Liz Claiborne Starts Over

By Stephen D. Simpson, CFA | October 17, 2011 AAA

Sometimes press releases can understate just what's actually going on. That certainly seems to be the case with Liz Claiborne (NYSE:LIZ). While this well-known women's clothing designer and marketer talked about "transactions" in the headline of its recent release, the reality is that the company largely sold itself and is basically going to cease to exist as Liz Claiborne.

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From Distribution to Ownership
Liz Claiborne and J.C. Penney (NYSE:JCP) have had a longstanding relationship, and JCP was already the exclusive license partner for the Liz Claiborne brands. The two companies have taken a big step forward though, as LIZ will be selling the Monet and Liz Claiborne brands to J.C. Penney for $288 million in total cash considerations. LIZ will maintain the international rights for Monet, will continue to supply Liz Claiborne and Monet-branded jewelry to J.C. Penney and will hold a royalty-free license on LCNY and Lizwear, but will otherwise be out of these businesses.

At the same time, the company is selling the Kensie brands to Bluestar Alliance and Dana Buchman to Kohl's (NYSE:KSS). These two deals will reap an additional $40 million for LIZ, and as in the case of J.C. Penney there was a preexisting retail relationship between LIZ and Kohl's.

Last but not least, the company will end its DKNY license a year early (ending this year). (For related reading in retail, see The 4 R's Of Investing In Retail.)

Much Needed Cash at a Reasonable Valuation
LIZ has been struggling for quite a while now, and management had little choice but to make some tough and drastic decisions. The company punted its money-losing Mexx business earlier in August, but clearly had to do more. With these deals, LIZ got rid of businesses that were losing money but still had clear brand value. Moreover, in selling these brands, at roughly eight times EBITDA, the company got a pretty fair price for them as well.

Now the company will have nearly $330 million to apply towards debt reduction - a sum that should leave the company with less than $300 million in long-term debt, and about $500 million in total debt at year-end.

Can Liz Wring Profits from What Remains?
After this deal, LIZ will be largely left with the Kate Spade, Lucky and Juicy Couture brands. On the positive side, sales trends aren't too bad here. Juicy comps were down in September, but Lucky and Kate Spade were both up nicely, and these brands posted almost 18% overall sales growth in the last quarter.

Profitability is a trickier question, though. While these brands were the only profitable parts of Liz Claiborne, in fiscal 2010, they have tripped over into operating losses so far this year. That isn't so encouraging given the performance at companies like Oxford (NYSE:OXM), VF Corp (NYSE:VFC) or Jones Group (NYSE:JNY), to say nothing of the recovery at women-oriented retailers like Chico's (NYSE:CHS).

Said differently, LIZ bought itself some breathing room with these deals, but they will only prolong and delay the inevitable if management can't figure out how to drive sustained profitability from those growing, younger-skewing brands that it's keeping.

The Bottom Line
This was pretty much what a deep-value investor would have been looking for when considering these shares below $5. Unfortunately, management has now fired that silver bullet, and the ultimate outcome of this story is still very much in doubt. Given that the company has shown that it can produce profits from the brands it's keeping (even if not on a consistent basis), a private equity buyout shouldn't be out of the question. (Private equity investing is becoming more accessible for individual investors, find out how you can get involved. For more, see A Primer On Private Equity.)

In the meantime, the sale of the Liz Claiborne brand to J.C. Penney means a name change is all but certain. Beyond this transaction, this is a stock that should only appeal to the most risk-tolerant turnaround investors. The new Liz Claiborne certainly could be an improved company, and may be able to rebuild the name into a retail winner. That is going to take a lot of time to realize, though, and investors should not buy this stock with the expectation of a quick turnaround.

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