NEW YORK — Declines in profits at Liz Claiborne Inc. in both the fourth quarter and the full year, a result of restructuring charges, marked a tough debut for chief executive officer William L. McComb.
For the quarter ended Dec. 30, Claiborne’s net income dropped 6.6 percent, to $73.2 million from $78.3 million. Its diluted earnings per share fell to 71 cents from 74 cents. But excluding a charge of 23 cents a share for restructuring expenses, Claiborne earned 94 cents per diluted share — in line with company estimates.
Buoyed by the acquisition of Kate Spade, Claiborne’s sales in the quarter jumped 10.8 percent, to $1.33 billion from $1.2 billion in the corresponding quarter in 2005.
For the full fiscal year, earnings fell just shy of 20 percent, to $254.7 million from $317.4 million in fiscal year 2005. Diluted EPS gained 5 cents, to $2.99 from $2.94. Sales for the fiscal year increased 3 percent, to $4.99 billion from $4.85 billion.
Sales of Lucky Brand grew 37 percent year-to-year. Sales of Juicy Couture increased 30 percent for the year, and more than doubled in the fourth quarter, compared with a year ago, primarily due to the brand’s fragrance launch.
Streamlining expenses cost the company $37 million in the year’s final quarter and $87 million for the entire year, while the initiatives saved $9 million in the fourth quarter and $31 million for the year. Claiborne reinvested $6 million in the fourth quarter and $15 million for the year.
“From a 2006 perspective, we had reinvested approximately 50 percent of the savings back into the marketing and in-store promotions of our power brands,” said chief operating officer Mike Scarpa. “We made the decision as we looked at 2007, when substantially all of the $70 million would be reinvested into the power brands in terms of marketing in-store.”
While the company pours money into creating buzz around its power brands, which include Kate Spade and Juicy Couture, it may shed other labels. As reported, Claiborne is closing its Mexx business in the U.S., which once had 11 stores, but today is down to four.
“Now, I believe there are huge opportunities to breathe new energy into several of the brands in our fantastic portfolio, and this will be one of our key areas of focus,” McComb said. “We will also have to decide if there are brands in the portfolio that should be divested.”
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Claiborne president Trudy Sullivan shed further light on the rationale of last week’s group president reshuffling, alluding to last year’s creation of Liz Claiborne diffusion brands exclusive to J.C. Penney — a move that is said to have strained relations between Federated Department Stores and Claiborne. “Moving the midtier businesses into the better and moderate zone under Pamela Thomas-Graham allows Pamela to have full brand authority of Liz Claiborne and Claiborne in the core brands, as well as their diffusion lines,” Sullivan said.
Margaret Mager, retail analyst and managing director for Goldman Sachs & Co., said Wall Street was prepared for McComb to be a marketer, but that the extent of the upcoming efforts still came as somewhat of a surprise.
“The new news was the thought process in 2007 around marketing,” Mager said. “Marketing is one of those things you can spend a lot of money on and may or may not create the effect that you hope. Look at the Gap. There’s a lot that has to come together to make marketing effective. You need someone with a very clear vision of the brand or it can be just throwing money down the drain.”
Brad Stephens, an analyst for Morgan Keegan & Co. Inc., said that though he thinks McComb is doing the right thing in the long term, such spending is disconcerting for shorter-term investors.
“He’s going to take the time to grow the brands,” Stephens said. “He’s here to run this business for the long haul. To do that, there are the painful things you have to do in the short term, including closing down underperforming segments.”
The apparel giant said it was no longer providing quarterly earnings guidance, but that after completing an ongoing review of restructuring operations in July, it would issue earnings guidance for fiscal year 2007.
“Because we view 2007 as a transitional year, we are not providing financial guidance for the year at this time,” McComb said. “We expect to provide financial guidance for 2007 and our long-term financial targets when we unveil our business plan in July because we have a solid business. We have the opportunity to take the time to do this right. Regarding the current Wall Street estimates for 2007, we understand how you arrive at these numbers, but it is important to note that additional streamlining initiatives in 2007 as well as the full reinvestment of the savings associated with our 2006 streamlining initiatives, primarily in marketing, for our power brands, will impact these estimates.”