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    MARKET EDGES

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For those of you who think you’ve missed LIZ, here’s your shot.

Classic LIZ. Not even a full quarter elapses since the company reset expectations on the sale of JCP back in October and management is taking its EBITDA outlook for F12 down by $5-$10mm. But there’s more here than meets the eye.

We think there are two key factors that make this time different; 1) sales aren’t the issue (unlike the last THREE years), and 2) it is a cost budgeting issue, and LIZ is making headcount changes accordingly as the CFO is leaving the company.

To be clear, there is no change to our underlying thesis, which is that this is a 180 degree shift in the characteristics of the company. It is rapidly moving from an unfocused, unprofitable, capital intensive portfolio of marginal brands with meaningful risk of bankruptcy where people stick to price/sales or EBITDA valuation metrics; to being a super-focused portfolio of premium brands, with significantly lower capital requirements, higher margins, and global growth opportunity. In the end, we think that investors will shift meaningfully in sentiment from valuing LIZ on a Sales and EBITDA basis to looking at raw earnings power over a multi-year period.

  1. No company in their right mind would make a revenue call this early in the year. This is all about shared costs as 5th & Pacific kicks off its first year.
  2. The corporate expense line is $70-$75mm as of the last month with ~$15mm in reductions earmarked for next year. Roughly $10mm of that was associated with Mexx and expected to be cut on the front end so the remaining $5mm or so appears to have hit a snag and is either taking longer than expected or is no longer available. We’re fairly confident it’s not the later. This is the element of the equation that management is supposed to have greater visibility on; however, forecast accuracy on the cost side of its business clearly continues to be a challenge.
  3. Therein enters the second half of the announcement that after four years Andy Warren will be stepping down as CFO in March. Our sense is that the transition is a bit less abrupt than it appears in the press release. Simply put, McComb cannot afford for a CFO to be pushed out abruptly. Keep in mind that his own contract comes up for renewal in six months. The last thing he can afford is for the wheels to be falling off the story at that time because six months earlier, a CFO who is long gone left problems tucked away in the closet. McComb needs a nice, peaceful easy smooth transition. One thing is for certain, it will certainly be easier for LIZ to attract quality talent then is was just 4-months ago.

We’re not going to go through the fruitless exercise of what the stock will do today. We’ll let the price speak for itself.


The post-market activity (-8%) puts the stock where it was six days ago (when the re-branding was announced) – before the Street started to bake in the low likelihood that a negative release was not coming at ICR.


In looking at valuation, the $5-$10mm change in F12 EBITDA most likely reflects a delay in execution rather than any real structural change to the underlying fundamental opportunity for $20-$30mm of cost saves over time. That said, we need to acknowledge the reality that it could be $0.50-$1.00 in valuation that is lost forever.


But one thing that is vital here is that THIS IS NOW A GROWTH COMPANY. We are not going to beat up a growth story for averting cost cuts. The only way that Kate can double, then double again, then double again is to invest capital. Same as it relates to taking Juicy global, and continuing to fix Lucky.

Would you rather be JNY, who lowered guidance again today and offset a big revenue miss with SG&A cuts? No way. That WILL catch up with them, I can promise you that.


So the bottom line is that if the market freaks out over this, then we say ‘let it.’

For the people who have seen this name slip between their fingertips and think that ‘they’ve missed it’, here’s a late holiday gift.


Happy New Year!

LIZ: A Gift - LIZ 1Yr Comps

 

LIZ: A Gift - LIZ 2Yr Comps