LIZ: We Like The Set-up

A confluence of thoughts this morning made me come back to one of the most hated names in retail – Liz Claiborne.

US investors didn’t pay much attention this morning to the LVMH acquisition of a majority stake in Bulgari. It’s not the $5.2bn price tag or 27x EV/EBITDA multiple that matters to us as much as the simple fact that there will always be a market for great content. LVMH would have no interest in LIZ, but it took me back to the following comments, which are more relevant.

On Feb 17th PPR’s (Gucci parent) Francois Pinault is on the tape in saying that acquisitions remain core to the story (though he did note that the luxury side of the house will grow organically). PPR is not afraid to step outside its traditional box to buy a good brand that gets them to a new luxury consumer. The best case there is Puma ($7bn) deal in April 2007.

That brings me to Liz Claiborne. I know that it’s tough to use Liz Claiborne in the same sentence as Gucci or Bulgari. Trust me, I’m not going to make the case that they compete.

But can anyone explain to me why there are so many LBOs and activist investors hitting the tape for retail-related businesses at peak margins? But no one wants to get their hands dirty on the junk?

Yes, LIZ has major problems. Not the least of which is that I can’t even get people to give 5 minutes of their calendar to discuss this name. But we get to a sum of parts between $10-$12 per-share. Interesting that we model Kate Spade to be worth $3.75 per share alone. LIZ is at $5.41 today.

I understand that ‘break up values’ never work for valuation purposes. On the same token, my handy dandy valuation textbook doesn’t tell me why ‘problem child’ stocks gap up massively when management changes are announced. Try using a p/e analysis on that one.

I noted the ‘good is good/bad is good’ call over a year ago and I proved to be flat-out wrong. Perhaps the biggest area I was wrong was in my opinion that no Board worth its salt would ever let these results continue without major management changes, or an outright breakup of the company.

Well…The environment has changed, and the Board is allowing McComb to move forward with his current plans to; a) grow JCPenney/QVC, b) close underperforming retail stores, and c) fix Mexx.

Thus far, he’s underperforming on the margin – though cash flow is still not near a level that would threaten covenants. We’ll know that within two quarters.

In the end, will the nine outside Directors (three seats turn each year) allow this ship to sink if the current initiatives don’t work? Never say never. I hope that the answer is ‘No.’ But Hope is not part of Hedgeye’s investment process. Before that question needs to be answered I’m going to bet on a) our earnings and cash flow model, and more people taking the time to analyze it over the next 3 weeks.

As an aside, LIZ is hosting a March 31st analyst meeting in NYC. This is one where they’ll have all the heads of all business units. It should be insightful, to say the least.