LIZ: You Gotta Buy This Thing

We met with the management of LIZ Friday following the release of our LIZ Black Book titled “Get in While you Can.” If anything, we came away even more positive on LIZ. Here are our top takeaways:

  • Asset Sales: The recent sales of LIZ’s fragrance business and Mexx are not likely to be the company’s last before year-end. With both deals coming after management’s recent public stance that it has “multiple irons in the fire” it has investors questioning if deal activity is done for now. The reality is that we’d be surprised if any of the brands currently in the Partnered Brands portfolio are around this time next year. With the Mexx deal now out of the way, management is highly focused on reducing debt. Additional sales are the most realistic means to this end near-term.
  • Juicy Product Evolution: It’s rare that a management team isn’t bullish on product for an upcoming season, but we’ve met with CEO Bill McComb on multiple occasions and it was hard not to notice his incremental bullishness on Juicy. This is great to see from a timing perspective as were at the point where Spring orders are just coming in. With the company now starting to receive orders for Spring ’12 when the first of Leann Nealz’ new product will hit shelves, there’s reason to believe a turn in Juicy is more reality than hope at this stage. When all anyone wants to talk about is momentum at Kate, this was great to hear.
  • Juicy Asia: The partnership for Juicy in Asia (similar to the one in place with Kate) that was expected to be announced by July is now expected to be made by year-end. Resources were reallocated to get the Mexx deal done this summer – nothing else to read into regarding the delay here. Our sense is that comps are still running up +30%-60%.
  • Juicy Management: Similar to the leadership structure at Kate Spade, we think that LIZ will soon hire a co-president who will be tasked with running the operational side of Juicy alongside Leann Nealz. Not only should this add to the bench strength at Juicy, but more importantly will free up McComb’s time to focus elsewhere (i.e. consummating deals) and will allow Leann to focus time on where she’s strong.
  • Lucky: Q4 will be a key quarter for brand and is likely when operating margins should flip from a marginal loss to positive.
  • Kate: Apparel now accounts for ~30% of sales (i.e. it’s not just handbags). While management wants to keep apparel at less than 50% on a go forward basis, the goal would be for the category to settle in at 30%-40% of sales.
  • CapEx is running at ~$80mm annually, but will be reduced to ~$60mm post Mexx.
  • Guidance: When management provided its guidance for $180mm-$220mm in EBITDA for next year they assumed a consumption environment similar to the 2H of 2009, were only 2-months into the positive comp trends at Lucky, and had not yet seen the incremental margin improvement yet at Juicy. They remain cautious seemingly because of what they’re reading/hearing, not because of what they are seeing. We’re at $230mm in EBITDA next year.

Lastly, while not a specific takeaway from the meeting per se, we’d note that our view on LIZ has been largely received with blank stares and considerable disinterest from clients over the last few quarters. That is starting to change as the path towards earnings visibility begins to improve at LIZ. This remains one of our top long ideas.

Please see our recent Black Book “Get in While You Can” for far more detail on LIZ and the key developments within each of the company’s brands.

Casey Flavin

Director