LIZ: Initial Take… I Like It

Overall…good stuff. Had a write down, and they guided low. But they will beat – as in this Q for the first time in 2 years. People are underestimating the ‘balance sheet repair’ factor.
The crux of my call on LIZ is that 1) the aggregate value of the pieces are worth at least 3x the current EV, 2) contrary to market conjecture, LIZ will not go under, and will not even breach a covenant, 3) the Street is underestimating the levers at LIZ’ disposal, and effective immediately the 2-year downward spiral in estimate revisions is finally over. Ultimately, investors will re-focus on the equity value of LIZ in ’09 as the balance sheet is fixed, and estimates for ‘09/’10 will approach $0.75/$1.00. This can’t sustain a sub-$3 stock for too long…

The quarter reported this morning largely synched with my thesis. Here are some key points.
1. Adjusted EPS of ($0.04). Horrible numbers, but better than my estimate ($0.07), the Street ($0.09) and guidance. Again, the downward spiral of revisions is over.

2. LIZ paid down $175mm in debt in the quarter due to lower capex and aggressive working capital management. This does not include the extra $90mm in tax refund LIZ received in Feb, or the $83mm net proceeds from the Li&Fung deal.

3. The company is likely to use these proceeds to take down debt further – to under the $600mm mark (from near $900mm previously).

4. LIZ is on track to realize $70mm from recent 8% corporate headcount cuts.

5. Guidance is very tepid. Actually, it is nonexistent for ’09. The company noted that it will have an operating loss in 1H, and is planning its business accordingly. I’m not suggesting that its business is good, but guess what folks… with that statement LIZ is speaking to its creditors – not you or me! It is planning its business around expectations for an operating loss – but will come out better.

6. The company recorded a $382mm impairment charge associated with its US business. This was news to me. LIZ noted that it was required to do so bc the current market cap declined to a level below book value, and LIZ had to mark to market. I’m all for marking to market. But my sense is that when the actual cash flow from these assets is realized in hindsight the book value will prove too low.

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