So Bill, the question I pose to you is quite simple. Do you want equity value or not? The path you are on will erase your remaining $3 stock price faster than you can say “fashionista.” Will your options struck at $40 ever be worth anything? I doubt it. But the fact remains that you’ve got a couple of major call options that will, if exercised, 1) triple your stock price, 2) mitigate the need for a dividend cut, 3) fund your Oct ’09 debt payment, and 4) make you some friends with your company’s long-term shareholders.
It’s a simple question, no? It’s one that I thought that the Board would be asking a few hundred percent higher. I outlined two key modeling scenarios in my 11/11 note (LIZ: Dismantling An Empire) – one where management remains in denial and lets its business and balance sheet erode, and the other where it takes the bull by the horns strategically and makes the current equity valuation (or lack thereof) appear to be a gift. Here’s some added color as to why I get to LIZ being a 3-bagger if this team actually decides to embrace a proactive strategy to create value.
Assumptions in my sum-of-parts analysis.
1. Shrink. Get rid of Mexx. Aside from being an earnings drag, it is a massive working capital drain. $1bn in revenue with 75% in Europe – and the brand has not been able to make money in a weak dollar environment? Sell the leases (which you can do in most parts of Europe). See if you can get a couple of bucks for it. If not, eat crow and give it away. In the US, your leases are in good shape. Take advantage of them. Milk them. Stop trying to grow.
2. Unwind the parts of the core Liz Claiborne brand that should never have existed in the first place. This was once a $1.4bn brand. By last year it was $1bn. Take it below $700mm to a core level where it stands a chance to actually be relevant to its core customer. The asset valuation below shows that at this level, I assume margins of only 6%, and give it a 2x EBITDA multiple. Yes, I am valuing the venerable ‘Liz Claiborne’ trademark at only $125mm (or less than 0.2x sales for a non-seasonal, non-capital-intensive asset).
3. Get by on 2% of sales in corporate expenses. VFC does it. Why can’t you?
4. Juicy Coture, Lucky Brand, and Kate Spade keep mid/high-teens segment margins, and are valued at 4x EBITDA.
5. LIZ frees up $150mm in working capital from Mexx divestiture, and gets another $150mm for all asset sales remaining (including Mexx).