October 27, 2011 at 07:00 AM EDT
Liz Claiborne Shifts Its Focus Uptown
The company is betting on its upscale brands to revive its fortunes.

In today’s retail apparel market, cheap is not chic. That’s one big reason for Liz Claiborne’s (NYSE:LIZ) recent extreme makeover – a move that cast off the company’s namesake brand as part of a transformational strategy to boost business by focusing on upscale buyers.

Last month, many experts wrote off Liz Clairborne’s stock as circling the drain because of underperforming brands and a heavy debt load. Then the retailer spun off two fragrance lines, Monet jewelry and its Liz Claiborne, Mexx, Kinsie and Mac & Jac units. The company will now focus on its upscale Juicy Couture, Kate Spade and Lucky brands. CEO William McComb told CNBC last week that the next step would be to find a new name, which will be announced within the next year.

Here’s why the new look might make sense: the sluggish economy has battered mid-market clothing retailers like Liz Clairborne, Gap (NYSE:GPS), Aeropostale (NYSE:ARO), Urban Outfitters (NYSE:URBN) and Guess (NYSE:GES).

But high-end retailers like Abercrombie & Fitch (NYSE:ANF), Lululemon (NYSE:LULU) and Nordstrom (NYSE:JWN) are soaring.

Among LIZ’s surviving brands, the Kate Spade New York line is the growth star: sales in the second quarter were a whopping $68 million — 63.8% higher than the same quarter last year. The brand is best described as a fusion of playful and sophisticated style and is well known for its designer clothing, accessories, and beauty products – as well as high-end designer diaper bags. It boasts 44 specialty retail stores and 29 outlet stores.

Lucky Brand is the company’s designer jeans unit. Its denim sportswear and outerwear cashes in on a California bohemian vibe and a strong celebrity following among Hollywood A-listers like Will Smith and Gwyneth Paltrow. The brand has 180 specialty retail stores and 40 outlet stores and is sold through chains like Macy’s (NYSE:M). Sales in the second quarter were $97 million, up 12.5% over the same quarter last year.

Juicy Couture is a high-end, affordable clothing line that targets women and girls 10-26; it includes accessories, baby apparel and a beauty line. In addition to the 79 specialty retail stores and 49 outlet stores, the company markets through upscale retailers like Saks (NYSE:SKS), Nordstrom (NYSE:JWN) and Neiman Marcus. The brand posted second-quarter sales of $117 million, up 4.7% from the same quarter last year.

But growth in those brands is tempered by Liz Clairborne’s wider quarterly loss. Investors will be looking for big growth in the three surviving brands when LIZ next reports earnings on Nov. 9. The challenges are clear from its fundamentals: with a market cap of $1.5 billion, LIZ has a PEG ratio of –0.77 because it’s losing money. The company’s total debt is $768.8 million, compared to total cash of only $26.7 million.

The jury is still out as to whether this new strategy will be a win or another fashion-retailing faux pas. But at the very least, the new strategy has attracted some positive buzz from investors. The company plans to use the $328 million it gets from the castoff brands to pay down debt. The makeover has given the share price a big bounce, too. Between Jan. 3 and Aug. 22, LIZ fell 45% to $4.06; since then, the stock has risen to $8.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.


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