2/24/2010
By Brian Sozzi, Research Analyst

There was much, much to consolidate on the topic of Liz Claiborne (LIZ) following the release of its 4Q09 earnings (if you could call another quarterly loss "earnings).  To the credit of CEO Bill McComb and his team, Liz Claiborne is moving in the right direction.  The actions orchestrated since 2007 have been painful to watch, closing distribution facilities, chopping dead brands bought at the top of the market by Paul Charron, and reconfiguring the relationships with wholesale partners.  There is a ton of work left to be done, but for the first time in a while the earnings generating potential of Liz Claiborne is emerging.  We believe that the key planks in our Buy rating and $9.00 price target on Liz Claiborne shares are still applicable.  Those planks include:

1. Return to profitability, perhaps by 3Q10, through a combination of enhanced results at Domestic Brands segment and the kick in of the JC Penney/QVC Liz Claiborne/LCNY license agreements in August.  The agreements will bring Liz Claiborne royalty fees, meaning less working capital requirements and operating expenses, among other factors.
2. Reworking of a very prohibitive credit facility structure given improved liquidity entering 2010.
3. Continued debt reduction ($90.0 million note due shortly) easing pressure on net earnings.

4Q09 was challenging for Liz Claiborne, partially arising from a lack of inventory at specialty store concepts, reduced wholesaler support for the Liz Claiborne brand, and of course deeply rooted fundamental flaws at Mexx.  There were highlights, including Domestic Brands segment being profitable on a GAAP basis, further debt reduction, continued whittling down of unproductive inventory at outlets, and gross margin expansion.  Let's not mince words, however, as Liz Claiborne's debt is over 2.0x SE, there was $20.0 million cash on the balance sheet eagerly awaiting the arrival of a $167.0 million tax refund (must be used to pay down debt as stated in amended revolver), and a framework for 2012 ($1.00 P/S; 10.00% EBITDA margin) that as we sit here contemplatively looks unachievable if Mexx continues to underperform and merchandise execution doesn't consistently improve.

Once again, there are many factors to consolidate on this story.  But, it's our view that Liz Claiborne's somewhat favorable debt schedule ($500.0 million note due about five years from now), and the planks we outlined above, are enough to support our call.

Quick aside.  The presentation by the new leader of Mexx, Thomas Grote, was highly entertaining.  The presentation sounded like a pitch made on a roadshow to drum up investor interest in Mexx; he called Mexx an "unpolished jewel" and predicted future annual sales of $1.0 billion ($833.9 million FY09).  One thing was apparent; Mexx needs serious fixing from processes to products.

Brian Sozzi
Wall Street Strategies