LIZ: Positive Delta


LIZ’ guidance update provides us with a few nuggets on the state of business through February. There are puts and takes, but for a company that has only dished out disappointing news, this is somewhat of a positive. We still think that LIZ continues to have one of the most positive asymmetric risk profiles in  retail.  


In looking through the details of the release, the reality is that with the company maintaining its 2011 EBITDA outlook there is little to dissect here beyond the current sales performance within the company’s Direct Brands. As you can see in the chart below tracking comp trajectory by brand, sales have improved sequentially at both Mexx Europe and Lucky following disappointing December results, Juicy has picked up as well after decelerating in January and Kate Spade remains off the charts with comps up 90% YTD. These trends are consistent with an acceleration in the 2-year comps as well. Mexx Canada is the only negative callout with sales decelerating on the margin in February. As a reminder, while Fx is expected to provide a modest tailwind for Mexx in Q1, it provided a positive benefit of more than 6% last year suggesting that underlying sales are indeed improving. Overall, sales in the Direct Brands appear to be coming in slightly better than expected.


As it relates to Q1, the company also provided initial EBITDA guidance that suggests profitability is coming in lighter than the consensus (though LIZ did not offer any guidance before hand). The implied EBIT guidance suggests a loss of $57mm-to-$52mm compared to our estimate of a $29mm equating to EPS of (-$0.53-$0.57) vs. our (-$0.34E) and the Street at (-$0.27E) assuming a 25% tax rate. While likely due to a combination of both gross margin contraction as a result of both inventory clearance and inability to leverage SG&A, we expect the former to improve with stronger sales over the balance of the year and an update on the later at the analyst day in April.


It’s also worth noting the timing of the analyst day which was moved from the original date of March 31st. The sole reason for moving back the analyst day is due to management’s roadshow associated with the proposed offering of $200mm senior secured notes – the proceeds of which will be used to refinance the 5% Euro notes due July 2013 providing added flexibility.


Net/net, this is not a name without hair – the 1H was and continues to be one that is expected to be a choppy; however, with the full-year EBITDA outlook unchanged and sales trends improving on the margin, we view the announcement as a slight net positive for LIZ.


LIZ: Positive Delta - LIZ Comp Traj 3 11


Casey Flavin


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