LIZ: The Reverse Commute

Our HQ is in New Haven, CT -- about 25 feet from Yale University. I love my commute, because while everyone is driving south towards NYC, I am driving twice as fast in the other direction. That's what Liz Claiborne's announcement this morning sounds like to me. Liz is decentralizing its global sourcing operations such that its 8 top brand heads have the flexibility to go direct to the factories of choice to strengthen relationships between design and manufacturing -- even if it means going around Liz's sourcing infrastructure and using more expensive buying agents. This comes at a time when other companies are channeling a greater proportion of production through vertically controlled sourcing platform. I'm not sure I love this move as I do my own reverse commute. But I'll take action over inaction in this space any day.

On one hand, I give credit to any brand that acts in a way that compresses the lead time to get design closer to the point of consumer purchase. LIZ is an extremely bureaucratic organization with layers of approvals needed to push product through the system. This change might have some positive flow through as it relates to product relevancy from a trend perspective as well as inventory carrying costs.

On the flip side, given the immense cost pressures emerging - which I think is a paradigm shift for the industry - I wonder why anyone would choose to give up any form of size/leverage over key suppliers. In putting the cost inputs back in the hand of the individual brands - and potentially adding a 3rd party sourcing agent, this does anything but de-risk the cost model.

So how does this change my view on LIZ? It really does not. As I mentioned on 5/13, Bill McComb has been reinvesting cost cuts back into the organization over the past year. As such, he's sitting there with the highest SG&A ratio in the industry by a long shot, and LIZ has instituted a cliff-vesting schedule to incentivize 2009 performance based on EPS and ROIC hurdles. With nearly 500,000 options struck in the high $30s, he has one of three choices in '09; 1) watch his investments pay off in greater revenue and EBIT, 2) watch his efforts fail and subsequently cut (and print) several hundred million in costs, or 3) fail across the board, and risk both his current employment and the company's structure as we know it today. For a stock that has stopped going down on bad news, I don't see how any of these options won't be a positive.

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