Attached files
file | filename |
---|---|
EX-31.A - EX-31.A - Kate Spade & Co | y87505exv31wa.htm |
EX-32.A - EX-32.A - Kate Spade & Co | y87505exv32wa.htm |
EX-32.B - EX-32.B - Kate Spade & Co | y87505exv32wb.htm |
EX-10.1 - EX-10.1 - Kate Spade & Co | y87505exv10w1.htm |
EX-31.B - EX-31.B - Kate Spade & Co | y87505exv31wb.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
|
October 2, 2010 | |||
or
o | TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
|
to |
Commission file number: 1-10689
LIZ CLAIBORNE, INC.
(Exact name of registrant as specified in its charter)
Delaware | 13-2842791 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
1441 Broadway, New York, New York | 10018 | |
(Address of principal executive offices) | (Zip Code) |
(212) 354-4900
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer x | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No x
The number of shares of the Companys Common Stock, par value $1.00 per share, outstanding at
October 25, 2010 was 94,474,513.
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
October 2, 2010
INDEX TO FORM 10-Q
October 2, 2010
PAGE | ||||||||
NUMBER | ||||||||
PART I - | ||||||||
Item 1. | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 29 | ||||||||
Item 2. | 30 49 | |||||||
Item 3. | 49 50 | |||||||
Item 4. | 50 | |||||||
PART II - | ||||||||
Item 1. | 50 | |||||||
Item 1A. | 51 53 | |||||||
Item 2. | 53 | |||||||
Item 5. | 53 | |||||||
Item 6. | 54 | |||||||
SIGNATURES | 55 | |||||||
EX-10.1 | ||||||||
EX-31.A | ||||||||
EX-31.B | ||||||||
EX-32.A | ||||||||
EX-32.B |
Table of Contents
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in, or incorporated by reference into, this Form 10-Q, future filings by us
with the Securities and Exchange Commission, our press releases, and oral statements made by, or
with the approval of, our authorized personnel, that relate to our future performance or future
events are forward-looking statements under the Private Securities Litigation Reform Act of 1995.
Such statements are indicated by words or phrases such as intend, anticipate, plan,
estimate, project, expect, believe, we are optimistic that we can, current visibility
indicates that we forecast or currently envisions and similar phrases. Forward-looking
statements include statements regarding, among other items:
| our ability to continue to have the necessary liquidity, through cash flows from
operations and availability under our amended and restated revolving credit facility, may
be adversely impacted by a number of factors, including the level of our operating cash
flows, our ability to maintain established levels of availability under, and to comply with
the other covenants included in, our amended and restated revolving credit facility and the
borrowing base requirement in our amended and restated revolving credit facility that
limits the amount of borrowings we may make based on a formula of, among other things,
eligible accounts receivable and inventory; the minimum availability covenant in our
amended and restated revolving credit facility that requires us to maintain availability in
excess of an agreed upon level and whether holders of our Convertible Notes issued in
June 2009 will, if and when such notes are convertible, elect to convert a substantial
portion of such notes, the par value of which we must currently settle in cash; |
||
| general economic conditions in the United States, Europe and other parts of the world; |
||
| levels of consumer confidence, consumer spending and purchases of discretionary items,
including fashion apparel and related products, such as ours; |
||
| continued restrictions in the credit and capital markets, which would impair our ability
to access additional sources of liquidity, if needed; |
||
| changes in the cost of raw materials, labor, advertising and transportation; |
||
| our dependence on a limited number of large US department store customers, and the risk
of consolidations, restructurings, bankruptcies and other ownership changes in the retail
industry and financial difficulties at our larger department store customers; |
||
| our ability to successfully implement our long-term strategic plans; |
||
| our ability to effect a turnaround of our MEXX Europe business; |
||
| our ability to successfully re-launch our LUCKY BRAND product offering; |
||
| our ability to respond to constantly changing consumer demands and tastes and fashion
trends, across multiple product lines, shopping channels and geographies; |
||
| our ability to attract and retain talented, highly qualified executives, and maintain
satisfactory relationships with our employees, both union and non-union; |
||
| our ability to adequately establish, defend and protect our trademarks and other
proprietary rights; |
||
| our ability to successfully develop or acquire new product lines or enter new markets or
product categories, and risks related to such new lines, markets or categories; |
||
| risks associated with the implementation of the licensing arrangements with J.C. Penney
Corporation, Inc. and J.C. Penney Company, Inc. and with QVC, Inc. discussed in this
report, including, without limitation, our ability to efficiently change our operational
model and infrastructure as a result of such licensing arrangements, our ability to
continue a good working relationship with these licensees and possible changes in our other
brand relationships or relationships with other retailers as a result; |
||
| the impact of the highly competitive nature of the markets within which we operate, both
within the US and abroad; |
||
| our reliance on independent foreign manufacturers, including the risk of their failure
to comply with safety standards or our policies regarding labor practices; |
||
| risks associated with our agreement with Li & Fung Limited, which results in a single
foreign buying/sourcing agent for a significant portion of our products; |
||
| a variety of legal, regulatory, political and economic risks, including risks related to
the importation and exportation of product and tariffs and other
trade barriers, to which our international operations are
subject; |
||
| our ability to adapt to and compete effectively in the current quota environment in
which general quota has expired on apparel products but political activity seeking to
re-impose quota has been initiated or threatened; |
||
| our exposure to domestic and foreign currency fluctuations; |
||
| our ability to complete the closure of our LIZ CLAIBORNE branded outlet operations on
terms satisfactory to us and the adverse effect such closure may have on our results of
operations and cash flows; |
||
| limitations on our ability to utilize all or a portion of our US deferred tax assets if
we experience an ownership change; and
|
Table of Contents
| the outcome of current and future litigations and other proceedings in which we are
involved, which may have a material adverse effect on our results of operations and cash
flows. |
Forward-looking statements are based on current expectations only and are not guarantees of future
performance, and are subject to certain risks, uncertainties and assumptions, including those
described in Item 1A Risk Factors in this report as well as in our 2009 Annual Report on Form
10-K. We may change our intentions, beliefs or expectations at any time and without notice, based
upon any change in our assumptions or otherwise. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated or projected. In addition, some factors are beyond our control.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as
a result of new information, future events or otherwise.
Table of Contents
4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(In thousands, except share data)
October 2, 2010 | October 3, 2009 | |||||||||||
(Unaudited) | January 2, 2010 | (Unaudited) | ||||||||||
Assets |
||||||||||||
Current Assets: |
||||||||||||
Cash and cash equivalents |
$ | 16,392 | $ | 20,372 | $ | 25,173 | ||||||
Accounts receivable - trade, net |
274,989 | 263,508 | 369,724 | |||||||||
Inventories, net |
380,435 | 319,713 | 409,964 | |||||||||
Deferred income taxes |
73 | 769 | 8,179 | |||||||||
Other current assets |
98,081 | 267,499 | 120,375 | |||||||||
Assets held for sale |
7,052 | 15,070 | 16,649 | |||||||||
Total current assets |
777,022 | 886,931 | 950,064 | |||||||||
Property and Equipment, Net |
386,153 | 444,688 | 494,725 | |||||||||
Intangibles, Net |
226,427 | 231,229 | 247,285 | |||||||||
Deferred Income Taxes |
6,380 | 7,565 | 2,474 | |||||||||
Other Assets |
41,553 | 35,490 | 31,066 | |||||||||
Total Assets |
$ | 1,437,535 | $ | 1,605,903 | $ | 1,725,614 | ||||||
Liabilities and Stockholders Equity |
||||||||||||
Current Liabilities: |
||||||||||||
Short-term borrowings |
$ | 171,480 | $ | 70,868 | $ | 229,066 | ||||||
Convertible Senior Notes |
73,662 | 71,137 | -- | |||||||||
Accounts payable |
198,969 | 144,942 | 188,335 | |||||||||
Accrued expenses |
254,932 | 343,288 | 250,053 | |||||||||
Income taxes payable |
2,443 | 5,167 | 6,439 | |||||||||
Deferred income taxes |
7,150 | 7,150 | -- | |||||||||
Total current liabilities |
708,636 | 642,552 | 673,893 | |||||||||
Long-Term Debt |
491,737 | 516,146 | 599,520 | |||||||||
Other Non-Current Liabilities |
196,880 | 201,027 | 159,779 | |||||||||
Deferred Income Taxes |
29,212 | 26,299 | 39,765 | |||||||||
Commitments and Contingencies (Note 10) |
||||||||||||
Stockholders Equity: |
||||||||||||
Preferred stock, $0.01 par value, authorized shares
50,000,000, issued shares none |
-- | -- | -- | |||||||||
Common stock, $1.00 par value, authorized shares
250,000,000, issued shares 176,437,234 |
176,437 | 176,437 | 176,437 | |||||||||
Capital in excess of par value |
330,786 | 319,326 | 315,574 | |||||||||
Retained earnings |
1,447,935 | 1,669,316 | 1,711,028 | |||||||||
Accumulated other comprehensive loss |
(62,221 | ) | (69,371 | ) | (76,559 | ) | ||||||
1,892,937 | 2,095,708 | 2,126,480 | ||||||||||
Common stock in treasury, at cost 81,961,339,
81,488,984 and 81,420,425 shares |
(1,884,475 | ) | (1,879,160 | ) | (1,877,281 | ) | ||||||
Total Liz Claiborne, Inc. stockholders equity |
8,462 | 216,548 | 249,199 | |||||||||
Noncontrolling interest |
2,608 | 3,331 | 3,458 | |||||||||
Total stockholders equity |
11,070 | 219,879 | 252,657 | |||||||||
Total Liabilities and Stockholders Equity |
$ | 1,437,535 | $ | 1,605,903 | $ | 1,725,614 | ||||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
Table of Contents
5
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Nine Months Ended | Three Months Ended | |||||||||||||||
October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | |||||||||||||
(39 Weeks) | (39 Weeks) | (13 Weeks) | (13 Weeks) | |||||||||||||
Net Sales |
$ | 1,835,555 | $ | 2,209,580 | $ | 658,283 | $ | 761,716 | ||||||||
Cost of goods sold |
933,462 | 1,197,294 | 320,633 | 416,750 | ||||||||||||
Gross Profit |
902,093 | 1,012,286 | 337,650 | 344,966 | ||||||||||||
Selling, general & administrative
expenses |
1,070,568 | 1,205,939 | 357,134 | 403,948 | ||||||||||||
Goodwill impairment |
-- | 2,785 | -- | -- | ||||||||||||
Impairment of other intangible assets |
2,594 | -- | -- | -- | ||||||||||||
Operating Loss |
(171,069 | ) | (196,438 | ) | (19,484 | ) | (58,982 | ) | ||||||||
Other income (expense), net |
12,262 | (11,471 | ) | (29,539 | ) | (10,097 | ) | |||||||||
Interest expense, net |
(47,170 | ) | (46,862 | ) | (12,618 | ) | (17,410 | ) | ||||||||
Loss Before Provision (Benefit) for Income
Taxes |
(205,977 | ) | (254,771 | ) | (61,641 | ) | (86,489 | ) | ||||||||
Provision (benefit) for income taxes |
6,242 | (5,830 | ) | 875 | 621 | |||||||||||
Loss from Continuing Operations |
(212,219 | ) | (248,941 | ) | (62,516 | ) | (87,110 | ) | ||||||||
Discontinued operations, net of
income taxes |
(9,822 | ) | (15,639 | ) | (288 | ) | (3,602 | ) | ||||||||
Net Loss |
(222,041 | ) | (264,580 | ) | (62,804 | ) | (90,712 | ) | ||||||||
Net loss attributable to the noncontrolling interest |
(723 | ) | (554 | ) | (110 | ) | (171 | ) | ||||||||
Net Loss Attributable to Liz Claiborne, Inc. |
$ | (221,318 | ) | $ | (264,026 | ) | $ | (62,694 | ) | $ | (90,541 | ) | ||||
Earnings per Share: |
||||||||||||||||
Basic and Diluted |
||||||||||||||||
Loss from Continuing Operations Attributable
to Liz Claiborne, Inc. |
$ | (2.24 | ) | $ | (2.65 | ) | $ | (0.66 | ) | $ | (0.93 | ) | ||||
Net Loss Attributable to Liz Claiborne, Inc. |
$ | (2.35 | ) | $ | (2.81 | ) | $ | (0.67 | ) | $ | (0.96 | ) | ||||
Weighted Average Shares, Basic and Diluted |
94,224 | 93,855 | 94,259 | 93,908 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
Table of Contents
6
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended | ||||||||
October 2, 2010 | October 3, 2009 | |||||||
(39 Weeks) | (39 Weeks) | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (222,041 | ) | $ | (264,580 | ) | ||
Adjustments to arrive at loss from continuing operations |
9,822 | 15,639 | ||||||
Loss from continuing operations |
(212,219 | ) | (248,941 | ) | ||||
Adjustments to reconcile loss from continuing operations to net
cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization |
110,356 | 119,263 | ||||||
Impairment of goodwill and other intangible assets |
2,594 | 2,785 | ||||||
Loss on asset disposals and impairments, including
streamlining initiatives, net |
24,935 | 23,349 | ||||||
Share-based compensation |
5,114 | 6,689 | ||||||
Foreign currency gains, net |
(11,125 | ) | -- | |||||
Other, net |
(667 | ) | 101 | |||||
Changes in assets and liabilities: |
||||||||
Increase in accounts receivable trade, net |
(16,854 | ) | (19,363 | ) | ||||
(Increase) decrease in inventories, net |
(58,084 | ) | 56,003 | |||||
(Increase) decrease in other current and non-current assets |
(7,625 | ) | 26,439 | |||||
Increase (decrease) in accounts payable |
55,239 | (20,885 | ) | |||||
(Decrease) increase in accrued expenses and other non-current liabilities |
(86,979 | ) | 843 | |||||
Net change in income tax assets and liabilities |
172,973 | 94,615 | ||||||
Net cash used in operating activities of discontinued operations |
(955 | ) | (13,917 | ) | ||||
Net cash (used in) provided by operating activities |
(23,297 | ) | 26,981 | |||||
Cash Flows from Investing Activities: |
||||||||
Purchases of property and equipment |
(48,663 | ) | (54,451 | ) | ||||
Proceeds from sale of property and equipment |
1,144 | -- | ||||||
Payments for purchases of businesses |
(5,000 | ) | (8,755 | ) | ||||
Payments for in-store merchandise shops |
(1,436 | ) | (5,794 | ) | ||||
Investments in and advances to equity investee |
(4,033 | ) | -- | |||||
Other, net |
(257 | ) | (270 | ) | ||||
Net cash used in investing activities of discontinued operations |
(5,599 | ) | (564 | ) | ||||
Net cash used in investing activities |
(63,844 | ) | (69,834 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Short-term borrowings, net |
(6,608 | ) | (9,541 | ) | ||||
Proceeds from borrowings under revolving credit agreement |
470,295 | -- | ||||||
Repayment of borrowings under revolving credit agreement |
(361,648 | ) | -- | |||||
Proceeds from issuance of Convertible Senior Notes |
-- | 90,000 | ||||||
Principal payments under capital lease obligations |
(4,627 | ) | (3,246 | ) | ||||
Payment of deferred financing fees |
(15,001 | ) | (39,130 | ) | ||||
Net cash provided by financing activities |
82,411 | 38,083 | ||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
750 | 4,512 | ||||||
Net Change in Cash and Cash Equivalents |
(3,980 | ) | (258 | ) | ||||
Cash and Cash Equivalents at Beginning of Period |
20,372 | 25,431 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 16,392 | $ | 25,173 | ||||
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
Table of Contents
7
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in thousands, except per share amounts)
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Liz Claiborne, Inc. and its wholly-owned and
majority-owned subsidiaries (the Company) included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America (US
GAAP) have been condensed or omitted from this report, as is permitted by such rules and
regulations; however, the Company believes that its disclosures are adequate to make the
information presented not misleading. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and notes thereto
included in the Companys 2009 Annual Report on Form 10-K. Information presented as of January 2,
2010 is derived from audited financial statements.
The Companys segment reporting structure reflects a brand-focused approach, designed to optimize
the operational coordination and resource allocation of the Companys businesses across multiple
functional areas including specialty retail, retail outlets, wholesale apparel, wholesale
non-apparel, e-commerce and licensing. The three reportable segments described below represent the
Companys brand-based activities for which separate financial information is available and which is
utilized on a regular basis by its chief operating decision maker (CODM) to evaluate performance
and allocate resources. In identifying its reportable segments, the Company considers economic
characteristics, as well as products, customers, sales growth potential and long-term
profitability. The Company aggregates its five operating segments to form reportable segments,
where applicable. As such, the Company reports its operations in three reportable segments as
follows:
| Domestic-Based Direct Brands segment consists of the specialty
retail, outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry
and handbags), e-commerce and licensing operations of the Companys three domestic,
retail-based operating segments: JUICY COUTURE, KATE SPADE and LUCKY BRAND. |
||
| International-Based Direct Brands segment consists of the specialty
retail, outlet, concession, wholesale apparel, wholesale non-apparel (including
accessories, jewelry and handbags), e-commerce and licensing operations of MEXX, the
Companys international, retail-based operating segment. |
||
| Partnered Brands segment consists of one operating segment including
the wholesale apparel, wholesale non-apparel, outlet, concession, e-commerce and licensing
operations of the Companys wholesale-based brands including: AXCESS, CLAIBORNE
(mens), DANA BUCHMAN, KENSIE, LIZ CLAIBORNE, LIZ CLAIBORNE NEW YORK, MAC & JAC, MARVELLA,
MONET, TRIFARI and the Companys licensed DKNY® JEANS and DKNY® ACTIVE brands. |
During the third quarter of 2010, the Company announced the plan to exit the LIZ CLAIBORNE branded
outlet stores in the US and Puerto Rico. As of October 2, 2010, the Company completed the closure
of five of the 87 planned outlet store closures.
On January 8, 2010, the Company entered into an agreement with Lauras Shoppe (Canada) Ltd. and
Lauras Shoppe (P.V.) Inc. (collectively, Laura Canada), which includes the assignment of 38 LIZ
CLAIBORNE Canada store leases and transfer of title to certain property and equipment to Laura
Canada in exchange for a net fee of approximately $7.9 million.
During the first quarter of 2009, the Company completed the closure of its Mt. Pocono, Pennsylvania
distribution center. Certain assets associated with such distribution center were segregated and
reported as held for sale on the accompanying Condensed Consolidated Balance Sheets.
Table of Contents
8
The activities of the Companys former Emma James, Intuitions, J.H. Collectibles, Tapemeasure, C&C
California, Laundry by Design, prAna, Narciso Rodriguez and Enyce brands, the retail operations of
the Companys SIGRID OLSEN brand that were not converted to other brands, the retail operations of
the Companys former Ellen Tracy brand and the Companys LIZ CLAIBORNE Canada stores and closed LIZ
CLAIBORNE outlet stores in the US and Puerto Rico have been segregated and reported as discontinued
operations for all periods presented. The SIGRID OLSEN and Ellen Tracy wholesale activities and
DANA BUCHMAN operations either did not represent operations and cash flows that could be clearly
distinguished operationally and for financial reporting purposes from the remainder of the Company
or retain continuing involvement with the Company and therefore have not been presented as
discontinued operations.
Summarized financial data for the aforementioned brands that are classified as discontinued
operations are provided in Note 2 Discontinued Operations.
In the opinion of management, the information furnished reflects all adjustments, all of which are
of a normal recurring nature, necessary for a fair presentation of the results for the reported
interim periods. Results of operations for interim periods are not necessarily indicative of
results for the full year. Management has evaluated events or transactions that have occurred from
the balance sheet date through the date the Company issued these financial statements.
NATURE OF OPERATIONS
Liz Claiborne, Inc. is engaged primarily in the design and marketing of a broad range of apparel
and accessories. The Companys fiscal year ends on the Saturday closest to December 31. The 2010
fiscal year, ending January 1, 2011, reflects a 52-week period, resulting in a 13-week, three-month
period and a 39-week, nine-month period for the third quarter. The 2009 fiscal year reflects a
52-week period, resulting in a 13-week, three-month period and a 39-week, nine-month period for the
third quarter.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the Company. All
inter-company balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The Companys critical accounting policies are those that are most important to the portrayal of
its financial condition and results of operations in conformity with US GAAP. These critical
accounting policies are applied in a consistent manner. The Companys critical accounting policies
are summarized in Note 1 of Notes to Consolidated Financial Statements included in its Annual
Report on Form 10-K for the fiscal year ended January 2, 2010.
The application of critical accounting policies requires that the Company make estimates and
assumptions about future events and apply judgments that affect the reported amounts of revenues
and expenses. Estimates by their nature are based on judgments and available information.
Therefore, actual results could materially differ from those estimates under different assumptions
and conditions. The Company continues to monitor the critical accounting policies to ensure proper
application of current rules and regulations. During 2010, there have been no significant changes
in the critical accounting policies discussed in the Companys Annual Report on Form 10-K for the
fiscal year ended January 2, 2010.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
On January 3, 2010, the first day of fiscal year 2010, the Company adopted new accounting guidance
on fair value measurements. The new accounting guidance requires (i) an entity to disclose
separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements
and describe the reasons for such transfers and (ii) separate presentation of purchases, sales,
issuances and settlements for significant unobservable inputs (Level 3). The new accounting
guidance also clarifies the disclosure requirements about the inputs and valuation techniques for
Level 2 or Level 3 fair value measurements. The adoption of the new accounting guidance did not
affect the Companys condensed consolidated financial statements, but did require additional
disclosures, which are provided in Note 9 Fair Value Measurements.
Table of Contents
9
OTHER MATTERS
The Company has been greatly impacted by the economic downturn, including a drastic decline in
consumer spending that began in the second half of 2008 and which persisted during 2009 and into
2010. Although the decline in consumer spending has moderated, unemployment levels remain high,
consumer retail traffic remains depressed and the retail environment remains highly promotional. The Company continues to focus on the execution of its
strategic plans and improvements in productivity, with a primary focus on operating cash flow
generation, retail execution and international expansion. The Company will also continue to
carefully manage liquidity and spending. Projected 2010 capital expenditures are approximately
$90.0 million (from $72.6 million in 2009).
The Companys 6.0% Convertible Senior Notes due June 15, 2014 (the Convertible Notes) are
convertible during any fiscal quarter if the last reported sale price of the Companys common stock
during 20 out of the last 30 trading days in the prior fiscal quarter equals or exceeds $4.2912
(which is 120% of the conversion price). As a result of stock price performance, the Convertible
Notes were convertible during the third quarter of 2010 and are convertible during the fourth
quarter of 2010. As previously disclosed in connection with the issuance of the Convertible Notes,
the Company has not yet obtained stockholder approval under the rules of the NYSE for the issuance
of the full amount of common stock issuable upon conversion of the Convertible Notes. Until such
approval is obtained, if the Convertible Notes are surrendered for conversion, the Company must pay
the $1,000 principal amount of the Convertible Notes in cash and may settle the remaining
conversion value in the form of cash, stock or a combination of cash and stock, subject to an
overall limit on the number of shares of stock that may be issued.
In May 2010, the Company completed a second amendment to and restatement of its revolving credit
facility (as amended, the Amended Agreement), as discussed in Note 8 Debt and Lines of Credit.
Under the Amended Agreement, the aggregate commitments were reduced to $350.0 million from $600.0
million, and the maturity date was extended from May 2011 to August 2014, subject to certain early
termination provisions which provide for earlier maturity dates if the Companys 5.0% 350.0 million
euro Notes due July 2013 and the Convertible Notes are not repaid or refinanced by certain agreed
upon dates. The Company is subject to various covenants and other requirements, such as financial
requirements, reporting requirements and negative covenants. Pursuant to the May 2010 amendment,
the Company is required to maintain minimum aggregate borrowing availability of not less than $45.0
million and must apply substantially all cash collections to reduce outstanding borrowings under
the Amended Agreement when availability under the Amended Agreement falls below the greater of
$65.0 million and 17.5% of the then-applicable aggregate commitments. The Companys borrowing
availability under the Amended Agreement is determined primarily by the level of its eligible
accounts receivable and inventory balances. In addition, the Amended Agreement removes the
springing fixed charge coverage covenant that was a condition of the prior amended and restated
revolving credit agreement.
During the first nine months of 2010, the Company received $171.1 million of net income tax refunds
on previously paid taxes primarily due to a Federal law change in 2009 allowing 2008 or 2009
domestic losses to be carried back for five years, with the fifth year limited to 50.0% of taxable
income. The Company repaid amounts outstanding under its amended and restated revolving credit
facility with the amount of such refunds.
Based on its forecast of borrowing availability under the Amended Agreement, the Company currently
anticipates that cash flows from operations and the projected borrowing availability under its
Amended Agreement will be sufficient to fund its liquidity requirements for at least the next
12 months. There can be no certainty that availability under the Amended Agreement will be
sufficient to fund the Companys liquidity needs. Should the Company be unable to comply with the
requirements in the Amended Agreement, the Company would be unable to borrow under such agreement,
and any amounts outstanding would become immediately due and payable unless the Company were able
to secure a waiver or an amendment under the Amended Agreement. The sufficiency and availability of
the Companys projected sources of liquidity may be adversely affected by a variety of factors,
including, without limitation: (i) the level of the Companys operating cash flows, which will be
impacted by retailer and consumer acceptance of the Companys products, general economic conditions
and the level of consumer discretionary spending; (ii) the status of, and any further adverse
changes in, the Companys credit ratings; (iii) the Companys ability to maintain required levels
of borrowing availability and to comply with applicable covenants (as amended) and other covenants
included in its debt and credit facilities; (iv) the financial wherewithal of the Companys larger
department store and specialty store customers; (v) the Companys ability to successfully execute
on the licensing arrangements with J.C. Penney Corporation, Inc. and J.C. Penney Company, Inc.
(collectively, JCPenney) and with QVC, Inc. (QVC) with respect to the LIZ CLAIBORNE family of
brands (see Note 13 Additional
Financial Information); (vi) interest rate and exchange rate fluctuations; and (vii) whether
holders of the Convertible Notes, if and when such notes are convertible, elect to convert a
substantial portion of such notes, the par value of
Table of Contents
10
which the Company must currently settle in cash. An acceleration of amounts outstanding under the
Amended Agreement would likely cause cross-defaults under the Companys other outstanding
indebtedness, including the Convertible Notes and the Companys 350.0 million euro Notes.
2. DISCONTINUED OPERATIONS
Since 2007, the Company has completed various disposal transactions including (i) its former Emma
James, Intuitions, J.H. Collectibles and Tapemeasure brands in a single transaction on October 4,
2007; (ii) certain assets and liabilities of its former C&C California and Laundry by Design brands
on February 4, 2008; (iii) substantially all of the assets and liabilities of its former prAna
brand on April 4, 2008; (iv) the assets and liabilities of its former Ellen Tracy brand on April
10, 2008; (v) certain assets related to its interest in the Narciso Rodriguez brand and the
termination of certain agreements entered in connection with the acquisition of such brand on
October 7, 2008; and (vi) certain assets and liabilities of its former Enyce brand on October 20,
2008.
On January 8, 2010, the Company entered into an agreement with Laura Canada, which includes the
assignment of 38 LIZ CLAIBORNE Canada store leases and transfer of title to certain property and
equipment to Laura Canada in exchange for a net fee of approximately $7.9 million.
During the third quarter of 2010, the Company announced the plan to exit the LIZ CLAIBORNE branded
outlet stores in the US and Puerto Rico. As of October 2, 2010, the Company completed the closure
of five of the planned outlet store closures.
The Company recorded pretax losses of $9.8 million ($6.2 million, net of income taxes) and $4.1
million during the nine months ended October 2, 2010 and October 3, 2009, respectively, and pretax
income (loss) of $0.6 million and $(1.5) million during the three months ended October 2, 2010 and
October 3, 2009, respectively, to reflect the estimated difference between the carrying value of
the net assets sold and their estimated fair value, less costs to dispose, including estimated
transaction costs. The net loss on disposal of discontinued operations in the nine months ended
October 2, 2010 included a $3.6 million benefit for an expected refund of previously paid taxes.
The charges recorded in 2009 do not result in a tax benefit as the Company recorded valuation
allowances for substantially all deferred tax assets during 2009 (see Note 7 Income Taxes).
Accordingly, the pretax and after tax amounts of such charges are equal.
Assets held for sale on the accompanying Condensed Consolidated Balance Sheets consisted of
Property and equipment associated with the Companys closed Mt. Pocono, Pennsylvania distribution
center.
Summarized Condensed Consolidated Statement of Operations data for discontinued operations are as
follows:
Nine Months Ended | Three Months Ended | |||||||||||||||
In thousands | October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | ||||||||||||
(39 Weeks) | (39 Weeks) | (13 Weeks) | (13 Weeks) | |||||||||||||
Net sales |
$ | 17,867 | $ | 23,589 | $ | 3,682 | $ | 7,557 | ||||||||
Loss before benefit for
income
taxes |
$ | (4,369 | ) | $ | (11,506 | ) | $ | (899 | ) | $ | (2,082 | ) | ||||
Benefit for income taxes |
(762 | ) | -- | (34 | ) | -- | ||||||||||
Loss from discontinued
operations, net of income
taxes |
$ | (3,607 | ) | $ | (11,506 | ) | $ | (865 | ) | $ | (2,082 | ) | ||||
(Loss) income on disposal of
discontinued operations, net
of income taxes |
$ | (6,215 | ) | $ | (4,133 | ) | $ | 577 | $ | (1,520 | ) | |||||
Table of Contents
11
3. STOCKHOLDERS EQUITY
Activity for the nine months ended October 2, 2010 in the Capital in excess of par value, Retained
earnings, Common stock in treasury, at cost and Noncontrolling interest accounts was as follows:
Common | ||||||||||||||||
Capital in | Stock in | |||||||||||||||
Excess of Par | Retained | Treasury, at | Noncontrolling | |||||||||||||
In thousands | Value | Earnings | Cost | Interest | ||||||||||||
Balance as of January 2, 2010 |
$ | 319,326 | $ | 1,669,316 | $ | (1,879,160 | ) | $ | 3,331 | |||||||
Net loss |
-- | (221,318 | ) | -- | (723 | ) | ||||||||||
Restricted shares issued, net
of cancellations and
shares withheld for taxes |
6,377 | -- | (5,383 | ) | -- | |||||||||||
Share-based compensation |
5,114 | -- | -- | -- | ||||||||||||
Dividend equivalent units vested |
(31 | ) | (63 | ) | 68 | -- | ||||||||||
Balance as of October 2, 2010 |
$ | 330,786 | $ | 1,447,935 | $ | (1,884,475 | ) | $ | 2,608 | |||||||
Activity for the nine months ended October 3, 2009 in the Capital in excess of par value, Retained
earnings, Common stock in treasury, at cost and Noncontrolling interest accounts was as follows:
Common | ||||||||||||||||
Capital in | Stock in | |||||||||||||||
Excess of Par | Retained | Treasury, at | Noncontrolling | |||||||||||||
In thousands | Value | Earnings | Cost | Interest | ||||||||||||
Balance as of January 3, 2009 |
$ | 292,144 | $ | 1,975,082 | $ | (1,873,300 | ) | $ | 4,012 | |||||||
Net loss |
-- | (264,026 | ) | -- | (554 | ) | ||||||||||
Issuance of Convertible Senior Notes, net |
11,992 | -- | -- | -- | ||||||||||||
Restricted shares issued, net of
cancellations and
shares withheld for taxes |
4,778 | -- | (4,027 | ) | -- | |||||||||||
Share-based compensation |
6,689 | -- | -- | -- | ||||||||||||
Dividend equivalent units vested |
(29 | ) | (28 | ) | 46 | -- | ||||||||||
Balance as of October 3, 2009 |
$ | 315,574 | $ | 1,711,028 | $ | (1,877,281 | ) | $ | 3,458 | |||||||
Table of Contents
12
Comprehensive loss is comprised of net loss, the effects of foreign currency translation, changes
in the net investment hedge, changes in unrealized gains (losses) on available-for-sale securities
and changes in the fair value of cash flow hedges. Total comprehensive loss, net of income taxes
for interim periods was as follows:
Nine Months Ended | Three Months Ended | |||||||||||||||
October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | |||||||||||||
In thousands | (39 Weeks) | (39 Weeks) | (13 Weeks) | (13 Weeks) | ||||||||||||
Net loss |
$ | (222,041 | ) | $ | (264,580 | ) | $ | (62,804 | ) | $ | (90,712 | ) | ||||
Other comprehensive income
(loss), net of income
taxes: |
||||||||||||||||
Change in cumulative
translation
adjustment |
16,586 | (2,307 | ) | (10,216 | ) | (2,335 | ) | |||||||||
Change in cumulative
translation
adjustment on
Eurobond and other
instruments, net of
income taxes of
$2,435, $2,116, $344
and $1,083,
respectively |
(12,851 | ) | 913 | 14,050 | 4,223 | |||||||||||
Change in unrealized
gains (losses) on
available-for-sale
securities, net of
income taxes of $0,
$0, $0 and $0,
respectively |
(30 | ) | 196 | (8 | ) | 19 | ||||||||||
Change in fair value
of cash flow hedges,
net of income taxes
of $1,760, $(1,007),
$(302) and $(699),
respectively |
3,445 | (8,645 | ) | (9,002 | ) | (3,410 | ) | |||||||||
Comprehensive loss |
(214,891 | ) | (274,423 | ) | (67,980 | ) | (92,215 | ) | ||||||||
Comprehensive loss
attributable to the
noncontrolling interest |
723 | 554 | 110 | 171 | ||||||||||||
Comprehensive loss
attributable to
Liz Claiborne, Inc. |
$ | (214,168 | ) | $ | (273,869 | ) | $ | (67,870 | ) | $ | (92,044 | ) | ||||
Accumulated other comprehensive loss consisted of the following:
In thousands | October 2, 2010 | January 2, 2010 | October 3, 2009 | |||||||||
Cumulative translation adjustment, net of income taxes
of $4,694, $7,129 and $15,999, respectively |
$ | (60,413 | ) | $ | (64,148 | ) | $ | (64,416 | ) | |||
Unrealized gains (losses) on cash flow hedging
derivatives, net of income taxes of $73, $1,833 and
$2,325, respectively |
(2,119 | ) | (5,564 | ) | (11,792 | ) | ||||||
Unrealized gains (losses) on available-for-sale
securities, net of income taxes of $0, $0 and $0,
respectively |
311 | 341 | (351 | ) | ||||||||
Accumulated other comprehensive loss, net of income taxes |
$ | (62,221 | ) | $ | (69,371 | ) | $ | (76,559 | ) | |||
4. INVENTORIES, NET
Inventories, net consisted of the following:
In thousands | October 2, 2010 | January 2, 2010 | October 3, 2009 | |||||||||
Raw materials |
$ | 3,019 | $ | 5,896 | $ | 10,964 | ||||||
Work in process |
309 | 773 | 2,028 | |||||||||
Finished goods |
377,107 | 313,044 | 396,972 | |||||||||
Total inventories, net |
$ | 380,435 | $ | 319,713 | $ | 409,964 | ||||||
Table of Contents
13
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
In thousands | October 2, 2010 | January 2, 2010 | October 3, 2009 | |||||||||
Land and buildings |
$ | 67,662 | $ | 69,235 | $ | 69,300 | ||||||
Machinery and equipment |
318,215 | 312,444 | 334,147 | |||||||||
Furniture and fixtures |
258,705 | 274,235 | 291,107 | |||||||||
Leasehold improvements |
494,748 | 529,281 | 566,100 | |||||||||
1,139,330 | 1,185,195 | 1,260,654 | ||||||||||
Less: Accumulated depreciation and
amortization |
753,177 | 740,507 | 765,929 | |||||||||
Total property and equipment, net |
$ | 386,153 | $ | 444,688 | $ | 494,725 | ||||||
Depreciation and amortization expense on property and equipment for the nine months ended October
2, 2010 and October 3, 2009 was $82.5 million and $94.1 million, respectively, which includes
depreciation for property and equipment under capital leases of $3.7 million and $4.5 million,
respectively. Depreciation and amortization expense on property and equipment for the three months
ended October 2, 2010 and October 3, 2009 was $27.2 million and $30.4 million, respectively, which
includes depreciation for property and equipment under capital leases of $1.1 million and $1.3
million, respectively. Machinery and equipment under capital leases was $30.6 million, $36.1
million and $36.2 million as of October 2, 2010, January 2, 2010 and October 3, 2009, respectively.
6. GOODWILL AND INTANGIBLES, NET
The following tables disclose the carrying value of all intangible assets:
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Amortization | ||||||||||||||||
In thousands | Period | October 2, 2010 | January 2, 2010 | October 3, 2009 | ||||||||||||
Amortized intangible assets: |
||||||||||||||||
Gross carrying amount: |
||||||||||||||||
Licensed trademarks (a) |
-- | $ | -- | $ | -- | $ | 32,154 | |||||||||
Owned trademarks |
4 years | 1,350 | 1,000 | 1,000 | ||||||||||||
Customer relationships |
13 years | 12,274 | 12,220 | 12,159 | ||||||||||||
Merchandising rights (b) |
4 years | 27,758 | 35,025 | 48,024 | ||||||||||||
Other |
4 years | 2,322 | 2,322 | 2,322 | ||||||||||||
Subtotal |
7 years | 43,704 | 50,567 | 95,659 | ||||||||||||
Accumulated amortization: |
||||||||||||||||
Licensed trademarks |
-- | -- | (22,125 | ) | ||||||||||||
Owned trademarks |
(667 | ) | (517 | ) | (466 | ) | ||||||||||
Customer relationships |
(4,187 | ) | (3,426 | ) | (3,161 | ) | ||||||||||
Merchandising rights |
(20,682 | ) | (23,488 | ) | (30,346 | ) | ||||||||||
Other |
(1,604 | ) | (1,487 | ) | (1,419 | ) | ||||||||||
Subtotal |
(27,140 | ) | (28,918 | ) | (57,517 | ) | ||||||||||
Net: |
||||||||||||||||
Licensed trademarks |
-- | -- | 10,029 | |||||||||||||
Owned trademarks |
683 | 483 | 534 | |||||||||||||
Customer relationships |
8,087 | 8,794 | 8,998 | |||||||||||||
Merchandising rights |
7,076 | 11,537 | 17,678 | |||||||||||||
Other |
718 | 835 | 903 | |||||||||||||
Total amortized intangible assets, net |
16,564 | 21,649 | 38,142 | |||||||||||||
Unamortized intangible assets: |
||||||||||||||||
Owned trademarks |
209,863 | 209,580 | 209,143 | |||||||||||||
Total intangible assets |
$ | 226,427 | $ | 231,229 | $ | 247,285 | ||||||||||
Table of Contents
14
(a) | The decrease in the balance compared to October 3, 2009 reflected a non-cash
impairment charge of $9.5 million recorded in the fourth quarter of 2009 within the Companys
Partnered Brands segment related to the Companys licensed trademark intangible asset
associated with its licensed DKNY® JEANS and DKNY® ACTIVE brands. |
|
(b) | The decrease in the balance compared to October 3, 2009 included non-cash impairment
charges of $2.6 million recorded in the second quarter of 2010 primarily within the Companys
Partnered Brands segment related to merchandising rights of its LIZ CLAIBORNE and licensed
DKNY® JEANS brands and a non-cash impairment charge of $4.7 million recorded in the fourth
quarter of 2009 within the Companys Partnered Brands segment primarily related to LIZ
CLAIBORNE merchandising rights. |
Amortization expense of intangible assets was $5.3 million and $11.6 million for the nine
months ended October 2, 2010 and October 3, 2009, respectively, and $1.7 million and $4.2 million
for the three months ended October 2, 2010 and October 3, 2009, respectively.
The estimated amortization expense for intangible assets for the next five fiscal years is as
follows:
(In millions) | ||||
Fiscal Year | Amortization Expense | |||
2010 |
$ | 6.3 | ||
2011 |
4.5 | |||
2012 |
3.1 | |||
2013 |
1.9 | |||
2014 |
1.3 |
In the second quarter of 2009, the Company recorded $2.8 million of additional purchase price and
an increase to goodwill related to its contingent payment to the former owners of Mac & Jac. The
Company performed a step two goodwill impairment assessment, concluded that the goodwill recorded
as a result of the settlement of the contingency was impaired and recorded an impairment charge of
$2.8 million in its Partnered Brands segment.
7. INCOME TAXES
As of the fourth quarter of 2008, the Company recorded valuation allowances for substantially all
deferred tax assets due to the combination of (i) its history of pretax losses; (ii) the Companys
ability to carry forward or carry back tax losses or credits and (iii) then current general
economic conditions. During the third quarter of 2010, the Company continues to provide a full
valuation allowance on deferred tax assets in most jurisdictions.
The Companys provision for income taxes for the nine and three months ended October 2, 2010
primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets,
current tax on operations in certain jurisdictions and an increase in the accrual for interest
related to uncertain tax positions.
The Companys benefit for income taxes during the nine and three months ended October 3, 2009
primarily resulted from the allocation of a tax benefit to continuing operations. Amounts credited
to capital in excess of par value, other comprehensive income or discontinued operations during the
year are considered sources of income that enable a company to recognize a tax benefit on its loss
from continuing operations. The issuance of the Convertible Notes in June of 2009 resulted in the
recognition of a credit to the Capital in excess of par value account of $20.6 million (see Note 8
Debt and Lines of Credit), which caused the allocation of a tax benefit to continuing operations
of approximately $8.0 million. The benefit for income taxes for the nine months ended October 3,
2009 is net of tax expense related primarily to an increase in deferred tax liabilities for
indefinite-lived intangible assets. The Companys provision for income taxes for the three months
ended October 3, 2009, primarily resulted from an increase in deferred tax liabilities for
indefinite-lived intangible assets.
The number of years with open tax audits varies depending upon the tax jurisdiction. The major tax
jurisdictions include the US and the Netherlands. The Company is no longer subject to US Federal
examination by the Internal Revenue Service (IRS) for the years before 2006 and, with a few
exceptions, this applies to tax examinations by state authorities for the years before 2005. As a
result of the US Federal tax law change in 2009 extending the carryback period from two to five
years and the Companys carryback of its 2009 tax loss to 2004 and 2005, the IRS has the ability to
re-open its past examinations of 2004 and 2005. The Company has been reviewed by the IRS for 2004
and 2005. The Company is no longer subject to income tax examination by the Dutch tax authorities
for years before 2005.
Table of Contents
15
The Company expects a reduction in the liability for unrecognized tax benefits by an amount between
$1.6 million and $2.9 million within the next 12 months due to the expiration of the statute of
limitations and various tax settlements. As of October 2, 2010, uncertain tax positions of $85.5
million exist, which would provide an effective rate impact in the future if subsequently
recognized.
8. DEBT AND LINES OF CREDIT
Long-term debt consisted of the following:
In thousands | October 2, 2010 | January 2, 2010 | October 3, 2009 | |||||||||
5.0% Notes, due July 2013 (a) |
$ | 481,838 | $ | 501,827 | $ | 510,182 | ||||||
6.0% Convertible Senior Notes, due June 2014 (b) |
73,662 | 71,137 | 70,323 | |||||||||
Revolving credit facility |
167,327 | 66,507 | 228,109 | |||||||||
Capital lease obligations |
14,052 | 18,680 | 19,729 | |||||||||
Other |
-- | -- | 243 | |||||||||
Total debt |
736,879 | 658,151 | 828,586 | |||||||||
Less: Short-term borrowings (c) |
171,480 | 70,868 | 229,066 | |||||||||
Convertible Notes (d) |
73,662 | 71,137 | -- | |||||||||
Long-term debt |
$ | 491,737 | $ | 516,146 | $ | 599,520 | ||||||
(a) | The change in the balance of these euro-denominated notes reflected the impact
of changes in foreign currency exchange rates. |
|
(b) | The balance at October 2, 2010, January 2, 2010 and October 3, 2009 represented
principal of $90.0 million and an unamortized debt discount of $16.3 million, $18.9 million
and $19.7 million, respectively. |
|
(c) | At October 2, 2010, the balance primarily consisted of outstanding borrowings under
the Companys amended and restated revolving credit facility and obligations under capital
leases. |
|
(d) | The Convertible Notes were reflected as a current liability since they were
convertible at October 2, 2010 and January 2, 2010. |
5.0% Notes
On July 6, 2006, the Company completed the issuance of 350.0 million euro (or $446.9 million based on the exchange rate in effect on such date) 5.0% Notes (the Notes) due July 8, 2013. The net proceeds of the offering were used to refinance the Companys then outstanding 350.0 million euro 6.625% Notes due August 7, 2006, which were originally issued on August 7, 2001. The Notes are listed on the Luxembourg Stock Exchange and bear interest from and including July 6, 2006, payable annually in arrears on July 8 of each year beginning on July 8, 2007. A portion of the Notes is designated as a hedge of the Companys net investment in certain of the Companys euro-denominated functional currency subsidiaries (see Note 15 Derivative Instruments).
On July 6, 2006, the Company completed the issuance of 350.0 million euro (or $446.9 million based on the exchange rate in effect on such date) 5.0% Notes (the Notes) due July 8, 2013. The net proceeds of the offering were used to refinance the Companys then outstanding 350.0 million euro 6.625% Notes due August 7, 2006, which were originally issued on August 7, 2001. The Notes are listed on the Luxembourg Stock Exchange and bear interest from and including July 6, 2006, payable annually in arrears on July 8 of each year beginning on July 8, 2007. A portion of the Notes is designated as a hedge of the Companys net investment in certain of the Companys euro-denominated functional currency subsidiaries (see Note 15 Derivative Instruments).
6.0% Convertible Senior Notes
On June 24, 2009, the Company issued $90.0 million Convertible Notes. The Convertible Notes bear interest at a rate of 6.0% per year and mature on June 15, 2014. The Company used the net proceeds from this offering to repay $86.6 million of outstanding borrowings under its amended and restated revolving credit facility.
On June 24, 2009, the Company issued $90.0 million Convertible Notes. The Convertible Notes bear interest at a rate of 6.0% per year and mature on June 15, 2014. The Company used the net proceeds from this offering to repay $86.6 million of outstanding borrowings under its amended and restated revolving credit facility.
The Convertible Notes are convertible at an initial conversion rate of 279.6421 shares of the
Companys common stock per $1,000 principal amount of Convertible Notes (representing an initial
conversion price of $3.576 per share of common stock), subject to adjustment in certain
circumstances. Upon conversion, a holder will receive cash up to the aggregate principal amount of
the Convertible Notes converted and cash, shares of common stock or a combination thereof (at the
Companys election) in respect of the conversion value above the Convertible Notes principal
amount, if any. The conversion rate is subject to a conversion rate cap of 211.2064 shares per
$1,000 principal amount. Holders may convert the Convertible Notes at their option prior to the
close of business on the business day immediately preceding March 15, 2014 only under the following
circumstances: (i) during any fiscal quarter commencing after October 3, 2009, if the last reported
sale price of the common stock for at least 20 trading days (whether or not consecutive) during a
period of 30 consecutive trading days ending on the last trading day of the preceding fiscal
quarter is greater than or equal to 120% of the applicable conversion price on each applicable
trading day; (ii) during the five business day period after any 10 consecutive trading day period
in which the trading price per $1,000 principal amount of Convertible Notes for each day of such
measurement period was less than 98% of the product of the last reported sale price of the
Companys common stock and the applicable conversion rate on
Table of Contents
16
each such day; or (iii) upon the
occurrence of specified corporate events. In addition, on or after March 15, 2014
until the close of business on the third scheduled trading day immediately preceding the maturity
date, holders may convert their Convertible Notes at any time, regardless of the foregoing
circumstances. As of October 2, 2010, none of the Convertible Notes were converted although they
were convertible at the option of the holder.
The Company separately accounts for the liability and equity components of the Convertible Notes in
a manner that reflects the Companys nonconvertible debt borrowing rate when interest is recognized
in subsequent periods. The Company allocated $20.6 million of the $90.0 million principal amount of
the Convertible Notes to the equity component and to debt discount. The debt discount will be
amortized into interest expense through June 2014 using the effective interest method. The
Companys effective interest rate on the Convertible Notes is 12.25%. The non-cash interest expense
that will be recorded will increase as the Convertible Notes approach maturity and accrete to face
value. Interest expense associated with the semi-annual interest payment and non-cash amortization
of the debt discount was $6.6 million and $2.4 million for the nine months ended October 2, 2010
and October 3, 2009, respectively, and $2.3 million and $2.2 million for the three months ended
October 2, 2010 and October 3, 2009, respectively.
Amended and Restated Revolving Credit Facility
In May 2010, the Company completed a second amendment to and restatement of its revolving credit facility. Availability under the Amended Agreement shall be the lesser of $350.0 million or a borrowing base that is computed monthly and comprised primarily of its eligible accounts receivable and inventory. A portion of the funds available under the Amended Agreement not in excess of $200.0 million is available for the issuance of letters of credit, whereby standby letters of credit may not exceed $65.0 million. The amended and restated revolving credit facility is secured by a first priority lien on substantially all of the Companys assets and includes a $200.0 million multi-currency revolving credit line and a $150.0 million US Dollar credit line. The Amended Agreement allows two borrowing options: one borrowing option with interest rates based on euro currency rates and a second borrowing option with interest rates based on the alternate base rate, as defined in the Amended Agreement, with a spread based on the aggregate availability under the Amended Agreement.
In May 2010, the Company completed a second amendment to and restatement of its revolving credit facility. Availability under the Amended Agreement shall be the lesser of $350.0 million or a borrowing base that is computed monthly and comprised primarily of its eligible accounts receivable and inventory. A portion of the funds available under the Amended Agreement not in excess of $200.0 million is available for the issuance of letters of credit, whereby standby letters of credit may not exceed $65.0 million. The amended and restated revolving credit facility is secured by a first priority lien on substantially all of the Companys assets and includes a $200.0 million multi-currency revolving credit line and a $150.0 million US Dollar credit line. The Amended Agreement allows two borrowing options: one borrowing option with interest rates based on euro currency rates and a second borrowing option with interest rates based on the alternate base rate, as defined in the Amended Agreement, with a spread based on the aggregate availability under the Amended Agreement.
The Amended Agreement restricts the Companys ability to, among other things, incur indebtedness,
grant liens, repurchase stock, issue cash dividends, make investments and acquisitions and sell
assets, in each case subject to certain designated exceptions. In addition, the Amended Agreement
(i) requires the Company to maintain minimum aggregate borrowing availability of not less than
$45.0 million; (ii) requires the Company to apply substantially all cash collections to reduce
outstanding borrowings under the Amended Agreement when availability under the Amended Agreement
falls below the greater of $65.0 million and 17.5% of the then-applicable aggregate commitments;
(iii) adjusts certain interest rate spreads based upon availability; (iv) provides for the
inclusion of an intangible asset value of $30.0 million in the borrowing base which declines in
value over two years; (v) permits the incurrence of liens and sale of assets in connection with the
grant and exercise of the JCPenney purchase option under the JCPenney license agreement; and
(vi) permits the acquisition of certain joint venture interests and the indebtedness and guarantees
by certain parties arising in connection with such acquisition, subject to certain capped amounts
and meeting certain borrowing availability tests.
The funds available under the Amended Agreement may be used to refinance or repurchase certain
existing debt, provide for working capital and for general corporate purposes, and back both trade
and standby letters of credit in addition to the Companys synthetic lease. The Amended Agreement
contains customary events of default clauses and cross-default provisions with respect to the
Companys other outstanding indebtedness, including the Notes and the Convertible Notes. The
Amended Agreement will expire in August 2014, provided that in the event that the Companys 350.0
million euro Notes are not refinanced, purchased or defeased prior to April 8, 2013, then the
maturity date shall be April 8, 2013, and in the event that the Convertible Notes are not
refinanced, purchased or defeased prior to March 15, 2014, then the maturity date shall be March
15, 2014. In both circumstances, if any such refinancing or extension provides for a maturity date
that is earlier than 91 days following August 6, 2014, then the maturity date shall be the date
that is 91 days prior to the maturity date of such notes.
The Company currently believes that the financial institutions under the Amended Agreement are able
to fulfill their commitments, although such ability to fulfill commitments will depend on the
financial condition of the Companys lenders at the time of borrowing.
Prior to the execution of the Amended Agreement, during the first quarter of 2010, the Company was
required to and did repay amounts outstanding under the previous amended and restated revolving
credit facility with the receipt
Table of Contents
17
of tax refunds, which aggregated $164.1 million. Such repayments did not reduce future borrowing
capacity or alter the maturity date of the facility.
As of October 2, 2010, availability under the Companys amended and restated revolving credit
facility was as follows:
Total | Borrowing | Outstanding | Letters of | Available | Excess | |||||||||||||||||||
In thousands | Facility (a) | Base (a) | Borrowings | Credit Issued | Capacity | Capacity (b) | ||||||||||||||||||
Revolving credit
facility
(a) |
$ | 350,000 | $ | 428,023 | $ | 167,327 | $ | 25,992 | $ | 156,681 | $ | 111,681 |
(a) | Availability under the Amended Agreement is the lesser of $350.0 million or a
borrowing base comprised primarily of eligible accounts receivable and inventory. |
|
(b) | Excess capacity represents available capacity reduced by the minimum required
aggregate borrowing availability under the Amended Agreement of $45.0 million. |
Capital Lease
On November 21, 2006, the Company entered into a seven year capital lease with a financial institution totaling $30.6 million. The purpose of the lease was to finance the equipment associated with its distribution facilities in Ohio and Rhode Island, which had been previously financed through the Companys 2001 synthetic lease, which matured in 2006 (see Note 10 Commitments and Contingencies). On June 15, 2010, the Company prepaid $1.5 million principal of the capital lease due to the closure of its former distribution center in Rhode Island.
On November 21, 2006, the Company entered into a seven year capital lease with a financial institution totaling $30.6 million. The purpose of the lease was to finance the equipment associated with its distribution facilities in Ohio and Rhode Island, which had been previously financed through the Companys 2001 synthetic lease, which matured in 2006 (see Note 10 Commitments and Contingencies). On June 15, 2010, the Company prepaid $1.5 million principal of the capital lease due to the closure of its former distribution center in Rhode Island.
9. FAIR VALUE MEASUREMENTS
The Company utilizes the following three level hierarchy that defines the assumptions used to
measure certain assets and liabilities at fair value:
Level 1 | Quoted market prices in active markets for identical assets or liabilities; |
||
Level 2 | Inputs other than Level 1 inputs that are either directly or indirectly observable; and |
||
Level 3 | Unobservable inputs developed using estimates and assumptions developed by the
Company, which reflect those that a market participant would use. |
The following table presents the financial assets and liabilities the Company measures at fair
value on a recurring basis, based on such fair value hierarchy:
Level 2 | ||||||||||||
In thousands | October 2, 2010 | January 2, 2010 | October 3, 2009 | |||||||||
Financial Assets: |
||||||||||||
Derivatives |
$ | 774 | $ | 586 | $ | 2 | ||||||
Financial Liabilities: |
||||||||||||
Derivatives |
$ | (5,531 | ) | $ | (3,781 | ) | $ | (8,415 | ) |
The fair values of the Companys Level 2 derivative instruments are primarily based on observable
forward exchange rates. Unobservable quantitative inputs used in the valuation of the Companys
derivative instruments include volatilities, discount rates and estimated credit losses.
The following table presents the non-financial assets the Company measured at fair value on a
non-recurring basis in 2010, based on such fair value hierarchy:
Total Losses | ||||||||||||||||||||||||
Fair Value Measured and Recorded at | Nine Months | Three Months | ||||||||||||||||||||||
Net Carrying | Reporting Date Using: | Ended | Ended | |||||||||||||||||||||
Value as of | October 2, | October 2, | ||||||||||||||||||||||
In thousands | October 2, 2010 | Level 1 | Level 2 | Level 3 | 2010 | 2010 | ||||||||||||||||||
Property and
equipment |
$ | 2,646 | $ | -- | $ | -- | $ | 2,646 | $ | 17,027 | $ | 2,477 | ||||||||||||
Intangible assets |
-- | -- | -- | -- | 2,594 | -- | ||||||||||||||||||
Assets held for sale |
7,052 | -- | -- | 7,052 | 8,018 | 8,018 |
Table of Contents
18
As a result of the decisions to exit the LIZ CLAIBORNE branded outlet stores in the United States
and Puerto Rico and certain LUCKY BRAND retail locations, cease use of certain corporate and
European concession assets and close a distribution center in 2010, impairment analyses were
performed on the associated property and equipment. The Company determined that a portion of the
assets exceeded their fair values, resulting in impairment charges of $17.0 million, which were
recorded in Selling, general and administrative expenses (SG&A) on the accompanying Condensed
Consolidated Statement of Operations.
In the third quarter of 2010, the Company determined that the carrying value of the assets held for
sale related to its closed Mt. Pocono distribution center exceeded the estimated fair value and
recorded an impairment charge of $8.0 million.
The following table presents the non-financial assets the Company measured at fair value on a
non-recurring basis in 2009, based on such fair value hierarchy:
Total Losses | ||||||||||||||||||||||||
Net Carrying | Fair Value Measured and | Nine Months | Three Months | |||||||||||||||||||||
Value as of | Recorded at Reporting Date Using: | Ended | Ended | |||||||||||||||||||||
October 3, | October 3, | October 3, | ||||||||||||||||||||||
In thousands | 2009 | Level 1 | Level 2 | Level 3 | 2009 | 2009 | ||||||||||||||||||
Property and equipment |
$ | 1,835 | $ | -- | $ | -- | $ | 1,835 | $ | 13,351 | $ | 9,767 |
As a result of the decision to exit certain operational retail formats, related to (i) KATE SPADE;
(ii) LUCKY BRAND; (iii) Partnered Brands; and (iv) JUICY COUTURE, as well as cease use of certain
corporate and MEXX software, impairment analyses were performed on the associated property and
equipment. The Company determined that a portion of such assets exceeded their fair value,
resulting in impairment charges of $13.4 million, which were recorded in SG&A on the accompanying
Condensed Consolidated Statement of Operations.
The fair values of the Companys Level 3 Property and equipment and Assets held for sale are based
on either a market approach or an income approach using the Companys forecasted cash flows over
the estimated useful lives of such assets, as appropriate.
The fair values and carrying values of the Companys debt instruments are detailed as follows:
October 2, 2010 | January 2, 2010 | October 3, 2009 | ||||||||||||||||||||||
Carrying | Carrying | Carrying | ||||||||||||||||||||||
In thousands | Fair Value | Value | Fair Value | Value | Fair Value | Value | ||||||||||||||||||
5.0% Notes, due July 2013 (a) |
$ | 398,546 | $ | 481,838 | $ | 392,615 | $ | 501,827 | $ | 356,619 | $ | 510,182 | ||||||||||||
6.0% Convertible Senior Notes, due June
2014 (a) |
167,245 | 73,662 | 160,738 | 71,137 | 144,149 | 70,323 | ||||||||||||||||||
Revolving credit facility (b) |
167,327 | 167,327 | 66,507 | 66,507 | 228,109 | 228,109 |
(a) | Carrying values include unamortized debt discount. |
|
(b) | Borrowings under the revolving credit facility bear interest based on a market rate;
accordingly, its fair value approximates its carrying value. |
The fair values of the Companys debt instruments were estimated using market observable
inputs, including quoted prices in active markets, market indices and interest rate measurements.
Within the hierarchy of fair value measurements, these are Level 2 fair values. The fair values of
cash and cash equivalents, accounts receivable and accounts payable approximate their carrying
values due to the short-term nature of these instruments.
10. COMMITMENTS AND CONTINGENCIES
Buying/Sourcing
During the first quarter of 2009, the Company entered into an agreement with Li & Fung Limited (Li & Fung), whereby Li & Fung was appointed as the Companys buying/sourcing agent for all of the Companys brands and products (other than jewelry). The Company received a payment of $75.0 million at closing and an additional payment of $8.0 million in the second quarter of 2009 to offset specific, incremental, identifiable expenses
During the first quarter of 2009, the Company entered into an agreement with Li & Fung Limited (Li & Fung), whereby Li & Fung was appointed as the Companys buying/sourcing agent for all of the Companys brands and products (other than jewelry). The Company received a payment of $75.0 million at closing and an additional payment of $8.0 million in the second quarter of 2009 to offset specific, incremental, identifiable expenses
Table of Contents
19
associated with the transaction. The agreement with Li & Fung provides for a refund of a portion of
the closing payment in certain limited circumstances, including a change of control of the Company,
the sale or discontinuation of any current brand, or certain termination events. The Company is
also obligated to use Li & Fung as its buying/sourcing agent for a minimum value of inventory
purchases each year through the termination of the agreement in 2019. The licensing arrangements
with JCPenney and QVC resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE
branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a
result, under the agreement with Li & Fung, the Company refunded $24.3 million of the closing
payment received from Li & Fung during the second quarter of 2010. In addition, the Companys
agreement with Li & Fung is not exclusive; however, the Company is required to source a specified
percentage of product purchases from Li & Fung.
Acquisitions
On January 26, 2006, the Company acquired 100% of the equity of Westcoast Contempo Fashions Limited and Mac & Jac Holdings Limited, which collectively design, market and sell the Mac & Jac, Kensie and Kensiegirl apparel lines (Mac & Jac). The purchase price totaled 26.2 million Canadian dollars (or $22.7 million), which included the retirement of debt at closing and fees, but excluded contingent payments to be determined based upon a multiple of Mac & Jacs earnings in fiscal years 2006, 2008, 2009 and 2010. In May 2009, the Company paid the former owners of Mac & Jac $3.8 million based on 2008 fiscal year earnings. The Company estimates that the contingent payment based on 2010 earnings will be in the range of approximately $0-$5.0 million, which will be accounted for as additional purchase price when paid.
On January 26, 2006, the Company acquired 100% of the equity of Westcoast Contempo Fashions Limited and Mac & Jac Holdings Limited, which collectively design, market and sell the Mac & Jac, Kensie and Kensiegirl apparel lines (Mac & Jac). The purchase price totaled 26.2 million Canadian dollars (or $22.7 million), which included the retirement of debt at closing and fees, but excluded contingent payments to be determined based upon a multiple of Mac & Jacs earnings in fiscal years 2006, 2008, 2009 and 2010. In May 2009, the Company paid the former owners of Mac & Jac $3.8 million based on 2008 fiscal year earnings. The Company estimates that the contingent payment based on 2010 earnings will be in the range of approximately $0-$5.0 million, which will be accounted for as additional purchase price when paid.
On June 8, 1999, the Company acquired 85.0% of the equity of Lucky Brand Dungarees, Inc. (Lucky
Brand), whose core business consists of the Lucky Brand Dungarees line of women and mens
denim-based sportswear. The total purchase price consisted of aggregate cash payments of $126.2
million and additional payments made from 2005 to 2009 totaling $65.0 million for 12.3% of the
remaining equity of Lucky Brand. The Company acquired 0.4% of the equity of Lucky Brand in January
of 2010 for a payment of $5.0 million. The remaining 2.3% of the original shares outstanding will
be settled for an aggregate purchase price composed of the following two installments: (i) a
payment made in 2008 of $15.7 million that was based on a multiple of Lucky Brands 2007 earnings,
which the Company has accounted for as additional purchase price and (ii) a 2011 payment that will
be based on a multiple of Lucky Brands 2010 earnings, net of the 2008 payment, which the Company
estimates will be in the range of approximately $0-$5.0 million.
Other
On November 21, 2006, the Company entered into an off-balance sheet financing arrangement with a financial institution (commonly referred to as a synthetic lease) to refinance the purchase of various land and real property improvements associated with warehouse and distribution facilities in Ohio and Rhode Island totaling $32.8 million. This synthetic lease arrangement expires on May 31, 2011 and replaced the previous synthetic lease arrangement, which expired on November 22, 2006. The lessor is a wholly-owned subsidiary of a publicly traded corporation. The lessor is a sole member, whose ownership interest is without limitation as to profits, losses and distribution of the lessors assets. The Companys lease represents less than 1.0% of the lessors assets. The lease includes guarantees by the Company for a substantial portion of the financing and options to purchase the facilities at original cost; the maximum initial guarantee was approximately $27.0 million. The lessors risk included an initial capital investment in excess of 10.0% of the total value of the lease, which is at risk during the entire term of the lease. The equipment portion of the original synthetic lease was sold to another financial institution and leased back to the Company through a seven-year capital lease totaling $30.6 million. The lessor does not meet the definition of a variable interest entity and therefore consolidation by the Company is not required.
On November 21, 2006, the Company entered into an off-balance sheet financing arrangement with a financial institution (commonly referred to as a synthetic lease) to refinance the purchase of various land and real property improvements associated with warehouse and distribution facilities in Ohio and Rhode Island totaling $32.8 million. This synthetic lease arrangement expires on May 31, 2011 and replaced the previous synthetic lease arrangement, which expired on November 22, 2006. The lessor is a wholly-owned subsidiary of a publicly traded corporation. The lessor is a sole member, whose ownership interest is without limitation as to profits, losses and distribution of the lessors assets. The Companys lease represents less than 1.0% of the lessors assets. The lease includes guarantees by the Company for a substantial portion of the financing and options to purchase the facilities at original cost; the maximum initial guarantee was approximately $27.0 million. The lessors risk included an initial capital investment in excess of 10.0% of the total value of the lease, which is at risk during the entire term of the lease. The equipment portion of the original synthetic lease was sold to another financial institution and leased back to the Company through a seven-year capital lease totaling $30.6 million. The lessor does not meet the definition of a variable interest entity and therefore consolidation by the Company is not required.
The Company continued further consolidation of its warehouse operations with the closure of its
Rhode Island distribution facility in May 2010. In June 2010, the Company paid $4.8 million and
received $2.8 million of proceeds, each in connection with its former Rhode Island distribution
center, which was financed under the synthetic lease. The Company estimates its present obligation
under the terms of the synthetic lease will be $5.2 million for the Ohio distribution facility.
That amount is being recognized in SG&A over the remaining lease term. However, pursuant to the
terms of the lease, in September 2010, the Company communicated its intent to purchase the
underlying assets of such facility and expects to close the purchase for $28.0 million in the
second quarter of 2011.
In May 2010, the terms of the synthetic lease were amended to make the applicable financial
covenants under the synthetic lease consistent with the terms of the Amended Agreement. The Company
has not entered into any other off-balance sheet arrangements.
Table of Contents
20
In connection with the disposition of the LIZ CLAIBORNE Canada retail stores (see Note 2
Discontinued Operations), 38 store leases were assigned to Laura Canada, of which the Company
remains secondarily liable for the remaining obligations on 31 such leases. As of October 2, 2010,
the future aggregate payments under these leases amounted to $35.3 million and extended to various
dates through 2020.
11. STREAMLINING INITIATIVES
2010 Actions
The Company continued to consolidate its warehouse operations, an initiative that began in 2009. These actions included the closure of its Marcel Laurin, Canada and Vernon, California distribution facilities in August and September 2010, respectively.
The Company continued to consolidate its warehouse operations, an initiative that began in 2009. These actions included the closure of its Marcel Laurin, Canada and Vernon, California distribution facilities in August and September 2010, respectively.
In April 2010, the Company completed an agreement with an affiliate of Donna Karan International,
Inc. (DKI) to terminate its licensed DKNY® MENS Sportswear operations and close, transfer or
repurpose its DKNY® JEANS outlet stores (see Note 13 Additional Financial Information). These
actions include contract terminations, staff reductions and consolidation of office space and are
expected to be completed by the end of 2010.
In July 2010, the Company initiated actions to exit the Companys LIZ CLAIBORNE branded outlet
stores in the US and Puerto Rico, which will result in charges for lease terminations, impairments
of property and equipment and severance. These actions are expected to be completed in early 2011.
2009 Actions
In the first quarter of 2009, the Company completed its long-term, buying/sourcing agency agreement with Li & Fung. As a result, the Companys international buying offices were integrated into Li & Fung or reduced to support functions. The Companys streamlining initiatives related to this action included lease terminations, property and equipment disposals and employee terminations and relocation and were completed during 2009. Expenses associated with this action were partially offset by a payment of $8.0 million received from Li & Fung during the second quarter of 2009.
In the first quarter of 2009, the Company completed its long-term, buying/sourcing agency agreement with Li & Fung. As a result, the Companys international buying offices were integrated into Li & Fung or reduced to support functions. The Companys streamlining initiatives related to this action included lease terminations, property and equipment disposals and employee terminations and relocation and were completed during 2009. Expenses associated with this action were partially offset by a payment of $8.0 million received from Li & Fung during the second quarter of 2009.
During the first quarter of 2009, the Company completed the closure of its Mt. Pocono, Pennsylvania
distribution center, including staff eliminations and initiated actions to sell the facility.
Also, during the first quarter of 2009, the Company committed to a plan to close or repurpose its
Lucky Brand kids stores, although the Company will continue to offer associated merchandise through
other channels. The action included lease terminations and staff reductions and was completed in
the fourth quarter of 2009.
In August 2009, the Company initiated additional streamlining initiatives that will continue to
impact all of its reportable segments, including store closures principally within its
International-Based Direct Brands segment, staff reductions, including consolidation of certain
support and production functions and outsourcing certain corporate functions.
In connection with the license agreements with JCPenney and QVC (see Note 13 Additional Financial
Information), the Company initiated certain actions including consolidation of office space and
reduction of staff in certain support functions. As a result, the Company incurred charges related
to the reduction of leased space, impairments of property and equipment and other assets, severance
and other restructuring costs. These actions were completed in the second quarter of 2010.
The Company also initiated actions to consolidate certain warehouse operations, with the closure of
its leased Santa Fe Springs, California distribution facility in January 2010 and the closure of
its Lincoln, Rhode Island distribution facility in May 2010.
For the nine months ended October 2, 2010, the Company recorded pretax charges totaling $70.7
million related to these initiatives. The Company expects to pay approximately $20.6 million of
accrued streamlining costs in the next 12 months. For the nine months ended October 3, 2009, the
Company recorded pretax charges of $73.7 million related to these initiatives, including $34.2
million of payroll and related costs, $16.4 million of lease termination costs, $17.9 million of
fixed asset write-downs and disposals and $5.2 million of other costs. Approximately $22.4 million
and $17.9 million of these charges were non-cash during the nine months ended October 2, 2010 and
October 3, 2009, respectively.
Table of Contents
21
For the nine and three months ended October 2, 2010 and October 3, 2009, expenses associated with
the Companys streamlining actions were primarily recorded in SG&A in the Condensed Consolidated
Statements of Operations and impacted reportable segments as follows:
Nine Months Ended | Three Months Ended | |||||||||||||||
October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | |||||||||||||
In thousands | (39 Weeks) | (39 Weeks) | (13 Weeks) | (13 Weeks) | ||||||||||||
Domestic-Based Direct Brands |
$ | 20,068 | $ | 23,738 | $ | 8,677 | $ | 11,383 | ||||||||
International-Based Direct
Brands |
6,249 | 18,315 | 3,163 | 3,892 | ||||||||||||
Partnered Brands |
44,348 | 31,632 | 11,607 | 11,230 | ||||||||||||
Total |
$ | 70,665 | $ | 73,685 | $ | 23,447 | $ | 26,505 | ||||||||
A summary rollforward of the liability for streamlining initiatives is as follows:
Contract | ||||||||||||||||||||
Payroll and | Termination | Asset | ||||||||||||||||||
In thousands | Related Costs | Costs | Write-Downs | Other Costs | Total | |||||||||||||||
Balance at January
2, 2010 |
$ | 32,696 | $ | 22,821 | $ | -- | $ | 7,204 | $ | 62,721 | ||||||||||
2010 provision |
12,609 | 26,448 | 22,428 | 9,180 | 70,665 | |||||||||||||||
2010 asset
write-downs |
-- | -- | (22,428 | ) | -- | (22,428 | ) | |||||||||||||
Translation
difference |
(784 | ) | (93 | ) | -- | (199 | ) | (1,076 | ) | |||||||||||
2010 spending |
(41,764 | ) | (22,877 | ) | -- | (9,729 | ) | (74,370 | ) | |||||||||||
Balance at October
2, 2010 |
$ | 2,757 | $ | 26,299 | $ | -- | $ | 6,456 | $ | 35,512 | ||||||||||
Table of Contents
22
12. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per common share.
Nine Months Ended | Three Months Ended | |||||||||||||||
October 2, 2010 | October 3, 2009 | October 2, 2010 | October 3, 2009 | |||||||||||||
In thousands | (39 Weeks) | (39 Weeks) | (13 Weeks) | (13 Weeks) | ||||||||||||
Loss from continuing operations |
$ | (212,219 | ) | $ | (248,941 | ) | $ | (62,516 | ) | $ | (87,110 | ) | ||||
Net loss attributable to the noncontrolling
interest |
(723 | ) | (554 | ) | (110 | ) | (171 | ) | ||||||||
Loss from continuing operations attributable to
Liz Claiborne, Inc. |
(211,496 | ) | (248,387 | ) | (62,406 | ) | (86,939 | ) | ||||||||
Loss from discontinued operations, net of income
taxes |
(9,822 | ) | (15,639 | ) | (288 | ) | (3,602 | ) | ||||||||
Net loss attributable to Liz Claiborne, Inc. |
$ | (221,318 | ) | $ | (264,026 | ) | $ | (62,694 | ) | $ | (90,541 | ) | ||||
Basic weighted average shares outstanding |
94,224 | 93,855 | 94,259 | 93,908 | ||||||||||||
Stock options and nonvested shares(a)(b) |
-- | -- | -- | -- | ||||||||||||
Convertible Notes(c) |
-- | -- | -- | -- | ||||||||||||
Diluted weighted average shares outstanding |
94,224 | 93,855 | 94,259 | 93,908 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic and diluted |
||||||||||||||||
Loss from continuing operations attributable to
Liz Claiborne, Inc. |
$ | (2.24 | ) | $ | (2.65 | ) | $ | (0.66 | ) | $ | (0.93 | ) | ||||
Loss from discontinued operations attributable
to Liz Claiborne, Inc. |
$ | (0.11 | ) | $ | (0.16 | ) | $ | (0.01 | ) | $ | (0.03 | ) | ||||
Net loss attributable to Liz Claiborne, Inc. |
$ | (2.35 | ) | $ | (2.81 | ) | $ | (0.67 | ) | $ | (0.96 | ) | ||||
(a) | Because the Company incurred a loss from continuing operations for the nine and
three months ended October 2, 2010 and October 3, 2009, all outstanding stock options and
nonvested shares are antidilutive for such periods. Accordingly, for the nine and three months
ended October 2, 2010 and October 3, 2009, approximately 6.8 million and 6.9 million
outstanding stock options, respectively, and approximately 0.9 million and 1.1 million
outstanding nonvested shares, respectively, were excluded from the computation of diluted loss
per share. |
|
(b) | Excludes approximately 0.1 million and 0.4 million nonvested shares for the
nine and three months ended October 2, 2010 and October 3, 2009, respectively, for which the
performance criteria have not yet been achieved. |
|
(c) | Because the Company incurred a loss from continuing operations for the nine
and three months ended October 2, 2010, approximately 9.8 million and 7.1 million potentially
dilutive shares issuable upon conversion of the Convertible Notes were considered antidilutive
for such periods, and were excluded from the computation of diluted loss per share. The
Convertible Notes were not dilutive for the nine and three months ended October 3, 2009 as
they were not convertible for such periods. |
13. ADDITIONAL FINANCIAL INFORMATION
Licensing-Related Transactions
In October 2009, the Company entered into a multi-year license agreement with JCPenney, which granted JCPenney an exclusive right and license (subject to pre-existing licenses and certain limited exceptions) to use the LIZ CLAIBORNE, LIZ & CO., CLAIBORNE and CONCEPTS BY CLAIBORNE trademarks with respect to covered product categories and includes the worldwide manufacturing of the licensed products and the sale, marketing, merchandising, advertising and promotion of the licensed products in the US and Puerto Rico. Under the agreement, JCPenney may only use designs provided or approved by the Company. The agreement has a term that may remain in effect up to July 31, 2020. Sales by JCPenney under the agreement commenced in August 2010. At the end of year five, JCPenney will have the option to acquire the trademarks and other Liz Claiborne brands for use in the US
In October 2009, the Company entered into a multi-year license agreement with JCPenney, which granted JCPenney an exclusive right and license (subject to pre-existing licenses and certain limited exceptions) to use the LIZ CLAIBORNE, LIZ & CO., CLAIBORNE and CONCEPTS BY CLAIBORNE trademarks with respect to covered product categories and includes the worldwide manufacturing of the licensed products and the sale, marketing, merchandising, advertising and promotion of the licensed products in the US and Puerto Rico. Under the agreement, JCPenney may only use designs provided or approved by the Company. The agreement has a term that may remain in effect up to July 31, 2020. Sales by JCPenney under the agreement commenced in August 2010. At the end of year five, JCPenney will have the option to acquire the trademarks and other Liz Claiborne brands for use in the US
Table of Contents
23
and Puerto Rico. JCPenney will also have the option to take ownership of the
trademarks in the same territory at the end of year 10. The license agreement provides for the
payment to the Company of royalties based on net sales of licensed products by JCPenney and a
portion of the related gross profit when the gross profit percentage exceeds a specified rate,
subject to a minimum annual payment.
The Company also entered into a multi-year license agreement with QVC, granting rights (subject to
pre-existing licenses) to certain of the Companys trademarks and other intellectual property
rights. QVC has the rights to use the LIZ CLAIBORNE NEW YORK brand with Isaac Mizrahi as creative
director on any apparel, accessories, or home categories in its US and international markets. QVC
merchandises and sources the product and the Company provides brand management oversight. The
agreement provides for the payment to the Company of a royalty based on net sales.
In April 2010, the Company entered into an agreement with DKI, which includes the termination of
the DKNY® MENS Sportswear license and the transfer of certain outlet stores of its licensed DKNY®
JEANS brand to DKI, subject to landlord consent. In connection with the termination of the DKNY®
MENS Sportswear license, the Company recorded a pretax charge of $9.9 million in the nine months
ended October 2, 2010.
Condensed Consolidated Statements of Cash Flows Supplementary Disclosures
During the nine months ended October 2, 2010 and October 3, 2009, the Company received net income tax refunds of $171.1 million and $98.5 million, respectively and made interest payments of $30.7 million and $32.7 million, respectively. As of October 2, 2010 and October 3, 2009, the Company accrued capital expenditures totaling $8.2 million and $5.0 million, respectively.
During the nine months ended October 2, 2010 and October 3, 2009, the Company received net income tax refunds of $171.1 million and $98.5 million, respectively and made interest payments of $30.7 million and $32.7 million, respectively. As of October 2, 2010 and October 3, 2009, the Company accrued capital expenditures totaling $8.2 million and $5.0 million, respectively.
During the nine months ended October 2, 2010 and October 3, 2009, the Company paid $24.3 million to
Li & Fung and received a payment of $75.0 million from Li & Fung related to a buying/sourcing
agreement, respectively, which are included within (Decrease) increase in accrued expenses and
other non-current liabilities on the accompanying Condensed Consolidated Statements of Cash Flows.
During the nine months ended October 2, 2010 and October 3, 2009, the Company made business
acquisition payments of $5.0 million related to the Lucky Brand acquisition and $8.8 million
related to the Lucky Brand and Mac & Jac acquisitions.
Related Party Transactions
On November 20, 2009, the Company and Sanei International Co., LTD established a joint venture under the name of Kate Spade Japan Co., Ltd. (KSJ). The joint venture is a Japanese corporation and its purpose is to market and distribute small leather goods and other fashion products and accessories in Japan under the Kate Spade brand. The Company accounts for its 49.0% interest in KSJ under the equity method of accounting. As of October 2, 2010 and January 2, 2010, the Company recorded $13.1 million and $7.4 million, respectively, related to its investments in and advances to the equity investee, which is included in Other non-current assets in the accompanying Condensed Consolidated Balance Sheets. In the first quarter of 2010, the Company advanced $4.0 million to KSJ. The Companys equity in the earnings of KSJ was $0.7 million and $0.1 million in the nine and three months ended October 2, 2010.
On November 20, 2009, the Company and Sanei International Co., LTD established a joint venture under the name of Kate Spade Japan Co., Ltd. (KSJ). The joint venture is a Japanese corporation and its purpose is to market and distribute small leather goods and other fashion products and accessories in Japan under the Kate Spade brand. The Company accounts for its 49.0% interest in KSJ under the equity method of accounting. As of October 2, 2010 and January 2, 2010, the Company recorded $13.1 million and $7.4 million, respectively, related to its investments in and advances to the equity investee, which is included in Other non-current assets in the accompanying Condensed Consolidated Balance Sheets. In the first quarter of 2010, the Company advanced $4.0 million to KSJ. The Companys equity in the earnings of KSJ was $0.7 million and $0.1 million in the nine and three months ended October 2, 2010.
14. SEGMENT REPORTING
The Companys segment reporting structure reflects a brand-focused approach, designed to optimize
the operational coordination and resource allocation of the Companys businesses across multiple
functional areas including specialty retail, retail outlets, wholesale apparel, wholesale
non-apparel, e-commerce and licensing. The three reportable segments described below represent the
Companys brand-based activities for which separate financial information is available and which is
utilized on a regular basis by its CODM to evaluate performance and allocate resources. In
identifying its reportable segments, the Company considers economic characteristics, as well as
products, customers, sales growth potential and long-term profitability. The Company aggregates its
five operating segments to form reportable segments, where applicable. As such, the Company reports
its operations in three reportable segments as follows:
| Domestic-Based Direct Brands segment consists of the specialty retail, outlet,
wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags),
e-commerce and licensing operations |
Table of Contents
24
of the Companys three domestic, retail-based operating segments: JUICY COUTURE, KATE
SPADE and LUCKY BRAND. |
|||
| International-Based Direct Brands segment consists of the specialty retail,
outlet, concession, wholesale apparel, wholesale non-apparel (including accessories,
jewelry and handbags), e-commerce and licensing operations of MEXX, the Companys
international, retail-based operating segment. |
||
| Partnered Brands segment consists of one operating segment including the
wholesale apparel, wholesale non-apparel, outlet, concession, e-commerce and licensing
operations of the Companys wholesale-based brands including: AXCESS, CLAIBORNE
(mens), DANA BUCHMAN, KENSIE, LIZ CLAIBORNE, LIZ CLAIBORNE NEW YORK, MAC & JAC, MARVELLA,
MONET, TRIFARI and the Companys licensed DKNY® JEANS and DKNY® ACTIVE brands. |
The Companys Chief Executive Officer has been identified as the CODM. The CODM evaluates
performance and allocates resources based primarily on the operating income of each reportable
segment. The accounting policies of the Companys reportable segments are the same as those
described in Note 1 Basis of Presentation. There are no inter-segment sales or transfers. The
Company also presents its results on a geographic basis based on selling location, between Domestic
(wholesale customers, Company-owned retail and outlet stores located in the United States and
e-commerce sites) and International (wholesale customers and Company-owned specialty retail, outlet
and concession stores located outside of the United States). The Company, as licensor, also
licenses to third parties the right to produce and market products bearing certain Company-owned
trademarks; the resulting royalty income is included within the results of the associated segment.
Operating | ||||||||||||||||
Dollars in thousands | Net Sales | % to Total | Loss | % of Sales | ||||||||||||
Nine Months Ended October 2, 2010 (39 weeks) |
||||||||||||||||
Domestic-Based Direct Brands |
$ | 773,273 | 42.1 | % | $ | (18,323 | ) | (2.4 | )% | |||||||
International-Based Direct Brands |
531,159 | 29.0 | % | (69,632 | ) | (13.1 | )% | |||||||||
Partnered Brands |
531,123 | 28.9 | % | (83,114 | ) | (15.6 | )% | |||||||||
Totals |
$ | 1,835,555 | 100.0 | % | $ | (171,069 | ) | (9.3 | )% | |||||||
Nine Months Ended October 3, 2009 (39 weeks) |
||||||||||||||||
Domestic-Based Direct Brands |
$ | 780,895 | 35.4 | % | $ | (37,659 | ) | (4.8 | )% | |||||||
International-Based Direct Brands |
621,449 | 28.1 | % | (69,471 | ) | (11.2 | )% | |||||||||
Partnered Brands |
807,236 | 36.5 | % | (89,308 | ) | (11.1 | )% | |||||||||
Totals |
$ | 2,209,580 | 100.0 | % | $ | (196,438 | ) | (8.9 | )% | |||||||
Operating | ||||||||||||||||
Income | ||||||||||||||||
Dollars in thousands | Net Sales | % to Total | (Loss) | % of Sales | ||||||||||||
Three Months Ended October 2, 2010 (13 weeks) |
||||||||||||||||
Domestic-Based Direct Brands |
$ | 290,501 | 44.1 | % | $ | 4,701 | 1.6 | % | ||||||||
International-Based Direct Brands |
187,456 | 28.5 | % | (13,999 | ) | (7.5 | )% | |||||||||
Partnered Brands |
180,326 | 27.4 | % | (10,186 | ) | (5.6 | )% | |||||||||
Totals |
$ | 658,283 | 100.0 | % | $ | (19,484 | ) | (3.0 | )% | |||||||
Three Months Ended October 3, 2009 (13 weeks) |
||||||||||||||||
Domestic-Based Direct Brands |
$ | 270,496 | 35.5 | % | $ | (7,365 | ) | (2.7 | )% | |||||||
International-Based Direct Brands |
224,353 | 29.5 | % | (19,167 | ) | (8.5 | )% | |||||||||
Partnered Brands |
266,867 | 35.0 | % | (32,450 | ) | (12.2 | )% | |||||||||
Totals |
$ | 761,716 | 100.0 | % | $ | (58,982 | ) | (7.7 | )% | |||||||
Table of Contents
25
GEOGRAPHIC DATA:
Operating | ||||||||||||||||
Dollars in thousands | Net Sales | % to Total | Loss | % of Sales | ||||||||||||
Nine Months Ended October 2, 2010 (39 weeks) |
||||||||||||||||
Domestic |
$ | 1,206,569 | 65.7 | % | $ | (95,094 | ) | (7.9 | )% | |||||||
International |
628,986 | 34.3 | % | (75,975 | ) | (12.1 | )% | |||||||||
Totals |
$ | 1,835,555 | 100.0 | % | $ | (171,069 | ) | (9.3 | )% | |||||||
Nine Months Ended October 3, 2009 (39 weeks) |
||||||||||||||||
Domestic |
$ | 1,490,434 | 67.5 | % | $ | (100,334 | ) | (6.7 | )% | |||||||
International |
719,146 | 32.5 | % | (96,104 | ) | (13.4 | )% | |||||||||
Totals |
$ | 2,209,580 | 100.0 | % | $ | (196,438 | ) | (8.9 | )% | |||||||
Operating | ||||||||||||||||
Dollars in thousands | Net Sales | % to Total | Loss | % of Sales | ||||||||||||
Three Months Ended October 2, 2010 (13 weeks) |
||||||||||||||||
Domestic |
$ | 437,689 | 66.5 | % | $ | (4,850 | ) | (1.1 | )% | |||||||
International |
220,594 | 33.5 | % | (14,634 | ) | (6.6 | )% | |||||||||
Totals |
$ | 658,283 | 100.0 | % | $ | (19,484 | ) | (3.0 | )% | |||||||
Three Months Ended October 3, 2009 (13 weeks) |
||||||||||||||||
Domestic |
$ | 506,871 | 66.5 | % | $ | (29,133 | ) | (5.7 | )% | |||||||
International |
254,845 | 33.5 | % | (29,849 | ) | (11.7 | )% | |||||||||
Totals |
$ | 761,716 | 100.0 | % | $ | (58,982 | ) | (7.7 | )% | |||||||
Domestic-Based Direct Brands segment assets increased to $671.0 million at October 2, 2010 from
$640.2 million at January 2, 2010. International-Based Direct Brands segment assets decreased to
$346.7 million at October 2, 2010 from $403.8 million at January 2, 2010. Partnered Brands segment
assets decreased to $372.8 million at October 2, 2010 from $533.7 million at January 2, 2010.
15. DERIVATIVE INSTRUMENTS
The Companys operations are exposed to risks associated with fluctuations in foreign currency
exchange rates. In order to reduce exposures related to changes in foreign currency exchange rates,
the Company uses foreign currency collars and forward contracts for the purpose of hedging the
specific exposure to variability in forecasted cash flows associated primarily with inventory
purchases mainly by the Companys European and Canadian entities. As of October 2, 2010, the
Company had forward contracts maturing through December 2011 to sell 37.0 million Canadian dollars
for $35.8 million and to sell 78.5 million euro for $103.5 million.
Table of Contents
26
The following table summarizes the fair value and presentation in the condensed consolidated
financial statements for derivatives designated as hedging instruments and derivatives not
designated as hedging instruments:
Foreign Currency Contracts Designated as Hedging Instruments | ||||||||||||||||||||||||
In thousands | Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||
Balance Sheet | Notional | Balance Sheet | Notional | |||||||||||||||||||||
Period | Location | Amount | Fair Value | Location | Amount | Fair Value | ||||||||||||||||||
October 2, 2010 |
Other current assets | $ | 14,565 | $ | 774 | Accrued expenses | $ | 124,739 | $ | 5,531 | ||||||||||||||
January 2, 2010 |
Other current assets | 26,408 | 586 | Accrued expenses | 74,634 | 3,091 | ||||||||||||||||||
October 3, 2009 |
Other current assets | -- | -- | Accrued expenses | 116,669 | 7,827 |
Foreign Currency Contracts Not Designated as Hedging Instruments | ||||||||||||||||||||||||
In thousands | Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||
Balance Sheet | Notional | Balance Sheet | Notional | |||||||||||||||||||||
Period | Location | Amount | Fair Value | Location | Amount | Fair Value | ||||||||||||||||||
October 2, 2010 |
Other current assets | $ | -- | $ | -- | Accrued expenses | $ | -- | $ | -- | ||||||||||||||
January 2, 2010 |
Other current assets | -- | -- | Accrued expenses | 12,015 | 690 | ||||||||||||||||||
October 3, 2009 |
Other current assets | 1,938 | 2 | Accrued expenses | 11,979 | 588 |
The following table summarizes the effect of foreign currency exchange contracts on the condensed
consolidated financial statements:
Location of Gain or | Amount of Gain or | |||||||||||||||
Amount of Gain or | (Loss) Reclassified | Amount of Gain or | (Loss) Recognized | |||||||||||||
(Loss) Recognized | from Accumulated | (Loss) Reclassified | in Operations on | |||||||||||||
in Accumulated | OCI into Operations | from Accumulated | Derivative | |||||||||||||
OCI on Derivative | (Effective and | OCI into Operations | (Ineffective | |||||||||||||
In thousands | (Effective Portion) | Ineffective Portion) | (Effective Portion) | Portion) | ||||||||||||
Nine months ended October 2, 2010 |
$ | 1,174 | Cost of goods sold | $ | (4,031 | ) | $ | (277) | ||||||||
Nine months ended October 3, 2009 |
(6,886 | ) | Cost of goods sold | 2,766 | (1,003) | |||||||||||
Three months ended October 2, 2010 |
(7,787 | ) | Cost of goods sold | 1,517 | (153) | |||||||||||
Three months ended October 3, 2009 |
(7,246 | ) | Cost of goods sold | (3,137 | ) | (879) |
As of October 2, 2010, approximately $0.4 million of unrealized losses in Accumulated other
comprehensive loss relating to cash flow hedges will be reclassified into earnings in the next
twelve months as the inventory is sold.
The Company hedges its net investment position in certain euro-denominated functional currency
subsidiaries by designating a portion of the 350.0 million euro-denominated bonds as the hedging
instrument in a net investment hedge. To the extent the hedge is effective, related foreign
currency translation gains and losses are recorded within Other comprehensive loss. Translation
gains and losses related to the ineffective portion of the hedge are recognized in current
operations.
The related translation gains (losses) recorded within Other comprehensive loss were $8.2 million
and $(14.4) million for the nine months ended October 2, 2010 and October 3, 2009, respectively,
and $(17.3) million and $(12.5) million for the three months ended October 2, 2010 and October 3,
2009, respectively. During the first
Table of Contents
27
quarter of 2009, the Company dedesignated 143.0 million of the
euro-denominated bonds as a hedge of its net
investment in certain euro functional currency subsidiaries due to a decrease in the carrying value
of the hedged item below 350.0 million euro. During the first quarter of 2010, the Company
dedesignated an additional 66.0 million of the euro-denominated bonds as a hedge of its net
investment in certain euro functional currency subsidiaries due to a further decline in the
carrying value of the hedged item. The associated foreign currency translation gains (losses) of
$12.1 million and $(9.9) million for the nine months ended October 2, 2010 and October 3, 2009,
respectively, and $(25.7) million and $(8.6) million for the three months ended October 2, 2010 and
October 3, 2009, respectively, are reflected within Other income (expense), net on the accompanying
Condensed Consolidated Statements of Operations.
16. SHARE-BASED COMPENSATION
The Company recognizes the cost of all employee share-based awards on a straight-line attribution
basis over their respective vesting periods, net of estimated forfeitures.
The Company issues stock options and restricted shares as well as shares with performance features
to employees under share-based compensation plans. Stock options are issued at the current market
price, have a three-year vesting period and a contractual term of 7-10 years. As of October 2,
2010, the Company has not changed the terms of any outstanding awards.
Compensation expense for restricted shares, including shares with performance features, is measured
at fair value on the date of grant based on the number of shares granted and the quoted market
price of the Companys common stock.
Compensation expense related to the Companys share-based payment awards totaled $5.1 million and
$6.7 million for the nine months ended October 2, 2010 and October 3, 2009, respectively, and $1.5
million and $2.3 million during the three months ended October 2, 2010 and October 3, 2009,
respectively.
Stock Options
The Company utilizes the Binomial lattice pricing model to estimate the fair value of options
granted. The Company believes this model provides the best estimate of fair value due to its
ability to incorporate inputs that change over time, such as volatility and interest rates and to
allow for actual exercise behavior of option holders.
Nine Months Ended | ||||
Valuation Assumptions: | October 2, 2010 | October 3, 2009 | ||
Weighted-average fair value of options granted |
$3.00 | $2.06 | ||
Expected volatility |
56.9% to 58.8% | 48.7% to 74.8% | ||
Weighted-average volatility |
58.4% | 65.9% | ||
Expected term (in years) |
5.0 | 5.2 | ||
Dividend yield |
| | ||
Risk-free rate |
0.3% to 5.3% | 0.5% to 5.0% | ||
Expected annual forfeiture |
12.6% | 11.8% |
Expected volatilities are based on a term structure of implied volatility, which assumes changes in
volatility over the life of an option. The Company utilizes historical optionee behavioral data to
estimate the option exercise and termination rates that are used in the valuation model. The
expected term represents an estimate of the period of time options are expected to remain
outstanding. The expected term provided in the above table represents an option weighted-average
expected term based on the estimated behavior of distinct groups of employees who received options
in 2010 and 2009. The range of risk-free rates is based on a forward curve of interest rates at the
time of option grant.
Table of Contents
28
A summary of award activity under stock option plans as of October 2, 2010 and changes therein
during the nine month period then ended are as follows:
Weighted | Weighted Average | Aggregate | ||||||||||||||
Average Exercise | Remaining | Intrinsic Value | ||||||||||||||
Shares | Price | Contractual Term | (In thousands) | |||||||||||||
Outstanding at January 2, 2010 |
4,918,630 | $ 19.27 | 4.9 | $ | 4,736 | |||||||||||
Granted |
2,550,000 | 5.97 | ||||||||||||||
Cancelled |
(653,534 | ) | 16.56 | |||||||||||||
Outstanding at October 2, 2010 |
6,815,096 | $ 14.55 | 5.1 | $ | 7,161 | |||||||||||
Vested or expected to vest at October 2, 2010 |
6,004,109 | $ 15.79 | 4.9 | $ | 5,942 | |||||||||||
Exercisable at October 2, 2010 |
2,232,346 | $ 32.24 | 3.1 | $ | 39 | |||||||||||
As of October 2, 2010, there were approximately 4.6 million nonvested stock options. The weighted
average grant date fair value per award for nonvested stock options was $2.71.
As of October 2, 2010, there was $9.2 million of total unrecognized compensation cost related to
nonvested stock options granted under the Companys stock option plans. That expense is expected to
be recognized over a weighted average period of 1.9 years. The total fair value of shares vested
during the nine month periods ended October 2, 2010 and October 3, 2009 was $3.4 million and $2.9
million, respectively.
Restricted Stock
A summary of award activity under restricted stock plans as of October 2, 2010 and changes therein
during the nine month period then ended are as follows:
Weighted | |||||||||
Average Grant | |||||||||
Shares | Date Fair Value | ||||||||
Nonvested stock at January 2, 2010 (a) |
1,132,856 | $ | 16.58 | ||||||
Granted |
373,000 | 6.91 | |||||||
Vested |
(270,926 | ) | 30.23 | ||||||
Cancelled |
(253,645 | ) | 9.28 | ||||||
Nonvested stock at October 2, 2010 (a) |
981,285 | $ | 11.03 | ||||||
Expected to vest as of October 2, 2010 |
618,877 | $ | 10.77 | ||||||
(a) | In the second and third quarters of 2008, performance shares were granted to a
group of key executives. These shares are subject to certain service and performance
conditions, a portion of which were measured as of fiscal 2008 year-end and the remainder will
be measured at fiscal 2010 year-end. The shares which were contingently issuable based on 2008
performance were deemed not earned and were cancelled. The ultimate amount of earned shares
measured at fiscal 2010 year-end will be determined by the extent of achievement of the
performance criteria set forth in the performance share agreements and will range from 0
200% of target. |
As of October 2, 2010, there was $2.5 million of total unrecognized compensation cost related
to nonvested stock awards granted under restricted stock plans. That expense is expected to be
recognized over a weighted average period of 1.7 years. The total fair value of shares vested
during the nine month periods ended October 2, 2010 and October 3, 2009 was $8.2 million and $8.6
million, respectively.
17. LEGAL PROCEEDINGS
A complaint captioned The Levy Group, Inc. v. L.C. Licensing, Inc. and Liz Claiborne, Inc. was
filed in the New York Supreme Court in New York County on January 21, 2010. The complaint alleged
claims for breach of contract, breach of the implied covenant of good faith and fair dealing,
promissory estoppel and tortious interference against L.C. Licensing, Inc. and the Company in
connection with a trademark licensing agreement between L.C. Licensing, Inc. and its licensee, The
Levy Group, Inc. The Levy Group, Inc.s alleged claims purportedly arose from
Table of Contents
29
the Companys
decision to sign a long-term licensing agreement with JCPenney. The complaint sought an award of
$100.0 million in compensatory damages plus punitive damages. On March 4, 2010, the Company moved
to dismiss the complaint for failure to state a claim. On October 12, 2010, the Court issued an
order granting the motion and dismissing all of The Levy Group, Inc.s claims with prejudice. The
Levy Group, Inc. has until November 18, 2010 to file a notice of appeal with respect to this order.
The Company is a party to several other pending legal proceedings and claims. Although the outcome
of any such actions cannot be determined with certainty, management is of the opinion that the
final outcome of any of these actions should not have a material adverse effect on the Companys
financial position, results of operations, liquidity or cash flows.
Table of Contents
30
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Business / Segments
Our segment reporting structure reflects a brand-focused approach, designed to optimize the
operational coordination and resource allocation of our businesses across multiple functional areas
including specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce
and licensing. The three reportable segments described below represent our brand-based activities
for which separate financial information is available and which is utilized on a regular basis by
our chief operating decision maker to evaluate performance and allocate resources. In identifying
our reportable segments, we consider economic characteristics, as well as products, customers,
sales growth potential and long-term profitability. We aggregate our five operating segments to
form reportable segments, where applicable. As such, we report our operations in three reportable
segments as follows:
| Domestic-Based Direct Brands segment consists of the specialty retail,
outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry and
handbags), e-commerce and licensing operations of our three domestic, retail-based
operating segments: JUICY COUTURE, KATE SPADE and LUCKY BRAND. |
||
| International-Based Direct Brands segment consists of the specialty retail,
outlet, concession, wholesale apparel, wholesale non-apparel (including accessories,
jewelry and handbags), e-commerce and licensing operations of MEXX, our international,
retail-based operating segment. |
||
| Partnered Brands segment consists of one operating segment including the
wholesale apparel, wholesale non-apparel, outlet, concession, e-commerce and licensing
operations of our wholesale-based brands including: AXCESS, CLAIBORNE (mens), DANA
BUCHMAN, KENSIE, LIZ CLAIBORNE, LIZ CLAIBORNE NEW YORK, MAC & JAC, MARVELLA, MONET, TRIFARI
and our licensed DKNY® JEANS and DKNY® ACTIVE brands. |
We also present our results on a geographic basis based on selling location:
| Domestic (wholesale customers, licensing, Company-owned specialty retail and
outlet stores located in the US and e-commerce sites); and |
||
| International (wholesale customers, licensing, Company-owned specialty retail
and outlet stores and concession stores located outside of the US and e-commerce sites). |
We, as licensor, also license to third parties the right to produce and market products bearing
certain Company-owned trademarks; the resulting royalty income is included within the results of
the associated segment.
Market Environment / Global Economic Uncertainty
The industries in which we operate have historically been subject to cyclical variations, including
recessions in the general economy. Our results are dependent on a number of factors impacting
consumer spending, including but not limited to, general economic and business conditions; consumer
confidence; wages and employment levels; the housing market; levels of perceived and actual
consumer wealth; consumer debt levels; availability of consumer credit; credit and interest rates;
fluctuations in foreign currency exchange rates; fuel and energy costs; energy shortages; the
performance of the financial equity and credit markets; tariffs and
other trade barriers; taxes; general political conditions, both
domestic and abroad; and the level of customer traffic within department stores, malls and other
shopping and selling environments.
We have been greatly impacted by the economic downturn, including a drastic decline in consumer
spending that began in the second half of 2008 and which persisted during 2009 and into 2010.
Although the decline in consumer spending has moderated, unemployment levels remain high,
consumer retail traffic remains depressed and the retail environment remains highly promotional. We continue to focus on the execution of our strategic
plans and improvements in productivity, with a primary focus on operating cash flow generation,
retail execution and international expansion. We will also continue to carefully manage liquidity
and spending.
Table of Contents
31
Competitive Profile
We operate in global fashion markets that are intensely competitive and subject to, among other
things, macroeconomic conditions and consumer demands, tastes and discretionary spending habits. As
we anticipate that the global economic uncertainty will continue into the foreseeable future, we
are focusing on carefully managing those factors within our control, most importantly spending. We
will continue our streamlining efforts to drive cost out of our operations through initiatives that
are discussed in Recent Initiatives Cost Reduction Initiatives, below. These initiatives are
aimed at driving efficiencies as well as improvements in working capital and operating cash flows.
We remain cautious about the near-term retail environment.
In summary, the measure of our success in the future will depend on our ability to continue to
navigate through an uncertain macroeconomic environment with challenging market conditions, execute
on our strategic vision, including attracting and retaining the management talent necessary for
such execution, designing and delivering products that are acceptable to the marketplaces that we
serve, sourcing the manufacture and distribution of our products on a competitive and efficient
basis and evolving our retail capabilities.
Reference is also made to the other economic, competitive, governmental and technological factors
affecting our operations, markets, products, services and prices as are set forth in this report,
including, without limitation, under Statement Regarding Forward-Looking Statements and Item 1A
Risk Factors in this Form 10-Q and in our 2009 Annual Report on Form 10-K.
Recent Initiatives
Following a comprehensive review, on July 14, 2010, our Board of Directors approved plans to exit
our LIZ CLAIBORNE branded outlet stores in the United States and Puerto Rico. As a result of this
decision, we expect the meaningful operating losses related to this business to be eliminated in
early 2011 when this action is anticipated to be completed. Our other outlet stores in the US and
Puerto Rico for our JUICY COUTURE, LUCKY BRAND, KATE SPADE and KENSIE brands are not impacted by
this decision. As of October 2, 2010, we completed the closure of five of the 87 planned outlet
store closures.
In April 2010, we completed an agreement with an affiliate of Donna Karan International, Inc. to
terminate our licensed DKNY® MENS Sportswear operations and close, transfer or repurpose our DKNY®
JEANS outlet stores (see Note 13 of Notes to Condensed Consolidated Financial Statements). These
actions include contract terminations, staff reductions and consolidation of office space and are
expected to be completed by the end of 2010.
Distribution of Our Liz Claiborne Brands
On October 7, 2009, in an effort to revitalize our LIZ CLAIBORNE brand franchise, reduce working
capital needs and increase earnings and profitability, we entered into licensing arrangements with
J.C. Penney Corporation, Inc. and J.C. Penney Company, Inc. (collectively, JCPenney) and with
QVC, Inc. (QVC) for such brands.
Our multi-year license agreement with JCPenney granted JCPenney an exclusive right and license
(subject to pre-existing licenses and certain limited exceptions) to use the LIZ CLAIBORNE, LIZ &
CO., CLAIBORNE and CONCEPTS BY CLAIBORNE trademarks with respect to covered product categories and
includes the worldwide manufacturing of the licensed products and the sale, marketing,
merchandising, advertising and promotion of the licensed products in the United States and Puerto
Rico. Under the agreement, JCPenney may only use designs provided or approved by us. The agreement
has a term that may remain in effect up to July 31, 2020. Sales by JCPenney under the agreement
commenced in August 2010. At the end of year five, JCPenney will have the option to acquire the
trademarks and other Liz Claiborne brands for use in the US and Puerto Rico. JCPenney will also
have the option to take ownership of the trademarks in the same territory at the end of year 10.
The license agreement provides for the payment to us of royalties based on net sales of licensed
products by JCPenney and a portion of the related gross profit when the gross profit percentage
exceeds a specified rate, subject to a minimum annual payment.
We also entered into a multi-year license agreement with QVC, granting rights (subject to
pre-existing licenses) to certain of our trademarks and other intellectual property rights. QVC has
the rights to use the LIZ CLAIBORNE NEW YORK brand with Isaac Mizrahi as creative director on any
apparel, accessories, or home categories in its US and international markets. QVC merchandises and
sources the product and we provide brand management oversight. The agreement provides for the
payment to us of a royalty based on net sales.
Table of Contents
32
Cost Reduction Initiatives
Our cost reduction efforts have included tighter controls surrounding discretionary spending and
streamlining initiatives that have included rationalization of distribution centers and office
space, store closures and staff reductions, including consolidation of certain support and
production functions and outsourcing certain corporate functions. These actions, in conjunction
with more extensive use of direct shipments and third party arrangements have enabled us to
significantly reduce our reliance on owned or leased distribution centers. With the closure of four
distribution centers in 2010, we have closed ten distribution centers since 2007.
In connection with the license agreements with JCPenney and QVC discussed above, we initiated
actions to consolidate office space and reduce staff in certain support functions. These actions
were completed in the second quarter of 2010. We will also continue to closely manage spending,
with projected 2010 capital expenditures of approximately $90.0 million, compared to $72.6 million
in 2009.
Liquidity
In May 2010, we completed a second amendment to and restatement of our revolving credit facility
(as amended, the Amended Agreement). Under the Amended Agreement, the aggregate commitments were
reduced to $350.0 million from $600.0 million, and the maturity date was extended from May 2011 to
August 2014, subject to certain early termination provisions which provide for earlier maturity
dates if our 5.0% 350.0 million euro Notes due July 2013 (the Notes) and our 6.0% Convertible
Senior Notes due June 2014 (the Convertible Notes) are not repaid or refinanced by certain agreed
upon dates. We are subject to various covenants and other requirements, such as financial
requirements, reporting requirements and negative covenants. Pursuant to the May 2010 amendment, we
are required to maintain minimum aggregate borrowing availability of not less than $45.0 million
and must apply substantially all cash collections to reduce outstanding borrowings under the
Amended Agreement when availability under the Amended Agreement falls below the greater of $65.0
million and 17.5% of the then-applicable aggregate commitments. Our borrowing availability under
the Amended Agreement is determined primarily by the level of our eligible accounts receivable and
inventory balances. In addition, the Amended Agreement removes the springing fixed charge coverage
covenant that was a condition of the prior amended and restated revolving credit agreement.
For further information concerning our debt and credit facilities, see Note 8 of Notes to Condensed
Consolidated Financial Statements and Financial Position, Liquidity and Capital Resources, below.
During the first nine months of 2010, we received $171.1 million of net income tax refunds on
previously paid taxes primarily due to a Federal law change in 2009 allowing our 2008 or 2009
domestic losses to be carried back for five years, with the fifth year limited to 50.0% of taxable
income. We repaid amounts outstanding under our amended and restated revolving credit facility with
the amount of such refunds.
Based on our forecast of borrowing availability under the Amended Agreement, we anticipate that
cash flows from operations and the projected borrowing availability under the Amended Agreement
will be sufficient to fund our liquidity requirements for at least the next 12 months. For a
discussion of risks related to our liquidity, see Item 1A Risk Factors and Financial
Position, Liquidity and Capital Resources, below.
Discontinued Operations
In connection with actions initiated in July 2007, we disposed of certain assets and/or liabilities
of our former Emma James, Intuitions, J.H. Collectibles, Tapemeasure, C&C California, Laundry by
Design, prAna and Ellen Tracy brands and closed our SIGRID OLSEN brand, which included the closure
of its wholesale operations and the closure or conversion of its retail locations and entered into
an exclusive license agreement with Kohls Corporation (Kohls), whereby Kohls sources and sells
products under the DANA BUCHMAN brand.
We also sold certain assets related to our interest in the Narciso Rodriguez brand and terminated
certain agreements entered in connection with the acquisition of such brand in 2007 and disposed of
certain assets of our former Enyce brand.
In January 2010, we entered into an agreement with Lauras Shoppe (Canada) Ltd. and Lauras Shoppe
(P.V.) Inc. (collectively, Laura Canada), which includes the assignment of 38 LIZ CLAIBORNE
Canada store leases and transfer of title to certain property and equipment to Laura Canada in
exchange for a net fee of approximately $7.9 million.
Table of Contents
33
As discussed above, our Board of Directors approved plans to exit our LIZ CLAIBORNE outlet stores
in the US and Puerto Rico.
The activities of our former Emma James, Intuitions, J.H. Collectibles, Tapemeasure, C&C
California, Laundry by Design, prAna, Narciso Rodriguez and Enyce brands, the retail operations of
our SIGRID OLSEN brand that were not converted to other brands and the retail operations of our
former Ellen Tracy brand, and our LIZ CLAIBORNE Canada stores and closed LIZ CLAIBORNE outlet
stores in the US and Puerto Rico have been segregated and reported as discontinued operations for
all periods presented. The SIGRID OLSEN and Ellen Tracy wholesale activities and DANA BUCHMAN
operations either did not represent operations and cash flows that could be clearly distinguished
operationally and for financial reporting purposes from the remainder of the Company or retain
continuing involvement with the Company and therefore have not been presented as discontinued
operations.
Overall Results for the Nine Months Ended October 2, 2010
Net Sales
Net sales for the first nine months of 2010 were $1.836 billion, a decrease of $374.0 million, or
16.9%, compared to net sales for the first nine months of 2009. A total of $167.4 million, or 7.8%,
of the overall decline in net sales is associated with our LIZ CLAIBORNE family of brands as we
transitioned from the legacy department store model to the licensing model under the JCPenney and
QVC arrangements.
The remaining decrease in net sales of $206.6 million, or 9.1%, reflected (i) sales declines in the
ongoing operations of our Partnered Brands segment and (ii) sales declines in our
International-Based Direct Brands segment due to decreased wholesale volume and reduced average
selling prices, and to a lesser extent, our Domestic-Based Direct Brands segment, principally due
to decreased wholesale volume. The effect of fluctuations in foreign currency exchange rates
increased net sales by $1.4 million.
Gross Profit and Loss from Continuing Operations
Gross profit in the first nine months of 2010 was $902.1 million, a decrease of $110.2 million
compared to the first nine months of 2009, primarily due to reduced sales in our Partnered Brands
and International-Based Direct Brands segments, partially offset by an increase in gross profit in
our Domestic-Based Direct Brands segment. Gross profit as a percentage of net sales increased to
49.1% in 2010 from 45.8% in 2009, reflecting improved gross profit rates in all of our segments and
an increased proportion of sales from the retail operations of our Domestic-Based Direct Brands
segment, which runs at a higher gross profit rate than the company average. We recorded a loss from
continuing operations of $212.2 million in the first nine months of 2010, as compared to a loss
from continuing operations of $249.0 million in 2009. The reduced loss from continuing operations
primarily reflected the impact of a reduction in Selling, general & administrative expenses
(SG&A) and an increase in Other income (expense), primarily due to a period-over-period increase
of $22.0 million in foreign currency translation gains related to our euro Notes (see Financial
Position, Liquidity and Capital Resources Hedging Activities), partially offset by the impact
of decreased gross profits.
Balance Sheet
We ended the first nine months of 2010 with a net debt position of $719.9 million as compared to
$803.0 million at the end of the first nine months of 2009. Including the receipt of $172.4 million
of net income tax refunds, we generated $159.9 million in cash from continuing operations over the
past twelve months, which enabled us to fund $61.9 million of capital and in-store shop
expenditures, a $24.3 million refund paid to Li & Fung Limited (Li & Fung) related to a
buying/sourcing arrangement, $11.3 million of investments in and advances to Kate Spade Japan Co.
Ltd. (KSJ), an equity method investee and $5.0 million of acquisition related payments, while
decreasing our net debt by $83.1 million. The effect of foreign currency translation on our euro
Notes decreased our debt balance by $28.7 million at October 2, 2010 compared to October 3, 2009.
International Operations
In the first nine months of 2010, international sales represented 34.3% of our overall sales, as
compared to 32.5% in the first nine months of 2009. Accordingly, our overall results can be greatly
impacted by changes in foreign currency exchange rates, which increased net sales in the first nine
months of 2010 by $1.4 million. The period-over-period fluctuations of the euro and Canadian dollar
against the US dollar during 2010 compared to 2009 has
Table of Contents
34
positively impacted sales in our Canadian businesses and has negatively impacted sales in our
European businesses. Although we use foreign currency forward contracts and options to hedge
against our exposure to exchange rate fluctuations affecting the actual cash flows of our
international operations, unanticipated shifts in exchange rates could have an impact on our
financial results.
RESULTS OF OPERATIONS
As discussed above, we present our results based on three reportable segments and on a geographic
basis.
NINE MONTHS ENDED OCTOBER 2, 2010 COMPARED TO NINE MONTHS ENDED OCTOBER 3, 2009
The following table sets forth our operating results for the nine months ended October 2, 2010
(comprised of 39 weeks) compared to the nine months ended October 3, 2009 (comprised of 39 weeks):
Nine Months Ended | Variance | |||||||||||||||
October 2, 2010 | October 3, 2009 | |||||||||||||||
Dollars in millions | (39 Weeks) | (39 Weeks) | $ | % | ||||||||||||
Net Sales |
$ | 1,835.6 | $ | 2,209.6 | $ | (374.0 | ) | (16.9 | )% | |||||||
Gross Profit |
902.1 | 1,012.3 | (110.2 | ) | (10.9 | )% | ||||||||||
Selling, general & administrative
expenses |
1,070.6 | 1,205.9 | 135.3 | 11.2 | % | |||||||||||
Impairment of goodwill and other
intangible assets |
2.6 | 2.8 | 0.2 | 7.1 | % | |||||||||||
Operating Loss |
(171.1 | ) | (196.4 | ) | 25.3 | 12.9 | % | |||||||||
Other income (expense), net |
12.3 | (11.5 | ) | 23.8 | * | |||||||||||
Interest expense, net |
(47.2 | ) | (46.9 | ) | (0.3 | ) | (0.6 | )% | ||||||||
Provision (benefit) for income taxes |
6.2 | (5.8 | ) | (12.0 | ) | * | ||||||||||
Loss from Continuing Operations |
(212.2 | ) | (249.0 | ) | 36.8 | 14.8 | % | |||||||||
Discontinued operations, net of income
taxes |
(9.8 | ) | (15.6 | ) | 5.8 | 37.2 | % | |||||||||
Net Loss |
(222.0 | ) | (264.6 | ) | 42.6 | 16.1 | % | |||||||||
Net loss attributable to the
noncontrolling interest |
(0.7 | ) | (0.6 | ) | 0.1 | 16.7 | % | |||||||||
Net Loss Attributable to Liz Claiborne,
Inc. |
$ | (221.3 | ) | $ | (264.0 | ) | $ | 42.7 | 16.2 | % | ||||||
* Not meaningful. |
Net Sales
Net sales for the first nine months of 2010 were $1.836 billion, a decrease of $374.0 million, or 16.9%, when compared to the first nine months of 2009. This reduction primarily reflected sales declines in our Partnered Brands and International-Based Direct Brands segments. The decrease in our Partnered Brands segment included a $167.4 million decrease in our LIZ CLAIBORNE family of brands as we transitioned to the licensing model under the JCPenney and QVC arrangements. The impact of changes in foreign currency exchange rates in our international businesses increased net sales by $1.4 million in the first nine months of 2010. The decrease in net sales also
Net sales for the first nine months of 2010 were $1.836 billion, a decrease of $374.0 million, or 16.9%, when compared to the first nine months of 2009. This reduction primarily reflected sales declines in our Partnered Brands and International-Based Direct Brands segments. The decrease in our Partnered Brands segment included a $167.4 million decrease in our LIZ CLAIBORNE family of brands as we transitioned to the licensing model under the JCPenney and QVC arrangements. The impact of changes in foreign currency exchange rates in our international businesses increased net sales by $1.4 million in the first nine months of 2010. The decrease in net sales also
Table of Contents
35
reflected
the continuing challenges of turning around certain underperforming businesses and the continued
adverse economic conditions in the markets in which we operate.
Net sales results for our segments are provided below:
| Domestic-Based Direct Brands net sales were $773.3 million, a decrease
of $7.6 million, or 1.0%, reflecting the following: |
- | Net sales for JUICY COUTURE were $376.8 million, flat
compared to 2009, reflecting an increase in wholesale
non-apparel and outlet operations, offset by a
decrease in wholesale apparel operations. |
||
We ended the first nine months of 2010 with 70
specialty stores and 40 outlet stores, reflecting the
net addition over the last 12 months of 5 specialty
stores and 7 outlet stores. Key operating metrics for
our JUICY COUTURE retail operations included the
following: |
| Average retail square footage in the first nine
months of 2010 was approximately 340 thousand square
feet, a 6.2% increase compared to 2009; |
||
| Sales productivity was $519 per average square foot
as compared to $536 for the first nine months of 2009;
and |
||
| Comparable store net sales in our Company-owned
stores decreased by 0.2% in the first nine months of
2010. Comparable direct-to-consumer net sales are
equivalent to comparable store sales, as 12 months
have not elapsed from the launch of the Company-owned
website. |
- | Net sales for LUCKY BRAND were $275.8 million, a 10.3%
decrease compared to 2009, reflecting decreases in
specialty retail, partially resulting from reduced
average selling prices due to the aggressive
liquidation of inventory, in addition to decreases in
wholesale apparel and wholesale non-apparel
operations. |
||
We ended the first nine months of 2010 with 189
specialty stores and 37 outlet stores, reflecting the
net closure over the last 12 months of 4 specialty
stores and 9 outlet stores. Key operating metrics for
our LUCKY BRAND retail operations included the
following: |
| Average retail square footage in the first nine
months of 2010 was approximately 579 thousand square
feet, a 0.8% decrease compared to 2009; |
||
| Sales productivity was $254 per average square foot
as compared to $290 for the first nine months of 2009;
|
||
| Comparable store net sales in our Company-owned
stores decreased by 13.9% in the first nine months of
2010; and |
||
| Comparable e-commerce net sales increased by 1.5%;
inclusive of e-commerce net sales, comparable
direct-to-consumer sales decreased 12.7%. |
- | Net sales for KATE SPADE were $120.7 million, a 24.1%
increase compared to 2009, driven by increases in
retail and wholesale operations. |
||
We ended the first nine months of 2010 with 40
specialty stores and 29 outlet stores, reflecting the
net closure over the last 12 months of 7 specialty
stores. Key operating metrics for our KATE SPADE
retail operations included the following: |
| Average retail square footage in the first nine
months of 2010 was approximately 138 thousand square
feet, a 10.5% decrease compared to 2009; |
||
| Sales productivity was $418 per average square foot
as compared to $331 for the first nine months of 2009; |
||
| Comparable store net sales in our Company-owned
stores increased by 17.7% in the first nine months of
2010; and |
||
| Comparable e-commerce net sales increased by 91.6%;
inclusive of e-commerce net sales, comparable
direct-to-consumer sales increased 30.9%. |
Table of Contents
36
| International-Based Direct Brands, comprised of our MEXX retail-based
lifestyle brand, net sales were $531.2 million, a decrease of $90.3
million, or 14.5%, compared to 2009, primarily due to decreases in our
MEXX Europe wholesale and retail operations, partially offset by an
increase in our MEXX Canada retail operations. |
|
We ended the first nine months of 2010 with 171 specialty stores, 93
outlet stores and 149 concessions, reflecting the net addition over
the last 12 months of 14 specialty stores and the net closure of 7
outlet stores and 53 concessions (inclusive of the conversion of 3
concessions to specialty retail formats). Key operating metrics for
our MEXX retail operations included the following: |
- | Average retail square footage in the first nine months
of 2010 was approximately 1.553 million square feet, a
3.7% increase compared to 2009; |
||
- | Sales productivity was $194 per average square foot as
compared to $221 for the first nine months of 2009; |
||
- | Comparable store net sales in our Company-owned stores
decreased by 6.2% in the first nine months of 2010;
and |
||
- | Comparable e-commerce and concession net sales
increased by 2.0%; inclusive of e-commerce and
concession net sales, comparable direct-to-consumer
sales decreased 5.0%. |
| Partnered Brands net sales were $531.1 million, a decrease of $276.1 million, or 34.2%, reflecting: |
- | A $176.8 million, or 21.9%, decrease related to brands that have been licensed or
exited, primarily due to a $167.4 million decrease in sales in our LIZ CLAIBORNE
family of brands as we transitioned from the legacy department store model to the
licensing model under the JCPenney and QVC arrangements; |
||
- | A net $75.8 million, or 9.4%, decrease related to reduced sales of our ongoing
Partnered Brands business, primarily related to our licensed DKNY® JEANS brand and
our AXCESS and MONET brands; and |
||
- | A $23.5 million, or 2.9%, decrease related to reduced sales in our outlet operations. |
Comparable direct-to-consumer net sales are calculated as follows:
- | New stores become comparable after 14 full fiscal months of operations
(on the 1st day of the 15th full fiscal month); |
||
- | Except in unusual circumstances, closing stores become non-comparable
one full fiscal month prior to the scheduled closing date; |
||
- | A remodeled store will be changed to non-comparable when there is a
20.0% or more increase/decrease in its selling square footage
(effective at the start of the fiscal month when construction begins).
The store becomes comparable again after 14 full fiscal months from
the re-open date; |
||
- | A store that relocates becomes non-comparable when the new location is
materially different from the original location (in respect to selling
square footage and/or traffic patterns); |
||
- | Stores that are acquired are not comparable until they have been
reflected in our results for a period of 12 months; and |
||
- | E-commerce sales are comparable after 12 full fiscal months from the
website launch date (on the 1st day of the 13th full fiscal month). |
Net sales per average square foot is defined as net sales divided by the average of beginning and
end of period gross square feet.
Viewed on a geographic basis, Domestic net sales decreased by $284.0 million, or 19.0%, to
$1.207 billion, primarily reflecting the declines within our Partnered Brands segment, JUICY
COUTURE wholesale operations and LUCKY BRAND retail and wholesale operations, partially offset by
an increase in our KATE SPADE retail and wholesale operations and JUICY COUTURE retail operations.
International net sales decreased by $90.2 million, or 12.5%, to $629.0 million, primarily
due to declines in our MEXX Europe wholesale and retail operations, partially offset by an increase
in our MEXX Canada retail operations. The impact of fluctuations in foreign currency exchange rates
increased international sales by $1.4 million.
Gross Profit
Gross profit in the first nine months of 2010 was $902.1 million (49.1% of net sales), compared to $1.012 billion (45.8% of net sales) in the first nine months of 2009. The decrease in gross profit is primarily due to reduced sales in all of our segments. Fluctuations in foreign currency exchange rates in our international businesses increased gross profit by $0.8 million. However, our gross profit rate increased due to an increased proportion of sales from retail operations in our Domestic-Based Direct Brands segment, which runs at a higher gross profit rate than the Company average. Gross profit rates improved in our Domestic-Based Direct Brands segment, despite reduced average selling
Gross profit in the first nine months of 2010 was $902.1 million (49.1% of net sales), compared to $1.012 billion (45.8% of net sales) in the first nine months of 2009. The decrease in gross profit is primarily due to reduced sales in all of our segments. Fluctuations in foreign currency exchange rates in our international businesses increased gross profit by $0.8 million. However, our gross profit rate increased due to an increased proportion of sales from retail operations in our Domestic-Based Direct Brands segment, which runs at a higher gross profit rate than the Company average. Gross profit rates improved in our Domestic-Based Direct Brands segment, despite reduced average selling
Table of Contents
37
prices in our LUCKY BRAND retail operations due to the aggressive liquidation of
inventory, in addition to improved gross profit rates in our Partnered Brands segment and our
International-Based Direct Brands segment.
Selling, General & Administrative Expenses
SG&A decreased $135.3 million, or 11.2%, to $1.071 billion in the first nine months of 2010 from $1.206 billion in the first nine months of 2009. The decrease in SG&A reflected the following:
SG&A decreased $135.3 million, or 11.2%, to $1.071 billion in the first nine months of 2010 from $1.206 billion in the first nine months of 2009. The decrease in SG&A reflected the following:
| A $112.9 million decrease in our Partnered Brands segment and
corporate SG&A, inclusive of a decrease associated with our LIZ
CLAIBORNE family of brands as we transition to the licensing model
under the JCPenney and QVC arrangements; |
|
| A $30.6 million decrease in our International-Based Direct Brands
segment, including a $14.9 million decrease in shipping and handling
expenses, a $9.3 million decrease in concession fees and a $5.3
million decrease in payroll related expenses; |
|
| A $1.5 million decrease in our Domestic-Based Direct Brands segment; |
|
| A $1.3 million decrease due to the impact of fluctuations in foreign
currency exchange rates in our international operations; and |
|
| An $11.0 million increase in expenses associated with our streamlining
initiatives and brand-exiting activities. |
SG&A as a percentage of net sales was 58.3%, compared to 54.6% in the first nine months of 2009,
primarily reflecting increases in our Partnered Brands and International-Based Direct Brands
segments due to the decline in sales, which exceeded the proportionate reduction in SG&A, partially
offset by an improved SG&A rate in our Domestic-Based Direct Brands segment.
Impairment of Goodwill and Other Intangible Assets
In the first nine months of 2010, we recorded non-cash impairment charges of $2.6 million primarily within our Partnered Brands segment principally related to merchandising rights of our LIZ CLAIBORNE and licensed DKNY® JEANS brands.
In the first nine months of 2010, we recorded non-cash impairment charges of $2.6 million primarily within our Partnered Brands segment principally related to merchandising rights of our LIZ CLAIBORNE and licensed DKNY® JEANS brands.
In the first nine months of 2009, we recorded $2.8 million of additional purchase price and an
increase to goodwill related to our contingent earn-out payment to the former owners of Mac & Jac
in the second quarter of 2009. Based on economic circumstances and other factors, we concluded that
the goodwill recorded as a result of the settlement of the contingency was impaired and recorded an
impairment charge in our Partnered Brands segment.
Operating Loss
Operating loss for the first nine months of 2010 was $171.1 million ((9.3)% of net sales) compared to $196.4 million ((8.9)% of net sales) in 2009. The impact of fluctuations in foreign currency exchange rates in our international operations decreased operating loss by $2.1 million in 2010. Operating loss by segment is provided below:
Operating loss for the first nine months of 2010 was $171.1 million ((9.3)% of net sales) compared to $196.4 million ((8.9)% of net sales) in 2009. The impact of fluctuations in foreign currency exchange rates in our international operations decreased operating loss by $2.1 million in 2010. Operating loss by segment is provided below:
| Domestic-Based Direct Brands operating loss in the first nine months
of 2010 was $18.4 million ((2.4)% of net sales), compared to an
operating loss of $37.6 million ((4.8)% of net sales) in 2009. The
decreased operating loss reflected a decrease in SG&A, including
reduced payroll related expenses of $12.9 million and increased gross
profit. |
|
| International-Based Direct Brands operating loss in the first nine
months of 2010 was $69.6 million ((13.1)% of net sales), compared to
an operating loss of $69.5 million ((11.2)% of net sales) in 2009.
Compared to the prior year period, the operating loss reflected: (i)
decreased gross profit; (ii) a $14.9 million reduction in shipping and
handling expenses; (iii) a $9.3 million reduction in concession fees;
(iv) a $5.3 million decrease in payroll related expenses; and (v) a
$3.1 million decrease in the operating loss resulting from
fluctuations in foreign currency exchange rates. |
|
| Partnered Brands operating loss in the first nine months of 2010 was
$83.1 million ((15.6)% of net sales), compared to an operating loss of
$89.3 million ((11.1)% of net sales) in 2009. The decreased operating
loss reflected reduced SG&A, including a reduction related to the LIZ
CLAIBORNE transition to the licensing model under the JCPenney and QVC
arrangements, partially offset by reduced gross profit. |
On a geographic basis, Domestic operating loss decreased by $5.2 million to an operating
loss of $95.1 million, which reflected reduced losses in our Domestic-Based Direct Brands segment
and, to a lesser extent, our Partnered Brands segment. The International operating loss was
$76.0 million in the first nine months of 2010 compared to an operating loss of $96.1 million in
the first nine months of 2009. This change reflected decreased losses in our Partnered Brands
operations in Canada and Europe. The impact of fluctuations in foreign currency exchange rates in
our international operations decreased the operating loss by $2.1 million.
Table of Contents
38
Other Income (Expense), Net
Other income (expense), net amounted to $12.3 million and $(11.5) million for the nine months ended October 2, 2010 and October 3, 2009, respectively. Other income (expense), net consisted primarily of (i) the impact of the partial dedesignation of the hedge of our investment in certain euro functional currency subsidiaries, which resulted in the recognition of non-cash foreign currency translation gains (losses) of $12.1 million and $(9.9) million on our euro-denominated notes within earnings in the first nine months of 2010 and 2009, respectively, and (ii) foreign currency transaction gains and (losses) in the first nine months of 2010 and 2009.
Other income (expense), net amounted to $12.3 million and $(11.5) million for the nine months ended October 2, 2010 and October 3, 2009, respectively. Other income (expense), net consisted primarily of (i) the impact of the partial dedesignation of the hedge of our investment in certain euro functional currency subsidiaries, which resulted in the recognition of non-cash foreign currency translation gains (losses) of $12.1 million and $(9.9) million on our euro-denominated notes within earnings in the first nine months of 2010 and 2009, respectively, and (ii) foreign currency transaction gains and (losses) in the first nine months of 2010 and 2009.
Interest Expense, Net
Interest expense, net increased $0.3 million, or 0.6%, to $47.2 million in the nine months ended October 2, 2010, as compared to $46.9 million in the nine months ended October 3, 2009, primarily reflecting (i) a $6.9 million write-off of debt issuance costs in 2010 as a result of a reduction in the size of our amended and restated revolving credit facility; (ii) increased interest expense related to the Convertible Notes, which were issued in June of 2009; and (iii) reduced interest expense due to decreased levels of borrowings under our amended and restated revolving credit facility.
Interest expense, net increased $0.3 million, or 0.6%, to $47.2 million in the nine months ended October 2, 2010, as compared to $46.9 million in the nine months ended October 3, 2009, primarily reflecting (i) a $6.9 million write-off of debt issuance costs in 2010 as a result of a reduction in the size of our amended and restated revolving credit facility; (ii) increased interest expense related to the Convertible Notes, which were issued in June of 2009; and (iii) reduced interest expense due to decreased levels of borrowings under our amended and restated revolving credit facility.
Provision (Benefit) for Income Taxes
During the nine months ended October 2, 2010, we recorded a provision for income taxes of $6.2 million, compared to a benefit for income taxes of $5.8 million during the nine months ended October 3, 2009. We did not record income tax benefits for substantially all losses incurred during the first nine months of 2010 and 2009, as it is not more likely than not that we will utilize such benefits due to the combination of (i) our history of pretax losses; (ii) our ability to carry forward or carry back tax losses or credits and (iii) current general economic conditions. The income tax provision for the nine months ended October 2, 2010 primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions. The income tax benefit for the nine months ended October 3, 2009 consisted principally of (i) a tax benefit of $8.0 million that offset tax expenses recorded in Stockholders equity and (ii) tax expense related to additional accruals associated with indefinite-lived intangible assets and uncertain tax positions.
During the nine months ended October 2, 2010, we recorded a provision for income taxes of $6.2 million, compared to a benefit for income taxes of $5.8 million during the nine months ended October 3, 2009. We did not record income tax benefits for substantially all losses incurred during the first nine months of 2010 and 2009, as it is not more likely than not that we will utilize such benefits due to the combination of (i) our history of pretax losses; (ii) our ability to carry forward or carry back tax losses or credits and (iii) current general economic conditions. The income tax provision for the nine months ended October 2, 2010 primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions. The income tax benefit for the nine months ended October 3, 2009 consisted principally of (i) a tax benefit of $8.0 million that offset tax expenses recorded in Stockholders equity and (ii) tax expense related to additional accruals associated with indefinite-lived intangible assets and uncertain tax positions.
Loss from Continuing Operations
Loss from continuing operations in the first nine months of 2010 decreased to $212.2 million, or (11.6)% of net sales, from $249.0 million in the first nine months of 2009, or (11.3)% of net sales. Earnings per share, Basic and Diluted, (EPS) from continuing operations attributable to Liz Claiborne, Inc. increased to $(2.24) in 2010 from $(2.65) in 2009.
Loss from continuing operations in the first nine months of 2010 decreased to $212.2 million, or (11.6)% of net sales, from $249.0 million in the first nine months of 2009, or (11.3)% of net sales. Earnings per share, Basic and Diluted, (EPS) from continuing operations attributable to Liz Claiborne, Inc. increased to $(2.24) in 2010 from $(2.65) in 2009.
Discontinued Operations, Net of Income Taxes
Loss from discontinued operations in the first nine months of 2010 was $9.8 million compared to a loss of $15.6 million in the first nine months of 2009. The results in the first nine months of 2010 include a loss on disposal of discontinued operations of $6.2 million primarily associated with the LIZ CLAIBORNE Canada stores and a $3.6 million loss from discontinued operations as compared to a $4.1 million loss on disposal of discontinued operations and an $11.5 million loss from discontinued operations in 2009. EPS from discontinued operations attributable to Liz Claiborne, Inc. was $(0.11) in 2010 and $(0.16) in 2009.
Loss from discontinued operations in the first nine months of 2010 was $9.8 million compared to a loss of $15.6 million in the first nine months of 2009. The results in the first nine months of 2010 include a loss on disposal of discontinued operations of $6.2 million primarily associated with the LIZ CLAIBORNE Canada stores and a $3.6 million loss from discontinued operations as compared to a $4.1 million loss on disposal of discontinued operations and an $11.5 million loss from discontinued operations in 2009. EPS from discontinued operations attributable to Liz Claiborne, Inc. was $(0.11) in 2010 and $(0.16) in 2009.
Net Loss Attributable to Liz Claiborne Inc.
Net loss attributable to Liz Claiborne, Inc. in the first nine months of 2010 decreased to $221.3 million from $264.0 million in the first nine months of 2009. EPS increased to $(2.35) in 2010, from $(2.81) in 2009.
Net loss attributable to Liz Claiborne, Inc. in the first nine months of 2010 decreased to $221.3 million from $264.0 million in the first nine months of 2009. EPS increased to $(2.35) in 2010, from $(2.81) in 2009.
Table of Contents
39
THREE MONTHS ENDED OCTOBER 2, 2010 COMPARED TO THREE MONTHS ENDED OCTOBER 3, 2009
The following table sets forth our operating results for the three months ended October 2,
2010 (comprised of 13 weeks) compared to the three months ended October 3, 2009 (comprised of 13
weeks):
Three Months Ended | Variance | |||||||||||||||
October 2, 2010 | October 3, 2009 | |||||||||||||||
Dollars in millions | (13 Weeks) | (13 Weeks) | $ | % | ||||||||||||
Net Sales |
$ | 658.3 | $ | 761.7 | $ | (103.4 | ) | (13.6 | )% | |||||||
Gross Profit |
337.7 | 345.0 | (7.3 | ) | (2.1 | )% | ||||||||||
Selling, general & administrative
expenses |
357.2 | 404.0 | 46.8 | 11.6 | % | |||||||||||
Operating Loss |
(19.5 | ) | (59.0 | ) | 39.5 | 66.9 | % | |||||||||
Other expense, net |
(29.5 | ) | (10.1 | ) | (19.4 | ) | * | |||||||||
Interest expense, net |
(12.6 | ) | (17.4 | ) | 4.8 | 27.6 | % | |||||||||
Provision for income taxes |
0.9 | 0.6 | (0.3 | ) | (50.0 | )% | ||||||||||
Loss from Continuing Operations |
(62.5 | ) | (87.1 | ) | 24.6 | 28.2 | % | |||||||||
Discontinued operations, net of income
taxes |
(0.3 | ) | (3.6 | ) | 3.3 | 91.7 | ||||||||||
Net Loss |
(62.8 | ) | (90.7 | ) | 27.9 | 30.8 | % | |||||||||
Net loss attributable to the
noncontrolling interest |
(0.1 | ) | (0.2 | ) | (0.1 | ) | (50.0 | )% | ||||||||
Net Loss Attributable to Liz Claiborne, Inc. |
$ | (62.7 | ) | $ | (90.5 | ) | $ | 27.8 | 30.7 | % | ||||||
* Not meaningful. |
Net Sales
Net sales for the third quarter of 2010 were $658.3 million, a decrease of $103.4 million, or 13.6%, when compared to the third quarter of 2009. This reduction reflected (i) a decline in sales of our Partnered Brands segment, including an $82.5 million decrease in sales in our LIZ CLAIBORNE family of brands as we transitioned to the licensing model under the JCPenney and QVC arrangements; (ii) a sales decline in our International-Based Direct Brands segment; (iii) an increase in sales in our Domestic-Based Direct Brands segment; and (iv) the impact of changes in foreign currency exchange rates in our international businesses, which decreased net sales by $12.8 million in the third quarter of 2010. The decrease in net sales also reflected the continuing challenges of turning around certain underperforming businesses and the continued adverse economic conditions in the markets in which we operate.
Net sales for the third quarter of 2010 were $658.3 million, a decrease of $103.4 million, or 13.6%, when compared to the third quarter of 2009. This reduction reflected (i) a decline in sales of our Partnered Brands segment, including an $82.5 million decrease in sales in our LIZ CLAIBORNE family of brands as we transitioned to the licensing model under the JCPenney and QVC arrangements; (ii) a sales decline in our International-Based Direct Brands segment; (iii) an increase in sales in our Domestic-Based Direct Brands segment; and (iv) the impact of changes in foreign currency exchange rates in our international businesses, which decreased net sales by $12.8 million in the third quarter of 2010. The decrease in net sales also reflected the continuing challenges of turning around certain underperforming businesses and the continued adverse economic conditions in the markets in which we operate.
Net sales results for our segments are provided below:
| Domestic-Based Direct Brands net sales were $290.5 million, an increase of $20.0 million, or 7.4%,
reflecting the following: |
- | Net sales for JUICY COUTURE were $148.1 million, an 11.3% increase compared to 2009,
reflecting increases in wholesale non-apparel and outlet operations. |
||
Key operating metrics for our JUICY COUTURE retail operations included the following: |
| Average retail square footage in the third quarter of 2010 was approximately 342
thousand square feet, a 6.2% increase compared to 2009; |
||
| Sales productivity was $192 per average square foot as compared to $191 for the
third quarter of |
Table of Contents
40
2009; and |
|||
| Comparable store net sales in our Company-owned stores increased by 1.3% in the
third quarter of 2010. Comparable direct-to-consumer net sales are equivalent to
comparable store sales, as 12 months have not elapsed from the launch of the
Company-owned website. |
- | Net sales for LUCKY BRAND were $97.8 million, a 5.5% decrease compared to 2009,
reflecting decreases in specialty retail, outlet and wholesale non-apparel
operations, partially offset by increases in wholesale apparel and e-commerce
operations. |
||
Key operating metrics for our LUCKY BRAND retail operations included the following: |
| Average retail square footage in the third quarter of 2010 was approximately 564
thousand square feet, a 4.2% decrease compared to 2009; |
||
| Sales productivity was $87 per average square foot as compared to $95 for the
third quarter of 2009; |
||
| Comparable store net sales in our Company-owned stores decreased by 10.2% in the
third quarter of 2010; and |
||
| Comparable e-commerce net sales increased by 29.0%; inclusive of e-commerce net
sales, comparable direct-to-consumer sales decreased 7.5%. |
- | Net sales for KATE SPADE were $44.6 million, a 31.2% increase compared to 2009,
primarily driven by increases in wholesale non-apparel, e-commerce and specialty
retail operations. |
||
Key operating metrics for our KATE SPADE retail operations included the following: |
| Average retail square footage in the third quarter of 2010 was approximately 139
thousand square feet, a 10.6% decrease compared to 2009; |
||
| Sales productivity was $151 per average square foot as compared to $121 for the
third quarter of 2009; |
||
| Comparable store net sales in our Company-owned stores increased by 18.6% in the
third quarter of 2010; and |
||
| Comparable e-commerce net sales increased by 97.1%; inclusive of e-commerce net
sales, comparable direct-to-consumer sales increased 31.8%. |
| International-Based Direct Brands net sales were $187.5 million, a decrease of $36.9 million, or 16.4%, compared to 2009, primarily due to
decreases in our MEXX Europe wholesale and retail operations, partially offset by an increase in our MEXX Canada retail and wholesale
operations. Excluding the impact of fluctuations in foreign currency exchange rates, net sales were $198.8 million, an 11.4% decrease as
compared to 2009. |
|
Key operating metrics for our MEXX retail operations included the following: |
- | Average retail square footage in the third quarter of 2010 was approximately 1.562 million square
feet, a 3.1% increase compared to 2009; |
||
- | Sales productivity was $63 per average square foot as compared to $72 for the third quarter of 2009; |
||
- | Comparable store net sales in our Company-owned stores decreased by 2.6% in the third quarter of
2010; and |
||
- | Comparable e-commerce and concession net sales increased by 4.0%; inclusive of e-commerce and
concession net sales, comparable direct-to-consumer sales decreased 1.7%. |
| Partnered Brands net sales were $180.3 million, a decrease of $86.5 million, or 32.4%, reflecting: |
- | An $82.3 million, or 30.8%, decrease related to brands that have been licensed or
exited, substantially all of which was due to a decrease in sales in our LIZ CLAIBORNE
family of brands as we transitioned from the legacy department store model to the
licensing model under the JCPenney and QVC arrangements, inclusive of a $3.6 million
increase in our licensing operations; |
||
- | A $5.6 million, or 2.1%, decrease related to reduced sales in our outlet operations; and |
||
- | A net $1.4 million, or 0.5%, increase related to increased sales of our ongoing
Partnered Brands business, primarily related to our licensed DKNY® JEANS brand,
partially offset by a decrease in our AXCESS brand. |
Table of Contents
41
Viewed on a geographic basis, Domestic net sales decreased by $69.2 million, or 13.6%, to
$437.7 million, primarily reflecting the declines within our Partnered Brands segment and LUCKY
BRAND retail and wholesale non-apparel operations, partially offset by increases in our KATE SPADE retail and wholesale
operations and our JUICY COUTURE wholesale non-apparel and retail operations. International
net sales decreased by $34.3 million, or 13.4%, to $220.6 million primarily due to declines in our
MEXX Europe wholesale and retail operations, partially offset by increases in our MEXX Canada
retail and wholesale operations. The impact of fluctuations in
foreign currency exchange rates decreased international sales by
$12.8 million.
Gross Profit
Gross profit in the third quarter of 2010 was $337.7 million (51.3% of net sales), compared to $345.0 million (45.3% of net sales) in the third quarter of 2009. The decrease in gross profit is primarily due to reduced sales in our Partnered Brands and International-Based Direct Brands segments, partially offset by increased sales in our Domestic-Based Direct brands segment. Fluctuations in foreign currency exchange rates in our international businesses decreased gross profit by $7.2 million. However, our gross profit rate increase reflected improved gross profit rates in all segments and an increased proportion of sales from retail operations in our Domestic-Based Direct Brands segment, which runs at a higher gross profit rate than the Company average.
Gross profit in the third quarter of 2010 was $337.7 million (51.3% of net sales), compared to $345.0 million (45.3% of net sales) in the third quarter of 2009. The decrease in gross profit is primarily due to reduced sales in our Partnered Brands and International-Based Direct Brands segments, partially offset by increased sales in our Domestic-Based Direct brands segment. Fluctuations in foreign currency exchange rates in our international businesses decreased gross profit by $7.2 million. However, our gross profit rate increase reflected improved gross profit rates in all segments and an increased proportion of sales from retail operations in our Domestic-Based Direct Brands segment, which runs at a higher gross profit rate than the Company average.
Selling, General & Administrative Expenses
SG&A decreased $46.8 million, or 11.6%, to $357.2 million in the third quarter of 2010 from $404.0 million in the third quarter of 2009. The decrease in SG&A reflected the following:
SG&A decreased $46.8 million, or 11.6%, to $357.2 million in the third quarter of 2010 from $404.0 million in the third quarter of 2009. The decrease in SG&A reflected the following:
| A $47.7 million decrease in our Partnered Brands segment and corporate
SG&A, inclusive of a decrease associated with our LIZ CLAIBORNE family
of brands as we transition to the licensing model under the JCPenney
and QVC arrangements; |
|
| An $8.6 million decrease due to the impact of fluctuations in foreign
currency exchange rates in our international operations; |
|
| A $3.9 million decrease in our International-Based Direct Brands
segment, including a $7.1 million decrease in shipping and handling
expenses and a $2.8 million decrease in concession fees, partially
offset by a $6.9 million increase in marketing expenses; |
|
| A $7.5 million increase in expenses associated with our streamlining
initiatives and brand-exiting activities; and |
|
| A $5.9 million increase in our Domestic-Based Direct Brands segment. |
SG&A as a percentage of net sales was 54.3%, compared to 53.0% in the third quarter of 2009,
primarily reflecting increases in our International-Based Direct Brands and Partnered Brands
segments due to the decline in sales, which exceeded proportionate reductions in SG&A, partially
offset by an improved SG&A rate in our Domestic-Based Direct Brands segment.
Operating Loss
Operating loss for the third quarter of 2010 was $19.5 million ((3.0)% of net sales) compared to $59.0 million ((7.7)% of net sales) in 2009. The impact of fluctuations in foreign currency exchange rates in our international operations decreased operating loss by $1.4 million in 2010. Operating loss by segment is provided below:
Operating loss for the third quarter of 2010 was $19.5 million ((3.0)% of net sales) compared to $59.0 million ((7.7)% of net sales) in 2009. The impact of fluctuations in foreign currency exchange rates in our international operations decreased operating loss by $1.4 million in 2010. Operating loss by segment is provided below:
| Domestic-Based Direct Brands operating income was $4.7 million (1.6%
of net sales), compared to an operating loss of $7.4 million ((2.7)%
of net sales) in 2009. The period-over-period change reflected an
increase in gross profit, in addition to a $2.8 million decrease in
expenses associated with our streamlining initiatives and brand
exiting activities. |
|
| International-Based Direct Brands operating loss was $14.0 million
((7.5)% of net sales), compared to an operating loss of $19.2 million
((8.5)% of net sales) in 2009. The decreased operating loss reflected
(i) a $7.1 million reduction in shipping and handling expenses; (ii) a
$1.7 million decrease resulting from fluctuations in foreign currency
exchange rates; (iii) decreased gross profit; and (iv) a $6.9 million
increase in marketing expenses. |
|
| Partnered Brands operating loss in the third quarter was $10.2 million
((5.6)% of net sales), compared to an operating loss of $32.4 million
((12.2)% of net sales) in 2009. The decreased operating loss reflected
reduced SG&A, as discussed above, partially offset by reduced gross
profit and a $4.5 million increase in expenses associated with our
streamlining initiatives and brand exiting activities. |
On a geographic basis, Domestic operating loss decreased by $24.3 million to a loss of $4.9
million, which reflected the generation of operating income in our Domestic-Based Direct Brands
segment compared to an operating loss in 2009 and decreased losses in our Partnered Brands segment.
The International operating loss was $14.6 million in the third quarter of 2010, compared
to an operating loss of $29.8 million in the third quarter of 2009. This change
Table of Contents
42
reflected the
decreased losses in the international operations of our Partnered Brands segment and in our
International-Based Direct Brands segment discussed above. The impact of fluctuations in foreign
currency exchange rates in our international operations decreased the operating loss by $1.4
million.
Other Expense, Net
Other expense, net amounted to $29.5 million and $10.1 million in the three months ended October 2, 2010 and October 3, 2009, respectively. Other expense, net consisted primarily of (i) the impact of the partial dedesignation of the hedge of our investment in certain euro functional currency subsidiaries, which resulted in the recognition of non-cash foreign currency translation losses of $25.7 million and $8.6 million for the third quarter of 2010 and 2009, respectively, on our euro-denominated notes within earnings and (ii) foreign currency transaction gains and losses in the third quarter of 2010 and 2009.
Other expense, net amounted to $29.5 million and $10.1 million in the three months ended October 2, 2010 and October 3, 2009, respectively. Other expense, net consisted primarily of (i) the impact of the partial dedesignation of the hedge of our investment in certain euro functional currency subsidiaries, which resulted in the recognition of non-cash foreign currency translation losses of $25.7 million and $8.6 million for the third quarter of 2010 and 2009, respectively, on our euro-denominated notes within earnings and (ii) foreign currency transaction gains and losses in the third quarter of 2010 and 2009.
Interest Expense, Net
Interest expense, net decreased $4.8 million, or 27.6%, to $12.6 million for the three months ended October 2, 2010, as compared to $17.4 million for the three months ended October 3, 2009, primarily reflecting reduced expense due to decreased levels of outstanding borrowings under our amended and restated revolving credit facility.
Interest expense, net decreased $4.8 million, or 27.6%, to $12.6 million for the three months ended October 2, 2010, as compared to $17.4 million for the three months ended October 3, 2009, primarily reflecting reduced expense due to decreased levels of outstanding borrowings under our amended and restated revolving credit facility.
Provision for Income Taxes
During the three months ended October 2, 2010 we recorded a provision for income taxes of $0.9 million, compared $0.6 million during the three months ended October 3, 2009. We did not record income tax benefits for substantially all losses incurred during the third quarter of 2010 and 2009, as it is not more likely than not that we will utilize such benefits due to the factors discussed above. The income tax provision for the three months ended October 2, 2010 and October 3, 2009 primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions.
During the three months ended October 2, 2010 we recorded a provision for income taxes of $0.9 million, compared $0.6 million during the three months ended October 3, 2009. We did not record income tax benefits for substantially all losses incurred during the third quarter of 2010 and 2009, as it is not more likely than not that we will utilize such benefits due to the factors discussed above. The income tax provision for the three months ended October 2, 2010 and October 3, 2009 primarily represented increases in deferred tax liabilities for indefinite-lived intangible assets, current tax on operations in certain jurisdictions and an increase in the accrual for interest related to uncertain tax positions.
Loss from Continuing Operations
Loss from continuing operations in the third quarter of 2010 decreased to $62.5 million, or (9.5)% of net sales, from $87.1 million in the third quarter of 2009, or (11.4)% of net sales. EPS from continuing operations attributable to Liz Claiborne, Inc. increased to $(0.66) in 2010 from $(0.93) in 2009.
Loss from continuing operations in the third quarter of 2010 decreased to $62.5 million, or (9.5)% of net sales, from $87.1 million in the third quarter of 2009, or (11.4)% of net sales. EPS from continuing operations attributable to Liz Claiborne, Inc. increased to $(0.66) in 2010 from $(0.93) in 2009.
Discontinued Operations, Net of Income Taxes
Loss from discontinued operations in the third quarter of 2010 was $0.3 million, including a $0.6 million gain on disposal of discontinued operations and a $0.9 million loss from discontinued operations. Loss from discontinued operations was $3.6 million in the third quarter of 2009, including a $1.5 million loss on disposal of discontinued operations and a $2.1 million loss from discontinued operations. EPS from discontinued operations attributable to Liz Claiborne, Inc. was $(0.01) in 2010 and $(0.03) in 2009.
Loss from discontinued operations in the third quarter of 2010 was $0.3 million, including a $0.6 million gain on disposal of discontinued operations and a $0.9 million loss from discontinued operations. Loss from discontinued operations was $3.6 million in the third quarter of 2009, including a $1.5 million loss on disposal of discontinued operations and a $2.1 million loss from discontinued operations. EPS from discontinued operations attributable to Liz Claiborne, Inc. was $(0.01) in 2010 and $(0.03) in 2009.
Net Loss Attributable to Liz Claiborne Inc.
Net loss attributable to Liz Claiborne, Inc. in the third quarter of 2010 decreased to $62.7 million from $90.5 million in the third quarter of 2009. EPS increased to $(0.67) in 2010, from $(0.96) in 2009.
Net loss attributable to Liz Claiborne, Inc. in the third quarter of 2010 decreased to $62.7 million from $90.5 million in the third quarter of 2009. EPS increased to $(0.67) in 2010, from $(0.96) in 2009.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements. Our primary ongoing cash requirements are to (i) fund seasonal working
capital needs (primarily accounts receivable and inventory); (ii) fund capital expenditures related
to the opening and refurbishing of our specialty retail and outlet stores, normal maintenance
activities and the purchase of our Ohio distribution facility in the second quarter of 2011 (see
Off-Balance Sheet Arrangements, below); (iii) fund remaining efforts associated with our
streamlining initiatives, which include consolidation of office space, store closures and
reductions in staff; (iv) invest in our information systems; and (v) fund operational and
contractual obligations. We expect that our streamlining initiatives will provide long-term cost
savings. We also require cash to fund payments related to outstanding earn-out provisions of
certain of our previous acquisitions.
Sources of Cash. Our historical sources of liquidity to fund ongoing cash requirements
include cash flows from operations, cash and cash equivalents and securities on hand, as well as
borrowings through our lines of credit.
In May 2010, we completed the Amended Agreement. Under the Amended Agreement, the aggregate
commitments were reduced to $350.0 million from $600.0 million, and the maturity date was extended
from May 2011 to August
Table of Contents
43
2014, provided that in the event that our 350.0 million euro Notes due July
2013 are not refinanced, purchased or defeased prior to April 8, 2013, then the maturity date shall be April 8, 2013, and in the event
that the Convertible Notes due 2014 are not refinanced, purchased or defeased prior to March 15,
2014, then the maturity date shall be March 15, 2014. In both circumstances, if any such
refinancing or extension provides for a maturity date that is earlier than 91 days following August
6, 2014, then the maturity date shall be the date that is 91 days prior to the maturity date of
such notes. We are subject to various covenants and other requirements, such as financial
requirements, reporting requirements and negative covenants. Pursuant to the May 2010 amendment, we
are required to maintain minimum aggregate borrowing availability of not less than $45.0 million
and must apply substantially all cash collections to reduce outstanding borrowings under the
Amended Agreement when availability under the Amended Agreement falls below the greater of $65.0
million and 17.5% of the then-applicable commitments. Our borrowing availability under the Amended
Agreement is determined primarily by the level of our eligible accounts receivable and inventory
balances. In addition, the Amended Agreement removes the springing fixed charge coverage covenant
that was a condition of the prior amended and restated revolving credit agreement.
The Convertible Notes enhance flexibility by allowing us to utilize shares to repay a portion of
the notes. The Convertible Notes are convertible during any fiscal quarter if the last reported
sale price of our common stock during 20 out of the last 30 trading days in the prior fiscal
quarter equals or exceeds $4.2912 (which is 120% of the conversion price). As a result of stock
price performance, the Convertible Notes were convertible during the third quarter of 2010 and are
convertible during the fourth quarter of 2010. As previously disclosed in connection with the
issuance of the Convertible Notes, we have not yet obtained stockholder approval under the rules of
the NYSE for the issuance of the full amount of common stock issuable upon conversion of the
Convertible Notes. Until such approval is obtained, if the Convertible Notes are surrendered for
conversion, we must pay the $1,000 principal amount of the conversion value of the Convertible
Notes in cash and may settle the remaining conversion value in the form of cash, stock or a
combination of cash and stock, subject to an overall limit on the number of shares of stock that
may be issued.
During the first nine months of 2010, we received $171.1 million of net income tax refunds on
previously paid taxes primarily due to a Federal law change in 2009 allowing our 2008 or 2009
domestic losses to be carried back for five years, with the fifth year limited to 50.0% of taxable
income. We repaid amounts outstanding under our amended and restated revolving credit facility with
the amount of such refunds.
As discussed above, under our Amended Agreement, we are subject to minimum borrowing availability
levels. Based on our forecast of borrowing availability under the Amended Agreement, we anticipate
that cash flows from operations and the projected borrowing availability under our Amended
Agreement will be sufficient to fund our liquidity requirements for at least the next 12 months.
There can be no certainty that availability under the Amended Agreement will be sufficient to fund
our liquidity needs. Should we be unable to comply with the requirements in the Amended Agreement,
we would be unable to borrow under such agreement and any amounts outstanding would become
immediately due and payable, unless we were able to secure a waiver or an amendment under the
Amended Agreement. Should we be unable to borrow under the Amended Agreement, or if outstanding
borrowings thereunder become immediately due and payable, our liquidity would be significantly
impaired, which would have a material adverse effect on our business, financial condition and
results of operations. In addition, an acceleration of amounts outstanding under the Amended
Agreement would likely cause cross-defaults under our other outstanding indebtedness, including the
Convertible Notes and the 5.0% Notes.
The sufficiency and availability of our projected sources of liquidity may be adversely affected by
a variety of factors, including, without limitation: (i) the level of our operating cash flows,
which will be impacted by retailer and consumer acceptance of our products, general economic
conditions and the level of consumer discretionary spending; (ii) the status of, and any further
adverse changes in, our credit ratings; (iii) our ability to maintain required levels of borrowing
availability and to comply with other covenants included in our debt and credit facilities; (iv)
the financial wherewithal of our larger department store and specialty store customers; (v) our
ability to successfully execute on the licensing arrangements with JCPenney and QVC with respect to
the LIZ CLAIBORNE family of brands; (vi) interest rate and exchange rate fluctuations; and (vii)
whether holders of the Convertible Notes, if and when such notes are convertible, elect to convert
a substantial portion of such notes, the par value of which we must currently settle in cash.
Although we consider the conversion of a material amount of the Convertible Notes in the near
future to be unlikely, if all or a substantial portion of the outstanding Convertible Notes were
converted and we were required to settle all
Table of Contents
44
of the principal of the converted Convertible Notes in
cash, then we might not have sufficient liquidity to meet our obligations to pay the amounts required upon conversion of the Convertible Notes and maintain the
requisite levels of availability required under the Amended Agreement.
Because of the continuing uncertainty and risks relating to future economic conditions, we may,
from time to time, explore various initiatives to improve our liquidity, including issuance of debt
securities, sales of various assets, additional cost reductions and other measures. In addition,
where conditions permit, we may also, from time to time, seek to
retire, refinance, extend, exchange or purchase our
outstanding debt in privately negotiated transactions or otherwise. We may not be able to
successfully complete any such actions, if necessary.
Cash and Debt Balances. We ended the first nine months of 2010 with $17.0 million in cash
and marketable securities, compared to $25.6 million at the end of the first nine months of 2009
and with $736.9 million of debt outstanding at the end of the first nine months of 2010, compared
to $828.6 million at the end of the first nine months of 2009. The $83.1 million decrease in our
net debt position (total debt less cash and marketable securities) over the last twelve months is
primarily attributable to cash flows from continuing operations for the last twelve months of
$159.9 million, which includes the receipt of $172.4 million of net income tax refunds, partially
offset by $61.9 million in capital and in-store shop expenditures, a $24.3 million payment to Li &
Fung related to a buying/sourcing arrangement, $11.3 million of investments in and advances to KSJ
and $5.0 million in acquisition related payments. The effect of foreign currency translation on our
euro-denominated 5.0% Notes decreased our debt balance by $28.7 million, compared to October 3,
2009.
Accounts Receivable decreased $94.7 million, or 25.6%, at October 2, 2010 compared to
October 3, 2009, primarily due to: (i) decreased wholesale sales in all of our segments; (ii) the
impact of brands that have been licensed or exited; and (iii) the impact of fluctuations in foreign
currency exchange rates, which decreased accounts receivable by $3.6 million, or 1.0%. Accounts
receivable increased $11.5 million, or 4.4% at October 2, 2010 compared to January 2, 2010,
primarily due to seasonal timing of wholesale shipments.
Inventories decreased $29.5 million, or 7.2% at October 2, 2010 compared to
October 3, 2009, primarily reflecting: (i) improved inventory turns; (ii) the year-over-year impact of
decreased sales in our International-Based Direct Brands segment; (iii) the impact of brands that have been licensed or
exited and (iv) an increase in Domestic-Based Direct Brands inventory to support growth initiatives, including retail store expansion. The impact of changes in foreign currency exchange rates decreased inventories by $2.4
million, or 0.6% at October 2, 2010 compared to October 3, 2009. Inventories increased by $60.7
million, or 19.0% compared to January 2, 2010 primarily due to the factors noted above and seasonal timing of wholesale
shipments.
Borrowings under our revolving credit facility peaked at $190.1 million during the first
nine months of 2010. Our borrowings under this facility totaled $167.3 million at October 2, 2010,
compared to $228.1 million at October 3, 2009.
Net cash (used in) provided by operating activities of our continuing operations was
$(22.3) million in the first nine months of 2010, compared to net cash provided by operating
activities of $40.9 million in the first nine months of 2009. This $63.2 million decrease was
primarily due to a period-over-period decrease related to working capital items of $157.3 million,
which includes a $24.3 million refund paid to Li & Fung in 2010 compared to a $75.0 million payment
received from Li & Fung in 2009, each related to a buying/sourcing agreement. This decrease was
partially offset by a $72.6 million increase in net income tax refunds in 2010 compared to 2009 and
reduced losses in 2010 compared to 2009 (excluding foreign currency gains and losses, impairment
charges and other non-cash items). The operating activities of our discontinued operations used
$1.0 million and $13.9 million of cash in the nine months ended October 2, 2010 and October 3,
2009, respectively.
Net cash used in investing activities of our continuing operations was $58.2 million in the
first nine months of 2010, compared to $69.3 million in the first nine months of 2009. Net cash
used in investing activities in the nine months ended October 2, 2010 primarily reflected the use
of $50.1 million for capital and in-store shop expenditures, $5.0 million for acquisition related
payments primarily related to our previous acquisition of LUCKY BRAND and $4.0 million for
investments in and advances to KSJ. Net cash used in investing activities in the nine months ended
October 3, 2009 primarily reflected the use of $60.2 million for capital and in-store shop
expenditures and the use of $8.8 million for acquisition related payments for our previous
acquisitions of LUCKY BRAND and MAC & JAC. In addition, the investing activities of our
discontinued operations used $5.6 million and $0.6 million of cash in the nine months ended October
2, 2010 and October 3, 2009, respectively.
Net cash provided by financing activities was $82.4 million in the first nine
months of 2010, compared to $38.1 million in the first nine months of 2009. The $44.3 million
period-over-period increase primarily reflected a
Table of Contents
45
decrease of $24.1 million in cash paid for deferred financing fees and a $21.6 million increase in
net cash provided by borrowing activities, primarily due to increased cash requirements for current
year operating activities.
Commitments and Capital Expenditures
During the first quarter of 2009, we entered into an agreement with Hong Kong-based, global consumer goods exporter Li & Fung, whereby Li & Fung was appointed as our buying/sourcing agent for all of our brands and products (other than jewelry) and we received a payment of $75.0 million at closing and an additional payment of $8.0 million in the second quarter of 2009 to offset specific, incremental, identifiable expenses associated with the transaction. Our agreement with Li & Fung provides for a refund of a portion of the closing payment in certain limited circumstances, including a change of control of the Company, the sale or discontinuation of any current brand, or certain termination events. We are also obligated to use Li & Fung as our buying/sourcing agent for a minimum value of inventory purchases each year through the termination of the agreement in 2019. The licensing arrangements with JCPenney and QVC resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under our agreement with Li & Fung, we refunded $24.3 million of the closing payment received from Li & Fung in the second quarter of 2010. In addition, our agreement with Li & Fung is not exclusive; however, we are required to source a specified percentage of product purchases from Li & Fung.
During the first quarter of 2009, we entered into an agreement with Hong Kong-based, global consumer goods exporter Li & Fung, whereby Li & Fung was appointed as our buying/sourcing agent for all of our brands and products (other than jewelry) and we received a payment of $75.0 million at closing and an additional payment of $8.0 million in the second quarter of 2009 to offset specific, incremental, identifiable expenses associated with the transaction. Our agreement with Li & Fung provides for a refund of a portion of the closing payment in certain limited circumstances, including a change of control of the Company, the sale or discontinuation of any current brand, or certain termination events. We are also obligated to use Li & Fung as our buying/sourcing agent for a minimum value of inventory purchases each year through the termination of the agreement in 2019. The licensing arrangements with JCPenney and QVC resulted in the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses from the Li & Fung buying/sourcing arrangement. As a result, under our agreement with Li & Fung, we refunded $24.3 million of the closing payment received from Li & Fung in the second quarter of 2010. In addition, our agreement with Li & Fung is not exclusive; however, we are required to source a specified percentage of product purchases from Li & Fung.
We may be required to make the following additional payments in connection with our acquisitions.
If paid in cash, these payments will be funded with cash provided by operating activities or
through availability under our amended and restated revolving credit facility:
| On January 26, 2006, we acquired 100% of the equity of Westcoast Contempo
Fashions Limited and Mac & Jac Holdings Limited, which collectively design, market and sell
the Mac & Jac, Kensie and Kensiegirl apparel lines (Mac & Jac). The purchase price
totaled 26.2 million Canadian dollars (or $22.7 million), which included the retirement of
debt at closing and fees, but excluded contingent payments to be determined based upon a
multiple of Mac & Jacs earnings in fiscal years 2006, 2008, 2009 and 2010. In May of 2009,
we paid the former owners of Mac & Jac $3.8 million based on 2008 fiscal year earnings. We
estimate that the remaining contingent payment based on 2010 earnings will be in the range
of approximately $0-$5.0 million, which will be accounted for as additional purchase price
when paid. |
||
| On June 8, 1999, we acquired 85.0% of the equity of Lucky Brand Dungarees, Inc.
(Lucky Brand), whose core business consists of the Lucky Brand Dungarees line of women
and mens denim-based sportswear. The total purchase price consisted of aggregate cash
payments of $126.2 million and additional payments made from 2005 to 2009 totaling $65.0
million for 12.3% of the remaining equity of Lucky Brand. We acquired 0.4% of the equity of
Lucky Brand in January of 2010 for a payment of $5.0 million. The remaining 2.3% of the
original shares outstanding will be settled for an aggregate purchase price composed of the
following two installments: (i) a payment made in 2008 of $15.7 million that was based on a
multiple of Lucky Brands 2007 earnings, which we have accounted for as additional purchase
price and (ii) a 2011 payment that will be based on a multiple of Lucky Brands 2010
earnings, net of the 2008 payment, which we estimate will be in the range of approximately
$0-$5.0 million. |
In connection with the disposition of the LIZ CLAIBORNE Canada retail stores discussed above, 38
store leases were assigned to Laura Canada, of which we remain secondarily liable for the remaining
obligations on 31 such leases. As of October 2, 2010, the future aggregate payments under these
leases amounted to $35.3 million and extended to various dates through 2020.
Projected 2010 capital expenditures are approximately $90.0 million, compared to $72.6 million in
2009. These expenditures primarily relate to our plan to open 35-40 retail stores globally, the
continued technological upgrading of our management information systems and costs associated with
the refurbishment of selected specialty and outlet stores. Capital expenditures and working capital
cash needs will be financed with cash provided by operating activities and our amended and restated
revolving credit facility.
Table of Contents
46
As discussed below in Off-Balance Sheet Arrangements, we communicated out intent to purchase the
underlying assets of our Ohio distribution facility in the second quarter of 2011.
Debt consisted of the following:
In thousands | October 2, 2010 | January 2, 2010 | October 3, 2009 | |||||||||
5.0% Notes (a) |
$ | 481,838 | $ | 501,827 | $ | 510,182 | ||||||
6.0% Convertible Senior Notes(b) |
73,662 | 71,137 | 70,323 | |||||||||
Revolving credit facility |
167,327 | 66,507 | 228,109 | |||||||||
Capital lease obligations |
14,052 | 18,680 | 19,729 | |||||||||
Other |
-- | -- | 243 | |||||||||
Total debt |
$ | 736,879 | $ | 658,151 | $ | 828,586 | ||||||
(a) | The change in the balance of these euro-denominated notes reflected the impact of changes in foreign currency exchange rates. | |
(b) | The balance at October 2, 2010, January 2, 2010 and October 3, 2009, represented principal of $90.0 million and an unamortized debt discount of $16.3 million, $18.9 million and $19.7 million, respectively. |
For information regarding our debt and credit instruments, refer to Note 8 of Notes to
Condensed Consolidated Financial Statements.
As discussed in Note 8 of Notes to Condensed Consolidated Financial Statements, in May 2010, we
completed a second amendment to and restatement of our revolving credit agreement. Availability
under the Amended Agreement shall be the lesser of $350.0 million or a borrowing base that is
computed monthly and comprised primarily of our eligible accounts receivable and inventory. A
portion of the funds available under the Amended Agreement not in excess of $200.0 million is
available for the issuance of letters of credit, whereby standby letters of credit may not exceed
$65.0 million.
As of October 2, 2010, availability under our amended and restated revolving credit facility was as
follows:
Total | Borrowing | Outstanding | Letters of | Available | Excess | |||||||||||||||||||
In thousands | Facility (a) | Base (a) | Borrowings | Credit Issued | Capacity | Capacity (b) | ||||||||||||||||||
Revolving credit facility (a)
|
$ | 350,000 | $ | 428,023 | $ | 167,327 | $ | 25,992 | $ | 156,681 | $ | 111,681 |
(a) | Availability under the Amended Agreement is the lesser of $350.0 million or a
borrowing base comprised primarily of eligible accounts receivable and inventory. |
|
(b) | Excess capacity represents available capacity reduced by the minimum required
aggregate borrowing availability under the Amended Agreement of $45.0 million. |
Off-Balance Sheet Arrangements
On November 21, 2006, we entered into an off-balance sheet financing arrangement with a financial
institution (commonly referred to as a synthetic lease) to refinance the purchase of various land
and real property improvements associated with warehouse and distribution facilities in Ohio and
Rhode Island totaling $32.8 million. This synthetic lease arrangement expires on May 31, 2011 and
replaced the previous synthetic lease arrangement, which expired on November 22, 2006. The lessor
is a wholly-owned subsidiary of a publicly traded corporation. The lessor is a sole member, whose
ownership interest is without limitation as to profits, losses and distribution of the lessors
assets. Our lease represents less than 1.0% of the lessors assets. The lease includes our
guarantees for a substantial portion of the financing and options to purchase the facilities at
original cost; the maximum initial guarantee was approximately $27.0 million. The lessors risk
included an initial capital investment in excess of 10.0% of the total value of the lease, which is
at risk during the entire term of the lease. The equipment portion of the original synthetic lease
was sold to another financial institution and leased back to us through a seven-year capital lease
totaling $30.6 million. The lessor does not meet the definition of a variable interest entity and
therefore consolidation by the Company is not required.
We continued further consolidation of our warehouse operations with the closure of our Rhode Island
distribution facility in May 2010. In June 2010, we paid $4.8 million and received $2.8 million of
proceeds, each in connection with our former Rhode Island distribution center, which was financed
under the synthetic lease. We estimate our present obligation under the terms of the synthetic
lease will be $5.2 million for the Ohio distribution facility. That
Table of Contents
47
amount is being recognized in
SG&A over the remaining lease term. However, pursuant to the terms of the lease, in
September 2010, we communicated our intent to purchase the underlying assets of such facility and
expect to close the purchase for $28.0 million in the second quarter of 2011.
In May 2010, the terms of the synthetic lease were amended to make the applicable financial
covenants under the synthetic lease consistent with the terms of the Amended Agreement. We have not
entered into any other off-balance sheet arrangements.
Hedging Activities
Our operations are exposed to risks associated with fluctuations in foreign currency exchange
rates. In order to reduce exposures related to changes in foreign currency exchange rates, we use
foreign currency collars and forward contracts for the purpose of hedging the specific exposure to
variability in forecasted cash flows associated primarily with inventory purchases mainly by our
European and Canadian entities. As of October 2, 2010, we had forward contracts maturing through
December 2011 to sell 37.0 million Canadian dollars for $35.8 million and to sell 78.5 million euro
for $103.5 million.
The following table summarizes the fair value and presentation in the condensed consolidated
financial statements for derivatives designated as hedging instruments and derivatives not
designated as hedging instruments:
Foreign Currency Contracts Designated as Hedging Instruments | ||||||||||||||||||||||||
In thousands | Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||
Balance | Balance | |||||||||||||||||||||||
Sheet | Notional | Sheet | Notional | |||||||||||||||||||||
Period | Location | Amount | Fair Value | Location | Amount | Fair Value | ||||||||||||||||||
October 2, 2010 |
Other current assets |
$ | 14,565 | $ | 774 | Accrued expenses |
$ | 124,739 | $ | 5,531 | ||||||||||||||
January 2, 2010 |
Other current assets |
26,408 | 586 | Accrued expenses |
74,634 | 3,091 | ||||||||||||||||||
October 3, 2009 |
Other current assets |
-- | -- | Accrued expenses |
116,669 | 7,827 | ||||||||||||||||||
Foreign Currency Contracts Not Designated as Hedging Instruments | ||||||||||||||||||||||||
In thousands | Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||
Balance | Balance | |||||||||||||||||||||||
Sheet | Notional | Sheet | Notional | |||||||||||||||||||||
Period | Location | Amount | Fair Value | Location | Amount | Fair Value | ||||||||||||||||||
October 2, 2010 |
Other current assets |
$ | -- | $ | -- | Accrued expenses |
$ | -- | $ | -- | ||||||||||||||
January 2, 2010 |
Other current assets |
-- | -- | Accrued expenses |
12,015 | 690 | ||||||||||||||||||
October 3, 2009 |
Other current assets |
1,938 | 2 | Accrued expenses |
11,979 | 588 |
Table of Contents
48
The following table summarizes the effect of foreign currency exchange contracts on the condensed
consolidated financial statements:
Amount of Gain | ||||||||||||||||
Location of Gain or | Amount of Gain | or (Loss) | ||||||||||||||
Amount of Gain or | (Loss) Reclassified | or (Loss) | Recognized in | |||||||||||||
(Loss) Recognized | from Accumulated | Reclassified from | Operations on | |||||||||||||
in Accumulated | OCI into Operations | Accumulated OCI | Derivative | |||||||||||||
OCI on Derivative | (Effective and | into Operations | (Ineffective | |||||||||||||
In thousands | (Effective Portion) | Ineffective Portion) | (Effective Portion) | Portion) | ||||||||||||
Nine months ended
October 2, 2010 |
$ | 1,174 | Cost of goods sold | $ | (4,031 | ) | $ | (277 | ) | |||||||
Nine months ended
October 3, 2009 |
(6,886 | ) | Cost of goods sold | 2,766 | (1,003 | ) | ||||||||||
Three months ended
October 2, 2010 |
(7,787 | ) | Cost of goods sold | 1,517 | (153 | ) | ||||||||||
Three months ended
October 3, 2009 |
(7,246 | ) | Cost of goods sold | (3,137 | ) | (879 | ) |
As of October 2, 2010, approximately $0.4 million of unrealized losses in Accumulated other
comprehensive loss relating to cash flow hedges will be reclassified into earnings in the next
twelve months as the inventory is sold.
We hedge our net investment position in certain euro-denominated functional currency subsidiaries
by designating a portion of the 350.0 million euro-denominated bonds as the hedging instrument in a
net investment hedge. To the extent the hedge is effective, related foreign currency translation
gains and losses are recorded within Other comprehensive loss. Translation gains and losses related
to the ineffective portion of the hedge are recognized in current operations.
The related translation gains (losses) recorded within Other comprehensive loss were $8.2 million
and $(14.4) million for the nine months ended October 2, 2010 and October 3, 2009, respectively,
and $(17.3) million and $(12.5) million for the three months ended October 2, 2010 and October 3,
2009, respectively. During the first quarter of 2009, we dedesignated 143.0 million of the
euro-denominated bonds as a hedge of our net investment in certain euro functional currency
subsidiaries due to a decrease in the carrying value of the hedged item below 350.0 million euro.
During the first quarter of 2010, we dedesignated an additional 66.0 million of the
euro-denominated bonds as a hedge of our net investment in certain euro functional currency
subsidiaries due to a further decline in the carrying value of the hedged item. The associated
foreign currency translation gains (losses) of $12.1 million and $(9.9) million for the nine months
ended October 2, 2010 and October 3, 2009, respectively, and $(25.7) million and $(8.6) million for
the three months ended October 2, 2010 and October 3, 2009, respectively, are reflected within
Other income (expense), net on the accompanying Condensed Consolidated Statements of Operations.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the condensed consolidated financial statements. These estimates and assumptions
also affect the reported amounts of revenues and expenses.
Critical accounting policies are those that are most important to the portrayal of our financial
condition and results of operations and require managements most difficult, subjective and complex
judgments as a result of the need to make estimates about the effect of matters that are inherently
uncertain. Our most critical accounting policies are summarized in Note 1 of Notes to Consolidated
Financial Statements and in Managements Discussion and Analysis of Financial Condition and Results
of Operations in Item 7, each included in our Annual Report on Form 10-K for the fiscal year ended
January 2, 2010. There were no significant changes in our critical accounting policies during the
nine months ended October 2, 2010. In applying such policies, management must use some amounts that
are based upon its informed judgments and best estimates. Due to the uncertainty inherent in these
estimates, actual results could differ from estimates used in applying the critical accounting
policies. Changes in such estimates, based on more accurate future information, may affect amounts
reported in future periods.
Table of Contents
49
Estimates by their nature are based on judgments and available information. The estimates that we
make are based upon historical factors, current circumstances and the experience and judgment of
our management. We evaluate our
assumptions and estimates on an ongoing basis and may employ outside experts to assist in our
evaluations. Therefore, actual results could materially differ from those estimates under different
assumptions and conditions.
ACCOUNTING PRONOUNCEMENTS
For a discussion of recently adopted accounting pronouncements, see Note 1 of Notes to Condensed
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We finance our capital needs through available cash and marketable securities, operating cash
flows, letters of credit, our synthetic lease and our amended and restated revolving credit
facility. Our floating rate revolving credit facility exposes us to market risk for changes in
interest rates. Loans thereunder bear interest at rates that vary with changes in prevailing market
rates.
We do not speculate on the future direction of interest rates. As of October 2, 2010, January 2,
2010 and October 3, 2009, our exposure to changing market rates was as follows:
In millions | October 2, 2010 | January 2, 2010 | October 3, 2009 | |||||||||
Variable rate debt |
$167.3 | $66.5 | $228.1 | |||||||||
Average interest rate |
4.55% | 6.87% | 6.85% |
A ten percent change in the average rate would have resulted in a $0.4 million change in interest
expense during the nine months ended October 2, 2010.
As of October 2, 2010, we have not employed interest rate hedging to mitigate such risks with
respect to our floating rate facility. We believe that our euro Notes and the Convertible Notes,
which are fixed rate obligations, partially mitigate the risks with respect to our variable rate
financing.
We transact business in multiple currencies, resulting in exposure to exchange rate fluctuations.
We mitigate the risks associated with changes in foreign currency exchange rates through the use of
foreign exchange forward contracts and collars to hedge transactions denominated in foreign
currencies for periods of generally less than one year. Gains and losses on contracts which hedge
specific foreign currency denominated commitments are recognized in the period in which the
underlying hedged item affects earnings.
At October 2, 2010, January 2, 2010 and October 3, 2009, we had forward contracts aggregating to
$139.3 million, $97.4 million and $119.5 million, respectively. We had outstanding foreign currency
collars with net notional amounts aggregating to $15.7 million and $11.1 million at January 2, 2010
and October 3, 2009, respectively. Unrealized gains (losses) for outstanding foreign currency
options and foreign exchange forward contracts were $(2.2) million at October 2, 2010, $(2.5)
million at January 2, 2010 and $(7.8) million at October 3, 2009. A sensitivity analysis to changes
in the foreign currencies when measured against the US dollar indicated that if the US dollar
uniformly weakened by 10.0% against all of the hedged currency exposures, the fair value of these
instruments would decrease by $12.8 million at October 2, 2010. Conversely, if the US dollar
uniformly strengthened by 10.0% against all of the hedged currency exposures, the fair value of
these instruments would increase by $14.9 million at October 2, 2010. Any resulting changes in the
fair value of the hedged instruments would be partially offset by changes in the underlying balance
sheet positions. The sensitivity analysis assumes a parallel shift in foreign currency exchange
rates. The assumption that exchange rates change in a parallel fashion may overstate the impact of
changing exchange rates on assets and liabilities denominated in foreign currency. We do not hedge
all transactions denominated in foreign currency.
We hedge our net investment position in certain euro functional currency subsidiaries by
designating a portion of the 350.0 million euro-denominated bonds as the hedging instrument in a
net investment hedge. As discussed above (see Hedging Activities), we dedesignated 209.0 million
of the euro-denominated bonds as a hedge of our net investment in certain euro functional currency
subsidiaries. A sensitivity analysis to changes in the US dollar when measured against the euro
indicated if the US dollar weakened by 10.0% against the euro, a translation loss of $28.8 million
associated with the ineffective portion of the hedge would be recorded in Other income (expense),
net.
Table of Contents
50
Conversely, if the US dollar strengthened by 10.0% against the euro, a translation gain of
$28.8 million associated with the ineffective portion of the hedge would be recorded in Other
income (expense), net.
We are exposed to credit related losses if the counterparties to our derivative instruments fail to
perform their obligations. We systemically measure and assess such risk as it relates to the credit
ratings of these counterparties, all of which currently have satisfactory credit ratings and
therefore we do not expect to realize losses associated with counterparty default.
ITEM 4. CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, evaluated our disclosure controls and procedures at the end of our third
fiscal quarter. Our Chief Executive Officer and Chief Financial Officer concluded that, as of
October 2, 2010, our disclosure controls and procedures were effective to ensure that all
information required to be disclosed is recorded, processed, summarized and reported within the
time periods specified, and that information required to be filed in the reports that we file or
submit under the Securities Exchange Act of 1934 (the Exchange Act) is accumulated and
communicated to our management, including our principal executive and principal financial officers,
to allow timely decisions regarding required disclosure. There were no changes in our internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 2, 2010 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A complaint captioned The Levy Group, Inc. v. L.C. Licensing, Inc. and Liz Claiborne, Inc. was
filed in the New York Supreme Court in New York County on January 21, 2010. The complaint alleged
claims for breach of contract, breach of the implied covenant of good faith and fair dealing,
promissory estoppel and tortious interference against L.C. Licensing, Inc. and the Company in
connection with a trademark licensing agreement between L.C. Licensing, Inc. and its licensee, The
Levy Group, Inc. The Levy Group, Inc.s alleged claims purportedly arose from the Companys
decision to sign a long-term licensing agreement with JCPenney. The complaint sought an award of
$100.0 million in compensatory damages plus punitive damages. On March 4, 2010, the Company moved
to dismiss the complaint for failure to state a claim. On October 12, 2010, the Court issued an
order granting the motion and dismissing all of The Levy Group, Inc.s claims with prejudice. The
Levy Group, Inc. has until November 18, 2010 to file a notice of appeal with respect to this order.
A purported class action complaint captioned Angela Tyler (individually and on behalf of all others
similarly situated) v. Liz Claiborne, Inc, Trudy F. Sullivan and William L. McComb, was filed in
the United States District Court in the Southern District of New York on April 28, 2009 against the
Company, its Chief Executive Officer, William L. McComb and Trudy Sullivan, a former President of
the Company. The complaint alleges certain violations of the federal securities laws, claiming
misstatements and omissions surrounding the Companys wholesale business. The Company believes that
the allegations contained in the complaint are without merit, and the Company intends to defend
this lawsuit vigorously. The Company moved to dismiss Plaintiffs Second Amended Complaint on October 4, 2010.
The Company is a party to several other pending legal proceedings and claims. Although the outcome
of any such actions cannot be determined with certainty, management is of the opinion that the
final outcome of any of these actions should not have a material adverse effect on the Companys
financial position, results of operations, liquidity or cash flows.
Table of Contents
51
ITEM 1A. RISK FACTORS
You should carefully consider the risk factors included in our Annual Report on Form 10-K for the
year ended January 2, 2010, in addition to other information included in this Quarterly Report on
Form 10-Q and in other documents we file with the SEC, in evaluating the Company and its business.
If any of the risks occur, our business, financial condition and operating results could be
materially adversely affected. We caution the reader that these risk factors may not be exhaustive.
We operate in a continually changing business environment and new risks emerge from time to time.
Management cannot predict such new risk factors, nor can we assess the impact, if any, of such new
risk factors on our business or to the extent which any factor or combination of factors may impact
our business.
There have not been any material changes during the quarter ended October 2, 2010 from the risk
factors disclosed in our Annual Report on Form 10-K for the year ended January 2, 2010, other than
the following:
Our ability to continue to have the liquidity necessary, through cash flows from operations and
availability under our second amended and restated revolving credit facility, may be adversely
impacted by a number of factors, including the level of our operating cash flows, our ability to
maintain established levels of availability under, and to comply with the other covenants included
in, our second amended and restated revolving credit facility and the borrowing base requirement in
our amended and restated revolving credit facility that limits the amount of borrowings we may make
based on a formula of, among other things, eligible accounts receivable and inventory; the minimum
availability covenant in our amended and restated revolving credit facility that requires us to
maintain availability in excess of an agreed upon level and whether holders of our Convertible
Notes issued in June 2009 will, if and when such notes are convertible, elect to convert a
substantial portion of such notes, the par value of which we must currently settle in cash.
Our primary ongoing cash requirements are to: (i) fund seasonal working capital needs (primarily
accounts receivable and inventory); (ii) fund capital expenditures related to the opening and
refurbishing of our specialty and outlet stores, normal maintenance activities and the purchase of
our Ohio distribution facility in the second quarter of 2011; (iii) fund remaining efforts
associated with our streamlining initiatives, which include consolidation of office space, store
closures and reductions in staff; (iv) invest in our information systems; and (v) fund operational
and contractual obligations. We also require cash to fund payments related to outstanding earn-out
provisions of certain of our previous acquisitions.
In May 2010, we completed a second amendment to and restatement of our revolving credit facility
(as amended, the Amended Agreement). Under the Amended Agreement, our aggregate commitments under
the facility were reduced to $350.0 million from $600.0 million, and the maturity date was extended
from May 2011 to August 2014, provided that in the event that our existing 350.0 million 5.0% Notes
due July 2013 are not refinanced, purchased or defeased prior to April 8, 2013, then the maturity
date shall be April 8, 2013, and in the event that our 6.0% Convertible Senior Notes due June 2014
(the Convertible Notes) are not refinanced, purchased or defeased prior to March 15, 2014, then
the maturity date shall be March 15, 2014. In both circumstances, if any such refinancing or
extension provides for a maturity date that is earlier than 91 days following August 6, 2014, then
the maturity date shall be the date that is 91 days prior to the maturity date of such notes. We
are subject to various covenants and other requirements, such as financial requirements, reporting
requirements and negative covenants. Pursuant to the May 2010 amendment, we are required to
maintain minimum aggregate borrowing availability of not less than $45.0 million and must apply
substantially all cash collections to reduce outstanding borrowings under the Amended Agreement
when availability under the Amended Agreement falls below the greater of $65.0 million and 17.5% of
the then-applicable aggregate commitments. Our borrowing availability under the Amended Agreement
is determined primarily by the level of our eligible accounts receivable and inventory balances. In
addition, the Amended Agreement removes the springing fixed charge coverage covenant that was a
condition of the prior amended and restated revolving credit agreement.
During the first nine months of 2010, we received $171.1 million of net income tax refunds on
previously paid taxes primarily due to a Federal law change in 2009 allowing our 2008 or 2009
domestic losses to be carried back for five years, with the fifth year limited to 50.0% of taxable
income. We repaid amounts outstanding under our amended and restated revolving credit facility with
the amount of such refunds. As a result of the US Federal tax law change extending the carryback
period from two to five years and our carryback of our 2009 tax loss to 2004 and 2005, the IRS has
the ability to re-open its past examinations of 2004 and 2005.
Table of Contents
52
As discussed above, under our Amended Agreement, we are subject to minimum borrowing availability
levels and various other covenants and other requirements, such as financial requirements,
reporting requirements and various
negative covenants. There can be no certainty that availability under the Amended Agreement will be
sufficient to fund our liquidity needs. Based upon our current projections, we currently anticipate
that our borrowing availability will be sufficient for at least the next 12 months. The sufficiency
and availability of our sources of liquidity may be affected by a variety of factors, including,
without limitation: (i) the level of our operating cash flows, which will be impacted by retailer
and consumer acceptance of our products, general economic conditions and the level of consumer
discretionary spending; (ii) the status of, and any further adverse changes in, our credit ratings;
(iii) our ability to maintain required levels of borrowing availability and other covenants
included in our debt and credit facilities; (iv) the financial wherewithal of our larger department
store and specialty store customers; (v) our ability to successfully execute on the licensing
arrangements with JCPenney and QVC with respect to the LIZ CLAIBORNE family of brands; (vi)
interest rate and exchange rate fluctuations; and (vii) whether holders of the Convertible Notes,
if and when such notes are convertible, elect to convert a substantial portion of such notes, the
par value of which we must currently settle in cash. Also, our agreement with Li & Fung provides
for a refund of a portion of the $75.0 million closing payment in certain limited circumstances,
including a change in control of our Company, the sale or discontinuation of any of our current
brands, or certain termination events. The licensing arrangements with JCPenney and QVC resulted in
the removal of buying/sourcing for a number of LIZ CLAIBORNE branded products sold under these
licenses from the Li & Fung buying/sourcing arrangement. As a result, under our agreement with Li &
Fung, we refunded $24.3 million of the closing payment received from Li & Fung during the second
quarter of 2010. Our agreement with Li & Fung is not exclusive; however, we are required to source
a specified percentage of product purchases from Li & Fung.
In addition, our Amended Agreement contains a borrowing base that is determined primarily by the
level of our eligible accounts receivable and inventory. If we do not have a sufficient borrowing
base at any given time, borrowing availability under our Amended Agreement may trigger the
requirement to apply substantially all cash collections to reduce outstanding borrowings or default
and also may not be sufficient to support our liquidity needs. Insufficient borrowing availability
under our Amended Agreement would likely have a material adverse effect on our business, financial
condition, liquidity and results of operations. Furthermore, a breach of the minimum aggregate
availability covenant would trigger an immediate Event of Default. An acceleration of amounts
outstanding under the Amended Agreement would likely cause cross-defaults under the Companys other
outstanding indebtedness, including the Convertible Notes and our 5.0% 350.0 million euro Notes due
2013. We currently believe that the financial institutions under the Amended Agreement are able to
fulfill their commitments, although such ability to fulfill commitments will depend on the
financial condition of our lenders at the time of borrowing.
The Convertible Notes are convertible during any fiscal quarter if the last reported sale price of
our common stock during 20 out of the last 30 trading days in the prior fiscal quarter equals or
exceeds $4.2912 (which is 120% of the conversion price). As a result of stock price performance
during the quarter ended October 2, 2010, the Convertible Notes are convertible during the fourth
quarter of 2010. As previously disclosed in connection with the issuance of the Convertible Notes,
we have not yet obtained stockholder approval under the rules of the New York Stock Exchange for
the issuance of the full amount of common stock issuable upon conversion of the Convertible Notes.
Until such approval is obtained, if the Convertible Notes are surrendered for conversion, we must
pay the $1,000 principal amount of the Convertible Notes in cash and may settle the remaining
conversion value in the form of cash, stock or a combination of cash and stock. Although we
consider the conversion of a material amount of the Convertible Notes in the near future to be
unlikely, if all or a substantial portion of the outstanding Convertible Notes were so converted
and we were required to settle all of the converted Convertible Notes in cash, then we might not
have sufficient liquidity to meet our obligations to pay the amounts required upon conversion of
the Convertible Notes and maintain the requisite levels of availability required under the Amended
Agreement.
Compliance with the minimum aggregate borrowing availability covenant is dependent on the results
of our operations, which are subject to a number of factors including current economic conditions
and levels of consumer spending. The recent economic environment has resulted in significantly
lower employment levels, disposable income and actual and/or perceived wealth, significantly lower
consumer confidence and significantly reduced retail sales. Further reductions in consumer
spending, as well as a failure of consumer spending levels to rise to previous levels, or a
continuation or worsening of current economic conditions would adversely impact our net sales and
cash flows. Should we be unable to comply with the requirements in the Amended Agreement, we would
be unable to borrow under such agreement, and any amounts outstanding would become immediately due
and payable unless we were able to secure a waiver or an amendment under the Amended Agreement.
Should we be unable to borrow under the Amended Agreement, or if outstanding borrowings thereunder
become immediately due and payable, our
Table of Contents
53
liquidity would be significantly impaired, which would have
a material adverse effect on our business, financial condition and results of operations. In
addition, an acceleration of amounts outstanding under the Amended
Agreement would likely cause cross-defaults under our other outstanding indebtedness, including the
Convertible Notes and the 5.0% Notes.
Because of the continuing uncertainty and risks relating to future economic conditions, including
consumer spending in particular, we may, from time to time, explore various initiatives to improve
our liquidity, including issuance of debt securities, sales of various assets, additional cost
reductions and other measures. In addition, where conditions permit, we may also, from time to
time, seek to retire, exchange or purchase our outstanding debt in privately negotiated
transactions or otherwise. We may not be able to successfully complete any of such actions if
necessary.
We may not be able to complete the closure of our Liz Claiborne branded outlet operations on terms
satisfactory to us, and such closure may have an adverse effect on our results of operations and
cash flows.
On July 14, 2010, our Board of Directors approved plans to exit our 87 LIZ CLAIBORNE branded outlet
stores in the United States and Puerto Rico. These closings are consistent with the capital
efficient, licensing-oriented model for the LIZ CLAIBORNE brand that is reflected in our licensing
agreements with JCPenney and QVC. We expect the exit process to be completed in early 2011.
Although we expect that the completion of the exit process would eliminate the material operating
losses of the LIZ CLAIBORNE branded outlet business, some of the affected stores are subject to
long-term leases. We may not be able to terminate our outlet store leases on satisfactory economic
terms or, if permissible under the leases, convert the stores to another use or assign such leases
to one or more third parties. In addition, we face the risk of liquidating our current inventory on
an abbreviated time frame and at reduced prices. As a result, we may incur a loss on such current
inventory at such outlets and inventory on order that is destined for such outlets. We may also
incur lease termination, severance and other costs related to this action. The reduction in the
visibility of the LIZ CLAIBORNE brands resulting from the closure or conversion of the current 87
locations may limit or impair the LIZ CLAIBORNE brands awareness and recognition, which may
negatively impact the sales of those LIZ CLAIBORNE brands made by JCPenney and QVC, and our
potential revenue from such licensing arrangements may also be negatively impacted.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes information about purchases by the Company during the three months
ended October 2, 2010 of equity securities that are registered by the Company pursuant to Section
12 of the Exchange Act:
Maximum | ||||||||||||||||
Approximate | ||||||||||||||||
Total Number of | Dollar Value of | |||||||||||||||
Shares Purchased as | Shares that May | |||||||||||||||
Total Number | Part of Publicly | Yet Be Purchased | ||||||||||||||
of Shares | Announced Plans or | Under the Plans or | ||||||||||||||
Purchased | Average Price | Programs | Programs | |||||||||||||
Period | (In thousands) (a) | Paid Per Share | (In thousands) | (In thousands) (b) | ||||||||||||
July 4, 2010 - July 31, 2010 |
3.8 | $ | 4.74 | -- | $ | 28,749 | ||||||||||
August 1, 2010 - September 4, 2010 |
11.4 | 4.48 | -- | 28,749 | ||||||||||||
September 5, 2010 - October 2, 2010 |
-- | -- | -- | 28,749 | ||||||||||||
Total -13 Weeks Ended October 2, 2010 |
15.2 | $ | 4.54 | -- | $ | 28,749 | ||||||||||
(a) | Includes shares withheld to cover tax-withholding
requirements relating to the vesting of restricted stock
issued to employees pursuant to the Companys
shareholder-approved stock incentive plans. |
|
(b) | The Company initially announced the authorization of a
share buyback program in December 1989. Since its
inception, the Companys Board of Directors has authorized
the purchase under the program of an aggregate of $2.275
billion of the Companys stock. The Amended Agreement
currently restricts the Companys ability to repurchase
stock. |
ITEM 5. OTHER INFORMATION
None.
Table of Contents
54
ITEM 6. EXHIBITS
10.1 |
Form of Award for Liz Claiborne, Inc. 2010 Profitability Incentive Awards. | |
31(a)
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31(b)
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32(a)*
|
Certification of Chief Executive Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32(b)*
|
Certification of Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | A signed original of the written statement required by Section 906 has
been provided to the Company and will be retained by the Company and
forwarded to the SEC or its staff upon request. |
Table of Contents
55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATE: | November 4, 2010 | |||||||
LIZ CLAIBORNE, INC. | LIZ CLAIBORNE, INC. | |||||||
By: | /s/ Andrew Warren | By: | /s/ Elaine H. Goodell | |||||
ANDREW WARREN | ELAINE H. GOODELL | |||||||
Chief Financial Officer | Vice President - Corporate Controller and | |||||||
(Principal financial officer) | Chief Accounting Officer | |||||||
(Principal accounting officer) |