Liz Claiborne, Inc

Liz Claiborne, Inc.

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Overview

New York based Liz Claiborne Inc. (LIZ) designs and markets an extensive line of women’s and men’s fashion apparel appropriate to occasions ranging from casual to dressy, fragrances and accessories. The company has four revenue segments- Wholesale Apparel, Wholesale Non-Apparel, Retail and Corporate. Liz Claiborne Inc.’s brands include Axcess, Bora Bora, Claiborne, Crazy Horse, Curve, Dana Buchman, Elisabeth, Ellen Tracy, Emma James, ENYCE, First Issue, Intuitions, Jane Street, J.H. Collectibles, Juicy Couture, Laundry by Shelli Segal, Liz Claiborne, Lucky Brand, Mambo, Marvella, Mexx, Monet, Monet2, Realities, Sigrid Olsen, Spark, Trifari and Villager. In addition, Liz Claiborne Inc. holds the exclusive, long-term license to produce and sell both men’s and women’s collections of DKNY® Jeans and DKNY® Active, as well as CITY DKNY® better women’s sportswear, in the Western Hemisphere. The Company also has the exclusive license to produce women’s wear under the Kenneth Cole New York, Unlisted and Reaction Kenneth Cole brand names, as well as the exclusive license to produce jewelry under the Kenneth Cole New York and Reaction Kenneth Cole brand names. Its website is LIZ’s fiscal year ends December 31.

The company’s diverse portfolio of brands and its multi-channel distribution strategy have led to a solid and consistent growth record. Liz posted a strong 4Q with sales increasing a record 16.1%. Specialty markets remained flat and the domestic business of Liz Claiborne declined. Liz ended the quarter with a total of 285 outlet stores, 269 specialty retail stores and 622 international concession stores.

Analysts have identified the following issues as critical to an evaluation of the investment merits of LIZ:

Sales

Liz Claiborne Inc. reported record 4Q sales. Net sales were $1.198 billion, up 16.1% year-over-year,driven primarily by the strength of LIZ’s balanced and diversified portfolio. Results were driven by ENYCE which contributed $19 million, as well as favorable foreign exchange gains that added $24 million in sales. FY04 net sales increased 9.2% year-over-year. Juicy Couture and ENYCE added $210 million in the year. Gains from foreign currency exchange contributed $95 million.

4Q Wholesale Apparel net sales increased 13.2% year-over-yearwhich includes a $19million contribution from ENCYE, and $10 million from favorable foreign currency exchange rates. FY04 net sales increased 5.3% year-over-year which includes a $181 million from Juicy Couture and ENYCE, $52 million gain from foreign currency exchange and an $84 million net decrease in other Wholesale Apparel business. This reflects an 18.8% yearly decline in Liz Claiborne business. 4Q Wholesale Non-Apparel net sales increased 10% primarily driven by the addition of our Juicy Couture accessories business (launched in February 2004), as well as increases in jewelry, handbags and fashion accessories businesses, partiallyoffset by decreases in cosmetics business.The impact of foreign currency exchange rates in LIZ’s internationalbusinesses was not material in this segment. FY04 Wholesale Non-Apparel increased 11.2% year-over-year. 4Q and FY04 Retail net sales increased 25.7% and 11.2% year-over-year respectively, reflecting gains from foreign currency fluctuations and increases in different brands. Corporate net sales were up by $2 million, to $10 million due to new licenses and growth from the existing licensing portfolio. FY04 Corporate net sales increased $6 million year-over-year to $37 million.

Management expects FY05 net sales to increase 6%-8%, with 4-5% increase in Wholesale Apparel, 6-8% increase in Wholesale Non-Apparel, 13-15% in Retail segment, and Corporate to increase 15% year-over-year. For the 1Q, management forecasts net sales to increase 7-9%, with 4-6% increase in Wholesale Apparel, 10-12% in Wholesale Non-Apparel, 15-18% in Retail, and Corporate to increase 10% year-over-year. One analyst (Prudential) thinks that Liz stands out strategically from competitors as being committed to health of its brands. One analyst Lehman Brothers) believes that the fast growing Mexx group will enable Liz Claiborne to further penetrate the key European market.LIZ also has potential growth opportunities in the United States. The analyst believes that Liz Claiborne continues to establish itself as one of the leaders in the rapidly consolidating branded-apparel industry; the company increased its presence in international markets to 24% of total sales. The analyst expects international sales to account for 27% of total sales. One analyst (Goldman Sachs) expects sales to grow 10% to $1,137 million at the mid point of management’s 9% to 11% guidance.

Margins

4Q gross margin decreased to 46.6% year-over-year, down 70 bps including $14 million from favorable foreign currency exchange rates as a result of the strengthening of the Euro. FY04 gross margin increased to 46.2%, including $52 million from favorable foreign currency exchange rates as a result of the strengthening of the Euro.

4Q operating margin for the quarter decreased to10.2%, down 160 bps year-over-year. Wholesale Apparel operating margin declined to 7.6%, compared to 8.6% year-over-year, principally reflecting reduced profits in the Liz Claiborne business. Wholesale Non-Apparel operating margin decreased to 13.8% and Retail’s operating margin went down to 12.4% year-over-year. Net margin in 4Q decreased to 6.9% year-over-year. FY04 operating margin decreased to 10.9%, compared to 11.1% in 2003. Wholesale Apparel decreased 10.9%, Wholesale Non-Apparel increased to 13.9%, and Retail declined to 6.9% year-over-year. Net margin increased to 6.8% for the year.

Management expects operating margin to be in the range of 10.9%-11.1% for FY05. For 1Q, the range is from 9.8% to 10.1%. One analyst (Lehman Brothers) expects SG&A expense ratio to increase 120 bps in 2005. Another analyst (Goldman Sachs) expects gross margins to increase 70 bps, SG&A to increase 50 bps, and total operating margin to increase by 20 bps.

Earnings per Share

Liz reported 4Q EPS of $0.75, up 13.6%, compared to $0.66 year-over-year, and a penny better than consensus. FY04 EPS increased11.8% to $2.85, compared to $2.55 year-over-year.

Management expects 1Q EPS to be in the range of $0.63-$0.66. For FY05, theirexpected range is $2.81-$2.84. For FY05, the range is from $3.05-$3.12. Most of the analysts are increasing their EPS estimates for FY05.

Target Price/Valuation

Of the 9 analysts covering Liz, 5gave positive ratings and 4gave neutral ratings. One analyst (SG Cowen) did not provide any rating.

Research analysts have set 12-month target prices that range from $41 (Prudential) to $52 (A.G.Edwards, UBS). Most analysts are using P/E multiples of EPS that range from 12 to 16.5 times. One analyst (Prudential) is taking13.5 times of 2005 EPS while another analyst (A.G.Edwards) is using 16.5 times 2005 EPS for its target. One analyst (Banc of America) raised his target price while another analyst (Merrill Lynch) reduced his target price.

Long-Term Growth

Digest long-term growth estimates range from 8% to 15%. The majority of analysts believe that LIZ is well positioned to remain a leader in the apparel industry. Oneanalyst (AG Edwards) thinks that long-term earnings growth will be driven by HSD increases in revenues, with MSD organic gains and layering-on of strategic acquisitions. The analyst is upbeat on Liz’s stock due to 1) increasing international penetration with focus on infrastructure improvements, 2) continuous retail expansion with focus on higher return concepts, and 3) acquisition of high growth, high margin businesses. One analyst (SG Cowen) views double-digit growth in core women’s tops business. The analyst expects new product expansion that can fuel additional share gains in 2005. Men’s and Women’s casual sportswear, denim, woven pants, shirts and skirts will be introduced in 2005.

Individual Analyst Opinions

POSITIVE RATINGS

A.G.Edwards- Buy ($52): Report date 1/18/05

Believes that the revised 5-year expected EPS CAGR of 15% is well deserved. Expects Paul Charron’s vision to continue to drive LT EPS growth.

Goldman –Outperform: Report date 2/28/05

The analyst rates the stock Outperform and believes that the MAY/FD merger will not have any negative impact on LIZ. The analyst does not think LIZ will lose ground in the merger but feels it may gain some ground over time as its ability to service such a large customer will give it a competitive advantage.

UBS –Buy ($52): Report date 3/3/05

NEUTRAL RATINGS

Banc of America–Neutral ($42): Report date 3/2/2005

The analyst rates the stock neutral with a target price of $42. Analyst believes the fundamental risks in the stock are: (1) LT growth remains dependent on an acquisition strategy that may be less accretive going forward in the wake of the FD/MAY, (2) potential for Liz’s bridge lines to come under pressure in ’05, (3) an outlook for continued declines in the core Liz brand, and (4) highvaluation relative to peers.

Buckingham – Accumulate ($46): Report date 3/3/2005

J.P. Morgan– Neutral: Report date 3/3/2005

The analyst rates the stock Neutral and seesfew near-term catalysts. Believes that LIZ’s diversification strategy should offset planned declines in core Liz sales as retailers push for faster inventory turn.

Lehman –Equal-Weight ($45): Report date 3/8/05

The analyst rates the stock Equal-weight with a target price of $45. Although the core Liz business is expected to decrease in the mid-to-high single digits in 2005, the analyst does not believe that there is significant risk associated with the core brand’s profitability.

Merrill –Neutral ($46):Report date 3/3/05

The analyst has a target price of $46. Analyst expects Liz to continue its strategy of acquiring smaller, higher growth brands. Analyst opines that Liz remains one of the few vendors to have maintained its operating earnings outlook. Believes company’s ability to deliver organic growth is superior to most. .

Prudential –Neutral Weight ($41): Report date 3/3/05

NEGATIVE RATINGS

NONE.

NOT RATED

SG Cowen- Report date 1/7/05

“We continue to believe that Liz shares can outperform relative to the market by 10-15 percentage points over the next year driven by further upward earnings revisions and . . .focus on strong business models, healthy financial returns and lower risk profiles ahead of less fiscal stimulus and more challenging margin comparisons.”