a lot of negative data points coming out in general. And then last, the color that you gave on the fourth quarter, I think there were four items that should improve substantially year over year. If any of those, if the magnitude is greater than the rest of the three other initiatives, can you just give us an idea of what the biggest of those, the deltas are year over year?

William L. McComb

Andy will talk to that. I’ll give you color on Europe first. We said at the end of first quarter that the U.K. and Spain were tough markets and while our interests in Spain are very small, other than El Corte Anglais, which is we have a big Liz Claiborne business there, but from a retail perspective and wholesale at Mexx, Spain, the south of Europe has not been an important profit contributor to the brand.

Between the end of first quarter and now, we are really seeing what I’ll call an infection, if you will, on the continent in the core Mexx markets in terms of consumer sentiment. There is no question that these markets are looking and feeling a whole lot more like the U.S., where the competitors and the composite that we look at are seeing the kinds of traffic reductions -- maybe not as bad as Mexx but up there, and so definitely the marketplace has gotten soft, and I think that you’ve got real numbers and you see the competitive comp reports there but it’s clear -- France, Germany, Benelux, maybe not as bad as the U.K. and Spain but it’s real.

Andy, why don’t you answer Brad’s question?

Andrew C. Warren

Sure. Just to elaborate, I mean, clearly as we think about going from a $0.24 to a high 60s, it’s a dramatic increase but if you look at the forward areas that I talked to and each of these is worth north of $10 million each of operating margin dollars improvement. If you think about those brands under review last year that we still had them for full year that we have since exited or closed or sold, those are big money-losing dilutive profitability for us and losses last year. If you think about the addition of 120 stores and what those have done for us in 2Q and what we expect them to do in 4Q, if you’ll recall back to the cosmetics impact and some of the real nuances that we had in the fourth quarter of last year that we have clearly resolved [inaudible] licensing deals, through new structures, through new people -- all those individually and as a group have an enormous impact on our operating margin profits.

Brad Stephens - Morgan Keegan

All right, got it. Good luck, guys.


Thank you. Your next question is coming from Kate McShane with Citigroup. Please go ahead.

Kate McShane - Citigroup

Thank you. Good morning. I have a few questions regarding margins as well -- can you talk about the markdown activity during the quarter and how it compared to the year-ago period at the department stores? And how much do you expect margin activity to impact your gross margins in the second half of the year?

David McTague

The markdown activity Q1 and Q2 were fairly aggressive. What we saw in natural product sell-through in Q2 literally each month continued to improve literally single-digits each month. There was a tremendous amount of pressure in Q1 from both a carry-over perspective in the general retail community on markdowns that they had held in Q4 and took them aggressively in Q1. As new product flow began, literally each month, March, April, May, the mix definitely improved. Having said that, there is still a tremendous amount of promotional activity out there. Consumer traffic is still down as we have seen from all leading indicators and there remains pressure.

Kate McShane - Citigroup

Okay, and kind of in the same vein then, can you talk about what you are seeing in terms of your inventory in the department store channel currently?

David McTague

Our current inventory currency, as I think about it, meaning how fresh is the product from regular price and new receipts, is current right now. We have pushed aggressively and worked closely with the retailers not only to be cautious in the amount of inventory flow, as Bill and Andy both spoke to previously as we move into Q3 and Q4, but we also have worked diligently to maintain accurate pricing to make sure that we are maintaining turn rates that will be consistent with allowing us to continue to flow new and exciting inventory for the consumers.

Kate McShane - Citigroup

And in your direct business, overall comp store sales trends were positive and you highlighted what drove that but it did look like margins were lower than it was the year before. Was there one concept that weighed more heavily on the margin contractions than the others, and was it because of higher-than-expected promotional activity?

William L. McComb

I’ll just cut to what you are asking -- between Kate and Lucky and Juicy, not Juicy and not Lucky. Just to be super clear about the Kate Spade situation, we are opening stores that are producing at a higher rate on a productivity basis than what we call our heritage fleet, which report in the comps, generally speaking. The spring product line is that last what I’ll call inherited line of product designed by what was the acquired management and design team. Debra Lloyd began in November. The work that she has done with her merchandising and design team will begin to show in holiday. We’ve gotten incredible reviews from a wholesale perspective on that and that’s a great indicator, a leading indicator of what you will see and how it will be received at retail.

The bottom line answer and simple answer to your question is yes, yes, yes. We said that Mexx Europe disproportionately weighed heavily on that operating margin and it did. But cutting through it, there wasn’t an unusual level of promotion activity on Juicy or Lucky, and there was more clearance, I’ll call it, at Kate, as the spring line -- which by the way, we bought and wholesalers bought very light, just because our own management wasn’t happy with that product design. But still we had a clearance situation there, and that’s it.

Kate McShane - Citigroup

Okay, and then my very last question in regards to Kate Spade -- so you said you were pulling back on the number of store openings next year. If there are some of those heritage stores that seem to be under-performing, is that more a function of the line as you were just talking about, or is it the location of the stores? Will there be store closures for Kate Spade?

William L. McComb

We’ve been kind of quietly working through a rationalization there. Tom, you can talk about some of those stores very specifically. What you will find, Kate, is that the big difference between old and new is square footage. We are putting Kate in a smaller box, with the exception of some stores that were Sigrid Olsen that had very -- what we’ll call advantaged lease positions in terms of actual rent structure. Some of those were 2,000 to 2,200 and we flipped a couple of those because they were prime locations in great malls and even though the square footage was bigger than our new recipe or our new formula, we didn’t want to give those up.

Other than that, we are looking in the 1,500 to 1,800 square foot range and we love the productivity and frankly brand statement that we make with those smaller boxes. That’s the big difference between them.

The heritage stores, in some cases there might be a location that wasn’t great but more than not, it’s the workability of the box, the shape, the format, the conduciveness to the fixturing and displaying the way that we want to do it.

Tom, why don’t you talk about some of the dynamics in there?

Tom Fitzgerald

No, I think that’s right. I think the locations are generally good. I think Bill’s point about size is right. The Sigrid Olsen stores that we are converting, the economics are still very attractive despite the stores being a little bit larger than our go-forward target. And as the brand is evolving, we are also looking to evolve the store design and that’s in part why we are taking a pause on the 2009 rollout as we want to optimize that new store design idea before we hit the accelerator. Again, and to Bill’s point, we’ve built a lot of stores. We may take some of those heritage stores and go back and implement some of the new store design concepts but that’s further down the road. We need to sort out what that new design is, how it works before we start thinking about implications for the existing base.

William L. McComb

But another example would be Newberry in Boston, which is an old store, great location, but it’s ready for a refit, a refurb, just display wise, visual wise, it’s not making the statement that the new brand makes, that a new store would make. And another good example would be Oak Street in Chicago, Tom, which we flipped. We moved across the street, basically, into a smaller box.

So that’s what’s happening with the Kate doors.

Kate McShane - Citigroup

Okay. Thank you.

William L. McComb

And one other point to make there, Kate, on that is implied in one of the things that Tom was talking about as we look at new concepts, there will be an apparel launch on this brand and how the stores work, how we fixture those stores, that’s being integrated into the new concept and before we open anymore doors, we want to have a real solid answer on that and it’s another good reason to swallow the big [bulice] of store openings that we’ve had this year and then integrate an apparel launch later.

Tom Fitzgerald

And just to clarify, we’re talking about store design within the existing concept, not a new store concept.

William L. McComb

Correct, correct.


Thank you. Your next question is coming from Benjamin Rowbotham with Goldman Sachs. Please go ahead.

Benjamin Rowbotham - Goldman Sachs

Following on that last line of questioning, I was hoping you might be able to provide some clarity on just how much of the first half gross margin contraction within the partner brands was due to more macro influence versus company specific Liz Claiborne related productivity issues.

And then maybe one for Andy -- when do you expect the corporate income tax rate to normalize out? Thanks.

William L. McComb

Okay. You know, your question was about the partnered brands’ operating margin in the first half and if you go through what we’ve said, we basically bifurcated that portfolio and said that we have high growth brands that have very attractive profitability rates right now that are going to continue to expand, both in terms of revenue and in terms of profitability, and they would include the Monet brand, DKNY Jeans, and the new [Enyce] line and the Kensie brand.

And then you have the brands that are I would say going through the reinvention -- the Isaac inspired Liz Claiborne New York line and the men’s Claiborne by John Bartlett line. And that is where the big, big, big opportunity for profit restoration I’ll call it, I’m not even going to use the term expansion because I think that we’ve been conservative when we talk about partnered brands eventually getting to the high-single-digits, almost 10% range. In time, this is going to play a very important role in it.

So in answering the question here with regard to the external environment, there’s clearly a dynamic on the Liz Claiborne line and on the men’s Claiborne line that is I’ll say systemic to those brands and not necessarily macro related. You add the two together and you definitely get a very soft performance.

David McTague

The only other things that I would add further to Kate’s earlier question is certainly we have seen an aggressive, aggressive promotional environment with the decline of traffic, and to Andy’s earlier comments of controlling the controllables, the things that we can control is product and price value, inventory levels, who we are distributing to, read and react and be able to bring in better product each month and manage our expenses with great, great clarity. The things we can’t control are friends and family events where everyone is a friend and family, you know, where there’s 40% off coupons and 25% off that and open a charge card for another 10% off, and certainly we all know where that is coming from. That is coming from a general profit pool. So our participation in that is an open dialog with our retail partners and we continue to be very proactive with them on the management of that inventory.

William L. McComb

But it all goes back to this point that we made about the importance of controlling the revenues in the receipt pools so that we effect higher full price natural margin sell-throughs. That’s really a big part of Dave’s plan in show rooms right now with the Isaac and John Bartlett launches.

Benjamin Rowbotham - Goldman Sachs

Understood, and then the tax rate?

Andrew C. Warren

We anticipate a more normalized and levelized tax rate in ’09. As you can imagine, ’08 with the streamlining costs and our working through some of these cost actions, some of these gas losses are creating some unusual tax fluctuations for us, so that will largely go away in ’09, as well as we think through some of our effective tax rate initiatives that we are going through, especially on the global front. That will also have an impact on ’09 as well.

So I anticipate a more normalized level ’09 and beyond.

Benjamin Rowbotham - Goldman Sachs

So then as you head into 2H, we should expect to see a lower-than-normal tax rate then?

Andrew C. Warren

Probably, yes.

Benjamin Rowbotham - Goldman Sachs


William L. McComb

And the only other question that you asked, do you still need an answer, about any one of those factors being weighted more heavily than the other?

Benjamin Rowbotham - Goldman Sachs

No, no, I mean -- I guess the point being is just trying to understand the potential ramp into 2009. I mean, how much of this has been macro driven versus how much you can fix. Thank you.


Thank you. Your next question is coming from Omar Saad with Credit Suisse. Please go ahead.

Omar Saad - Credit Suisse

Bill, I wanted to ask you kind of some bigger picture brand questions on the Liz and Mexx brands, kind of the repositioning and Isaac Mizrahi coming on the Liz Claiborne. Where do you see those brands fitting in in the consumer landscape, the apparel landscape? You know, Liz here in the U.S., in department store land, how should we think about its place in the world going forward next year and beyond versus what’s happened to the brand in the last 10 years and where it came from -- its heritage in the 80s when Liz Claiborne was still running it?

William L. McComb

Well, I would -- I’ll just give you the headline, and I don’t want us to get out in front of ourselves on this but I’ve been in the show room and I’ve seen what these guys have created and it’s stunning and it’s exciting and it’s so much about a marriage of the core values of what that brand is. When we talk to consumers and we study our consumer research to get at what does this brand stand for, I think we could not have picked a better artiste, master designer, leader for our business than Isaac. What he has done and what he has created, which you all will see in just a month, is incredibly irresistible. The bold use of color, of pattern, the almost key item focus rather than collection focus. The contemporary yet traditional sensibility that he has. What he’s done with fit, respecting that that’s been something that we’ve been very good at -- I think that it’s what this woman wants. I think that it has a feel that is -- I want to say more youthful without being young, which is absolutely what’s driving the marketplace today in that boomer segment, and it’s exciting.

And so you know what? It remains to be seen, doesn’t it? I mean, in our view this is all about the consumer and how the consumer responds to the product. I think that we will have the right support from our partners. I think that they are in a wait-and-see mode and I think that the wait-and-see isn’t just what they see in the showroom but how will consumers react?

But I have to tell you that you’ve got Isaac on a book tour this fall. Starting in October, it’s going to go for three months on an unbelievable book that he’s published and it’s going to go on after that. I think that what the media will do and what the editorial support that we are going to get is going to be the answer to your question. It’s about cultural relevance, isn’t it?

I can’t tell you strategically the answer to your question because at the end of the day, this isn’t fast-moving consumer goods. This is apparel. It’s image. It’s beauty. It’s self-image and the media will play a very important role in redefining where this brand fits in the psyche and mind of the consumer.

I will just tell you that from the chair that I am in and the view that I’ve got, I don’t think we could have done a better job in fusing life and energy in a brand appropriate way, and in a way that in the middle of America where all these people shop in these department stores, I think that we’ve got it nailed.

Now Mexx, Mexx is -- look, Mexx is -- it’s very interesting. You know, Mexx is a brand that we really believe in. You go to Benelux, you go to northern Germany and northern and eastern France and this is a brand that is sexy and it is -- you know, how we think about Banana Republic here, that’s the kind of brand that it is there. It’s a big, big brand. It’s over $1 billion in sales, and so it shows up in a lot of places. I was just in Germany two weeks ago and spent time talking to department managers in department stores in Frankfurt and I just -- I loved what they had to say about the brand. It’s popular, consumers love it, women like it as a career resource but it’s the kind of career-wear that you can wear into evening. And you know, I think that this is a business that sharper positioning, more aggressive marketing and advertising against an image that has to show up better in our stores -- product, product, product will go a long way.

We have a lot of things to do on the cost structure side of the business. We called that out a year ago, that this business has not been managed for the kind of competitive cost structure that some of our other businesses have and we have a great European team that’s bending backwards to work with us in achieving those goals.

But again culturally, it is a relevant business that needs product to turn it.

Omar Saad - Credit Suisse

Okay, great. Last question, kind of you talked about a year ago laying out the opportunities. If you look back -- and I guess it was last July when you had your -- you laid out your long-term strategic plan and restructuring plan for the business. A year later, macro aside, obviously the environment is much different than we all thought it was going to be. What do you see as the biggest opportunities and how do you assess where you are kind of a year later at this point?

William L. McComb

Well, I think to be super clear, I think the big opportunity is operating margin and that’s absolutely what we are all focused on. You’ve heard me talk about the productivity as a theme. I think that our management teams are there. Omar, we’ve made so much progress -- you can’t underestimate the structural changes that we’ve made in our corporation. We used to be organized in channel and product lanes, so that -- and there were no brand threads. There were no brand as business units.

Going from that centralized culture to a highly decentralized model where brands act in a highly interdependent way within a brand, cross-functional with a full P&L as the compass, huge, huge cultural change. And I feel great about that. I feel great about all the talent that we’ve hired, the quality of it, the degree to which people are moving through the [norm], storming into performing mode, the role of long-range planning, the role and focus of design and merchandising in our culture -- man, we needed it, a long way to go -- I mean, every answer to every question frankly has a product and design component to it and the answer to this whole thing isn’t just cost, cost, cost, cost, cost. It’s about productivity and product and initiatives.

It’s been -- you know, I feel like I’ve talked about Spring ’09 as if it was a decade away. I’m so glad that we are walking into show rooms right now and presenting to our wholesale customers.

I think now really this is about execution and with that, our eye is on operating margin. A lot of the expansion and capability that we needed in direct brands is largely complete. A couple of positions here and there but we are largely there and there is more rationalization to be done in certain parts. And so I feel like all of the teams and all of the functions in the new social structure that we have laid out, that everybody has got clear operating profit targets. And I think our teams are doing a very good job navigating the tough environment. I mean, again in partnered brands, even with all that that we talked about, I do think that Kensie and DKNY Jeans are great models of how you can be very profitable still in this kind of an environment and be a good partner and be right with the consumer and be a growing brand, and I think that we are close to that on the men’s business and the Liz Claiborne New York business.

Omar Saad - Credit Suisse

Excellent. Thank you.

William L. McComb

Pam, any other questions?


Thank you. We have time for one more question coming from Robert Drbul with Lehman Brothers. Please go ahead.

Robert S. Drbul - Lehman Brothers

A couple of questions, actually -- in the back half of the year, in your guidance that you are including, can you give us an idea of your expectations on the comp trends for your direct brands -- you know, Juicy, Lucky, Kate Spade and Mexx? Like, how you are planning the business for the rest of the year?

Andrew C. Warren

We don’t provide guidance by brand like that. I mean, the backdrop of our overall expectation is still a very challenging retail and macro environment. We’re not forecasting nor do we anticipate or wish for a better macro environment but we don’t provide specific guidance going forward on comps like that.

Robert S. Drbul - Lehman Brothers

Okay, and then in the fourth quarter, you called out the hit on the profitability from some of the discontinued operations from last year. Can you quantify the hit that you had last year that, you know, when you look at that comparison, Q408 versus Q407?

Andrew C. Warren

We’re not going to quantify it specifically but I’ll say that if you think about those brands that greatly diluted our fourth quarter ’07 profitability, I mean, there were some significant losses there, Bob, largely A, the environment was tough, as we all know, but those brands under review, they had order cancellations, there’s a lot of transition going on there as we were looking to sell or modify that brand structure. And so the impact on our fourth quarter results was significant. And having that behind us is an enormous amount of -- it’s very accretive to our view on the fourth quarter of this year.

Robert S. Drbul - Lehman Brothers

Okay, and then just one final question is for Bill -- are you at the level on the marketing spend where you had talked about you felt like you were under-invested in the marketing spend for several of your direct brand nameplates. At what point in time do you get to that level where you don’t have to continue to invest advertising or marketing dollars as a percentage of sales?

William L. McComb

Well, to be honest we pulled back a little bit. I wouldn’t say that we are at that -- pushing up against the 5% to sales ratio that we had said would be -- you know, we had identified we were spending 1% to 2%. We had said 3% to 5% was more the target and to be honest, in a marketplace like this, one of the things you do is you pull back on that, and we did.

I’m not saying we’ve gone dark. In fact, one of the great opportunities for the Lucky Brand, which now has a fleet of over 150 stores, a well installed retail presence across America, I can’t wait until we get into an environment where we can flip the lights on a great marketing campaign, which by the way is currently in development. But we haven’t made the decision to do that because we don’t want it to fall on deaf ears. If the consumer is being very cautious, we don’t think now is the time to push the spending to those levels.

I will tell you, I mean, I think that the model on those direct brands isn’t one where you get to a point where you’ve saturated the message and you pull back. Keeping an image, the benchmark work that we’ve done, Bob, shows that the strong image brands that have that direct business model, a good wholesale/retail mix like the brands that we are talking about -- I’m going to say Coach and like Ralph Lauren Polo brands -- these are businesses that advertising is a business driver and a business builder and it’s an expense that works as an investment.

So I will tell you that we are getting our Ps and Qs together right now in terms of -- by the way, the first ever true VP of marketing at Lucky was just recently hired. At Kate Spade, in this last quarter we hired a new VP of marketing and a head of publicity as well. And they are really building those as disciplines in those groups, working with agencies, developing a campaign that really pierces the emotional positioning of those brands.

And when we have marketing that we love, that we feel will have a very high return on investment, we will test levels and we will go back out and we will push those ratios closer to 3% to 5%, but we are not going to do it unless we know that we’ve got -- that we’re doing it in an environment where the return is going to happen in the year and beyond that. But it’s not my aspiration to get to a point where I feel like the marketing is done, check the box and now bring the levels down. It actually doesn’t work that way on those businesses.

Robert S. Drbul - Lehman Brothers

Thank you.


Thank you. At this time, I would like to turn the floor back over to Mr. McComb for any closing comments.

William L. McComb

I have no other closing comments. Thank you for your questions. I think that you’ve asked some good questions. We look forward to coming back in November with some guidance on 2009 and clearly a full report on our performance for the third quarter. Thank you for your attention.


Thank you. This concludes today’s Liz Claiborne second quarter 2008 earnings conference call. You may now disconnect your lines and have a pleasant day.

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