In its latest effort to help extricate itself from the
recession, Liz Claiborne Inc. (LIZ) is turning over its sourcing
operations for $83 million in cash to global apparel exporter and
supply chain specialist Li & Fung (0494.HK).
Li & Fung will be responsible for identifying and conducting
negotiations with vendors to make Liz Claiborne products and
merchandise - except for jewelry - and monitor quality.
The agreement encompasses all of Liz Claiborne's brands
including the Isaac Mizrahi line it is just starting to roll out in
department stores like Macy's Inc. (M) and Dillard's Inc.
(DDS).
The accord is a financial shot in the arm for Liz Claiborne.
"Of course, we want to do whatever we can do to pay down debt
and improve our credit metrics," spokeswoman Dana Stambaugh said.
"We are also interested in improving our inventory turn rate,
margins and profitability - this partnership affords all of
those."
The sweeping move means that Liz Claiborne may be ceding some
control, but the company will likely save money by having a more
consolidated approach and potentially will be able to bring
merchandise to market more quickly, analysts said.
Liz Claiborne will still handle the artistic end of things, like
design, as well as merchandising, although analysts say it isn't
clear what will happen to the hundreds of Liz Claiborne employees
who had been handling sourcing until now.
The move is an about face for Liz Claiborne, which hired Li
& Fung in November to be the sourcing agent to help fix its
troubled Mexx line, but told analysts at the time that there would
be no such plans for the rest of its brands.
But times quickly changed. "Within two months of the deal, we
already see significant improvements in costing, speed-to-market
and calendar adherence," Chief Executive William McComb said.
So Liz Claiborne felt the "partnering with Li & Fung is the
ideal solution," on a broad basis, McComb said. "This is the
optimal way to address the issues with our current sourcing
infrastructure and a significant strategic opportunity that will
enable us to deliver high quality product to our consumers and
retailers around the world."
Liz Claiborne has continued to struggle as a slump in consumer
spending has battered the retail industry. In addition to seeing
slower sales at its own stores, Liz Claiborne has suffered as
department stores cut back inventory.
Liz Claiborne in December said it will eliminate 725 jobs, or 8%
of its work force, citing the "highly uncertain" economic
environment.
In the past two years, the company has closed six distribution
centers, cutting 2,200 jobs, and streamlined its brand portfolio by
selling, closing or licensing 14 brands. The company has focused on
developing its "direct" brands - Liz Claiborne New York, Kate
Spade, Lucky Brand, Juicy Couture and Mexx.
By forming a partnership with Li & Fung, "Liz is doing what
they have to do to make themselves more viable, even if it means
giving up some control," said Howard Davidowitz, chairman of
Davidowitz & Associates, a retail-consulting and
investment-banking firm.
Brian Sozzi, equity research analyst with Wall Street
Strategies, said the accord with Li & Fung "is the type of
measure a company often does too late, when operating results have
come under pressure."
Liz Claiborne "has been struggling for about three years getting
goods to key department store customers in an efficient manner,"
Sozzi said. "Companies such as Macy's and J.C. Penney Inc. (JCP),
which carries a Liz Claiborne line, want fresh goods on the floor,
and for an apparel maker like Liz Claiborne there are lead times
associated with getting supplies for new merchandise" and the Li
& Fung arrangement may speed up the process.
Liz Claiborne may end up reducing costs fairly substantially,
because the company will now pay a fee to Li & Fung, which in
turn will tap a supply network that is much vaster and more
efficient than Liz Claiborne's.
"Over time, the improved cost structure should begin to be
evidenced in lower cost of goods sold, and subsequently, higher
gross margins," Sozzi said.
Liz Claiborne's move "is a step in the right direction," said
Hana Ben-Shabat, a partner with consulting firm A.T. Kearney.
"There is no silver bullet solution for anything retail right
now," Ben-Shabat said. "You have to do many things and this may be
an important one."
At the moment, Liz Claiborne's merchandising priority is getting
its Isaac Mizrahi-designed namesake line into stores including
Macy's, Bon-Ton Stores Inc. (BONT) and Belk Inc.
The Macy's rollout is occurring at a staggered pace.
About half of the 250 stores in Macy's eastern region are
carrying it, Macy's spokesman Jim Sluzewski said.
Expansion into other stores in the region "depends on what the
response is," Sluzewski said.
Liz Claiborne shares were recently up 4 cents to $2.37.
-By Karen Talley, Dow Jones Newswires; 201-938-5106; karen.talley@dowjones.com