LIZ CLAIBORNE INC LIZ
January 04, 2012 - 3:23pm EST by
om730
2012 2013
Price: 9.00 EPS $0.17 $0.79
Shares Out. (in M): 95 P/E 52.0x 11.0x
Market Cap (in $M): 851 P/FCF 21.0x 10.0x
Net Debt (in $M): 305 EBIT 57 158
TEV ($): 1,156 TEV/EBIT 20.0x 7.0x

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  • Sum Of The Parts (SOTP)
  • Divestitures
  • Fashion

Description

Note:  The 2011 and 2012 estimates above are really for 2012 and 2013.  We believe these are more important in judging the prospects of LIZ given that this a turnaround investment opportunity and the company has undergone significant change in the past year.
 
 

Summary Financials – Base Case:

Currency: $m except per share data FY11E   Proforma Financials FY09A FY10A TTM11A FY11E FY12E FY13E
Current Price  $     9.00   Revenues 2,915.9 2,500.1 2,429.2 1,301.2 1,510.3 1,785.0
Shares Outstanding 94.6     Growth % -24.5% -14.3% -2.8% -46.4% 16.1% 18.2%
Market Capitalization 851.1   EBIT (363.0) (176.9) (168.4) (85.8) 56.9 157.6
- Cash & Short Term Investments 100.4     EBIT Margin % -12.4% -7.1% -6.9% -6.6% 3.8% 8.8%
+ Total Debt 405.1   Adjusted EBITDA (203.8) (34.1) (28.4) (10.8) 144.0 260.5
+ Pref. Equity  -      EBITDA Margin % -7.0% -1.4% -1.2% -0.8% 9.5% 14.6%
+ Total Minority Interest  -    Adj. EBITDA - CapEx (268.2) (111.5) (112.3) (82.3) 76.0 180.1
= Total Enterprise Value (TEV) 1,155.9   EPS from Cont. Ops -$    5.37 -$    3.21 -$    3.40 -$    1.72  $    0.17  $    0.79
Book Value of Common Equity 100.1   Valuation:            
+ Pref. Equity  -    EV / Sales 0.4 0.5 0.5 0.9 0.8 0.6
+ Total Minority Interest  -    EV / Adjusted EBITDA (5.7) (33.9) (40.7) (107.4) 8.0 4.4
+ Total Debt 405.1   EV / Adj. EBITDA - CapEx (4.3) (10.4) (10.3) (14.0) 15.2 6.4
= Total Capital 505.2   Net Debt / EBITDA (3.1) (16.3) (24.6) (28.3) 1.9 0.8


Business Description:

LIZ is an apparel and accessories retailer that owns and operates the Juicy Couture, Lucky Brand and Kate Spade brands.  80+% of the revenues currently come from the U.S. ~70% of the operations are direct retail and ~30% are wholesale.  LIZ divested majority of its wholesale brands and licensing agreements, and its underperforming Mexx retail operation during Q311 and used the proceeds to significantly improve its capital structure and liquidity.  LIZ generates 44% of its revenues from Juicy Couture, 33% from Lucky Brand, 23% from Kate and Jack Spade and 6% from the license agreements.

 

Investment Thesis:

LIZ is a LONG because:

  • LIZ has refocused its business on a core group of strong brands led by strong brand-level managers
  • Going forward, the rationalization of costs, the benefits of managing a more focused portfolio and a decent runway for growth will enable LIZ to generate $0.75 - $0.85 in EPS in 2013 vs. consensus expectation of $0.34 per share
  • LIZ trades at ~10x our base case 2013 EPS estimates and ~0.6x our 2013 revenue estimates.  There is upside to our estimates given the significant operating leverage inherent in the business and the runway for growth available especially to Kate Spade and Juicy.  Furthermore, there is limited downside risk since a turnaround at Juicy and continued improvements at Lucky are not appropriately priced into the stock today.
  • Call option:  A spin-off or IPO of Kate Spade and/or other brands.  On a sum-of-parts basis Kate, Juicy and Lucky could be worth between $20 and $27 per share.

 

How this plays out: 

  • Reductions in the corporate overhead, raw material cost deflation starting in 2H12, and rising store productivity will drive increases in profitability.  In addition, majority of the capital expenditures in 2011/2012 will be allocated to expanding the Kate and Jack Spade stores that generate ROICs of 25+%. 
  • Combined, this will enable LIZ to generate $0.75 -$0.85 in EPS (base case) by 2013 vs. consensus estimates of $0.34 per share.  The path to profitability and subsequent earnings growth will cause multiples to expand.

 

What the bears are focused on:

  • The serious missteps made by the CEO during the past six years are hardwired into the minds of the bears today.  They believe that his past follies leave little faith that he can successfully lead this company through a turnaround.
  • Some bears also believe that Juicy, which continues to struggle, cannot be turned around.
  • A few bears believe that Lucky and Juicy are unattractive brands that offer limited upside.


Our view:

  • The recent divestitures have refocused LIZ towards a core group of strong and highly productive brands.  Our research indicates that these brands are run by strong and well-incentivized brand-level managers who have the right strategy/plan for their brands and continue to execute well.  The increased focus also makes a full turnaround much more likely. 
  • The CEO has now been through two successful turnarounds at Kate Spade and Lucky Brands and has learned from his earlier missteps.  Most importantly, he has realized that he is not a “product person” so he relies on the brand-level managers in this regard.  Our primary research confirms that LIZ operates under such a decentralized organizational structure where brand level managers have complete control over their brands in terms of product and design direction.
  • Our primary research also indicates that Juicy Couture has the right product team in place today under LeAnn Nealz with a clear and focused plan that is addressing the key issues faced by the brand.  Furthermore, the feedback on LeAnn’s new product line (in stores in January 2012) and remodeled stores has been resoundingly positive.   As such, in-store traffic and conversion rate trends should improve in 2012.  That said Juicy continues to need a good operationally focused CEO to support LeAnn.  LIZ is actively looking for such a leader and we expect that such a CEO will be hired in 2012.
  • Lastly, our analysis indicates that majority of the risks are priced into the stock leaving room for 100+% upside.


Sign-posts:

  • Apr11: “The time may come when [spinning off Kate Spade is] the right thing to do for the shareholder.  We’ll be agnostic about that.  But we know the we can – our current shareholders can enjoy the fruits of three years of hard work by building that asset up more.  And so, it’s not ready for prime time yet, but someday, it will be and could be.” – CEO
  • Sep11: Liz Claiborne Inc (LIZ.N) said it would sell its money losing international Mexx business to a joint venture with Gores Group LLC, allowing the women's clothing maker to cut down on debt and focus on its core brands.
  • Oct11: On 10/12/11, LIZ announced agreements to sell its licensed Liz Claiborne business to J.C. Penney, along with its Money jewelry brand for the U.S.a nd Puerto Rico.  LIZ also entered into an agreement to sell its Kensie, Kensie Girl, and mac and jack wholesale brands to Bluestar Alliance and the Dana Buchman brand to Kohl’s.  The total proceeds from the sale totaled $328M.  LIZ will use the proceeds to reduce in net debt position ~$600M to $290M or ~2x 2012 EBITDA.
  • Nov11:  Comparable store sales growth at Kate Spade and Lucky continue to ramp as of Q311
  • Nov11:  Cotton prices, which gave apparel makers fits, have halved since their March peak.  This will show up in product costs improvements starting in the summer of 2012
  • Nov11:  Initial reviews of the new product line and remodeled stores at Juicy Couture have been positive


Pre-Mortem:

  • Brand level managers resign or the CEO overrules them: Deborah Lloyd and Craig Levitt at Kate Spade, David Demattei and Patrick Wade at Lucky Brand, and LeAnn Nealz at Juicy are key to a successful turnaround at LIZ.  In addition, LIZ needs to bring in an operationally focused CEO to support LeAnn Nealz at Juicy.
  • Macro headwinds could delay turnaround efforts at Juicy Couture and hinder the continued improvements at Kate Spade and Lucky Brand.


Upside:

  • Brand spin-offs: On a sum-of-parts basis Kate, Juicy and Lucky could be worth between $20 and $27 per share.  Kate Spade itself could IPO for ~$1.8B ($18/share) or 4x 2012 EV/Sales.


Timeline – Key Events:

  • Near-term earnings announcements:  Q412 EPS is likely to be pressured by continued liquidation of Juicy’s old inventory to make room for the new product line hitting the stores in January 2012
  • New product introduction at Juicy: Improvements in traffic and conversion rates will be key to determine whether the new products being introduced this Spring are winning back customers

Catalyst

Improving comp trends at Juicy stores
Earnings growth
Possible brand spin-off
 
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    Description

    Note:  The 2011 and 2012 estimates above are really for 2012 and 2013.  We believe these are more important in judging the prospects of LIZ given that this a turnaround investment opportunity and the company has undergone significant change in the past year.
     
     

    Summary Financials – Base Case:

    Currency: $m except per share data FY11E   Proforma Financials FY09A FY10A TTM11A FY11E FY12E FY13E
    Current Price  $     9.00   Revenues 2,915.9 2,500.1 2,429.2 1,301.2 1,510.3 1,785.0
    Shares Outstanding 94.6     Growth % -24.5% -14.3% -2.8% -46.4% 16.1% 18.2%
    Market Capitalization 851.1   EBIT (363.0) (176.9) (168.4) (85.8) 56.9 157.6
    - Cash & Short Term Investments 100.4     EBIT Margin % -12.4% -7.1% -6.9% -6.6% 3.8% 8.8%
    + Total Debt 405.1   Adjusted EBITDA (203.8) (34.1) (28.4) (10.8) 144.0 260.5
    + Pref. Equity  -      EBITDA Margin % -7.0% -1.4% -1.2% -0.8% 9.5% 14.6%
    + Total Minority Interest  -    Adj. EBITDA - CapEx (268.2) (111.5) (112.3) (82.3) 76.0 180.1
    = Total Enterprise Value (TEV) 1,155.9   EPS from Cont. Ops -$    5.37 -$    3.21 -$    3.40 -$    1.72  $    0.17  $    0.79
    Book Value of Common Equity 100.1   Valuation:            
    + Pref. Equity  -    EV / Sales 0.4 0.5 0.5 0.9 0.8 0.6
    + Total Minority Interest  -    EV / Adjusted EBITDA (5.7) (33.9) (40.7) (107.4) 8.0 4.4
    + Total Debt 405.1   EV / Adj. EBITDA - CapEx (4.3) (10.4) (10.3) (14.0) 15.2 6.4
    = Total Capital 505.2   Net Debt / EBITDA (3.1) (16.3) (24.6) (28.3) 1.9 0.8


    Business Description:

    LIZ is an apparel and accessories retailer that owns and operates the Juicy Couture, Lucky Brand and Kate Spade brands.  80+% of the revenues currently come from the U.S. ~70% of the operations are direct retail and ~30% are wholesale.  LIZ divested majority of its wholesale brands and licensing agreements, and its underperforming Mexx retail operation during Q311 and used the proceeds to significantly improve its capital structure and liquidity.  LIZ generates 44% of its revenues from Juicy Couture, 33% from Lucky Brand, 23% from Kate and Jack Spade and 6% from the license agreements.

     

    Investment Thesis:

    LIZ is a LONG because:

    • LIZ has refocused its business on a core group of strong brands led by strong brand-level managers
    • Going forward, the rationalization of costs, the benefits of managing a more focused portfolio and a decent runway for growth will enable LIZ to generate $0.75 - $0.85 in EPS in 2013 vs. consensus expectation of $0.34 per share
    • LIZ trades at ~10x our base case 2013 EPS estimates and ~0.6x our 2013 revenue estimates.  There is upside to our estimates given the significant operating leverage inherent in the business and the runway for growth available especially to Kate Spade and Juicy.  Furthermore, there is limited downside risk since a turnaround at Juicy and continued improvements at Lucky are not appropriately priced into the stock today.
    • Call option:  A spin-off or IPO of Kate Spade and/or other brands.  On a sum-of-parts basis Kate, Juicy and Lucky could be worth between $20 and $27 per share.

     

    How this plays out: 

    • Reductions in the corporate overhead, raw material cost deflation starting in 2H12, and rising store productivity will drive increases in profitability.  In addition, majority of the capital expenditures in 2011/2012 will be allocated to expanding the Kate and Jack Spade stores that generate ROICs of 25+%. 
    • Combined, this will enable LIZ to generate $0.75 -$0.85 in EPS (base case) by 2013 vs. consensus estimates of $0.34 per share.  The path to profitability and subsequent earnings growth will cause multiples to expand.

     

    What the bears are focused on:

    • The serious missteps made by the CEO during the past six years are hardwired into the minds of the bears today.  They believe that his past follies leave little faith that he can successfully lead this company through a turnaround.
    • Some bears also believe that Juicy, which continues to struggle, cannot be turned around.
    • A few bears believe that Lucky and Juicy are unattractive brands that offer limited upside.


    Our view:

    • The recent divestitures have refocused LIZ towards a core group of strong and highly productive brands.  Our research indicates that these brands are run by strong and well-incentivized brand-level managers who have the right strategy/plan for their brands and continue to execute well.  The increased focus also makes a full turnaround much more likely. 
    • The CEO has now been through two successful turnarounds at Kate Spade and Lucky Brands and has learned from his earlier missteps.  Most importantly, he has realized that he is not a “product person” so he relies on the brand-level managers in this regard.  Our primary research confirms that LIZ operates under such a decentralized organizational structure where brand level managers have complete control over their brands in terms of product and design direction.
    • Our primary research also indicates that Juicy Couture has the right product team in place today under LeAnn Nealz with a clear and focused plan that is addressing the key issues faced by the brand.  Furthermore, the feedback on LeAnn’s new product line (in stores in January 2012) and remodeled stores has been resoundingly positive.   As such, in-store traffic and conversion rate trends should improve in 2012.  That said Juicy continues to need a good operationally focused CEO to support LeAnn.  LIZ is actively looking for such a leader and we expect that such a CEO will be hired in 2012.
    • Lastly, our analysis indicates that majority of the risks are priced into the stock leaving room for 100+% upside.


    Sign-posts:

    • Apr11: “The time may come when [spinning off Kate Spade is] the right thing to do for the shareholder.  We’ll be agnostic about that.  But we know the we can – our current shareholders can enjoy the fruits of three years of hard work by building that asset up more.  And so, it’s not ready for prime time yet, but someday, it will be and could be.” – CEO
    • Sep11: Liz Claiborne Inc (LIZ.N) said it would sell its money losing international Mexx business to a joint venture with Gores Group LLC, allowing the women's clothing maker to cut down on debt and focus on its core brands.
    • Oct11: On 10/12/11, LIZ announced agreements to sell its licensed Liz Claiborne business to J.C. Penney, along with its Money jewelry brand for the U.S.a nd Puerto Rico.  LIZ also entered into an agreement to sell its Kensie, Kensie Girl, and mac and jack wholesale brands to Bluestar Alliance and the Dana Buchman brand to Kohl’s.  The total proceeds from the sale totaled $328M.  LIZ will use the proceeds to reduce in net debt position ~$600M to $290M or ~2x 2012 EBITDA.
    • Nov11:  Comparable store sales growth at Kate Spade and Lucky continue to ramp as of Q311
    • Nov11:  Cotton prices, which gave apparel makers fits, have halved since their March peak.  This will show up in product costs improvements starting in the summer of 2012
    • Nov11:  Initial reviews of the new product line and remodeled stores at Juicy Couture have been positive


    Pre-Mortem:

    • Brand level managers resign or the CEO overrules them: Deborah Lloyd and Craig Levitt at Kate Spade, David Demattei and Patrick Wade at Lucky Brand, and LeAnn Nealz at Juicy are key to a successful turnaround at LIZ.  In addition, LIZ needs to bring in an operationally focused CEO to support LeAnn Nealz at Juicy.
    • Macro headwinds could delay turnaround efforts at Juicy Couture and hinder the continued improvements at Kate Spade and Lucky Brand.


    Upside:

    • Brand spin-offs: On a sum-of-parts basis Kate, Juicy and Lucky could be worth between $20 and $27 per share.  Kate Spade itself could IPO for ~$1.8B ($18/share) or 4x 2012 EV/Sales.


    Timeline – Key Events:

    • Near-term earnings announcements:  Q412 EPS is likely to be pressured by continued liquidation of Juicy’s old inventory to make room for the new product line hitting the stores in January 2012
    • New product introduction at Juicy: Improvements in traffic and conversion rates will be key to determine whether the new products being introduced this Spring are winning back customers

    Catalyst

    Improving comp trends at Juicy stores
    Earnings growth
    Possible brand spin-off
     
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