Liz Claiborne Inc. Q1 2010 Earnings Call Transcript

Liz Claiborne Inc. Q1 2010 Earnings Call Transcript
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Liz Claiborne Inc. (LIZ)

Q1 2010 Earnings Call

May 06, 2010 10:00 am ET


Bill McComb - CEO

Andy Warren - CFO

Dave DeMattei - CEO of Lucky Brand Jeans


Edward Yruma - KeyBanc

Omar Saad - Credit Suisse

Bob Drbul - Barclays Capital

Kate McShane - Citi Investment Research

Mary Gilbert - Imperial Capital

Chi Lee - Morgan Stanley

Jennifer Black - Jennifer Black & Associates

Jim Chartier - Monness, Crespi, Hardt & Co.



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Good morning, everyone, and welcome to the Liz Claiborne first quarter 2010 conference call, hosted by Chief Executive Officer Bill McComb. After the opening remarks we will be taking questions. This call is being recorded and is copyrighted material. Therefore, please note that it cannot be recorded, transcribed, or re-broadcasted without Liz Claiborne’s permission.

Your participation implies compliance with these requirements. If you do not agree, simply drop off the line. Please note that there will be a slide presentation accompanying the prepared remarks. The slides and earnings release can be accessed at in the Investor Relations section. There are separate links to the slides for webcast and phone participants.

Please note that statements made during this call that relate to the companies 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 first quarter 2010 quarterly report on Form 10-Q under the captions Item 1A Risk Factors and Statement Regarding Forward-looking Statements being 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 as a percentage of sales, operating income or loss, operating margins, income or loss from continuing operations and EPS, are presented on both a GAAP and a non-GAAP basis. Reconciliations of adjusted results to the actual results are available in the tables attached to the earnings release and slides captioned Reconciliation of Non-GAAP Financial Information. The Company believes that the adjusted results represent a more meaningful representation of its historical operations and financial performance since they provide period-to-period comparisons that are consistent and more easily understood.

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

Bill McComb

Good morning. Welcome to our first quarter 2010 earnings call. Today, we’ll report on the results posted in this morning’s earnings release. As you just heard, we are broadcasting today with speaker support slides, which are available via the Liz Claiborne corporate website, from the Investor Relations section. These slides will then be available after the call on that site as well.

With me today here are Andy Warren, our CFO, and Dave DeMattei, our new CEO of Lucky Brand Jeans. I’ll start by providing an overall perspective on the quarter and the year ahead, including our view of second quarter. Andy will take you through an in-depth review of the first quarter. I’ll then walk you through the segment results, and finally, prior to Q&A, we’ll introduce Dave DeMattei, who will share his perspective on his first 100 days at Lucky Brand, in the same way that Thomas Grote, of Mexx, did back in February.

Before we dive into the results and our commentary, I want to reiterate our key themes for 2010, in the context of our longer-range plans to achieve, by the end of 2012, the minimum threshold goals that we presented on her last earnings call. You should recall that those goals included realizing an EBITDA margin of 10% or greater, generating cumulative operating cash flow over the next three years of at least $600 million, and 2012 adjusted earnings per share of $1 or more.

To remind you, we said previously that 2010 would be marked by continuing losses throughout the first half, largely driven by next year of troughing prior to relaunch this fall, and sales of the department store Liz Claiborne brand being suspended during our major transition from traditional department store customers, to JCPenney and QVC this August.

In addition, some remaining operational challenges including returning our licensed DKNY Jeans business to profitability, reversing the long declining Liz Outlet business, and addressing the Liz International franchise, will contribute to operating losses in the first half. But, importantly, our plan for 2010 calls for sequential improvement in virtually all of the metrics in the back half of this year, as we make progress with each of those callouts, Mexx beginning its long awaited product and brand relaunch under new management, high profile launches of the Liz brand with committed and outstanding partners, and improvements on each of the moving parts inside partner brands.

Moreover, we expect to see continued momentum at Kate Spade and Juicy Couture, continued success at Mexx Canada, and a relaunch of Lucky Brand Jeans, which you’ll hear more about today. We expect to improve margins throughout the businesses in the second half, and although we’re not forecasting robust increases in traffic, we do expect positive comps in the direct brands.

So, against that backdrop, I’d say that I’m happy with the progress we’ve made in the first quarter. We realized improvement on gross margin in total. We achieved positive retail comps at Juicy and Kate Spade. We initiated significant changes at Lucky Brand, implemented an inventory clearance strategy which brought down AURs significantly, and drove negative comps, but achieved our goal of cleaning out the system very effectively.

At Mexx Europe, we’re executing the plan that Thomas outlined on the year end call, focusing on product development efforts for the fall relaunch, to address higher quality levels, and much more productive assortment strategies. I’m pleased with the product and merchandising initiatives that I’ve seen for the second half across the businesses, and thrilled with the transition taking place for the Liz Claiborne brand franchise at both JCPenney and QVC, where our aggressive launch plans are only getting stronger since we last talked. We’ve made the improvements to the licensed DKNY Jeans business that should help us get back to profitability during the fourth quarter, and we remained focused on fixing the Liz International and outlet businesses as well.

So, looking forward at second quarter, here, in the meantime, adjusted results for second quarter will be slightly worse than first quarter, although the assumptions are generally unchanged. The themes will be consistent with the first quarter, a strong concentration of sales from our own retail network, overall gross margin improvement, sales expansion at both Juicy and Kate Spade, and additional inventory clearing of aged product at Lucky Brand, driving negative comps and compressing gross margins there, again.

Additional pressure adding to the second quarter earnings decrease includes declining wholesale shipments at Lucky and continued trough earnings at Mexx Europe. Healthy and consistent results at Mexx Canada are expected to continue, and a final hiatus quarter on the Liz Claiborne wholesale business. In essence, we see a repeat of first quarter with an adjusted EPS loss of $0.45 to $0.55. So, even with the still tough first half, we said in February that all of this nets to a plan that would stretch to break even. That remains our management mantra and clearly the ultimate goal.

While it is still a possibility, a breakeven adjusted operating profit for the total year is not the most likely scenario. We still lack the visibility to be able to actually provide an adjusted earnings guidance range for the year. But, we continue to expect meaningful operating profit improvements in both the third and fourth quarters, with important momentum drivers taking us in to 2011, with Mexx Europe on a turn-around trajectory, Lucky Brand Jeans showing positive comps and margin expansion, single digit comp growth at Juicy and double digit comp growth at Kate Spade, earnings expansion in both, and profit and expense momentum in partner brands.

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