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Liz Claiborne Inc. Q2 2010 Earnings Call Transcript

Liz Claiborne Inc. Q2 2010 Earnings Call Transcript

Liz Claiborne Inc. (LIZ)

Q2 2010 Earnings Call

August 5, 2010 10:00 am ET


Bill McComb - CEO

Andy Warren - CFO


Kate McShane - Citi Investment Research

Edward Yruma - Keybanc

Bob Drbul - Barclays Capital

Mary Gilbert - Imperial Capital

Omar Saad - Credit Suisse

Chi Lee - Morgan Stanley

Jim Chartier - Monness, Crespi, Hardt


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» Liz Claiborne Inc. Q1 2010 Earnings Call Transcript
» Liz Claiborne Inc. Q4 2009 Earnings Call Transcript
» Liz Claiborne Inc. Q3 2009 Earnings Call Transcript

Good morning, everyone and welcome to the Liz Claiborne Second 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 it 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 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 2009 annual report on Form 10-K and the second quarter 2010 quarterly report on Form 10-Q being filed today with the SEC, in each case until the captions Item 1A: Risk Factors and Statement Regarding forward-looking Statements.

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 margin, interest expense net income or loss from continuing operations, and EPS are presented on both a GAAP and a non-GAAP basis.

Reconciliations of the 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 presentation 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

Thank you well good morning and welcome to our second quarter 2010 earnings call. We will follow a standard format today presenting with the aided power point slides which are available via the webcast and Andy Warren our CFO is joining me to discuss the results leaving plenty of time at the end for questions and answers. Here is the copy of the agenda as usual I will start with my perspective on the quarter and Andy will review the overall income statement, balance sheet and cash flow results. I would then walk you through the segment level results and discuss our view of the second half we will then get to your questions.

So referring to this morning’s press release, our second quarter results generally followed the path that we described during the last call. adjusted operating losses we in line with what we guided we posted very strong balance sheet metrics overall adjusted SG&A came in lower than expected, we saw continued growth and profit expansion at Kate Spade, Juicy reported single digit negative comps. This was driven by the month of April when promotions were curtailed versus last year resulting in positive adjusted operating profit.

We also experienced some challenges in the quarter that were greater than what we had expected the last time we spoke with you. Next Europe put even more than forecasted pressure on the overall reported gross margin and earnings as old merchandise was cleared. Losses in Liz outlets were worse than expected which contributed to the decision announced last month to exit that business.

And aggressive action at Lucky Brand Jeans to clear inventories also held back expected improvements in total company gross margin. But we’re successful in giving our stores a very clean start for the second half; we’ll discuss all of that later. My view of the direction for the second half remains unchanged. On our May conference call we outlined that the second of the year would bring a shift in our profit profile as key strategies and partnered brands and Mexx Europe begin to unfold on the retail sales floor.

In fact if you re-read our second quarter 2009 conference call transcript, you’ll see we called out that these two segments were what kept us up at night leading us to make significant leadership and operating model changes in both. It's a year later now and we’re projecting that these segments will account for more than 85% of the adjusted operating income swings that we'll see in the second half of 2010.

Thus they are both moving in the right direction, the key factors causing this swing in the second half are for partnered brands the introduction and flow of licensing revenue with JCPenney and QVC. Recall that last year we provided substantial discounts on our final shipments of Liz Claiborne goods to traditional department stores and that depressed gross margins. Also in partnered brands our licensed DKNY jeans brand had significant year-over-year improvement forecasted for this year from increased shipping based on fall and holidays orders already received.

At Mexx Europe we are looking for same store sales to return positive by fourth quarter 2010. As the price value of the merchandise improves and the merchandise mix shifts in favor of previously under penetrated categories like outer wear and sweaters which carry higher AUR’s. Gross margins are expected to improve substantially as a result. While improvements in partnered brands in Mexx Europe will account for the will account for the vast majority of the adjusted operating income swing that we expect for the second half. Domestic base, direct brands are already making good money and will post healthy increases as well. At Lucky Brand Jeans, the first half was an earnings wipeout due to inventory clearance.

But the second half will benefit from the numerous merchandizing and operational initiatives that the new team has put in place. We expect to start to generate improved same store sales trends in our full price retail stores as well as better gross margins. For Juicy and Kate Spade we expect two more quarters of continued solid performance.

It is worth calling out that Kate Spade is now beginning to contribute a more meaningful level of operating profit dollars to the direct brand segment. All rolled up were projecting positive adjusted operating income for the second half of this year compared to the adjusted operating losses last year. In terms of adjusted EPS we are excluding the impact of Liz outlet losses from this year's numbers and we expect third quarter adjusted EPS to be flat to slightly negative and fourth quarter adjusted EPS to be positive. While the debate surrounding the outlook for consumer spending, unemployment and the overall US economy is in the headlines everyday. And the apparel industry confronts cost of goods and inflation and margin pressure. Our view of the second half takes all of this into consideration.

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