10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 29, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 1-10689
LIZ CLAIBORNE, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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13-2842791 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
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1441 Broadway, New York, New York
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10018 |
(Address of principal executive offices)
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(Zip Code) |
Registrant’s telephone number, including area code: 212-354-4900
Securities registered pursuant to Section 12(b) of the Act:
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Title of class
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Name of each exchange on which registered |
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Common Stock, par value $1 per share
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 (the “Act”). Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
Based upon the closing sale price on the New York Stock Exchange composite tape on June 29, 2007,
the last business day of the registrant’s most recently completed second fiscal quarter, which
quarter ended June 30, 2007, the aggregate market value of the registrant’s Common Stock, par value
$1 per share, held by non-affiliates of the registrant on such date was approximately
$3,789,589,601. For purposes of this calculation, only executive officers and directors are deemed
to be the affiliates of the registrant.
Number of shares of the registrant’s Common Stock, par value $1 per share, outstanding as of
February 22, 2008: 94,624,807 shares.
Documents Incorporated by Reference:
Registrant’s Proxy Statement relating to its Annual Meeting of Stockholders to be held on May 15,
2008-Part III.
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-K (or incorporated by reference into this Form 10-K), in
future filings by us with the Securities and Exchange Commission (the “SEC”), in our press
releases, and in oral statements made by, or with the approval of,
our authorized personnel, that
relate to the Company’s future performance or future events are forward-looking statements under the Private
Securities Litigation Reform Act of 1995. Such statements are indicated by words or phrases such
as “intend,” “anticipate,” “plan,” “estimate,” “project,” “expect,” “we believe,” “we are
optimistic that we can,” “current visibility indicates that we forecast” or “currently envisions”
and similar phrases. Forward-looking statements include statements regarding, among other items:
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Our long-term growth strategies; |
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Anticipated results of operations or level of business for fiscal 2008, any fiscal
quarter of 2008 or any other future period, including those contained in this Form 10-K
under the heading “Forward Outlook;” |
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Our ability to continue to implement appropriate expense savings initiatives and
maintain a competitive cost structure; |
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Our ability to develop our retail and supply chain capabilities; |
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Our ability to expand internationally; |
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Our ability to successfully integrate the acquisitions of our KATE SPADE and NARCISO
RODRIGUEZ brands; |
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Our ability to be able to commit the resources, structure and marketing investment
necessary to support and grow our brands; |
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Our ability to navigate the difficult macroeconomic environment and challenges presented
in the wholesale and retail industries; |
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Our ability to offer products that are acceptable to our department store customers and
consumers; and |
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Our ability to realize sufficient cash flows from operations and to have access to
financing on acceptable terms to enable us to fund our liquidity requirements. |
The forward-looking statements are based on current expectations only and are not guarantees
of future performance, and are subject to certain risks, uncertainties and assumptions, including
those described in this report in “Item 1A — Risk
Factors.” The Company may change its intentions,
beliefs or expectations at any time and without notice, based upon any change in the Company’s
assumptions or otherwise. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from those anticipated,
estimated or projected. In addition, some factors are beyond our control. We undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
WEBSITE ACCESS TO COMPANY REPORTS
Our
investor website can be accessed at www.lizclaiborneinc.com under “Investor
Relations”. We were incorporated in January 1976 under
the laws of the State of Delaware. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports filed or furnished to the SEC pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 are available free of
charge on our investor website under the caption “SEC Filings” promptly after we electronically
file such materials with, or furnish such materials to, the
Securities and Exchange Commission (“S.E.C.”) No information contained on any
of our websites is intended to be included as part of, or incorporated by reference into, this
Annual Report on Form 10-K. Information relating to corporate governance at our Company, including
our Corporate Governance Guidelines, our Code of Ethics and Business Practices for all directors,
officers, and employees, and information concerning our directors, Committees of the Board,
including Committee charters, and transactions in Company securities by directors and executive
officers, is available at our website under “Investor
Relations” under the captions “Corporate Governance” and “SEC Filings.”
Paper copies of these filings and corporate governance documents are available to stockholders free
of charge by written request to Investor Relations, Liz Claiborne, Inc., 1441 Broadway, New York,
New York 10018. Documents filed with the S.E.C. are also available on
the S.E.C.’s internet website at www.sec.gov.
In this Form 10-K, unless the context requires otherwise, references to “Liz Claiborne,”
“our, “ “us,” “we” and “the Company” means Liz Claiborne, Inc. and its consolidated subsidiaries.
Our fiscal year ends on the Saturday closest to January 1. All references to “Fiscal 2007”
represent the 52 week fiscal year ended December 29, 2007. All references to “Fiscal 2006”
represent the 52 week fiscal year ended December 30, 2006. All references to the “Fiscal 2005”
represents the 52 week fiscal year ended December 31, 2005.
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PART I
Item 1. Business.
OVERVIEW AND NARRATIVE DESCRIPTION OF BUSINESS
General
Liz
Claiborne, Inc. designs and markets a global portfolio of
retail-based premium brands including
KATE SPADE, JUICY COUTURE, LUCKY BRAND JEANS and MEXX. We also have a group of department
store-based brands with strong consumer franchises including the LIZ CLAIBORNE and MONET families of
brands, ENYCE and the licensed
DKNY®
JEANS and
DKNY®
ACTIVE brands. The Company also offers cosmetics and fragrances.
In 2007, we performed a review of our operations to assess options to best evolve our strategy
on a sustainable, go-forward basis. The strategic realignment outlined below reflects a
brand-centric approach, designed to optimize the operational coordination and resource allocation
of our businesses across multiple functional areas including specialty retail, outlet, wholesale
apparel, wholesale non-apparel, e-commerce and licensing.
As
such, we have configured our operations into the following two reportable segments, each reflecting the
different financial missions, cultural profiles and focal points appropriate for these two
reportable segments:
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Direct Brands, which is comprised of the specialty retail, outlet, wholesale apparel,
wholesale non-apparel (including accessories, jewelry, handbags and fragrances), e-commerce
and licensing operations of our four retail-based brands: JUICY COUTURE, KATE SPADE, LUCKY
BRAND and MEXX. |
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Partnered Brands, which is comprised of the wholesale apparel, wholesale non-apparel,
outlet and specialty retail, e-commerce and licensing operations of our wholesale-based
brands including: AXCESS, CLAIBORNE (men’s), CONCEPTS BY CLAIBORNE, DANA BUCHMAN,
ENYCE, KENSIE, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA, MONET, NARCISO RODRIGUEZ,
TRIFARI, VILLAGER, the Company’s licensed DKNY® JEANS and DKNY® ACTIVE brands, as well as
the Company’s other non-Direct Brands fragrances including: CLAIBORNE, CURVE, LIZ
CLAIBORNE and our licensed USHER fragrance. |
With
this new structure in place, in mid-2007 we began implementing the following strategic imperatives:
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Implementing and maintaining a more competitive cost
structure. We have accelerated our structural realignment and
other initiatives to achieve cost savings targets through staff reductions,
closing and consolidations of distribution facilities and office
space, discretionary expense cuts, process re-engineering and supply
chain rationalization. |
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Developing best-in-class retail capabilities and
innovating in our supply chain. We are committed to
accelerating the flow of goods in both the retail and wholesale formats, providing “fashion
faster” in each. |
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Narrowing our portfolio to a select group of brands. As such, we have conducted a
strategic review of alternatives for 16 brands with the following outcome as of February
15, 2008: |
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On October 4, 2007, we completed the sale of our EMMA JAMES,
INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands. We also announced the
consolidation of our TINT brand into LIZ & CO., STAMP 10 brand into AXCESS
and the closure of our FIRST ISSUE brand. |
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On January 8, 2008, we announced the sale of our C & C CALIFORNIA and
LAUNDRY BY DESIGN brands in a single transaction (completed February 4, 2008), as
well as the closure of SIGRID OLSEN and retention of the ENYCE brand. We expect to
complete the closure of our SIGRID OLSEN brand in the first half of 2008. |
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On January 17, 2008, we announced that we entered into an exclusive
license agreement with Kohl’s Corporation
(“Kohl’s”) naming Kohl’s as the exclusive
retailer of our DANA BUCHMAN brand, under which we will design the
product and Kohl’s will lead manufacturing, production,
distribution and marketing. As a result, we expect to close our
current DANA BUCHMAN operations in the first half of 2008 and that the launch of
the DANA BUCHMAN line in Kohl’s stores will occur no later than the first quarter
of 2009. |
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On February 1, 2008, we announced that we had entered an agreement to
sell substantially all of the assets and liabilities of our prAna
brand to a group consisting of
the prAna founders and Steelpoint Capital Partners. We expect the sale to close by
the end of the first quarter of 2008. |
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On February 14, 2008, we announced that we had entered into an
agreement to sell substantially all of the assets and liabilities of
our ELLEN TRACY brand to a
group of investors, including Radius Partners, LLC. We expect the sale to close in
the second quarter of 2008. |
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The remaining brands under review are KENSIE and MAC & JAC. We expect
the review of these brands to be completed by the end of the first quarter of 2008. |
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Committing the necessary resources for marketing and capital
expenditures. |
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For a discussion of these changes, see “Item 7 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Overview; Competitive Profile,” below.
On
May 18, 2007, we acquired 50 percent ownership of the entity that owns the rights to the “Narciso Rodriguez” name and trademarks. As part of this transaction, we
entered into an exclusive license to operate NARCISO RODRIGUEZ worldwide, and formed a new company
to operate the license and develop the NARCISO RODRIGUEZ brand globally. For a discussion of our recent acquisitions, see
Note 2 of Notes to Consolidated Financial Statements.
International sales have come to represent an increasingly larger part of our total sales.
As a percentage of our total sales, international sales have grown from approximately
23% in 2003 to 32% in 2007. The growth in our international business has been the result of the growth and
continued expansion of MEXX Europe and MEXX Canada, the impact of currency fluctuation, as well as
the introduction of certain of our United States based brands into Europe, Canada and, to a lesser
extent, Asia.
We operate in global fashion markets that are intensely competitive. Our ability to
continuously evaluate and respond to changing consumer demands and tastes across multiple markets,
distribution channels and geographies is critical to our success. Although our brand portfolio
approach is aimed at diversifying our risks in this regard, misjudging shifts in consumer
preferences could have a negative effect on our results of operations. Other key aspects of
competition include quality, brand image, market share, distribution methods, price, size and
location of our retail stores and department store selling space, customer service and intellectual
property protection (see “Competition” below).
In summary, the measure of our success in the future will depend on our ability to execute on
our strategic vision, including attracting and retaining the management talent necessary for such
execution, designing and delivering products that are acceptable to the marketplaces that we serve,
sourcing the manufacture of our products on a competitive and efficient basis, and evolving our
retail capabilities. For a discussion of certain risks relating to our business, see “Item 1A -
Risk Factors” below.
Our principal executive offices are located in New York City, although we maintain sales
operations on a global basis, including locations in the United States, the Netherlands and
Canada.
Business Segments
In the second quarter of 2007, we revised our segment reporting structure to reflect the
strategic realignment of our businesses and internal reporting. As such, we now report our
operations from continuing operations in two reportable segments as follows:
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The Direct Brands segment — consists of the specialty retail, outlet, wholesale
apparel, wholesale non-apparel (including accessories, jewelry, handbags and fragrances),
e-commerce and licensing operations of our four retail-based operating segments: JUICY
COUTURE, KATE SPADE, LUCKY BRAND JEANS and MEXX; and |
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The Partnered Brands segment — consists of one operating segment, including the
wholesale apparel, wholesale non-apparel, outlet and specialty retail, e-commerce and
licensing operations of our wholesale-based brands including: the LIZ CLAIBORNE FAMILY OF
BRANDS (AXCESS, CLAIBORNE, CONCEPTS BY CLAIBORNE, DANA BUCHMAN(a), LIZ &
CO., and LIZ CLAIBORNE), the MONET FAMILY OF BRANDS (MARVELLA, MONET and TRIFARI),
VILLAGER, our licensed DKNY® JEANS and DKNY® ACTIVE brands, ELLEN TRACY(b),
ENYCE, NARCISO RODRIGUEZ, as well as COSMETICS & FRAGRANCES (CLAIBORNE, CURVE and USHER).
The remaining brands under strategic review (KENSIE and MAC & JAC) are also reported as
part of the Partnered Brands segment. |
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(a) |
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On January 17, 2008, we announced that we entered into an exclusive license
agreement with Kohl’s naming Kohl’s as the exclusive
retailer of our DANA
BUCHMAN brand. As a result, we expect to close our current DANA BUCHMAN operations in
the first half of 2008 and that the launch of the DANA BUCHMAN line in Kohl’s stores
will occur no later than the first quarter of 2009. |
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On February 14, 2008, we announced an agreement to sell
substantially all of the assets and
liabilities of ELLEN TRACY. The transaction is expected to close in the second quarter
of 2008. |
Certain assets and liabilities of the C & C CALIFORNIA, LAUNDRY BY DESIGN and prAna brands
have been segregated and reported as held for sale as of December 29, 2007 and the activities of
such brands, as well as those of EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE,
previously included in the Partnered Brands Segment, have been segregated and reported as
discontinued operations for all periods presented. Refer to Note 3 of Notes to the Consolidated
Financial Statements.
We also present our results of continuing operations on a geographic basis based on selling
location, between Domestic (wholesale customers, Company specialty retail and outlet stores located
in the United States and e-commerce sites) and International (wholesale customers and Company
specialty retail and outlet and concession stores located outside of the United States). We, as
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licensor, also license to third parties the right to produce and market products bearing certain
Company-owned trademarks; the resulting royalty income is included within the results of continuing
operations of the associated segment.
Refer to Note 21 of Notes to Consolidated Financial Statements and “Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Direct Brands. Consists of the specialty retail, outlet, wholesale apparel, wholesale
non-apparel (including accessories, jewelry, handbags and fragrances), e-commerce and licensing
operations of the following brands, of which up to twelve seasonal collections are presented for
specialty retail and between five and twelve seasonal collections are presented for wholesale
apparel/non-apparel during 2007.
JUICY COUTURE
Our JUICY COUTURE brand offers upscale women’s, men’s and children’s contemporary apparel, as
well as accessories, jewelry and fragrances, under various JUICY COUTURE trademarks. JUICY COUTURE
products are sold predominately through wholly owned retail and outlet stores, select upscale
specialty retail stores and department stores throughout the United States and through distributors
in Asia, Canada, Europe and the Middle East. In addition, JUICY COUTURE has existing licensing
agreements for footwear, optics, watches, swimwear and baby products. For a discussion of our
acquisition of JUICY COUTURE, refer to Note 2 of Notes to Consolidated Financial Statements.
KATE SPADE
Our KATE SPADE brand, acquired in December 2006, offers fashion accessories for women and men
under the KATE SPADE and JACK SPADE trademarks. These products are sold primarily in the United
States through wholly-owned retail and outlet stores, select specialty retail and upscale
department stores and through its e-commerce website, as well as through distributors in Asia. KATE
SPADE’s product line includes handbags, small leather goods, fashion accessories, jewelry, luggage
and fragrance. In addition, KATE SPADE has existing licensing agreements for strollers/rockers,
footwear, optics, tabletop and paper products. For a discussion of our acquisition of KATE SPADE,
refer to Note 2 of Notes to Consolidated Financial Statements.
LUCKY BRAND JEANS
Our LUCKY BRAND JEANS brand offers women’s, men’s and children’s denim and casual sportswear,
as well as accessories, jewelry and fragrances, under various LUCKY BRAND trademarks. LUCKY BRAND
products are available for sale at wholly owned retail and outlet stores, select department and
better specialty stores and through its e-commerce website. In addition, LUCKY BRAND has existing
licensing agreements for neckwear, swimwear, hats and footwear. For a discussion of our acquisition
of LUCKY BRAND JEANS, refer to Note 2 of Notes to Consolidated Financial Statements.
MEXX
Our MEXX brand, which is headquartered in the Netherlands, offers a wide range of men’s,
women’s and children’s fashion apparel under several trademarks including MEXX (men’s and women’s
fashion sportswear), MEXX SPORT (performance sportswear), and XX BY MEXX (coordinated contemporary
separates), for sale outside of the United States, principally in Europe and Canada.
Partnered Brands. Consists of the wholesale apparel, wholesale non-apparel (including
accessories, jewelry, handbags and fragrances), outlet, concession, specialty retail, e-commerce
and licensing operations of our wholesale-based brands in a wide range of apparel markets, of which
between four and twelve seasonal collections are presented for 2007. This segment includes the
following brands:
LIZ CLAIBORNE FAMILY OF BRANDS
AXCESS, fashion-forward men’s and women’s apparel and accessories sold principally in
Kohl’s department stores.
CLAIBORNE, men’s business-casual apparel and sportswear, accessories and fragrances sold at
department stores, our own outlet stores and online. In January 2008,
we announced that we had
entered into an agreement with menswear designer John Bartlett to design the Claiborne line to be
called “CLAIBORNE BY JOHN BARTLETT,” scheduled to launch in Spring 2009.
CONCEPTS BY CLAIBORNE, men’s casual separates sold exclusively in J.C. Penney Company, Inc.
(“J.C. Penney”) stores.
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DANA BUCHMAN, a classic lifestyle collection of women’s sportswear, accessories, intimate
apparel and footwear. In January 2008, we announced that we
entered into an exclusive license agreement with Kohl’s naming
it as the exclusive retailer of the brand. Pursuant to this
agreement, we will design the products under the license, and Kohl’s will
lead the manufacturing, production, distribution and marketing of
product. The line will
launch at Kohl’s no later than the first quarter of 2009. Prior
to such launch, we will be winding
down the existing inventory of DANA BUCHMAN product and will be closing our existing DANA BUCHMAN
retail and outlet stores.
LIZ & CO, women’s casual apparel and accessories sold exclusively in J.C. Penney stores.
LIZ CLAIBORNE, women’s career and casual sportswear, in misses and petite sizes, accessories
and fragrances for sale at department and specialty stores, our own outlet stores and online. This
brand also offers a line of women’s performance wear under the LIZ GOLF trademark. The Company
recently announced that designer Isaac Mizrahi will become Creative Director for the LIZ CLAIBORNE
brand overseeing the design and marketing functions for women’s apparel, accessories and licensing.
Mr. Mizrahi’s first collection is expected to arrive in stores in spring 2009.
LIZ CLAIBORNE WOMAN, classic career and casual apparel in large-sizes (including petite
proportions) sold at department and specialty stores, our own outlet stores and online.
MONET FAMILY OF BRANDS
MARVELLA, a jewelry line sold primarily at Target Corporation stores.
MONET, a signature jewelry brand for women sold in department stores as well as in our own
outlet stores and online.
MONET2, a signature jewelry brand for women sold primarily in J.C. Penney stores.
TRIFARI, a signature jewelry brand for women sold primarily in mid-tier department stores.
DKNY® ACTIVE AND DKNY® JEANS LICENSES
DKNY® ACTIVE offers junior’s, men’s and women’s activewear for sale at department and specialty
stores in the Western Hemisphere, pursuant to the exclusive license we hold to design, produce,
market and sell these products. See Note 4 of Notes to Consolidated Financial Statements.
DKNY® JEANS offers junior’s, men’s and women’s sportswear, jeans and activewear for sale at
department and specialty stores in the Western Hemisphere, pursuant to the exclusive license we
hold to design, produce, market and sell these products. See Note 4 of Notes to Consolidated
Financial Statements.
ELLEN TRACY
ELLEN TRACY offers elegant and sophisticated women’s sportswear under several of our
trademarks, including ELLEN TRACY, LINDA ALLARD ELLEN TRACY and COMPANY ELLEN TRACY, for sale at
upscale department stores and specialty stores. As discussed above, in the first quarter of 2008
we announced an agreement to sell substantially all of the assets and
liabilities of our ELLEN TRACY brand. The
transaction is expected to close in the second quarter of 2008.
ENYCE
ENYCE offers men’s and women’s fashion forward streetwear under the ENYCE and RSRV trademarks.
ENYCE products are sold predominately through specialty store chains, better specialty stores and
select department stores throughout the United States and through distributors in Canada, Germany
and Japan.
NARCISO RODRIGUEZ
NARCISO RODRIGUEZ is a designer brand offering women’s ready-to-wear collections at luxury
retailers worldwide. In addition, NARCISO RODRIGUEZ has existing licensing agreements for the sale
of fragrances for women and men. We are a 50% owner of the entity that
owns the rights to the NARCISO RODRIGUEZ brand and have entered into
an exclusive license for the brand.
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COSMETICS & FRAGRANCES
We offer fragrance and bath and body-care products under the following
Company-owned trademarks for women; LIZ CLAIBORNE and LIZSPORT. The trademark for men is CLAIBORNE
SPORT and trademarks for both men and women include BORA BORA, CURVE, MAMBO, REALITIES, SOUL BY
CURVE, SPARK and SPARK SEDUCTION. The Company also holds the exclusive license for the USHER
fragrance. Refer to Note 4 of Notes to the Consolidated Financial Statements.
SIGRID OLSEN
On January 8, 2008, we announced the closure of the SIGRID OLSEN brand, which is expected to
be completed in the first half of 2008.
PRANA
Our
prAna business, acquired in November 2005, offers men’s and
women’s sportswear, performance tops and bottoms, and
accessories, primarily sold in outdoor and specialty retainers
throughout the United States and in Canada, Europe and Japan. In
February 2008, we announced an agreement to sell substantially all of
the assets and liabilities of our prAna brand, which transaction is
expected to close in the first quarter of 2008. For a discussion of
our acquisition of prAna, see Note 2 of Notes to Consolidated
Financial Statements.
BRANDS REMAINING UNDER STRATEGIC REVIEW
MAC & JAC and KENSIE were acquired in January 2006. MAC & JAC offers modern, fashionable,
high-quality apparel for women and men and KENSIE offers modern, fashionable, high-quality
contemporary apparel for women, in each case, primarily through select specialty and department
stores in the United States and Canada. For a discussion of our acquisition of MAC & JAC, refer to
Note 2 of Notes to the Consolidated Financial Statements.
Specialty Retail Stores:
As of December 29, 2007, we operated a total of 433 specialty retail stores under various
Company trademarks, excluding locations related to brands that have been disposed of in connection
with our strategic review. Such amount is comprised of 284 retail stores within the United States
and 149 retail stores outside of the United States (primarily in Western Europe and Canada).
The following table sets forth select information, as of December 29, 2007, with respect to
our specialty retail stores:
U.S. Specialty Retail Stores
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Approximate Average Store |
Specialty Store Format |
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Number of Stores |
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Size (Square Feet) |
LUCKY BRAND JEANS |
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165 |
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2,400 |
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SIGRID OLSEN (a) |
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54 |
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2,300 |
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JUICY COUTURE |
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36 |
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3,300 |
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KATE SPADE |
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25 |
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2,300 |
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DANA BUCHMAN (a) |
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2 |
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3,800 |
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JACK SPADE |
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1 |
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800 |
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PRANA (b) |
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1 |
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2,100 |
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(a) |
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As result of our decision to close the SIGRID OLSEN brand and the licensing of
the DANA BUCHMAN brand to Kohl’s announced in January 2008, we expect to close all retail
stores related to such brands in the first half of 2008. Some locations will be redeployed
to other direct brand formats. |
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(b) |
|
On February 1, 2008, we announced an agreement to sell
our prAna brands; the transaction is
expected to close in the first quarter of 2008. |
Foreign Retail Specialty Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Average Store |
Specialty Store Format |
|
Number of Stores |
|
Size (Square Feet) |
MEXX |
|
|
99 |
|
|
|
4,500 |
|
MEXX Canada |
|
|
39 |
|
|
|
5,300 |
|
MONET Europe |
|
|
4 |
|
|
|
900 |
|
LUCKY BRAND Canada |
|
|
6 |
|
|
|
2,500 |
|
JUICY COUTURE |
|
|
1 |
|
|
|
3,000 |
|
Outlet Stores:
As of December 29, 2007, we operated a total of 350 outlet stores under various Company-owned
and licensed trademarks, excluding locations related to brands that have been disposed of in
connection with our strategic review. Such amount is comprised of 213 outlet stores within the
United States and 137 outlet stores outside of the United States (primarily in Western Europe and
Canada).
8
The following table sets forth select information, as of December 29, 2007, with respect to
our outlet stores:
U.S. Outlet Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Average Store |
Outlet Store Format |
|
Number of Stores |
|
Size by Square Footage |
LIZ CLAIBORNE |
|
|
130 |
|
|
|
10,400 |
|
ELLEN TRACY (a) |
|
|
16 |
|
|
|
3,600 |
|
DKNYÒ JEANS |
|
|
15 |
|
|
|
3,000 |
|
LUCKY BRAND DUNGAREES |
|
|
15 |
|
|
|
2,700 |
|
JUICY COUTURE |
|
|
15 |
|
|
|
2,500 |
|
KATE SPADE |
|
|
13 |
|
|
|
2,100 |
|
LIZ CLAIBORNE WOMAN |
|
|
6 |
|
|
|
3,000 |
|
DANA BUCHMAN (b) |
|
|
3 |
|
|
|
2,200 |
|
|
|
|
(a) |
|
In February 2008, we announced an agreement to sell
substantially all of the assets and liabilities
of ELLEN TRACY. The transaction is expected to close in the first half of 2008. |
|
(b) |
|
As a result of the licensing of the DANA BUCHMAN brand exclusively to Kohl’s
announced in January 2008, we expect to close all retail stores related to the brand in the
first half of 2008. |
Foreign Outlet Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Average Store |
Outlet Store Format |
|
Number of Stores |
|
Size by Square Footage |
MEXX Canada |
|
|
44 |
|
|
|
5,500 |
|
MEXX |
|
|
40 |
|
|
|
3,300 |
|
LIZ CLAIBORNE Canada |
|
|
37 |
|
|
|
4,400 |
|
LIZ CLAIBORNE Europe |
|
|
9 |
|
|
|
1,200 |
|
YZZA |
|
|
7 |
|
|
|
3,800 |
|
Concession Stores:
Outside of North America, we operate concession stores in select retail stores, which are
either owned or leased by a third-party department store or specialty store retailer. As of
December 29, 2007, the Company operated a total of 680 concession stores in Europe, excluding
locations related to brands that have been disposed of in connection with our strategic review.
The following table sets forth select information, as of December 29, 2007, with respect to
our concession stores:
Foreign Concessions
|
|
|
|
|
Concession Store Format |
|
Number of Stores |
MEXX |
|
|
313 |
|
MONET Jewelry |
|
|
282 |
|
LIZ CLAIBORNE Apparel |
|
|
85 |
|
9
E-Commerce:
Our products are sold on a number of branded websites. In addition, we operate several
websites that only provide information about our merchandise but do not sell directly to customers.
The following table sets forth select information concerning our branded websites, excluding those
related to C & C CALIFORNIA and LAUNDRY BY DESIGN, which were disposed of in connection with our
strategic review:
|
|
|
|
|
|
|
|
|
Information and Direct to |
Website |
|
Information Only |
|
Consumer Sales |
www.claiborne.com
|
|
|
|
Ö |
www.curvefragrances.com
|
|
|
|
Ö |
www.danabuchman.com
|
|
Ö |
|
|
www.dknyjeans.com
|
|
|
|
Ö |
www.ellentracy.com (a)
|
|
Ö |
|
|
www.enyce.com
|
|
|
|
Ö |
www.jackspade.com
|
|
|
|
Ö |
www.juicycouture.com
|
|
|
|
Ö |
www.katespade.com
|
|
|
|
Ö |
www.kensieclothing.com
|
|
Ö |
|
|
www.kensiegirl.com
|
|
Ö |
|
|
www.lizclaiborne.com (b)
|
|
|
|
Ö |
www.lizclaiborneinc.com (c)
|
|
Ö |
|
|
www.lizoutlet.com
|
|
Ö |
|
|
www.loveisnotabuse.com
|
|
Ö |
|
|
www.luckybrandjeans.com
|
|
|
|
Ö |
www.macandjac.com
|
|
Ö |
|
|
www.mexx.com (d)
|
|
|
|
Ö |
www.monetbridal.com
|
|
|
|
Ö |
www.prana.com (e)
|
|
|
|
Ö |
www.realities.com
|
|
|
|
Ö |
www.sigridolsen.com (f)
|
|
|
|
Ö |
www.soulbycurve.com
|
|
|
|
Ö |
|
|
|
(a) |
|
In February 2008, we announced an agreement to
sell substantially all of the assets
and liabilities of ELLEN TRACY. The transaction is expected to close in the
first half of 2008. |
|
(b) |
|
This website offers LIZ CLAIBORNE branded apparel, accessories and
LIZ CLAIBORNE WOMAN. |
|
(c) |
|
This website offers investors information concerning the Company. |
|
(d) |
|
This website offers MEXX branded apparel and accessories for sale
in Germany, France and the Netherlands. |
|
(e) |
|
On February 1, 2008, we announced the agreement to sell
substantially all of the assets and liabilities of our prAna
brand. We expect to close this transaction in the first quarter of 2008. |
|
(f) |
|
In January 2008, we announced that we were closing the SIGRID OLSEN
brand. We expect the closure to be completed in the first half of 2008. |
Licensing:
We license many of our brands to third parties with expertise in certain specialized products
and/or market segments, thereby extending each licensed brand’s market presence. We currently have
64 license arrangements pursuant to which third-party licensees produce merchandise under Company
trademarks in accordance with designs furnished or approved by us, the present terms of which (not
including renewal terms) expire at various dates through 2014. Each of the licenses provides for
the payment to us a percentage of the licensee’s sales of the licensed products against a
guaranteed minimum royalty, which generally increases over the term of the agreement. Income from
our licensing operations is included in Net Sales for the segment under which the license resides.
10
The following table sets forth select information with respect to select aspects of our
licensed brands, excluding those related to LAUNDRY BY DESIGN, which was disposed of in connection
with our strategic review:
|
|
|
Products |
|
Brands |
Audio Speaker Cases
|
|
LUCKY SOUNDS |
Baby Buggies/Rockers/Carriers
|
|
KATE SPADE |
Bed & Bath
|
|
LIZ CLAIBORNE, MEXX, SIGRID OLSEN (a), VILLAGER |
Belts
|
|
AXCESS, CLAIBORNE, CONCEPTS BY CLAIBORNE, ELLEN TRACY (b),
ENYCE, KENSIE |
Blankets/Throws
|
|
LIZ CLAIBORNE |
Cosmetics & Fragrances
|
|
MEXX, NARCISO RODRIGUEZ |
Decorative Fabrics
|
|
LIZ CLAIBORNE |
Dresses/Suits
|
|
ELLEN TRACY (b), LIZ CLAIBORNE, LIZ CLAIBORNE WOMAN, LIZ & CO |
Dress Shirts
|
|
AXCESS, CLAIBORNE, CONCEPTS BY CLAIBORNE |
Flooring/Area Rugs
|
|
LIZ CLAIBORNE |
Footwear
|
|
AXCESS, CLAIBORNE, CONCEPTS BY CLAIBORNE, ELLEN TRACY (b),
ENYCE, JUICY COUTURE, KATE SPADE, KENSIE, LIZ & CO., LIZ CLAIBORNE,
MEXX, VILLAGER |
Formalwear
|
|
CLAIBORNE |
Furniture
|
|
LIZ CLAIBORNE |
Handbags
|
|
ENYCE, KENSIE |
Hard Tabletop
|
|
KATE SPADE |
Intimate Apparel/Underwear
|
|
AXCESS, LIZ CLAIBORNE, KENSIE, LIZ & CO., MEXX |
Jewelry and Hair Accessories
|
|
ENYCE, KENSIE |
Kids/Baby
|
|
CLAIBORNE, ENYCE, JUICY COUTURE, METROCONCEPTS |
Legwear/Socks
|
|
AXCESS, CONCEPTS BY CLAIBORNE , ELLEN TRACY (b), ENYCE,
KENSIE, LIZ CLAIBORNE, MEXX |
Luggage
|
|
CLAIBORNE, CONCEPTS BY CLAIBORNE, LIZ CLAIBORNE, LIZ & CO |
Men’s Accessories
|
|
AXCESS, CLAIBORNE, CONCEPTS BY CLAIBORNE, ENYCE, LUCKY BRAND |
Neckwear/Scarves
|
|
AXCESS, CLAIBORNE, CONCEPTS BY CLAIBORNE, ENYCE, KENSIE, LUCKY BRAND |
Optics
|
|
AXCESS, CLAIBORNE, COMPOSITES — A CLAIBORNE CO, COMPOSITES — A LIZ
CLAIBORNE CO, CONCEPTS BY CLAIBORNE , CRAZY HORSE, DANA
BUCHMAN(c), ELLEN TRACY (b), JUICY COUTURE, KATE
SPADE, LIZ CLAIBORNE, LIZ & CO, LUCKY BRAND, MEXX, SIGRID OLSEN
(a) |
Outerwear
|
|
AXCESS, CLAIBORNE, CLASSICS BY CLAIBORNE, CLASSICS BY LIZ CLAIBORNE,
CONCEPTS BY CLAIBORNE , DANA BUCHMAN (c), ELLEN TRACY
(b), LIZ CLAIBORNE, LIZ CLAIBORNE WOMAN |
Pants
|
|
CLAIBORNE, CONCEPTS BY CLAIBORNE |
Personal and Home Care Products
|
|
LIZ CLAIBORNE, VILLAGER |
School Uniforms
|
|
CLAIBORNE, LIZ CLAIBORNE |
Sleepwear/Loungewear
|
|
AXCESS, CLAIBORNE, CONCEPTS BY CLAIBORNE, KENSIE, LIZ CLAIBORNE, LUCKY
BRAND, MEXX, STAMP 10, VILLAGER |
Slippers
|
|
LIZ CLAIBORNE |
Stationery/Paper Goods
|
|
KATE SPADE, MEXX |
Sunglasses
|
|
AXCESS, CLAIBORNE, DANA BUCHMAN (c), ELLEN TRACY
(b), JUICY COUTURE, KATE SPADE, KENSIE, LIZ & CO., LIZ
CLAIBORNE, LUCKY BRAND, MAC & JAC, MEXX, SIGRID OLSEN (a),
VILLAGER |
Swimwear
|
|
JUICY COUTURE, LIZ CLAIBORNE, LIZ CLAIBORNE WOMAN, LUCKY BRAND, MEXX |
Table Linens
|
|
LIZ CLAIBORNE |
Tailored Clothing
|
|
AXCESS, CLAIBORNE, CONCEPTS BY CLAIBORNE |
Watches
|
|
AXCESS, JUICY COUTURE, KENSIE, LUCKY BRAND, MEXX |
Window Treatments
|
|
LIZ CLAIBORNE |
|
|
|
(a) |
|
In January 2008, we announced that we were discontinuing the SIGRID OLSEN brand.
We expect the closure to be completed in the first half of 2008. |
|
(b) |
|
In February 2008, we announced an agreement to sell substantially all of the assets and liabilities
of ELLEN TRACY. The transaction is expected to close in the first half of 2008. |
|
(c) |
|
As discussed above, we entered into an exclusive license agreement with Kohl’s
naming it as the exclusive retailer for our DANA BUCHMAN brand. |
11
SALES AND MARKETING
Domestic sales accounted for approximately 68% of our 2007 and 70% of our 2006 net sales from
continuing operations. Our domestic wholesale sales are made primarily to department store chains
and specialty store customers. Retail sales are made through our own retail and outlet stores.
Wholesale sales are also made to international customers, military exchanges and to other channels
of distribution.
International sales accounted for approximately 32% of 2007 net sales from continuing
operations, as compared to 30% in 2006. In Europe, wholesale sales are made primarily to
department store and specialty store customers, while retail sales are made through concession
stores within department store locations, as well as our own retail and outlet stores. In Canada,
wholesale sales are made primarily to department store chains and specialty stores, and retail
sales are made through our own retail and outlet stores. In other international markets, including
Asia, the Middle East and Central and South America, we operate principally through third party
licensees, virtually all of which purchase products from us for re-sale at freestanding retail
stores and dedicated department store shops they operate. We also sell to distributors who resell
our products in these territories.
Wholesale sales (before allowances) from continuing operations from both our Direct and
Partnered brands segments to our 100 largest customers accounted for approximately 82% of 2007
wholesale sales (before allowances) from continuing operations (or 67% of net sales from continuing
operations), as compared to approximately 79% of 2006 wholesale sales (before allowances) from
continuing operations (or 66% of net sales from continuing operations). No single customer
accounted for more than 7% of wholesale sales (before allowances) from continuing operations for
2007 and 2006, (or 5% of net sales from continuing operations for 2007 and 2006), except for
Macy’s, Inc., which accounted for approximately 17% and 21% of wholesale sales (before allowances)
from continuing operations for 2007 and 2006, respectively, or 14% and 17% of net sales from
continuing operations for 2007 and 2006, respectively. See Note 11 of Notes to the Consolidated
Financial Statements. Many major department store groups make centralized buying decisions;
accordingly, any material change in our relationship with any such group could have a material
adverse effect on our operations. We expect that our largest customers will continue to account
for a significant percentage of our sales. Sales to the Company’s domestic department and specialty
store customers are made primarily through our New York City showrooms. Internationally, sales to
our department and specialty store customers are made through several of our showrooms, including
those in the Netherlands, Germany and the United Kingdom.
For further information concerning our domestic and international sales, see Note 21 of Notes
to Consolidated Financial Statements and “Item 7 — Management’s Discussion and Analysis of
Financial Condition and Results of Operations — Overview; Competitive Profile,” below.
Orders from our customers generally precede the related shipping periods by several months.
Our largest customers discuss with us retail trends and their plans regarding their anticipated
levels of total purchases of our products for future seasons. These discussions are intended to
assist us in planning the production and timely delivery of our products. We continually monitor
retail sales in order to directly assess consumer response to our products.
We have implemented in-stock reorder programs in several divisions to enable customers to
reorder certain items through electronic means for quick delivery. See “Manufacturing” below.
Many of our retail customers participate in our in-stock reorder programs through their own
internal replenishment systems.
During 2007, we continued our domestic in-store sales, marketing and merchandising programs
designed to encourage multiple item regular price sales, build one-on-one relationships with
consumers and maintain our merchandise presentation standards. These programs train sales
associates on suggested selling techniques, product, merchandise presentation and client
development strategies and are offered for many of our brands, including our JUICY COUTURE, LIZ
CLAIBORNE and LUCKY BRAND brands and our licensed DKNY® JEANS brand.
In 2007, we continued the expansion of our domestic in-store shop and fixture programs, which
is designed to enhance the presentation of our products on department store selling floors
generally through the use of proprietary fixturing, merchandise presentations and in-store
graphics. In-store shops operate under the following brand names: AXCESS, CLAIBORNE,
CONCEPTS BY CLAIBORNE, DANA BUCHMAN, DKNY® JEANS, ELLEN TRACY, JUICY COUTURE, KATE SPADE, LIZ
CLAIBORNE, LIZ & CO, LUCKY BRAND, MEXX, ENYCE, KENSIE, SIGRID OLSEN and VILLAGER. Our Accessories
brand also offers an in-store shop and fixture program. In 2007, we installed, in the aggregate,
approximately 650 in-store shops and, in 2008, we plan to install, in the aggregate, approximately
650 additional in-store shops. See “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Financial Position, Capital Resources and Liquidity.”
12
We spent approximately $214 million on advertising, marketing and promotion for all of our
brands in 2007, including approximately $63 million on national advertising, compared to aggregate
advertising, marketing and promotion expenditures in 2006 of approximately $184 million, including
approximately $51 million on national advertising.
MANUFACTURING
We do not own any product manufacturing facilities; all of our products are manufactured in
accordance with our specifications through arrangements with independent suppliers.
Products produced in Asia represent a substantial majority of the Company’s sales. We also
source product in the United States and other regions. During 2007, several hundred suppliers,
located in approximately 46 countries, manufactured our products, with the largest finished goods
supplier accounting for approximately 4% of the total of finished goods we purchased. We
continually seek additional qualified suppliers throughout the world for our sourcing needs and
seek to allocate our production requirements to suppliers appearing to have superior capacity,
quality (of product, operation and human rights compliance) and financial resources. Our purchases
from our suppliers are processed utilizing individual purchase orders specifying the price and
quantity of the items to be produced. We do not have any long-term, formal arrangements with any
of the suppliers that manufacture our products.
Most of our products are purchased as completed product “packages” from our manufacturing
contractors, where the contractor purchases all necessary raw materials and other product
components, according to our specifications. When we do not purchase “packages”, we obtain
fabrics, trimmings and other raw materials in bulk from various foreign and domestic suppliers,
which items are then delivered to our manufacturing contractors for use in our products. We do not
have any long-term, formal arrangements with any supplier of raw materials. To date, we have
experienced little difficulty in satisfying our raw material requirements and consider our sources
of supply adequate.
We operate under substantial time constraints in producing each of our collections. See
“Sales and Marketing” above. In order to deliver, in a timely manner, merchandise which reflects
current tastes, we attempt to schedule a substantial portion of our materials and manufacturing
commitments relatively late in the production cycle, thereby favoring suppliers able to make quick
adjustments in response to changing production needs. However, in order to secure necessary
materials and manufacturing facilities, we must make substantial advance commitments, often as much
as five months prior to the receipt of firm orders from customers for the items to be produced. We
continue to seek to reduce the time required to move products from design to the customer.
If we should misjudge our ability to sell our products, we could be faced with substantial
outstanding fabric and/or manufacturing commitments, resulting in excess inventories. See “Item 1A
- Risk Factors” below.
Our arrangements with foreign suppliers are subject to the risks of doing business abroad,
including currency fluctuations and revaluations, restrictions on the transfer of funds, terrorist
activities, pandemic disease and, in certain parts of the world, political, economic and currency
instability. Our operations have not been materially affected by any such factors to date.
However, due to the very substantial portion of our products that are produced abroad, any
substantial disruption of our relationships with our foreign suppliers could adversely affect our
operations.
In
addition, as we rely on independent manufacturers, a
manufacturer’s failure to ship product to us in a timely manner,
or to meet quality or safety standards, could cause us to miss
delivery dates to our customers. Failure to make
deliveries could cause customers to cancel orders, refuse deliveries
or seek reduced prices, all of which could have a material adverse
effect on us.
We expect all of our suppliers to adhere to the Liz Claiborne Standards of Engagement, which
include standards relating to child labor, working hours, wage payments and working conditions
generally. We have an ongoing program in place to monitor our suppliers’ compliance with our
standards. In this regard, each year, our internal or external monitors inspect a substantial
portion of our suppliers’ factories. Should we learn of a supplier’s failure to comply with our
standards, we urge the supplier to act quickly in order to comply. If a supplier fails to correct a
compliance deficiency, or if we determine that the supplier will be unable to correct a deficiency,
we may terminate our business relationship with the supplier. In addition, we are a participating
company in the Fair Labor Association’s program. The Fair Labor Association is a non-profit
organization dedicated to improving working conditions worldwide. Our human rights compliance
program was accredited by the Fair Labor Association in May 2005. This accreditation must be
renewed every three years.
Additionally, we are a certified and validated member of the United States Customs and Border
Protection’s Customs-Trade Partnership Against Terrorism (C-TPAT) program and expect all of our
suppliers shipping to the United States to adhere to the Company’s C-TPAT requirements, including
standards relating to facility security, procedural security, personnel security, cargo security
and the overall protection of the supply chain. In the event a supplier does not comply with our
C-TPAT requirements or if we determine that the supplier will be unable to correct a deficiency, we
may terminate our business relationship with the supplier.
13
IMPORTS AND IMPORT RESTRICTIONS
Virtually all of our merchandise imported into the United States, Canada and Europe is subject
to duties. Until January 1, 2005, our apparel merchandise was also subject to quota. Quota
represents the right, pursuant to bilateral or other international trade arrangements, to export
amounts of certain categories of merchandise into a country or territory pursuant to a visa or
license. Pursuant to the Agreement on Textiles and Clothing, quota on textile and apparel
products was eliminated for World Trade Organization (“WTO”) member countries, including the
United States, Canada and European countries, on January 1, 2005. Notwithstanding quota
elimination, China’s accession agreement for membership in the WTO provides that WTO member
countries (including the United States, Canada and European countries) may re-impose quotas on
specific categories of products in the event it is determined that imports from China have surged
and are threatening to create a market disruption for such categories of products (so called
“safeguard quota provisions”). During 2005, the United States and China agreed to a new quota
arrangement, which will impose quotas on certain textile products through the end of 2008. In
addition, the European Union also agreed with China on a new textile arrangement, which imposed
quotas through the end of 2007. The European Union and China have
announced that they will jointly monitor the volume of trade in a
number of highly sensitive product categories during 2008. The United States may also unilaterally impose additional duties
in response to a particular product being imported (from China or other countries) in such
increased quantities as to cause (or threaten) serious damage to the relevant domestic industry
(generally known as “anti-dumping” actions). In addition, China has imposed an export tax on all
textile products manufactured in China; we do not believe this tax will have a material impact on
our business. In January 2007, the U.S. federal government imposed a Vietnam Import Monitoring
Program on five broad product groups — shirts, trousers, sweaters, underwear, and swimwear — to
determine whether any of those imports might be unfairly traded, due to dumping. The review period
will last for the remainder of 2008 with six-month reviews of data collected. If dumping is
suspected, the U.S. Government will self-initiate a dumping case on behalf of the U.S. textile
industry, which could significantly affect our costs. Furthermore, additional duties, generally
known as countervailing duties, can also be imposed by the U.S. Government to offset subsidies
provided by a foreign government to foreign manufacturers if the importation of such subsidized
merchandise injures or threatens to injure a U.S. industry. Recent developments have now made it
possible to impose countervailing duties on products from non-market economies, such as China,
which would significantly affect our costs.
We are also subject to other international trade agreements and regulations, such as the North
American Free Trade Agreement, the Central American Free Trade Agreement and the Caribbean Basin
Initiative. In addition, each of the countries in which our products are sold has laws and
regulations covering imports. Because the U.S. and the other countries in which our products are
manufactured and sold may, from time to time, impose new duties, tariffs, surcharges or other
import controls or restrictions, including the imposition of “safeguard quota,” or adjust presently
prevailing duty or tariff rates or levels, we maintain a program of intensive monitoring of import
restrictions and opportunities. We strive to reduce our potential exposure to import related risks
through, among other things, adjustments in product design and fabrication and shifts of production
among countries and manufacturers.
In light of the very substantial portion of our products that are manufactured by foreign
suppliers, the enactment of new legislation or the administration of current international trade
regulations, executive action affecting textile agreements, or changes in sourcing patterns
resulting from the elimination of quota, could adversely affect our operations. Although we
generally expect that the elimination of quota will result, over the long term, in an overall
reduction in the cost of apparel produced abroad, the implementation of any “safeguard quota
provisions”, “countervailing duties” or any “anti-dumping” actions may result, over the near term,
in cost increases for certain categories of products and in disruption of the supply chain for
certain products categories. See “Item 1A — Risk Factors” below.
Apparel and other products sold by us are also subject to regulation in the U.S. and other
countries by other governmental agencies, including, in the U.S., the Federal Trade Commission,
U.S. Fish and Wildlife Service and the Consumer Products Safety Commission. These regulations
relate principally to product labeling, content and safety requirements, licensing requirements and
flammability testing. We believe that we are in substantial compliance with those regulations, as
well as applicable federal, state, local, and foreign regulations relating to the discharge of
materials hazardous to the environment. We do not estimate any significant capital expenditures for
environmental control matters either in the current year or in the near future. Our licensed
products and licensing partners are also subject to regulation. Our agreements require our
licensing partners to operate in compliance with all laws and regulations, and we are not aware of
any violations which could reasonably be expected to have a material adverse effect on our business
or results of operations.
Although we have not suffered any material inhibition from doing business in desirable markets
in the past, we cannot assure that significant impediments will not arise in the future as we
expand product offerings and introduce additional trademarks to new markets.
14
DISTRIBUTION
We distribute a substantial portion of our products through facilities we own or lease. Our
principal distribution facilities are located in California, New Jersey, Ohio, Pennsylvania, Rhode
Island and the Netherlands. See “Item 2 — Properties” below.
BACKLOG
On February 15, 2008, our order book reflected unfilled customer orders for approximately $1.0
billion of merchandise, as compared to approximately $1.2 billion at February 16, 2007. These
orders represent our order backlog. The amounts indicated include both confirmed and unconfirmed
orders, which we believe, based on industry practice and our past experience, will be confirmed.
We expect that substantially all such orders will be filled within the 2008 fiscal year. We note
that the amount of order backlog at any given date is materially affected by a number of factors,
including seasonal factors, the mix of product, the timing of the receipt and processing of
customer orders and scheduling of the manufacture and shipping of the product, which in some
instances is dependent on the desires of the customer. Accordingly, order book data should not be
taken as providing meaningful period-to-period comparisons.
TRADEMARKS
We own most of the trademarks used in connection with our businesses and products. We also
act as licensee of certain trademarks owned by third parties.
The following table summarizes the principal trademarks we own and/or use in connection with
our businesses and products, excluding those related to brands (i) that have been disposed of or
discontinued (C & C CALIFORNIA, ELISABETH, EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES, LAUNDRY BY
DESIGN and TAPEMEASURE), (ii) that we have announced we will be discontinuing (FIRST ISSUE, SIGRID
OLSEN, STAMP 10 and TINT) and (iii) for which we have entered a definitive agreement to dispose of
in connection with our strategic review (ELLEN TRACY, LINDA ALLARD ELLEN TRACY, prAna and TRACY
ELLEN TRACY):
|
|
|
|
|
|
|
|
|
AXCESS
|
|
|
|
LIZ CLAIBORNE |
|
|
CLAIBORNE
|
|
|
|
LUCKY BRAND |
|
|
CONCEPTS BY CLAIBORNE
|
|
|
|
LUCKY YOU LUCKY BRAND |
|
|
COUTURE COUTURE
|
|
|
|
MAC & JAC |
|
|
CURVE
|
|
|
|
MARVELLA |
|
|
DANA BUCHMAN (a)
|
|
|
|
MEXX |
|
|
ENYCE
|
|
|
|
MONET |
|
|
JACK SPADE
|
|
|
|
MONET 2 |
|
|
JUICY COUTURE
|
|
|
|
NARCISO RODRIGUEZ |
|
|
KATE SPADE
|
|
|
|
REALITIES |
|
|
KENSIE
|
|
|
|
TRIFARI |
|
|
LIZ
|
|
|
|
VILLAGER |
|
|
LIZ & CO
|
|
|
|
XX BY MEXX |
|
|
|
|
|
|
|
Licensed Trademarks |
|
|
|
|
|
|
|
|
|
|
|
|
|
DKNYÒ ACTIVE |
|
|
|
|
|
|
DKNYÒ JEANS |
|
|
|
|
|
|
USHER(b) |
|
|
|
|
|
|
|
(a) |
|
On January 17, 2008, we announced that we entered into an exclusive
license agreement with Kohl’s, naming Kohl’s as the
exclusive retailer for the DANA BUCHMAN brand. As a result, we expect to close our current DANA BUCHMAN
operations in the first half of 2008 and that the launch of the DANA BUCHMAN line in
Kohl’s stores will occur no later than the first quarter of 2009. |
|
(b) |
|
Refer to Note 4 of Notes to the Consolidated Financial Statements. |
In addition, we own and/or use many other logos and secondary trademarks, such as the JUICY
COUTURE crest and the LUCKY BRAND clover mark, associated with the above mentioned trademarks.
15
We have registered, or applied for registration of, a multitude of trademarks throughout the
world, including those referenced above, for use on a variety of apparel and apparel-related
products, including accessories, home furnishings, cosmetics and jewelry, as well as for retail
services. We regard our trademarks and other proprietary rights as valuable assets and believe that
they have significant value in the marketing of our products. We vigorously protect our trademarks
and other intellectual property rights against infringement.
In general, trademarks remain valid and enforceable as long as the marks are used in
connection with the related products and services and the required registration renewals are filed.
We regard the license to use the trademarks and our other proprietary rights in and to the
trademarks as valuable assets in marketing our products and, on a worldwide basis, vigorously seek
to protect them against infringement. As a result of the appeal of our brands, our products have
from time to time been the object of counterfeiting. We have implemented an enforcement program,
which we believe has been generally effective in controlling the sale of counterfeit products in
the U.S. and in major markets abroad.
In markets outside of the U.S., our rights to some or all of our trademarks may not be clearly
established. In the course of our international expansion, we have experienced conflicts with
various third parties who have acquired ownership rights in certain trademarks, including “Lucky
and “Juicy,” which would impede our use and registration of some of our principal trademarks. While
such conflicts are common and may arise again from time to time as we continue our international
expansion, we have generally successfully resolved such conflicts in the past through both legal
action and negotiated settlements with third-party owners of the conflicting marks. Although we
have not in the past suffered any material restraints or restrictions on doing business in
desirable markets or in new product categories, we cannot assure that significant impediments will
not arise in the future as we expand product offerings and additional brands to new markets.
COMPETITION
Notwithstanding our position as one of the largest fashion apparel and related accessories
companies in the United States, we are subject to intense competition as the apparel and related
product markets are highly competitive, both within the United States and abroad. We compete with
numerous designers and manufacturers of apparel and accessories, and fragrances, both domestic and
foreign. We compete primarily on the basis of fashion, quality and price, and our ability to
compete successfully depends upon a variety of factors, including among other things our ability
to:
|
• |
|
anticipate and respond to changing consumer demands in a timely manner; |
|
|
• |
|
develop quality and differentiated products that appeal to consumers; |
|
|
• |
|
appropriately price products; |
|
|
• |
|
establish and maintain favorable brand name and recognition; |
|
|
• |
|
maintain and grow market share; |
|
|
• |
|
establish and maintain acceptable relationships with our retail customers; |
|
|
• |
|
provide appropriate service and support to retailers; |
|
|
• |
|
provide effective marketing support and brand promotion; |
|
|
• |
|
appropriately identify size and location of our retail stores and department store
selling space; |
|
|
• |
|
protect our intellectual property; and |
|
|
• |
|
optimize our retail and supply chain capabilities. |
See
“Item 1A-Risk Factors”.
Within our U.S.-based, retail-focused Direct Brands segment, our principal competitors vary by
brand and include the following:
|
• |
|
For JUICY COUTURE: Theory, Diane Von Furstenberg, BCBG, Marc by Marc Jacobs, D&G and
Vince |
|
|
• |
|
For LUCKY BRAND JEANS: Diesel, Guess, True Religion and 7 for all Mankind |
|
|
• |
|
For KATE SPADE: Coach, Cole Haan, Michael Kors and Tory Burch (Accessories) |
The principal competitors of our MEXX European business include Esprit, Zara and InWear/Matinique.
Our principal competitors in the United States for the majority of the wholesale-based
Partnered Brands segment (LIZ CLAIBORNE and MONET families of brands and our licensed DKNY® JEANS
and DKNY® ACTIVE brands) include Jones Apparel Group, Inc., Polo Ralph Lauren Corporation, as well
as department store private label brands. For ENYCE, competitors include Ecko, Rocawear and Sean
John.
16
EMPLOYEES
At December 29, 2007, we had approximately 16,500 full-time employees worldwide, as compared
to approximately 17,000 full-time employees at December 30, 2006.
In the United States and Canada, we are bound by collective bargaining agreements with UNITE
HERE (which was previously known as the Union of Needletrades, Industrial and Textile Employees,
prior to its merger with the Hotel Employees and Restaurant Employees International Union) and with
related locals. Most of the UNITE HERE represented employees are employed in warehouse and
distribution facilities we operate within the United States (California, New Jersey, Ohio,
Pennsylvania and Rhode Island), and in Canada (Vancouver, British Columbia, and Montreal, Quebec).
The agreements with UNITE HERE expire in May 2009, other than the local agreements covering
employees at our Cincinnati, Ohio facility, which expire in June 2008. Collectively, these
agreements cover approximately 1,300 of our full-time employees. While relations between the
Company and the union have historically been amicable, the Company cannot rule out the possibility
of a labor dispute at one or more of its facilities. In addition, we are bound by an agreement with
the Industrial Professional & Technical Workers International Union, covering approximately 180 of
our full-time employees at our Santa Fe Springs, California facility and expiring on May 14, 2010.
We consider our relations with our employees to be satisfactory and to date we have not
experienced any interruption of our operations due to labor disputes. For a discussion regarding
our recent announcement concerning a reduction in our workforce, see “Item 7 — Management’s
Discussion and Analysis of Financial Condition and Results of Operations — Overview; Competitive
Profile,” below.
Item 1A. Risk Factors.
The
following risk factors should be read carefully in connection with
evaluating our business and the forward-looking statements contained
in this Annual Report on Form 10-K or in any other written or
oral communication made by or with the approval of any of our
authorized personnel. Any of the following risks
could materially adversely affect us, our business, our operating
results, our financial condition and the actual outcome of matters
as to which forward-looking statements are made in this Report.
Risks Related to Our Business and Our Long-Term Growth Strategy
We cannot assure the successful implementation and results of the long-term strategic plan that we
announced in July 2007.
Our ability to execute our long-term growth plan and achieve our projected results is subject
to a variety of risks, including the following:
|
• |
|
In June 2007, we announced that we reorganized our Company into five
operating segments that aggregate into two reportable segments, Direct
Brands and Partnered Brands, and realigned our management structure
around this new organization. There can be no assurances that such
restructuring and realignment will improve our operations or our
results. |
|
• |
|
As part of our strategic plan, we designated 16 brands for strategic
review, which included possible sale, licensing or closure. There can
be no assurances that we appropriately identified the appropriate
brands for strategic review or that we appropriately valued the assets
which we have sold or licensed to third parties. Moreover, we have
not closed the previously announced sales of our prAna and ELLEN TRACY
brands, and such closings are subject to a variety of closing
conditions; accordingly, there can be no assurances that those
transactions will in fact close. |
|
• |
|
Our strategic plan involves a significant expansion of our specialty
retail business. The successful operation and expansion of our
specialty retail business in our Direct Brands segment is subject to,
among other things, our ability to successfully expand the specialty
store base of our Direct Brands segment, our ability to successfully
find appropriate sites, negotiate favorable leases, design and create
appealing merchandise, appropriately manage inventory levels, install
and operate effective retail systems, apply appropriate pricing
strategies and integrate such stores into our overall business mix.
There can be no assurances that we can be successful in this regard,
and our inability to successfully expand our specialty retail business
would have a material adverse effect on our results. |
|
• |
|
We have announced a number of initiatives designed to achieve greater
collaboration with our wholesale customers and to improve results of
the Company’s wholesale-based Partnered Brands. These initiatives
include design agreements with Isaac Mizrahi with respect to our LIZ
CLAIBORNE brand and John Bartlett with respect to our CLAIBORNE
(men’s) brand. Our wholesale customers have been seeking
differentiated product and we believe that these design agreements
will enable us to distinguish our product offering. However, there
can be no assurances that these arrangements will result in improved
product or that the resulting products will be acceptable to our
wholesale customers or consumers. |
|
• |
|
The successful implementation of our strategic plan will require us to
evolve our supply chain system, including our product development,
sourcing, logistics and technology functions, to reduce product
cycle-time and costs and meet customer demands and the requirements of
the projected growth of our retail-based Direct Brands segment. There
can be no assurances that we can be successful in these efforts and
our failure to evolve our supply chain capabilities and reduce costs
in this area will have a material adverse impact on our business and
results. |
|
• |
|
We previously announced that our structural realignment and other
initiatives would yield substantial cost savings, and that we expected
such savings would drive operating margin expansion beginning in 2008.
There can be no assurances that we can successfully implement the
anticipated cost savings as announced on June 20, 2007. |
17
• |
|
Our strategic plan focuses on building strong brands through increased
marketing spending. Our ability to fund such efforts is critical to
the success of our strategy. Our inability to fund marketing
initiatives appropriate to support our strategic plan will have a
material adverse impact on our ability to achieve the growth we
project in our Direct Brands segment. |
We cannot assure that we can attract and retain talented highly qualified executives, or maintain
satisfactory relationships with our employees, both union and non-union.
Our success depends, to a significant extent, both upon the continued services of these
individuals, as well as our ability to attract, hire, motivate and retain additional talented and
highly qualified management in the future, including in the areas of design, merchandising, sales,
supply chain, marketing, production and systems, as well as our ability to hire and train qualified
retail management and associates. In addition, we will need to provide for the succession of
senior management. The loss of key members of management and our failure to successfully plan for
succession could disrupt our operations and our ability to successfully operate our business and
execute our strategic plan.
At the 2007 fiscal year end, we had approximately 16,500 full-time employees worldwide. We are
bound by a variety of collective bargaining agreements with two unions, covering approximately
1,480 employees, mostly in our warehouse and distribution facilities. We consider our relations
with our non-union and union employees to be satisfactory and to date we have not experienced any
interruption of our operations due to labor disputes. While our relations with the unions have
historically been amicable, the Company cannot rule out the possibility of a labor dispute at one
or more of its facilities, particularly in light of facility closings. Any such dispute could have
a material adverse impact on our business.
The success of our business depends on our ability to respond to constantly changing consumer
demands and tastes and fashion trends, across multiple product lines, shopping channels and
geographies.
The apparel and accessories industries have historically been subject to rapidly changing
consumer demands and tastes and fashion trends. We believe that our success is largely dependent on
our ability to effectively anticipate, gauge and respond to changing consumer demands and taste,
across multiple product lines, shopping channels and geographies, in the design, pricing, styling
and production of our products and in the merchandising and pricing of products in our retail
stores. Our products must appeal to a broad range of consumers whose preferences cannot be
predicted with certainty and are subject to constant change. Also, we must maintain and enhance
favorable brand recognition, which may be affected by consumer attitudes towards the desirability
of fashion products bearing a “mega brand” label and which are widely available at a broad range of
retail stores.
We attempt to schedule a substantial portion of our materials and manufacturing commitments
relatively late in the production cycle; however, in order to secure necessary materials and
manufacturing facilities, we must make substantial advance commitments, often as much as five
months prior to the receipt of firm orders from customers for the items to be produced. We need to
translate market trends into appropriate, saleable product offerings relatively far in advance,
while minimizing excess inventory
positions, and correctly balance the level of our fabric and/or merchandise commitments with
actual customer orders. We cannot assure that we will be able to continue to develop appealing
styles and brands or successfully meet changing customer and consumer demands in the future. In
addition, we cannot assure any new products or brands that we introduce will be successfully
received and supported by our wholesale customers or consumers. Our failure to gauge consumer
needs and fashion trends and respond appropriately, and to appropriately forecast our ability to
sell products, could adversely affect retail and consumer acceptance of our products and leave us
with substantial outstanding fabric and/or manufacturing commitments,
resulting in increases in unsold inventory or missed opportunities. If that occurs, we may need to employ
markdowns or promotional sales to dispose of excess inventory, which may harm our business and
results. At the same time, our focus on inventory management may result, from time to time, in our
not having a sufficient supply of products to meet demand and cause us to lose potential sales.
Our business could suffer if we cannot adequately establish, defend and protect our trademarks and
other proprietary rights.
We believe that our trademarks and other proprietary rights are significantly important to our
success and competitive position. Accordingly, we devote substantial resources to the establishment
and protection of our trademarks and anti-counterfeiting activities on a worldwide basis.
Counterfeiting of our products, particularly our JUICY COUTURE, LUCKY BRAND and KATE SPADE brands,
continues, however, and in the course of our international expansion we have experienced conflicts
with various third parties that have acquired or claimed ownership rights in some of our trademarks
or otherwise have contested our rights to our trademarks. We have, in the past, resolved certain of
these conflicts through both legal action and negotiated settlements, none of which, we believe,
has had a material impact on our financial condition and results of operations. There can be no
assurances that the actions taken to establish and protect our trademarks and other proprietary
rights will be adequate to prevent imitation of our products by others or to prevent others from
seeking to block sales of our products as a violation of their trademarks and proprietary rights.
Moreover, there can be no assurances that in certain countries others will not assert rights in, or
ownership of, our trademarks and
18
other proprietary rights or that we will be able to successfully
resolve such conflicts. In addition, the laws of certain foreign countries may not protect
proprietary rights to the same extent as do the laws of the United States. The loss of such
trademarks and other proprietary rights, or the loss of the exclusive use of such trademarks and
other proprietary rights, could have a material adverse effect on us. Any litigation regarding our
trademarks or other proprietary rights could be time consuming and costly.
Our success will depend on our ability to successfully develop or acquire new product lines or
enter new markets or product categories.
We have in the past, and may, from time to time, acquire or develop new product lines and/or
enter new markets or product categories, including through licensing arrangements. This would
include our acquisition of KATE SPADE in 2006, our agreement with NARCISO RODRIGUEZ, the license of
our DANA BUCHMAN brand to Kohl’s and the sale of our LIZ & CO. and CONCEPTS BY CLAIBORNE brands
outside of better department stores. These activities are accompanied by a variety of risks
inherent in any such new business venture, including the following:
• |
|
Our ability to identify appropriate business development
opportunities, including new product lines and markets. |
|
• |
|
New businesses, product lines or market activities may require methods
of operations, investments and marketing and financial strategies
different from those employed in our other businesses, and may also
involve buyers, store customers and/or competitors different from our
historical buyers, store customers and competitors. |
|
• |
|
We may not be able to generate projected or satisfactory level of
sales, profits and/or return on investment for a new business or
product line, and may also encounter unanticipated events and unknown
or uncertain liabilities that could materially impact our business. |
|
• |
|
We may experience possible difficulties, delays and/or unanticipated
costs in integrating the business, operations, personnel and/or
systems of an acquired business and may also not be able to retain and
appropriately motivate key personnel of an acquired business. |
|
• |
|
We may not be able to maintain product licenses, which are subject to
agreement with a variety of terms and conditions, or to enter into new
licenses to enable us to launch new products and lines. |
|
• |
|
With respect to a business where we act as licensee, such as our
licensed DKNY JEANS® and DKNY ACTIVE® brands and our NARCISO RODRIGUEZ
brand, there are a number of inherent risks, including, without
limitation, compliance with terms set forth in the applicable license
agreements, including among other things the maintenance of certain
levels of sales and the public perception and/or acceptance of the
licensor’s brands or other product lines, which are not within our
control. |
Our
ability to continue to have the liquidity necessary, through cash
flow from operations and financing, may be adversely impacted by a
number of factors, including the downgrading of our credit rating.
Our
primary ongoing cash requirements are to fund growth in working
capital (primarily accounts receivable and inventory), to invest in
our supply chain and information systems, to fund investment in
marketing and capital expenditures, and to fund our anticipated
retail store expansion, as well as expenditures for in-store
merchandise shops and normal maintenance activities. We also require
cash to fund potential acquisitions and payments related to earn-out
provisions of existing acquisition agreements.
In addition, we will require cash to fund any repurchase of Company stock under our
previously announced share repurchase programs. Our historical sources of liquidity to fund ongoing cash
requirements include cash flows from operations, cash and cash equivalents and securities on hand,
as well as borrowings through our commercial paper program and bank lines of credit
(which include revolving and trade letter of credit facilities).
We
anticipate that cash flows from operations, our commercial paper
program and bank and letter of credit facilities will be sufficient
to fund our liquidity requirements for the next twelve months and
that we will be able to adjust the amounts available under these
facilities if necessary. Such sufficiency and availability may be
adversely affected by a variety of factors, including, without
limitation, our ability to execute our strategy, retailer and
consumer acceptance of our products, which may impact our financial
performance, maintenance of our investment-grade credit rating,
maintenance of financial covenants (as amended) of our debt and
credit facilities, as well as interest rate and exchange rate
fluctuations. We can not be certain that any additional required
financing, whether debt or equity,
will be available in amounts needed or on terms acceptable to us, if at all.
On
August 8, 2007 and September 10, 2007 Moody’s and Standard &
Poor’s (“S&P”), respectively, completed a review
of our credit rating. Moody’s lowered the senior unsecured debt
rating to Baa3 from Baa2 and the commercial paper rating to Prime-3
from Prime-2. S&P affirmed our BBB unsecured debt rating and
lowered the commercial paper rating to A-3 from A-2. On February 15,
2008, Moody’s placed our Baa3 senior unsecured and Prime-3
commercial paper ratings under review for possible downgrade. There
can be no assurance that we will not be further downgraded by either
Moody’s or S&P, and any such additional downgrade could
adversely impact our ability to obtain financing in amounts needed or on
terms acceptable to us, if at all.
Risks Associated With Competition and the Marketplace
The markets in which we operate are highly competitive, both within the United States and abroad.
We face intense competitive challenges from other domestic and foreign fashion apparel and
accessories producers and retailers. Competition is based on a number of factors, including the
following:
• |
|
Anticipating and responding to changing consumer demands in a timely manner; |
|
• |
|
Establishing and maintaining favorable brand name and recognition; |
|
• |
|
Product quality; |
|
• |
|
Maintaining and growing market share; |
|
• |
|
Developing quality and differentiated products that appeal to consumers; |
|
• |
|
Establishing and maintaining acceptable relationships with our retail customers; |
|
• |
|
Pricing products appropriately; |
|
• |
|
Providing appropriate service and support to retailers; |
|
• |
|
Optimizing our retail and supply chain capabilities; |
|
• |
|
Size and location of our retail stores and department store selling space; and |
|
• |
|
Protecting intellectual property. |
Any increased competition, or our failure to adequately address these competitive factors,
could result in reduced sales or prices, or both, which could have a material adverse effect on us.
We also believe there is an increasing focus by the department stores to concentrate an increasing
portion of their product assortments within their own private label products. These private label
lines compete directly with our product lines and may receive prominent positioning on the retail
floor by department stores.
Our wholesale business is largely dependent on sales to a limited number of large U. S. department
store customers, and our business could suffer as a result of consolidations, restructurings and
other ownership changes in the retail industry.
Our 100 largest customers from both our Direct and Partnered Brands segments accounted for
approximately 82% of 2007 wholesale sales (before allowances) from continuing operations (or 67% of
net sales from continuing operations).
19
See “Item 1-Business-Sales and Marketing.” Many major
department store groups make centralized buying decisions; accordingly, any material change in our
relationship with any such group could have a material adverse effect on our operations. We expect
that our largest customers will continue to account for a significant percentage of our sales.
Our dependence on sales to a limited number of large U.S. department store customers is
subject to our ability to respond effectively to, among other things, (i) these customers’ buying
patterns, including their purchase and retail floor space commitments for apparel in general
(compared with other product categories they sell) and our products specifically (compared with
products offered by our competitors, including with respect to customer and consumer acceptance,
pricing and new product introductions); (ii) these customers’ strategic and operational
initiatives, including their continued focus on further development of their “private label”
initiatives; (iii) these customers’ desire to have the Company provide them with exclusive and/or
differentiated designs and product mixes; (iv) these customers’ requirements for vendor margin
support; (v) any credit risks presented by these customers, especially given the significant
proportion of the Company’s accounts receivable they represent; and (vi) the effect of any
potential consolidation among one or more of these larger customers, such as the merger between
Macy’s Inc. and The May Department Store Company.
We do not enter into long-term agreements with any of our customers. Instead, we enter into a
number of purchase order commitments with our customers for each of our lines every season. A
decision by the controlling owner of a group of stores or any other significant customer, whether
motivated by competitive conditions, financial difficulties or otherwise, to decrease or eliminate
the amount of merchandise purchased from us or to change their manner of doing business with us
could have a material adverse effect on our business or financial condition.
We sell our wholesale merchandise primarily to major department stores across the U.S. and
Europe and extend credit based on an evaluation of each customer’s financial condition, usually
without requiring collateral. However, the financial difficulties of a customer could cause us to
curtail or eliminate business with that customer. We may also assume
more credit risk relating to our receivables from
that customer. Our inability to collect on our trade accounts receivable from any of
our largest customers could have a material adverse effect on our business or financial condition.
Our reliance on independent manufacturers could cause delay and loss and damage our reputation and
customer relationships.
We do not own any product manufacturing facilities; all of our products are manufactured in
accordance with our specifications through arrangements with independent suppliers. Products
produced in Asia represent a substantial majority of our sales. We also source product in the
United States and other regions. During 2007, several hundred suppliers, located in approximately
46 countries, manufactured our products, with the largest finished goods supplier accounting for
approximately 4% of the total of finished goods we purchased. A supplier’s failure to manufacture
and deliver products to us in a timely manner or to meet our quality standards could cause us to
miss the delivery date requirements of our customers for those items. The failure to make timely
deliveries may drive customers to cancel orders, refuse to accept deliveries or demand reduced
prices, any of which could have a material adverse effect on us and our reputation in the
marketplace. Also, a manufacturer’s failure to comply with safety and content regulations and
standards, including with respect to children’s product and fashion jewelry, could result in
substantial liability and damage to our reputation. While we provide our manufacturers with
standards and we employ independent testing for safety and content issues, there can be no
assurances that we will be able to prevent or detect all failures of our manufacturers to comply
with such standards and regulations.
We require our independent manufacturers (as well as our licensees) to operate in compliance
with applicable laws and regulations. While our internal and vendor operating guidelines promote
ethical business practices and our staff periodically visits and monitors the operations of our
independent manufacturers, we do not control these manufacturers or their labor practices. The
violation of labor or other laws by an independent manufacturer used by us (or any of our
licensees), or the divergence of an independent manufacturer’s (or licensee’s) labor practices from
those generally accepted as ethical in the U.S., could interrupt, or otherwise disrupt the shipment
of finished products to us or damage our reputation. Any of these, in turn, could have a material
adverse effect on our financial condition and results of operations.
Our arrangements with foreign suppliers are also subject generally to the risks of doing
business abroad, including currency fluctuations and revaluations, restrictions on the transfer of
funds, terrorist activities, pandemic disease and, in certain parts of the world, political,
economic and currency instability. Our operations have not been materially affected by any such
factors to date. However, due to the very substantial portion of our products that are produced
abroad, any substantial disruption of our relationships with our foreign suppliers could adversely
effect our operations.
20
Economic, Social, Political and Regulatory Risks
General economic conditions, including a downturn in the economy, may affect consumer purchases of
discretionary items and fashion and retail products, which could adversely affect our sales.
The industries in which we operate have historically been subject to cyclical variations,
recessions in the general economy and future economic outlook. Our results are dependent on a
number of factors impacting consumer spending including but not limited to, general economic and
business conditions; consumer confidence; wages and employment levels; the housing market; consumer
debt levels; availability of consumer credit; credit and interest rates; fluctuations in foreign
currency exchange rates; fuel and energy costs; energy shortages; the level of the stock market;
taxes; general political conditions, both domestic and abroad; and the level of customer traffic
within department stores, malls and other shopping and selling environments.
Consumer purchases of discretionary items, including our products, may decline during
recessionary periods and at other times when disposable income is lower. A downturn or an uncertain
outlook in the economies in which we sell our products may materially adversely effect our
businesses and our revenues and profits. The domestic and international political situation also
affects consumer confidence. The threat, outbreak or escalation of terrorism, military conflicts or
other hostilities could lead to a decrease in consumer spending.
Fluctuations in the price, availability and quality of the fabrics or other raw materials used
by us in our manufactured apparel and in the price of materials used to manufacture our footwear
and accessories could have a material adverse effect on our cost of sales or our ability to meet
our customers’ demands. The prices for such fabrics depend largely on the market prices for the raw
materials used to produce them, particularly cotton, leather and synthetics. The price and
availability of such raw materials may fluctuate significantly, depending on many factors,
including crop yields and weather patterns. In the future, we may not be able to pass all or a
portion of such higher raw materials prices on to our customers.
Our business is exposed to domestic and foreign currency fluctuations.
While we generally purchase our products in U.S. dollars, we source most of our products
overseas. As a result, the cost of these products may be affected by changes in the value of the
relevant currencies, including currency devaluations. Changes in currency exchange rates may also
affect the U.S. dollar value of the foreign currency denominated prices at which our international
businesses sell products. Furthermore, our international sales represented approximately 32% of
our total sales in fiscal 2007, and such sales were derived from sales in foreign currencies,
primarily the euro. Our international sales, as well as our international businesses’ inventory and
accounts receivables levels, could be materially affected by currency fluctuations. Although we
hedge some exposures to changes in foreign currency exchange rates arising in the ordinary course
of business, we cannot assure that foreign currency fluctuations will not have a material adverse
impact on our financial condition or results of operations.
Our international operations, including manufacturing, are subject to a variety of legal,
regulatory, political and economic risks, including risks relating to the importation and
exportation of product.
We source most of our products outside the U.S. through arrangements with independent
suppliers in over 46 countries. There are a number of risks associated with importing our products,
including but not limited to the following:
• |
|
Quotas imposed by bilateral textile agreements with China and non-WTO countries.
These agreements limit the amount and type of goods that may be imported annually
from these countries; |
|
• |
|
Changes in social, political, legal and economic conditions or terrorist acts that
could result in the disruption of trade from the countries in which our
manufacturers or suppliers are located; |
|
• |
|
The imposition of additional regulations relating to imports or exports; |
|
• |
|
The imposition of additional duties, taxes and other charges on imports or exports; |
|
• |
|
Risks of increased sourcing costs, including costs for materials and labor,
including as a result of the elimination of quota on apparel products; |
|
• |
|
Our ability to adapt to and compete effectively in the current quota environment,
including changes in sourcing patterns resulting from the elimination of quota on
apparel products, as well as lowered barriers to entry; |
|
• |
|
Significant delays in the delivery of cargo due to security considerations; |
21
• |
|
The imposition of antidumping or countervailing duty proceedings
resulting in the potential assessment of special antidumping or
countervailing duties; and |
|
• |
|
The enactment of new legislation or the administration of current
international trade regulations, or executive action affecting
international textile agreements, including the United States’
reevaluation of the trading status of certain countries and/or
retaliatory duties, quotas or other trade sanctions, which, if
enacted, would increase the cost of products purchased from suppliers
in such countries, and the January 1, 2005 elimination of quota, which
may significantly impact sourcing patterns (although China has agreed
to safeguard quota on certain classes of apparel products through 2008
as a result of a surge in exports to the United States, political
pressure will likely continue for restraint on importation of
apparel). |
Any one of these factors could have a material adverse effect on our financial condition,
results of operations and current business practices.
Our ability to realize growth in new international markets and to maintain the current level
of sales in our existing international markets is subject to risks associated with international
operations. These include complying with a variety of foreign laws and regulations; unexpected
changes in regulatory requirements; new tariffs or other barriers in some international markets;
political instability and terrorist attacks; changes in diplomatic and trade relationships; and
general economic fluctuations in specific countries or markets.
Item 1B. Unresolved Staff Comments.
None.
22
Item 2. Properties.
Our distribution and administrative functions are conducted in both leased and owned
facilities. We also lease space for our retail specialty, outlet and concession stores. We
believe that our existing facilities are well maintained, in good operating condition and, upon
occupancy of additional space, will be adequate for our present level of operations, although from
time to time we use unaffiliated third parties to provide distribution services to meet our
distribution requirements. See Note 11 of Notes to Consolidated Financial Statements.
Our principal executive offices and showrooms, as well as sales, merchandising and design
staffs, are located at 1441 Broadway, New York, New York, where we lease approximately 305,000
square feet under a master lease which expires at the end of 2012 and contains certain renewal
options and rights of first refusal for additional space. Most of our business segments use the
1441 Broadway facility. In addition, in North Bergen, New Jersey, we own and operate an
approximately 300,000 square foot office complex, which houses operational staff. The following
table sets forth information with respect to our other key properties:
Key Properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate |
|
|
|
|
|
|
Square |
|
|
Location (a) |
|
Primary Use |
|
Footage |
|
Leased/Owned |
Mt. Pocono, Pennsylvania (b)
|
|
Apparel Distribution Center
|
|
|
1,230,000 |
|
|
Owned |
|
|
|
|
|
|
|
|
|
North Bergen, New Jersey (c)
|
|
Offices/Apparel Distribution Center
|
|
|
620,000 |
|
|
Owned |
|
|
|
|
|
|
|
|
|
Santa Fe Springs, California
|
|
Apparel Distribution Center
|
|
|
600,000 |
|
|
Leased |
|
|
|
|
|
|
|
|
|
West Chester, Ohio
|
|
Apparel Distribution Center
|
|
|
600,000 |
|
|
Leased |
|
|
|
|
|
|
|
|
|
Allentown, Pennsylvania (d)
|
|
Apparel/Non-Apparel Distribution Center
|
|
|
483,000 |
|
|
Leased |
|
|
|
|
|
|
|
|
|
Voorschoten, the Netherlands
(e)
|
|
Offices/Apparel Distribution Center
|
|
|
350,000 |
|
|
Leased |
|
|
|
|
|
|
|
|
|
Dayton, New Jersey
|
|
Non-Apparel Distribution Center
|
|
|
179,000 |
|
|
Leased |
|
|
|
|
|
|
|
|
|
Amsterdam, the Netherlands
(e)
|
|
Offices
|
|
|
160,000 |
|
|
Leased |
|
|
|
|
|
|
|
|
|
St. Laurent, Canada
|
|
Office/Apparel/Non-Apparel
Distribution Center
|
|
|
160,000 |
|
|
Leased |
|
|
|
|
|
|
|
|
|
Mt. Pocono, Pennsylvania
|
|
Apparel Distribution Center
|
|
|
150,000 |
|
|
Leased |
|
|
|
|
|
|
|
|
|
Vernon, California
|
|
Offices/Apparel Distribution Center
|
|
|
123,000 |
|
|
Leased |
|
|
|
|
|
|
|
|
|
Lincoln, Rhode Island
|
|
Non-Apparel Distribution Center
|
|
|
115,000 |
|
|
Leased |
|
|
|
|
|
|
|
|
|
1440 Broadway, New York, NY
|
|
Offices
|
|
|
103,000 |
|
|
Leased |
|
|
|
(a) |
|
We also lease showroom, warehouse and office space in various other domestic and
international locations. |
|
(b) |
|
This facility is on an 80-acre site, which we own. |
|
(c) |
|
In 2007, we completed the closure of our North Bergen, New Jersey apparel
distribution center. |
|
(d) |
|
In 2008, we completed the closure of our Allentown, Pennsylvania distribution
center. |
|
(e) |
|
These properties are used for our European operations. |
Pursuant to financing obtained through an off-balance sheet arrangement commonly referred to
as a synthetic lease, we have constructed the West Chester, Ohio and Lincoln, Rhode Island
facilities. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Financial Position, Capital Resources and Liquidity” and Note 11 of Notes to
Consolidated Financial Statements for a discussion of this arrangement. In 2006, we completed the
sale of an approximately 290,000 square foot warehouse and distribution facility in Montgomery,
Alabama. We still maintain ownership of 80 acres of land in Montgomery, Alabama, which we are
seeking to sell. In the first quarter of 2007, we completed the sale of our approximately 270,000
square foot facility in Augusta, Georgia (located on a 98-acre site and previously used in
connection with a dyeing and finishing joint venture). However, we retain certain obligations with
respect to the site. See “Item 3. Legal Proceedings” for a discussion of this matter.
Item 3. Legal Proceedings
The Company’s previously owned Augusta, Georgia facility became listed during 2004 on the
State of Georgia’s Hazardous Site Inventory of environmentally impacted sites due to the detection
of certain chemicals at the site. In November 2005, the Georgia Department of Natural Resources
requested that we submit a compliance status report and compliance status certification regarding
the site. The Company submitted the requested materials in the second quarter of 2006. In October
2006, the Company received a letter from the Department of Natural Resources requesting that we
provide additional information and perform additional tests to complete the compliance status
report, which was previously submitted. Additional testing was completed and the Company submitted
23
the results in the second quarter of 2007. The Georgia Department of Natural Resources has
reviewed the Company’s submission and has requested certain modifications to the response and some
minimal additional testing. The Company has submitted the modified response and additional
testing results.
The Company is a party to several pending legal proceedings and claims. Although the outcome
of any such actions cannot be determined with certainty, management is of the opinion that the
final outcome of any of these actions should not have a material adverse effect on the Company’s
financial position, results of operations, liquidity or cash flows. (See Notes 11 and 25 of Notes
to Consolidated Financial Statements).
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through the solicitation of proxies or
otherwise, during the fourth quarter of the fiscal year covered by this report.
Executive Officers of the Registrant.
Information as to the executive officers of the Company, as of February 15, 2008, is set forth
below:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position(s) |
William L. McComb
|
|
|
45 |
|
|
Chief Executive Officer |
|
|
|
|
|
|
|
Andrew Warren
|
|
|
41 |
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
Michael Scarpa
|
|
|
52 |
|
|
Chief Operating Officer |
|
|
|
|
|
|
|
Jill Granoff
|
|
|
45 |
|
|
Executive Vice President — Direct Brands |
|
|
|
|
|
|
|
David McTague
|
|
|
45 |
|
|
Executive Vice President — Partnered Brands |
|
|
|
|
|
|
|
Roberta S. Karp
|
|
|
49 |
|
|
Senior Vice President — Business Development,
Legal and Corporate Affairs |
|
|
|
|
|
|
|
Lawrence D. McClure
|
|
|
59 |
|
|
Senior Vice President — Human Resources |
Executive officers serve at the discretion of the Board of Directors.
Mr. McComb joined the Company as Chief Executive Officer and a member of the Board of
Directors on November 6, 2006. Prior to joining the Company, Mr. McComb was a company group
chairman at Johnson & Johnson. During his 14-year tenure with Johnson & Johnson, Mr. McComb oversaw
some of the company’s largest consumer product businesses and brands, including Tylenol, Motrin and
Clean & Clear. He also led the team that repositioned and restored growth to the Tylenol brand and
oversaw the growth of J&J’s McNeil Consumer business with key brand licenses such as St. Joseph
aspirin, where he implemented a strategy to grow the brand beyond the over-the-counter market by
adding pediatric prescription drugs. Mr. McComb currently serves on the board of INROADS of
Philadelphia and Technoserve, Inc., both not-for-profit organizations.
Mr. Warren joined the Company in July 2007. Prior to that, he had held numerous finance
positions at General Electric over the prior 18 years, including Senior Vice President and CFO for
NBC Cable from January 2002 to May 2004 and Executive Vice President and Chief Financial Officer
for NBC Universal Television Group from May 2004 to May 2006. Most recently, he served as Senior
Operations Leader, GE Audit Staff, from May 2006 to July 2007 where he helped lead the divestiture
of GE’s Plastics division.
Mr. Scarpa joined the Company in 1983 as budget manager and served in various management
positions thereafter. In 1991, Mr. Scarpa was promoted to Vice President — Divisional Controller
and in 1995 he was promoted to Vice President — Financial Planning and Operations. Effective July
2000, he became Vice President — Chief Financial Officer, in July 2002 he became Senior Vice
President — Chief Financial Officer, and in May 2005 he became Senior Vice President — Finance
and Distribution and Chief Financial Officer. Effective January 31, 2007, Mr. Scarpa was appointed
Chief Operating Officer.
Ms. Granoff joined the Company in September 2006 as Group President — Direct-to-Consumer and
was promoted to Executive Vice President — Direct Brands in June 2007. Prior to joining the
Company, Ms. Granoff was President and Chief Operating Officer of Victoria’s Secret Beauty (VSB), a
subsidiary of Limited Brands, where she worked from April 1999 to April 2006. Prior to her role at
24
VSB, Ms. Granoff worked at The Estee Lauder Companies from 1990 to 1999, culminating in her role as
Senior Vice President of Strategic Planning, Finance and Information Systems for Estee Lauder Inc.
Mr. McTague joined Liz Claiborne Inc. in August 2007 as Executive Vice President of Partnered
Brands. Prior to joining the Company, he was President of Converse Apparel and Accessories at NIKE,
Inc. from 2005 to 2007, where he was responsible for expanding the Converse brand into a global,
lifestyle brand, including premium apparel and accessories for men and women. Before that, he was
President of Global Apparel and Retail, Victorinox, Swiss Army Brands from 2004 to 2005, where he
oversaw design, strategy, operations, production, sales, analytical planning, retail presentation
and merchandising for the label. He also served as President of Tommy Hilfiger USA Menswear from
2000 to 2004.
Ms. Karp joined the Company in November 1986 as Legal Counsel and was promoted to Vice
President, Corporate Counsel in 1988 and Vice President, General Counsel in 1992. Ms. Karp added
Corporate Affairs to her responsibilities in 1996 and in 2000 she became Senior Vice President,
Corporate Affairs and General Counsel. Ms. Karp assumed her current position as Senior Vice
President, Business Development, Legal and Corporate Affairs in June 2007.
Mr. McClure joined the Company in 2000 as Senior Vice President — Human Resources. Prior to
joining the Company, Mr. McClure served as Vice President, Human Resources of Dexter Corporation, a
specialty materials company, from 1995.
25
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.
MARKET INFORMATION
Our Common Stock trades on the New York Stock Exchange (“NYSE”) under the symbol LIZ. The
table below sets forth the high and low closing sale prices of the Common Stock (based on the NYSE
composite tape) for the periods indicated.
|
|
|
|
|
|
|
|
|
Calendar Period |
|
High |
|
Low |
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
$ |
46.64 |
|
|
$ |
41.96 |
|
2nd Quarter |
|
|
44.77 |
|
|
|
33.44 |
|
3rd Quarter |
|
|
38.45 |
|
|
|
31.19 |
|
4th Quarter |
|
|
35.55 |
|
|
|
20.15 |
|
|
|
|
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
$ |
41.00 |
|
|
$ |
33.76 |
|
2nd Quarter |
|
|
40.76 |
|
|
|
36.90 |
|
3rd Quarter |
|
|
39.74 |
|
|
|
34.06 |
|
4th Quarter |
|
|
44.34 |
|
|
|
39.50 |
|
RECORD HOLDERS
On February 15, 2008, the closing sale price of our Common Stock was $17.60. As of February
15, 2008, the approximate number of record holders of Common Stock was 5,212.
DIVIDENDS
We have paid regular quarterly cash dividends since May 1984. Quarterly dividends for the
last two fiscal years were paid as follows:
|
|
|
|
|
Calendar Period |
|
Dividends Paid per Common Share |
2007: |
|
|
|
|
|
|
|
|
|
1st Quarter |
|
$ |
0.05625 |
|
2nd Quarter |
|
|
0.05625 |
|
3rd Quarter |
|
|
0.05625 |
|
4th Quarter |
|
|
0.05625 |
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
|
|
|
1st Quarter |
|
$ |
0.05625 |
|
2nd Quarter |
|
|
0.05625 |
|
3rd Quarter |
|
|
0.05625 |
|
4th Quarter |
|
|
0.05625 |
|
We currently plan to continue paying quarterly cash dividends on our Common Stock. The amount
of any such dividend will depend on our earnings, financial position, capital requirements and
other relevant factors.
26
PERFORMANCE GRAPH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
Liz Claiborne, Inc. |
|
|
|
100.00 |
|
|
|
|
120.81 |
|
|
|
|
146.71 |
|
|
|
|
125.22 |
|
|
|
|
152.82 |
|
|
|
|
71.34 |
|
|
|
S&P 500 Index |
|
|
|
100.00 |
|
|
|
|
128.93 |
|
|
|
|
143.41 |
|
|
|
|
150.45 |
|
|
|
|
174.21 |
|
|
|
|
185.06 |
|
|
|
LTTP Peer Group |
|
|
|
100.00 |
|
|
|
|
149.35 |
|
|
|
|
179.50 |
|
|
|
|
191.70 |
|
|
|
|
234.22 |
|
|
|
|
203.57 |
|
|
|
G-Share Peer Group |
|
|
|
100.00 |
|
|
|
|
131.44 |
|
|
|
|
146.75 |
|
|
|
|
144.51 |
|
|
|
|
178.90 |
|
|
|
|
148.27 |
|
|
|
The line graph above compares the cumulative total stockholder return on the Company’s Common
Stock over a 5-year period with the return on (i) the Standard & Poor’s 500 Stock Index (“S&P 500
Index”); (ii) an index comprised of the Company and the following 22 competitors comprising the
peer group for which executive compensation practices are compared (the “LTTP Peer Group”):
Abercrombie & Fitch; Ann Taylor Store Corporation; Coach, Inc.; Dillards, Inc.; The Gap, Inc.;
Jones Apparel Group, Inc.; Kellwood Company (which was acquired by Sun Capital Securities Group in
February 2008); Limited Brands, Inc.; Macy’s, Inc.; The May Department Stores Company (which was
acquired by Federated Department Stores in August 2005); The Neiman Marcus Group, Inc. (which was
acquired by Newton Acquisition Merger Sub Inc. in October 2005); NIKE, Inc.; Nordstrom, Inc;
Philips Van-Heusen Corporation; Polo Ralph Lauren Corporation; Quicksilver; Russell Corporation
(which was acquired by Berkshire Hathaway in August 2006); Saks Incorporated; The Talbots, Inc.;
Tiffany & Co; Tommy Hilfiger Corporation (which was acquired by Apax Partners in May 2006); and VF
Corporation; and (iii) an index comprised of the Company and the following 21 competitors
comprising the peer group for the Growth Share program (the “G-Share Peer Group”): Ann Taylor
Stores Corporation; The Gap, Inc.; Gucci Group N.V. (which was acquired by
Pinault-Printemps-Redoute in May 2004); Guess, Inc.; Haggar Corp. (which was acquired by Infinity
Associates in November 2005); Hartmarx Corporation; Jones Apparel Group, Inc.; Kellwood Company
(which was acquired by Sun Capital Securities Group in February 2008); Limited Brands, Inc.;
Oshkosh B’Gosh, Inc. (which was acquired by Carters Inc. in July 2005); Oxford Industries, Inc.;
Phillips-Van Heusen Corporation; Polo Ralph Lauren Corporation; Quiksilver, Inc.; Russell
Corporation (which was acquired by Berkshire Hathaway in August 2006); The Talbots, Inc.; Tarrant
Apparel Group; Tommy Hilfiger Corporation (which was acquired by Apax Partners in May 2006);
Tropical Sportswear Int’l Corporation (which was liquidated in February 2005); V.F. Corporation;
and The Warnaco Group, Inc. Returns for companies in the G-Share Peer Group and the LTPP Peer
Group that have been acquired or liquidated are reflected in the graph above through the end of the
year of such acquisition.
In accordance with the SEC disclosure rules, the measurements are indexed to a value of $100
at December 28, 2002 (the last trading day before the beginning of the Company’s 2003 fiscal year)
and assume that all dividends were reinvested.
27
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes information about our purchases during the year ended December 29,
2007 of equity securities that are registered by the Company pursuant to Section 12 of the
Securities Exchange Act of 1934:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Value of Shares that |
|
|
Total Number |
|
|
|
|
|
Part of Publicly |
|
May Yet Be |
|
|
of Shares |
|
|
|
|
|
Announced Plans or |
|
Purchased Under the |
|
|
Purchased |
|
Average Price |
|
Programs |
|
Plans or Programs |
Period |
|
(in thousands) |
|
Paid Per Share |
|
(in thousands) |
|
(in thousands)(b) |
December 31, 2006 - January 27, 2007 |
|
|
52.3 |
(a) |
|
$ |
44.08 |
|
|
|
— |
|
|
$ |
229,237 |
|
January 28, 2007 - March 3, 2007 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
229,237 |
|
March 4, 2007 - March 31, 2007 |
|
|
132.2 |
(a) |
|
|
43.08 |
|
|
|
— |
|
|
|
229,237 |
|
April 1, 2007 - April 28, 2007 |
|
|
0.1 |
(a) |
|
|
43.80 |
|
|
|
— |
|
|
|
229,237 |
|
April 29, 2007 - June 2, 2007 |
|
|
1,808.8 |
(a) |
|
|
34.21 |
|
|
|
1,808.7 |
|
|
|
167,364 |
|
June 4, 2007 - June 30, 2007 |
|
|
547.6 |
(a) |
|
|
35.87 |
|
|
|
547.5 |
|
|
|
147,724 |
|
July 1, 2007 - July 28, 2007 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
147,724 |
|
July 29, 2007 - September 1, 2007 |
|
|
1,769.9 |
(a) |
|
|
33.95 |
|
|
|
1,769.4 |
|
|
|
87,661 |
|
September 2,
2007 - September 29, 2007 |
|
|
1,216.4 |
(a) |
|
|
32.84 |
|
|
|
1,216.1 |
|
|
|
47,728 |
|
September 30, 2007 - October 27, 2007 |
|
|
3.0 |
(a) |
|
|
30.89 |
|
|
|
— |
|
|
|
47,728 |
|
October 28, 2007 - December 1, 2007 |
|
|
4,291.8 |
(a) |
|
|
26.10 |
|
|
|
4,281.3 |
|
|
|
36,005 |
(c) |
December 2, 2007 - December 29, 2007 |
|
|
290.0 |
|
|
|
25.02 |
|
|
|
290.0 |
|
|
|
28,749 |
|
|
Total year |
|
|
10,112.1 |
(a) |
|
$ |
30.55 |
|
|
|
9,913.0 |
|
|
$ |
28,749 |
|
|
|
|
(a) |
|
Includes shares withheld to cover tax-withholding
requirements relating to the vesting of restricted stock
issued to employees pursuant to the Company’s
shareholder-approved stock incentive plans. |
|
(b) |
|
The Company initially announced the authorization of a
share buyback program in December 1989. Since its
inception, the Company’s Board of Directors has authorized
the purchase under the program of an aggregate of $2.275
billion. As of February 15, 2008, the Company had $28.7
million remaining in buyback authorization under its
program. |
|
(c) |
|
On November 12, 2007, the Company’s Board of Directors
authorized the Company to purchase up to an additional
$100.0 million of its Common Stock for cash in open market
purchases and privately negotiated transactions. |
28
Item 6. Selected Financial Data.
The following table sets forth certain information regarding our operating results of
operations and financial position, and is qualified in its entirety by the consolidated financial
statements and notes thereto which appear elsewhere herein:
(All dollar amounts in thousands except per common share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
Net sales |
|
$ |
4,577,251 |
|
|
$ |
4,643,936 |
|
|
$ |
4,586,187 |
|
|
$ |
4,436,965 |
|
|
$ |
4,057,651 |
|
Gross profit |
|
|
2,165,726 |
|
|
|
2,260,239 |
|
|
|
2,199,914 |
|
|
|
2,070,704 |
|
|
|
1,831,558 |
|
Operating (loss) income |
|
|
(425,813 |
) |
|
|
381,514 |
|
|
|
484,206 |
|
|
|
471,460 |
|
|
|
449,560 |
|
(Loss) income from
continuing operations
(a) |
|
|
(370,020 |
) |
|
|
220,916 |
|
|
|
291,772 |
|
|
|
294,021 |
|
|
|
266,429 |
|
Net (loss) income |
|
|
(372,798 |
) |
|
|
254,685 |
|
|
|
317,366 |
|
|
|
313,569 |
|
|
|
279,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
|
794,456 |
|
|
|
796,195 |
|
|
|
848,798 |
|
|
|
871,540 |
|
|
|
836,911 |
|
Total assets |
|
|
3,268,467 |
|
|
|
3,495,768 |
|
|
|
3,152,036 |
|
|
|
3,029,752 |
|
|
|
2,606,999 |
|
Long term debt |
|
|
836,883 |
|
|
|
570,469 |
|
|
|
417,833 |
|
|
|
484,516 |
|
|
|
440,303 |
|
Stockholders’ equity |
|
|
1,515,564 |
|
|
|
2,129,981 |
|
|
|
2,002,706 |
|
|
|
1,811,789 |
|
|
|
1,577,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from
continuing
operations |
|
|
(3.71 |
) |
|
|
2.17 |
|
|
|
2.74 |
|
|
|
2.72 |
|
|
|
2.48 |
|
Net (loss) income |
|
|
(3.74 |
) |
|
|
2.50 |
|
|
|
2.98 |
|
|
|
2.90 |
|
|
|
2.60 |
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from
continuing
operations
(a) |
|
|
(3.71 |
) |
|
|
2.13 |
|
|
|
2.70 |
|
|
|
2.67 |
|
|
|
2.43 |
|
Net (loss) income |
|
|
(3.74 |
) |
|
|
2.46 |
|
|
|
2.94 |
|
|
|
2.85 |
|
|
|
2.55 |
|
Book value at year end |
|
|
16.00 |
|
|
|
20.65 |
|
|
|
19.08 |
|
|
|
16.66 |
|
|
|
14.40 |
|
Dividends paid |
|
|
0.23 |
|
|
|
0.23 |
|
|
|
0.23 |
|
|
|
0.23 |
|
|
|
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding, basic |
|
|
99,800,071 |
|
|
|
101,989,470 |
|
|
|
106,353,769 |
|
|
|
108,128,172 |
|
|
|
107,451,157 |
|
Weighted average shares
outstanding, diluted
(b) |
|
|
99,800,071 |
|
|
|
103,482,699 |
|
|
|
107,919,303 |
|
|
|
109,886,352 |
|
|
|
109,619,241 |
|
|
|
|
(a) |
|
During 2007 and 2006, we recorded charges of $78.0 million ($120.7 million pre-tax),
or $0.78 per share and $51.3 million ($81.6 million pre-tax) or $0.50 per share, respectively,
related to our streamlining initiatives, which are discussed in Note 14 of Notes to
Consolidated Financial Statements. During 2007, we recorded non-cash impairment charges of (i)
$343.1 million ($450.8 million pre-tax) or $3.44 per share related to goodwill previously
recorded in our Partnered Brands segment, (ii) $22.0 million ($36.3 million pre-tax) or $0.22
per share related to our ELLEN TRACY trademark and (iii) $9.0 million ($14.9 million pre-tax)
or $0.09 per share related to certain assets of our SIGRID OLSEN brand. These charges are
discussed in Notes 1 and 8 of Notes to Consolidated Financial Statements. |
|
|
|
During 2007, we also recorded additional charges related to our strategic review aggregating
$49.5 million ($82.0 million pre-tax), or $0.50 per share primarily related to inventory and
accounts receivable allowances associated with the termination of certain cosmetics product
offerings, the closure of certain brands and various professional and consulting costs. |
|
|
|
During 2006 and 2004, we recorded gains on the sale an equity investments of $2.2 million ($3.6
million pre-tax) or $0.02 per common share and $8.0 million ($11.9 million pre-tax) or $0.07
per common share, respectively. |
|
(b) |
|
Because we incurred a loss from continuing operations in 2007, outstanding stock
options and restricted shares are anti-dilutive. Accordingly, basic and diluted weighted
average shares outstanding are equal for such period. |
29
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Business/Segments
In the second quarter of 2007, we revised our segment reporting structure to reflect the strategic
realignment of our businesses and internal reporting. The strategic realignment reflects a
brand-focused approach, designed to optimize the operational coordination and resource allocation
of our businesses across multiple functional areas including specialty retail, retail outlets,
concession, wholesale apparel, wholesale non-apparel, e-commerce and licensing. As such, we now
report our operations in two reportable segments as follows:
|
• |
|
The Direct Brands segment — consists of the specialty retail, outlet, wholesale
apparel, wholesale non-apparel (including accessories, jewelry, handbags and fragrances),
e-commerce and licensing operations of our four retail-based operating segments: JUICY
COUTURE, KATE SPADE, LUCKY BRAND and MEXX; and |
|
|
• |
|
The Partnered Brands segment — consists of one operating segment including the
wholesale apparel, wholesale non-apparel, outlet and specialty retail, e-commerce and
licensing operations of our wholesale-based brands including: AXCESS, CLAIBORNE
(men’s), CONCEPTS BY CLAIBORNE, DANA BUCHMAN(a), ELLEN TRACY(b),
ENYCE, KENSIE, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA, MONET, NARCISO RODRIGUEZ,
SIGRID OLSEN(c), TRIFARI, VILLAGER, our licensed DKNY® JEANS and DKNY® ACTIVE
brands, as well as our other non-Direct Brands fragrances including: CLAIBORNE, CURVE,
ELLEN TRACY (b), LIZ CLAIBORNE and our licensed USHER fragrance. |
|
|
|
(a) |
|
On January 17, 2008, we announced that we entered into an exclusive license
agreement with Kohl’s Corporation (“Kohl’s”),
naming Kohl’s as the exclusive retailer for our DANA BUCHMAN brand. As a result, we expect to close our current
DANA BUCHMAN operations in the first half of 2008 and that the launch of the DANA
BUCHMAN line in Kohl’s stores will occur no later than the first quarter of 2009. |
|
(b) |
|
On February 14, 2008, we announced an agreement to sell
substantially all of assets and
liabilities of ELLEN TRACY. The transaction is expected to close in the second
quarter of 2008. |
|
(c) |
|
During 2007, we also decided to close our SIGRID OLSEN brand. We expect
such closure to be completed in the first half of 2008. |
In July 2007, we announced our long-term strategic plan, which included a strategic review and
potential divestiture or closure of 16 of our brands. On October 4, 2007, we completed the first
phase of such review by finalizing the disposal of certain assets of our former EMMA JAMES,
INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands in a single transaction. We completed the
second phase of such review by disposing of certain assets and liabilities of our C&C CALIFORNIA and LAUNDRY BY DESIGN
on February 4, 2008, and by entering into a definitive agreement to sell assets and
liabilities of our prAna brand. The transaction is expected to close in the first quarter of 2008.
The results of these brands, previously included in the Partnered Brands Segment, have been
segregated and reported as discontinued operations for all periods presented (see Note 3 of Notes
to Consolidated Financial Statements).
We also present our results on a geographic basis based on selling location, between Domestic
(wholesale customers, Company specialty retail and outlet stores located in the United States and
e-commerce sites) and International (wholesale customers and Company specialty retail and outlet
and concession stores located outside of the United States). We, as licensor, also license to third
parties the right to produce and market products bearing certain Company-owned trademarks; the
resulting royalty income is included within the results of the associated segment.
Competitive Profile
We operate in global fashion markets that are intensely competitive. Our ability to continuously
evaluate
and respond to changing consumer demands and tastes across multiple markets, distribution channels
and geographies is critical to our success. Although our brand portfolio approach is aimed at
mitigating our risks in this regard, misjudging shifts in consumer preferences could have a
negative effect on our results of operations. Other key aspects of competition include quality,
brand image, market share, distribution methods, price, size and location of our retail stores and
department store selling space, customer service and intellectual property protection. We believe
that our size and global operating capabilities can enable us to compete successfully by
positioning us to take advantage of synergies in product design, development, sourcing and
distribution of our products throughout the world.
Since 1999, we have acquired a number of brands in an effort to diversify our business across price
points and channels and to decrease our dependence on the domestic department store channel. We
have also diversified geographically, with our international operations representing 32.4% and
30.0% of total Company net sales for the years ended December 29, 2007 and December 30, 2006,
30
respectively. In addition, we expanded our own retail business by increasing the number of doors
in a variety of formats. As we expanded our brand portfolio, our management structure was based on
channel and category management, and our reliance on the domestic department store channel remained
significant.
After the appointment of our CEO in November 2006, we initiated a review of our operations to
assess options to best allocate our resources to those brands we believe have the maximum potential
for sustainable growth in sales and earnings and to best evolve our brand-focused strategy on a
going forward basis. On June 20, 2007, we announced the reconfiguration of our organization and on
July 11, 2007, we announced the preliminary results of our review of operations. The major
elements of our strategy are as follows:
Reconfiguring our organization into two new business segments:
|
• |
|
Direct Brands (comprised of our JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX
retail-based lifestyle brands); and |
|
|
• |
|
Partnered Brands (comprised of LIZ CLAIBORNE and our other owned and licensed
wholesale-based brands). The strategic realignment reflects a brand-focused approach,
designed to optimize the operational coordination and resource allocation of our
businesses across multiple functional areas including specialty retail, retail outlets,
wholesale apparel, wholesale non-apparel, e-commerce and licensing. |
The undertaking of our strategic review of 16 specific brands in our portfolio in an effort to
narrow our brand offerings to a select group that we believe we can fully resource and develop into
powerful, sustaining brands:
|
• |
|
On October 4, 2007, we completed the sale of our former EMMA JAMES, INTUITIONS, J.H.
COLLECTIBLES and TAPEMEASURE brands. |
|
|
• |
|
We also announced the consolidation of our TINT brand into LIZ & CO. and STAMP 10 brand
into AXCESS and the closure of our FIRST ISSUE brand. |
|
|
• |
|
On January 8, 2008, we also announced the decision to retain the ENYCE brand and to
close our SIGRID OLSEN brand. We expect such closure to be completed in the first half
of 2008. |
|
|
• |
|
On January 17, 2008, we announced that we entered into an exclusive license agreement
with Kohl’s, naming Kohl’s as the exclusive retailer for our DANA BUCHMAN brand. As
a result, we expect to close our current DANA BUCHMAN operations in the first half of 2008
and that the launch of the DANA BUCHMAN line in Kohl’s stores will occur no later than the
first quarter of 2009. |
|
|
• |
|
On February 1, 2008, we announced the agreement to sell our prAna brand. We expect to
close this transaction in the first quarter of 2008. |
|
|
• |
|
On February 4, 2008, we completed the sale of our former C & C CALIFORNIA and LAUNDRY
BY DESIGN brands. |
|
|
• |
|
On February 14, 2008, we announced the agreement to sell our ELLEN TRACY brand. We
expect to close this transaction in the second quarter of 2008. |
|
|
• |
|
The strategic review of our remaining brands, KENSIE and MAC & JAC, is scheduled to be
completed by the end of the first quarter of 2008. |
Implementing and maintaining a more competitive cost structure:
|
• |
|
We have accelerated our structural realignment and other
initiatives to achieve cost savings targets. Key actions taken
included headcount reductions, the closing of three of
our distribution centers, real estate rationalization and discretionary expense cuts. |
|
|
• |
|
We anticipate additional cost reductions to be realized through further staff reductions,
consolidations of distribution facilities and office space, discretionary expense cuts,
process re-engineering and supply chain cost rationalization. |
Committing the resources, structure and marketing investment necessary to fully support and
maximize the growth of our brands:
|
• |
|
We estimate committing approximately $200 million to capital expenditures, including
approximately $140 million to open new stores primarily within our Direct Brands segment
in 2008; |
|
|
• |
|
We are honing our organizational structure to better support the unique opportunities
within our reporting units; and |
|
|
• |
|
We anticipate spending approximately $100 million in 2008 in marketing activities in
support of our growth initiatives. |
Developing best-in-class, retail-centric capabilities, and initiating investments to
optimize our supply chain activities and accelerate the flow of goods to our stores in
both retail and wholesale formats.
31
Market Environment
Consumers have migrated, and are continuing to migrate, away from traditional department stores,
turning instead to specialty retailers, national chains and off-price retailers. This factor,
combined with the complexities and impacts of the ongoing retail industry consolidation and changes
in the domestic department store business model, including the continued increase in their emphasis
on private label offerings, has presented a multitude of challenges for us in the sector for a
number of years. As our larger department store customers have been focusing on inventory
productivity and product differentiation to gain competitive market share, improve natural margins,
reduce their dependency on vendor margin support and improve cash flows, they have executed, and we
believe will continue to execute, their buying activities very cautiously and conservatively, while
aggressively growing their private label businesses. Over the past few years, this operating
environment has adversely affected the results of our wholesale-based brands.
Apparel and non-apparel retailers, in general, including many of our major customers, have reported
disappointing holiday season comparable store sales. Accordingly, we continue to be cautious about
the near-term retail environment as evidenced by the slowdown in consumer spending, which reflects
the recent deterioration in the macro-economic environment in the U.S., as well as abroad.
This uncertain environment has been a driver in our acceleration of our strategic reviews of the
brands mentioned above and the ultimate outcomes for those brands as well as in our acceleration of
our streamlining initiatives.
In summary, the measure of our success in the future will depend on our ability to navigate through
a difficult macro-economic environment and challenging market conditions, execute on our strategic
vision, including evolving our retail capabilities, attracting and retaining the management talent
necessary for such execution, designing and delivering products that are acceptable to the
marketplaces that we serve and sourcing the manufacture of and distributing our products on a
competitive and efficient basis and evolving our retail capabilities.
Reference is also made to the other economic, competitive, governmental and technological factors
affecting the Company’s operations, markets, products, services and prices as are set forth under
“Statement Regarding Forward-Looking Statements” and those set forth under the heading “Item 1A —
Risk Factors.”
Operating Overview
Our 2007 results from continuing operations reflected the following pre-tax items:
|
• |
|
Expenses associated with our streamlining initiatives and our strategic review of
approximately $120.7 million and $41.4 million, respectively; |
|
|
• |
|
Non-cash charges associated with the impairment of our ELLEN TRACY trademark of
approximately $36.3 million; |
|
|
• |
|
Non-cash charges associated with the impairment of goodwill in the Partnered Brands
segment of approximately $450.8 million; and |
|
|
• |
|
Expenses associated with the elimination of certain cosmetics product offerings of
approximately $34.4 million. |
Additionally, disappointing results in our Partnered Brands segment reflected:
|
• |
|
Increased retailer markdowns driven by significant promotional activity before
year-end; and |
|
|
• |
|
Aggressive liquidation of excess inventories across all brands. |
As a
result of the sale or probable sale of brands under strategic review
in our Partnered Brands segment and the decline in the actual and
projected performance and cash flows of such segment, we determined
that a goodwill impairment test was required to be performed as of
December 29, 2007, in accordance with SFAS No. 142,
“Goodwill and Other Intangible Assets.” In performing this
evaluation, we considered declines in the Company’s market
value, which began in the second half of 2007. As a result, we
determined that the goodwill of our Partnered Brands segment, was
impaired and recorded a pretax impairment charge of
$450.8 million during the fourth quarter of 2007 (see
Note 1 and Note 8 of Notes to Consolidated Financial
Statements).
32
2007 Overall Results
Net Sales
Net sales in 2007 were $4.577 billion, a decrease of 1.4%, compared to 2006 net sales.
The sales results reflected decreased sales in the Partnered Brands Segment, primarily resulting
from decreases in our LIZ CLAIBORNE, DANA BUCHMAN, SIGRID OLSEN, ELLEN TRACY and Men’s apparel
businesses, partially offset by growth in certain regions in which our Direct Brands segment
operates and the impact in 2007 of the recently acquired KATE SPADE and NARCISO RODRIGUEZ brands.
The impact of foreign currency exchange rates, primarily as a result of the strengthening of the
euro and Canadian dollar, in our international businesses, increased sales by approximately $115.7
million during 2007.
Gross Profit and (Loss) Income from Continuing Operations
Our gross profit decreased to 47.3% of net sales in 2007 as compared to 48.7% in 2006, reflecting
decreased gross profit rates in our Partnered Brands segment primarily due to higher levels of
retailer support, increased sales to the off-price channel and inventory markdowns in our cosmetics
business, partially offset by an increased proportion of sales from our Direct Brands segment,
which operates at a higher gross profit rate than the Company average. We recorded a net loss
from continuing operations of $370.0 million in 2007 as compared to income from continuing
operations of $220.9 million in 2006, reflecting the gross profit items noted herein, as well as an
after-tax goodwill impairment charge of $343.1 million, after-tax expenses associated with our
streamlining initiatives of $78.0 million, as well as the impact of decreased sales in our
Partnered Brands Segment.
Balance Sheet
We ended 2007 with a net debt position of $682.0 million as compared to $397.6 million at 2006
year-end. We generated $273.9 million in cash from operations during fiscal 2007 and increased our
net debt position by $284.4 million, which enabled us to fund $48.3 million of acquisition-related
payments, our 2007 share repurchase of $300.5 million and our capital expenditures of $181.0
million. The effect of foreign currency translation on our Eurobond increased our debt balance by
$53.0 million.
International Operations
Revenues for the last five years are presented on a geographic basis as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
Domestic |
|
$ |
3,092,752 |
|
|
$ |
3,249,001 |
|
|
$ |
3,324,482 |
|
|
$ |
3,306,702 |
|
|
$ |
3,121,150 |
|
International |
|
|
1,484,499 |
|
|
|
1,394,935 |
|
|
|
1,261,705 |
|
|
|
1,130,263 |
|
|
|
936,501 |
|
Total Company |
|
$ |
4,577,251 |
|
|
$ |
4,643,936 |
|
|
$ |
4,586,187 |
|
|
$ |
4,436,965 |
|
|
$ |
4,057,651 |
|
In 2007, sales from our international operations represented 32.4% of our net sales, compared to
23.1% in 2003, primarily due to growth of MEXX Europe and MEXX Canada and, to a lesser extent,
expansion of the MONET brand. We expect our international sales to continue to represent a
significant portion of our overall sales. Accordingly, our overall results can be greatly impacted
by changes in foreign currency exchange rates. In 2007, the impact of foreign currency exchange
rates represented $115.7 million of the increase in international sales compared to $28.0 million
of the increase in international sales in 2006. Although we use foreign currency forward contracts
and options to hedge against our exposure to exchange rate fluctuations affecting the actual cash
flows associated with our international operations, unanticipated shifts in exchange rates could
have an impact on our financial results.
Acquisitions
On
May 18, 2007, we acquired 50 percent ownership of the entity
that owns the rights to the NARCISO RODRIGUEZ name and trademarks, entered into an
exclusive license to operate the Narciso Rodriguez business worldwide
and formed a new company to operate the license and
develop the NARCISO RODRIGUEZ brand worldwide. The purchase price totaled $13.9 million, which
includes closing fees and certain post-closing adjustments. We believe the addition of NARCISO
RODRIGUEZ provides
an opportunity to build a broad business in the luxury designer category (a category in which we
did not previously participate) that is sold in partnership-oriented, upscale retailers. We
allocated $8.9 million of purchase price to the value of trademarks and trade names associated with
the business, $0.3 million to the value of a non-compete agreement, $0.6 million to the value of a
beneficial lease and $5.0 million to goodwill. The $5.0 million of goodwill that was included in
the Partnered Brands segment was subsequently written off as part of our fourth quarter 2007 non-cash
impairment charge and deducted for tax purposes. The value of
trademarks and tradenames, the non-compete agreement and the
beneficial lease are being amortized over 7 years, 3 years and 5
years, respectively. As we maintain control over the assets and activities of the NARCISO RODRIGUEZ
brand, the related financial results have been consolidated from the date of acquisition. Unaudited
pro forma information related to this acquisition is not included, as the impact of this
transaction is not material to our consolidated results.
On December 13, 2006, we acquired 100 percent of the equity of Kate Spade LLC (“Kate Spade”). Based
in New York City, Kate Spade is a designer, marketer, wholesaler and retailer of fashion
accessories for women and men through its KATE SPADE® and
33
JACK SPADE® brands. We believe the KATE
SPADE brand enjoys widespread consumer recognition in the accessible luxury category and provides
considerable opportunity for growth in its direct-to-consumer business. The purchase price totaled
approximately $124 million, plus $3.4 million in fees and for certain post-closing adjustments and
assumption of liabilities that were accounted for as additional purchase price. We allocated $74.9
million of purchase price to the value of trademarks and trade names associated with the business,
$6.5 million to the value of customer relationships, $2.6 million to the value of beneficial leases
and $36.0 million to goodwill. The trademarks and tradenames are
deemed to have indefinite lives and are subject to an annual
impairment test. The value of customer relationships and beneficial
leases are being amortized over 14 years and from 2 to 9 years,
respectively. Unaudited pro forma information related to this acquisition is not
included, as the impact of this transaction is not material to our consolidated results.
On January 26, 2006, we acquired 100 percent of the equity of Westcoast Contempo Fashions Limited
and Mac & Jac Holdings Limited, which collectively design, market and sell the Mac & Jac, Kensie
and Kensiegirl apparel lines (“Mac & Jac”), a privately held fashion apparel company. The purchase
price totaled 26.2 million Canadian dollars (or $22.7 million), which includes the retirement of
debt at closing and fees, but excludes contingent payments to be determined based upon a multiple
of Mac & Jac’s earnings in fiscal years 2006, 2008, 2009 and 2010. There was no contingent payment
made based on 2006 fiscal year earnings. We allocated $13.9 million of purchase price to the value
of trademarks and trade names associated with the business and $5.6 million to the value of
customer relationships. The trademarks and trade names are deemed to have indefinite lives and are
subject to an annual test for impairment. The value of customer relationships is being amortized
over 12 years. We currently estimate that the aggregate of the contingent payments will be in the
range of approximately $10-12 million and will be accounted for as additional purchase price when
paid. Unaudited pro forma information related to this acquisition is not included, as the impact
of this transaction is not material to our consolidated results.
The prAna
acquisition agreement requires us to make contingent payments to the former owners of
prAna based on certain performance parameters of prAna over a pre-determined time frame. In
connection with the sale of the prAna brand, we agreed to satisfy such contingent obligation for
$18.4 million, which will be paid concurrently with the closing of the sale of the prAna brand and
will be recorded as an expense within our Consolidated Statement of Operations in 2008.
On April 7, 2003, we acquired 100 percent of the equity of Juicy Couture, Inc. (formerly, Travis
Jeans, Inc.) (“Juicy Couture”), a privately held fashion apparel company. The total purchase price
consisted of: (i) a payment, including the assumption of debt and fees of $53.1 million and (ii) a
contingent payment to be determined as a multiple of Juicy Couture’s earnings for one of the years
ended 2005, 2006 or 2007. The selection of the measurement year for the contingent payment is at
either party’s option. In March of 2005, the contingent payment agreement was amended to include an
advance option for the sellers providing that (i) if the 2005 measurement year is not selected, the
sellers may elect to receive up to 70 percent of the estimated contingent payment based upon 2005
results; and (ii) if the 2005 and 2006 measurement years are not selected, the sellers are eligible
to elect to receive up to 85 percent of the estimated contingent payment based on the 2006
measurement year net of any 2005 advances. In April 2006, the sellers elected to receive a 70
percent advance against the contingent purchase price and were paid $80.3 million on April 20,
2006. In May 2007, the sellers elected to receive an 85 percent advance against the contingent
purchase price and were paid $19.9 million on May 23, 2007. These payments were accounted for as
additional purchase price and as increases to goodwill. The 2008 payment of $72.9 million will be
made in the first
half of 2008 based on a multiple of Juicy Couture’s 2007 earnings, and has been accounted for as
additional purchase price and an increase to goodwill.
On June 8, 1999, we acquired 85.0 percent of the equity of Lucky Brand Dungarees, Inc. (“Lucky
Brand”), whose core business consists of the Lucky Brand Dungarees line of women and men’s
denim-based sportswear. The total purchase price consisted of a cash payment made at the closing
date of approximately $85.0 million and a payment made in April 2003 of $28.5 million. An
additional payment of $12.7 million was made in 2000 for tax-related purchase price adjustments. On
January 16, 2007, January 17, 2006 and January 28, 2005, we paid $10.0 million, $10.0 million and
$35.0 million, respectively, for 1.5 percent, 1.9 percent and 8.25 percent, respectively, of the
equity interest of Lucky Brand. On September 20, 2007, we entered into an agreement to acquire the
remaining shares that were owned by the sellers of Lucky Brand, amending an agreement signed on
January 28, 2005. We will acquire 0.4% in each of January of 2008, 2009 and 2010 of the equity
interest in Lucky for payments of $5.0 million each. We recorded the present value of fixed amounts
owed of $14.0 million in Accrued expenses and Other non-current liabilities. As of December 29,
2007, the excess of the liability recorded over the related amount of minority interest has been
recorded as goodwill. The remaining 2.28% of the original shares outstanding will be settled for an
aggregate purchase price composed of the following two installments: (i) the 2008 payment of $14.4
million that will be made in the first half of 2008 based on a multiple of Lucky Brand’s 2007
earnings, which we have accounted for as additional purchase price and (ii) the 2011 payment that
will be based on a multiple of Lucky Brand’s 2010 earnings, net of the 2008 payment, which we
estimate will be in the range of $9-12 million.
34
RESULTS OF OPERATIONS
We present our results based on the two reportable segments discussed in the Overview section, as
well as on the following geographic basis based on selling location:
• |
|
Domestic: wholesale customers, licensees, Company specialty retail and outlet
stores located in the United States and our e-commerce sites; and |
|
• |
|
International: wholesale customers, licensees, Company specialty retail, outlet
stores and concession stores located outside of the United States, primarily in our European
and Canadian operations. |
All data and discussion with respect to our segments included within this “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” is presented after applicable
intercompany eliminations.
2007 vs. 2006
The following table sets forth our operating results for the year ended December 29, 2007 (52
weeks), compared to the year ended December 30, 2006 (52 weeks):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended |
|
Variance |
|
|
December 29, |
|
December 30, |
|
|
|
|
Dollars in millions |
|
2007 |
|
2006 |
|
$ |
|
% |
Net Sales |
|
$ |
4,577.3 |
|
|
$ |
4,643.9 |
|
|
$ |
(66.6 |
) |
|
|
(1.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
2,165.7 |
|
|
|
2,260.2 |
|
|
|
(94.5 |
) |
|
|
(4.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
2,104.4 |
|
|
|
1,878.7 |
|
|
|
225.7 |
|
|
|
12.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark impairment |
|
|
36.3 |
|
|
|
— |
|
|
|
36.3 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
450.8 |
|
|
|
— |
|
|
|
450.8 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income |
|
|
(425.8 |
) |
|
|
381.5 |
|
|
|
(807.3 |
) |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income, net |
|
|
(4.4 |
) |
|
|
5.4 |
|
|
|
(9.8 |
) |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(42.2 |
) |
|
|
(34.9 |
) |
|
|
(7.3 |
) |
|
|
(20.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes |
|
|
(102.4 |
) |
|
|
131.1 |
|
|
|
(233.5 |
) |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from Continuing Operations |
|
|
(370.0 |
) |
|
|
220.9 |
|
|
|
(590.9 |
) |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax |
|
|
4.5 |
|
|
|
33.8 |
|
|
|
(29.3 |
) |
|
|
86.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations, net of tax |
|
|
(7.3 |
) |
|
|
— |
|
|
|
(7.3 |
) |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
$ |
(372.8 |
) |
|
$ |
254.7 |
|
|
$ |
(627.5 |
) |
|
|
|
* |
Net Sales
Net sales for 2007 were $4.577 billion, a decrease of 1.4%, as compared to net sales for 2006. The
impact of foreign currency exchange rates, primarily as a result of the strengthening of the
Canadian dollar and the euro, in our international businesses increased net sales by approximately
$115.7 million during the year. Net sales data are provided below:
|
• |
|
Direct Brands net sales were $2.258 billion, increasing $373.9 million, or 19.8%,
reflecting the following: |
|
– |
|
Net sales for MEXX were $1.252 billion, a 7.8% increase compared to 2006. Excluding the
impact of foreign currency exchange rates, net sales for MEXX were $1.153 billion, a (0.7%)
decrease as
compared to 2006, primarily due to decreases in our MEXX Europe retail operations, partially offset
by increases in our MEXX Canada retail businesses. |
|
— |
|
We ended 2007 with 138 specialty stores, 84 outlets and 313 concessions, reflecting
the net addition over the last 12 months of 10 specialty stores, 2 outlet stores and 23
concession stores; |
|
|
— |
|
Average retail square footage in 2007 was approximately 1.331 million square feet, a
4.7% increase compared to 2006; |
35
|
— |
|
Sales productivity was $433 per average square foot as compared to $449 for fiscal
2006; |
|
|
— |
|
Comparable store sales in our MEXX Company-owned stores decreased by 2.0% overall,
primarily due to a decrease in our MEXX Europe business, partly offset by an increase in our MEXX
Canada business; and |
|
|
— |
|
A $98.7 million increase resulting from the impact of foreign currency exchange rates in
our European and Canadian businesses. |
|
– |
|
Net sales for LUCKY BRAND were $421.6 million, a 9.8% increase compared to 2006,
primarily driven by
increases in Domestic retail operations partially offset by declines in the cosmetics business. |
|
— |
|
We ended 2007 with 171 specialty stores and 15 outlet stores, reflecting the net addition over
the
last 12 months of 36 specialty stores and 8 outlet stores; |
|
|
— |
|
Average retail square footage in 2007 was approximately 391 thousand square feet, a 32.2%
increase
compared to 2006; |
|
|
— |
|
Sales productivity was $587 per average square foot as compared to $641 for fiscal 2006;
and |
|
|
— |
|
Comparable store sales in our Company-owned stores were flat for 2007. |
|
– |
|
Net sales for JUICY COUTURE were $493.8 million, a 48.7% increase compared to
2006, primarily driven by
increases in retail, and wholesale non-apparel (including fragrance). |
|
— |
|
We ended 2007 with 37 specialty stores and 15 outlet stores, reflecting the net addition over
the
last 12 months of 19 specialty stores and 6 outlet stores; |
|
|
— |
|
Average retail square footage in 2007 was approximately 118 thousand square feet, a 170.0%
increase
compared to 2006; |
|
|
— |
|
Sales productivity was $1,158 per average square foot as compared to $1,059 for fiscal 2006;
and |
|
|
— |
|
Comparable store sales in our Company-owned stores increased by 23.0% in 2007. |
|
– |
|
Net sales for KATE SPADE (acquired in December 2006) were $90.5 million, an
$84.5 million increase
compared to 2006. |
|
— |
|
We ended 2007 with 26 specialty retail stores and 13 outlet stores; |
|
|
— |
|
Average retail square footage in 2007 was 68 thousand square feet; and |
|
|
— |
|
Sales productivity was $631 per average square foot in 2007. |
Comparable Company-owned store sales are
calculated as follows:
|
— |
|
New stores become comparable after 14 full fiscal months of operations (on
the 1st day of the 15th full fiscal month); |
|
|
— |
|
Except in unusual circumstances, closing stores become non-comparable one
full fiscal month prior to the scheduled closing date; |
|
|
— |
|
A remodeled store will be changed to non-comparable when there is a 20% or
more increase/decrease in its selling square footage (effective at the start of the
fiscal month when construction begins). The store becomes comparable again after 14
full fiscal months from the re-open date; |
|
|
— |
|
A store that relocates becomes non-comparable when the new location is
materially different from the original location (in respect to selling square
footage and/or traffic patterns); and |
|
|
— |
|
Stores that are acquired are not comparable until they have been reflected
in our results for a period of 12 months. |
Net sales per average square foot is defined
as net sales divided by the average of beginning and
end of period gross square feet.
• |
|
Partnered Brands net sales were $2.319 billion, a decrease of $440.6 million or
16.0%, reflecting: |
|
– |
|
Our department store customers’ continued focus
on inventory productivity and product
differentiation to gain competitive market share
and improve margins and cash flows, as they
continue to execute their buying activities very
cautiously, while aggressively growing their
private label businesses. This operating
environment continued to adversely affect our
Partnered Brands segment, and contributed to
reduced sales in 2007 for the following brands:
LIZ CLAIBORNE, SIGRID OLSEN (closing in the
first half of 2008), Cosmetics (due to reduced
distribution and increased returns resulting
from the closure of certain brands), CLAIBORNE,
MONET, FIRST ISSUE (which closed in early 2008),
ELLEN TRACY (which we have agreed to sell in a
transaction that is expected to close in the
second quarter of 2008), DANA BUCHMAN (licensed
on an exclusive basis to Kohl’s in January 2008, with current operations
expected to close in the first half of 2008 and
the licensed offering expected to be launched no
later than the first quarter of 2009), licensed
DKNY® Jeans and ENYCE. The
sales decline also
reflects the elimination of our CITY UNLTD. and
CRAZY HORSE brands, partially offset by the
addition of our LIZ & CO. and CONCEPTS BY
CLAIBORNE brands and the launch of our licensed
USHER fragrance; and |
|
|
– |
|
The impact of fluctuations in foreign currency
exchange rates, which increased sales by $15.9
million primarily related to our LIZ CLAIBORNE
and MONET operations in Europe and Canada. |
36
Viewed on a geographic basis, Domestic net sales decreased by $156.2 million or 4.8%, to
$3.093 billion, reflecting decreases in our Partnered Brands segment, partially offset by increases
in our Direct Brands segment primarily due to growth in JUICY COUTURE and the inclusion of KATE
SPADE (acquired in December of 2006). International net sales increased $89.6 million or
6.4%, to $1.485 billion. The increase in international sales reflected the impact of fluctuations
in foreign currency exchange rates, which increased sales by approximately $115.7 million, as well
as increases in our MEXX Canada retail business partially offset by decreases in our MEXX Europe
business.
Gross Profit
Gross profit in 2007 was $2.166 billion, a $94.5 million decrease as compared to 2006. Gross profit
as a percentage of net sales decreased to 47.3% in 2007 as compared to 48.7% in 2006, reflecting
decreased gross profit rates in our Partnered Brands segment due to higher levels of retailer
support, the aggressive liquidation of excess inventories across all
brands, as well as costs associated with the elimination of certain
cosmetics product offerings, partially
offset by an increased proportion of sales from our Direct Brands segment, which operates at a
higher gross profit rate than the Company average. Gross profit increased approximately $67.1
million due to the impact of fluctuations in foreign currency exchange rates on our international
businesses. Warehousing activities, including receiving, storing, picking, packing and general
warehousing charges, are included in selling, general and administrative expenses (“SG&A”);
accordingly, our gross profit may not be comparable to others who may include these expenses as a
component of cost of goods sold.
Selling, General & Administrative Expenses
SG&A increased $225.7 million or 12.0%, to $2.104 billion in 2007 over 2006. The SG&A increase
reflected the following:
• |
|
The inclusion of $55.8 million of expenses related to KATE SPADE (acquired in December 2006) and NARCISO RODRIGUEZ
(acquired in May 2007); |
• |
|
The inclusion of $21.2 million of expenses related to our licensed USHER fragrance; |
• |
|
An $85.2 million increase primarily resulting from the retail expansion in our Direct Brands segment; |
• |
|
A $63.5 million increase due to the impact of changes in foreign currency exchange rates on our international operations; |
• |
|
A $50.0 million increase due to incremental costs associated with streamlining activities and the inclusion of expenses
resulting from our strategic review in 2007; and |
• |
|
A net decrease of $50.0 million associated with other SG&A items. |
SG&A as a percent of net sales was 46.0% in 2007, compared to 40.5% in 2006, primarily reflecting
an increased SG&A rate in our Partnered Brands segment resulting from the de-leveraging impact of
decreased wholesale net sales, higher expenses associated with our streamlining activities,
expenses associated with the strategic review of our brand portfolio as well as an increased
proportion of expenses from our Direct Brands segment, which runs at a higher SG&A rate than the
Company average.
Trademark Impairment
Non-cash charges totaling $36.3 million were recorded as a result of the impairment of the ELLEN
TRACY trademark due to decreases in sales projections over the next few years.
Goodwill Impairment
A non-cash charge of $450.8 million was recorded in the Partnered Brands segment reflecting
a decrease in its fair value below its carrying value due to declines in the actual and projected performance and cash flows in the segment.
Operating (Loss) Income
Operating loss for 2007 was $425.8 million, a decrease of $807.3 million as compared to 2006. This
decrease includes the impact of the non-cash impairment charges discussed above of $487.1 million
in the Partnered Brand Segment. Operating loss as a percent of net sales was (9.3%) in 2007
compared to income of 8.2% in 2006. The impact of changes in foreign currency exchange rates on our
international operations added $3.6 million to operating income for the year. Operating income by
segment is provided below:
• |
|
Direct Brands operating income increased to $206.2 million (9.1% of
sales) in 2007 compared to operating income of $205.6 million (10.9%
of sales) in 2006, as a result of growth in our JUICY COUTURE brand
and the impact of foreign currency exchange rates in our international
operations, partially offset by reduced income in our LUCKY BRAND
operations as a result of expenses associated with brand building and
reduced income in our MEXX Europe retail operations. |
37
• |
|
The Partnered Brands operating loss for the year was $632.0 million
((27.2) % of net sales), compared to operating income of $175.9
million (6.4% of net sales) in 2006. This decrease is due to lower
sales (primarily in brands under strategic review) and increased retailer support, expenses associated with the
elimination of certain cosmetics product offerings, an increase in
expenses associated with our streamlining initiatives, expenses
associated with the strategic review of our brands, as well as the
Partnered Brands goodwill and ELLEN TRACY trademark non-cash
impairment charges. |
On a geographic basis, Domestic recorded an operating loss of $476.8 million, a decrease of
$783.0 million. The Domestic decrease predominantly reflected reduced income in our Partnered
Brands segment and the impact of the non-cash impairment charges discussed above, partially offset
by an increase in the domestic operations of our Direct Brands segment. International
operating income decreased $24.3 million or 32.3% to $51.0 million. The International decrease
primarily reflected reduced income in our Partnered Brands segment primarily from our LIZ CLAIBORNE
and MONET European brands, as well as our Direct Brands European retail business, partially offset
by the impact of $3.6 million of foreign currency exchange rates in our international businesses.
Other Income (Expense), Net
In 2007, other income (expense), net was $(4.4) million of expense compared to $5.4 million of
income in 2006. In 2007, net other (expense) income was primarily comprised of $3.7 million of
foreign currency transaction losses and $1.1 million of minority interest (see “Financial Position,
Capital Resources and Liquidity — Commitments and Capital Expenditures,” below, for discussion of
the purchase of the remaining Lucky Brand minority interest), partially offset by a $0.4 million
realized gain from the sale of certain equity investments. In 2006, net other income (expense) was
primarily comprised of a $3.6 million realized gain from the sale of certain equity investments and
foreign currency transaction gains of $3.0 million, partially offset by $1.2 million of minority
interest.
Interest Expense, Net
Net interest expense in 2007 was $42.2 million, compared to $34.9 million in 2006, both of which
were principally related to borrowings incurred to finance our strategic initiatives, including
share repurchases and acquisitions. Net interest expense includes $10.3 million and $4.4 million
of interest income in 2007 and 2006, respectively.
(Benefit) Provision for Income Taxes
Income taxes in 2007 decreased by $233.5 million to an income tax benefit of $(102.4) million as
compared to a tax expense of $131.1 million in 2006. Tax expense decreased by $107.7 million as a
result of the goodwill impairment charge. The tax rate benefit resulting from the goodwill
impairment charge was less than the statutory rate as a significant portion of
the goodwill impairment charge is non-deductible. The resulting effective tax rate benefit on the pre-tax loss from
continuing operations was 21.7% in 2007 as compared to 37.2% of pre-tax income in 2006.
(Loss) Income from Continuing Operations
Loss from continuing operations in 2007 was $(370.0) million and Income from continuing operations
in 2006 was $220.9 million, or 4.8% of net sales. EPS from continuing operations decreased to
$(3.71) in 2007 from diluted EPS of $2.13 in 2006. We incurred a loss from continuing operations
in 2007, therefore outstanding stock options and restricted shares are anti-dilutive. Accordingly,
basic and diluted weighted average shares outstanding are equal for such period.
Income from Discontinued Operations, Net of Tax
Income from discontinued operations in 2007 decreased to $4.5 million, from $33.8 million in 2006
due to (i) decreased performance of the brands comprising our discontinued operations in 2007 and
(ii) the inclusion of the results of EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE for
nine months in 2007, but for the entire year in 2006 (these brands were disposed on October 4,
2007). EPS from discontinued operations decreased to $0.04 in 2007 from $0.33 in 2006.
Loss on Disposal of Discontinued Operations, Net of Tax
Loss on disposal of discontinued operations in 2007 was $7.3 million, or $(0.07) per common share
reflecting the estimated difference between the carrying value of the assets sold and their
estimated fair values less costs to dispose, including transaction costs.
Net (Loss) Income
The net loss recorded in 2007 was $(372.8) million as compared to net income of $254.7 million in
2006, or 5.5% of net sales. EPS decreased to $(3.74) in 2007, from $2.46 in 2006. These decreases
primarily reflect the after-tax impact of the non-cash goodwill and trademark impairment charges of
$365.1 million ($(3.66) per share) and the operating loss incurred in our Partnered Brands segment.
38
2006 vs. 2005
The following table sets forth our operating results for the year ended December 30, 2006 (52
weeks), compared to the year ended December 31, 2005 (52 weeks):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Variance |
|
|
December 30, |
|
December 31, |
|
|
Dollars in millions |
|
2006 |
|
2005 |
|
$ |
|
% |
|
Net Sales |
|
$ |
4,643.9 |
|
|
$ |
4,586.2 |
|
|
$ |
57.7 |
|
|
|
1.3 |
% |
|
Gross Profit |
|
|
2,260.2 |
|
|
|
2,199.9 |
|
|
|
60.3 |
|
|
|
2.7 |
% |
|
Selling, general & administrative expenses |
|
|
1,878.7 |
|
|
|
1,715.7 |
|
|
|
163.0 |
|
|
|
9.5 |
% |
|
Operating Income |
|
|
381.5 |
|
|
|
484.2 |
|
|
|
(102.7 |
) |
|
|
(21.2 |
)% |
|
Other income (expense), net |
|
|
5.4 |
|
|
|
(2.3 |
) |
|
|
7.7 |
|
|
|
334.8 |
% |
|
Interest expense, net |
|
|
(34.9 |
) |
|
|
(31.8 |
) |
|
|
(3.1 |
) |
|
|
(9.7 |
)% |
|
Provision for income taxes |
|
|
131.1 |
|
|
|
158.3 |
|
|
|
(27.2 |
) |
|
|
(17.2 |
)% |
|
Income from Continuing Operations |
|
|
220.9 |
|
|
|
291.8 |
|
|
|
(70.9 |
) |
|
|
(24.3 |
)% |
|
Income from discontinued operations, net of tax |
|
|
33.8 |
|
|
|
25.6 |
|
|
|
8.2 |
|
|
|
32.0 |
% |
|
Net Income |
|
$ |
254.7 |
|
|
$ |
317.4 |
|
|
$ |
(62.7 |
) |
|
|
(19.8 |
%) |
Net Sales
Net sales for 2006 were $4.644 billion, an increase of $57.7 million, or 1.3%, over net sales for
2005. The impact of fluctuations in foreign currency exchange rates on our international
businesses increased net sales by approximately $28.0 million during the year. Net sales data are
provided below:
• |
|
Direct Brands net sales were $1.884 billion increasing $258.7 million, or 15.9%, reflecting the following: |
|
– |
|
Net sales for MEXX were $1.162 billion, a 9.8% increase compared to 2005, primarily due to
increases in our MEXX Europe retail and wholesale businesses (due to volume growth as a result of
new specialty retail customers), as well as increases in our MEXX Canada retail business. |
|
— |
|
We ended 2006 with 128 specialty stores, 82 outlets and 290 concessions, primarily reflecting
the net addition over the last 12 months of 5 specialty retail stores and one outlet store; |
|
|
— |
|
Average retail square footage in 2006 was approximately 1.271 million square feet, a 5.9%
increase compared to 2005; |
|
|
— |
|
Sales productivity was $449 per average square foot as compared to $409 for fiscal 2005; |
|
|
— |
|
Comparable store sales in our MEXX Company-owned stores increased by 1.8% overall, primarily the
result of an increase in our Canadian specialty retail business, partly offset by a decrease in our
Canadian outlet business; and |
|
|
— |
|
A $20.0 million increase resulting from the impact of foreign currency exchange rates in our
European and Canadian businesses. |
|
– |
|
Net sales for LUCKY BRAND were $384.1 million, a 22.5% increase compared to 2005, primarily driven
by increases in retail and wholesale non-apparel. |
|
— |
|
We ended 2006 with 135 specialty stores and 7 outlet stores, reflecting the net addition over
the last 12 months of 29 specialty stores and one outlet store; |
|
|
— |
|
Average retail square footage in 2006 was approximately 296 thousand square feet, a 26.3%
increase compared to 2005; |
|
|
— |
|
Sales productivity was $641 per average square foot as compared to $637 for fiscal 2005; and |
|
|
— |
|
Comparable store sales in our Company-owned stores increased by 5.3% in 2006. |
39
|
– |
|
Net sales for JUICY COUTURE were $332.2 million, a 31.0% increase compared to 2005, primarily
driven by increases in retail, and wholesale non-apparel (including fragrance). |
|
— |
|
We ended 2006 with 18 specialty stores and 9 outlet stores, reflecting the net addition over the
last 12 months of 15 specialty stores and 7 outlet stores; |
|
|
— |
|
Average retail square footage in 2006 was approximately 44 thousand square feet, a 504.4%
increase compared to 2005; |
|
|
— |
|
Sales productivity was $1,059 per average square foot as compared to $1,318 for fiscal 2005, as
the brand evolved from a very limited to a broader distribution (27 stores); and |
|
|
— |
|
Comparable store sales in our Company-owned stores increased by 18.9% in 2006. |
|
– |
|
Net sales for KATE SPADE (acquired in December 2006) were $6.0 million.
We ended 2006 with 20 specialty retail stores and 4 outlet stores. |
• |
|
Partnered Brands net sales were $2.760 billion, a decrease of $201.0 million or 6.8%, reflecting: |
|
– |
|
A $231.9 million net decrease primarily reflecting our department
store customers’ focus on inventory productivity and product
differentiation to gain competitive market share and improve margins
and cash flows, as they execute their buying activities very
cautiously, while aggressively growing their private label businesses.
This operating environment adversely affected our Partnered Brand
segment and contributed to reduced sales for the following brands: LIZ
CLAIBORNE, SIGRID OLSEN, ELLEN TRACY, CLAIBORNE, FIRST ISSUE, MONET,
DANA BUCHMAN and AXCESS men’s. The sales decline also reflects the
elimination of our CITY UNLTD. and CRAZY HORSE brands which is being
replaced in 2007 by LIZ & CO., partly offset by growth in our licensed
DKNY® Jeans (due to volume growth primarily due to additional points
of sale, and ENYCE (due to increased demand); |
|
|
– |
|
The impact of $35.2 million of sales from our acquisition of MAC & JAC; |
|
|
– |
|
The inclusion in 2005 of a $12.3 million reimbursement from a customer
of improperly collected markdown allowance; and |
|
|
– |
|
Fluctuations in foreign currency exchange rates increased sales by
$8.0 million primarily related to our LIZ CLAIBORNE operations in
Europe and Canada. |
Viewed on a geographic basis, Domestic net sales decreased by $75.5 million, or 2.3%, to
$3.249 billion, reflecting declines in the domestic operations of our Partnered Brands segment
partially offset by increases in our domestic Direct Brands segment. International net
sales increased $133.2 million, or 10.6%, to $1.395 billion. The international increase reflected
increases in our MEXX Europe and Canadian retail operations in our Direct Brand Segment.
Fluctuations in foreign currency exchange rates increased international sales by approximately
$28.0 million.
Gross Profit
Gross profit increased $60.3 million, or 2.7%, to $2.260 billion in 2006 over 2005. $16.1 million
of the increase in gross profit is due to the impact of changes in foreign currency exchange rates
on our international businesses. Gross profit as a percent of net sales increased to 48.7% in 2006
from 48.0% in 2005, reflecting the impact of a changing mix within our portfolio, partially offset
by a decreased gross profit rate in our Partnered Brands segment and the impact of the $12.3
million (0.3% of net sales) reimbursement in 2005 from a customer of improperly collected markdown
allowances. The change in mix primarily reflected an increased proportion of sales from our Direct
Brands segment, which runs at a higher gross profit rate than the Company average, and a decreased
proportion of sales from our Partnered Brands segment, which runs at a lower gross profit rate than
the Company average. Warehousing activities including receiving, storing, picking, packing and
general warehousing charges are included in SG&A; accordingly, our gross profit may not be
comparable to others who may include these expenses as a component of cost of goods sold.
Selling, General & Administrative Expenses
SG&A increased $163.0 million, or 9.5%, to $1.879 billion in 2006 over 2005 and as a percent of net
sales increased to 40.5% in 2006 from 37.4%. The SG&A increase reflected the following:
• |
|
The inclusion of $18.4 million of expenses from our acquisitions of MAC & JAC and KATE
SPADE; |
• |
|
A $96.4 million increase primarily resulting from the retail expansion of our Direct Brands
Segment; |
• |
|
A $13.7 million increase due to the impact of fluctuations in foreign currency exchange
rates on our international operations; |
• |
|
$81.6 million of expenses primarily consisting of employee severance costs, lease
termination costs and fixed asset write-downs, offset by savings of $28.2 million associated
with our streamlining initiatives; |
• |
|
$14.9 million of reinvestment in marketing and in-store activities of realized savings from
our streamlining initiatives; and |
• |
|
A $33.8 million net decrease in Partnered brands and corporate expenses primarily
reflecting reduced incentive compensation expense. |
40
The increased SG&A rate primarily reflected net expenses associated with our business streamlining
initiatives and the increased proportion of expenses related to our Direct Brands segment, which
runs at a higher SG&A rate than the Company average, as described above, in addition to reduced
expense leverage resulting from the decreased proportion of expenses related to our Partnered
Brands segment, which runs at a lower SG&A rate than the Company average.
Operating Income
Operating income was $381.5 million (8.2% of net sales) in 2006 compared to $484.2 million (10.6%
of net sales) in 2005. The decrease is primarily attributable to $81.6 million of expenses
associated with our streamlining initiatives, the $12.3 million reimbursement in 2005 from a
customer of improperly collected markdown allowances, as well as the impact of reduced wholesale
apparel sales, partially offset by decreased wholesale and corporate expenses. Operating income
increased by $2.3 million in 2006 due to the impact of changes in foreign currency exchange rates
on our international businesses. Operating income by business segment is provided below:
• |
|
Direct Brands operating income was $205.6 million decreasing $37.1
million, or 15.3%, as a result of reduced income in our MEXX Europe
retail and wholesale operations partially offset by growth in our
LUCKY BRAND and MEXX Canada operations. The impact of foreign currency
exchange rates in our international business increased operating
income by $2.6 million. |
• |
|
The Partnered Brands operating income for 2006 was $175.9 million
(6.4% of net sales), compared to operating income of $241.5 million
(8.2% of net sales) in 2005. The decline was a result of lower sales
and increased retailer support as well as an increase in expenses
associated with our streamlining initiatives and the inclusion in 2005
of $12.3 million from a customer of improperly collected markdown
allowances. |
Viewed on a geographic basis, Domestic operating income decreased by $70.5 million, or
18.7%, to $306.2 million predominantly reflecting the reduced income in our Partnered Brands
segment and the expenses associated with our streamlining initiatives. International
operating income decreased $32.2 million, or 30.0%, to $75.3 million. The international decrease
reflected decreased profitability in our MEXX European retail business and expenses associated with
our streamlining initiatives.
Other Income (Expense), Net
In 2006, Other income (expense), net was $5.4 million of income compared to $2.3 million of expense
in 2005. In 2006, net other income (expense) was primarily comprised of a $3.6 million realized
gain from the sale of certain equity investments and foreign currency transaction gains of $3.0
million, partially offset by $1.2 million of minority interest expense. (See “Financial Position,
Capital Resources and Liquidity — Commitments and Capital Expenditures,” below, for discussion of
the purchase of the remaining LUCKY BRAND minority interest). In 2005, Other income (expense), net
was primarily comprised of $1.8 million of minority interest expense.
Interest Expense, Net
Net interest expense in 2006 was $34.9 million, compared to $31.8 million in 2005, both of which
were principally related to borrowings incurred to finance our strategic initiatives, including
acquisitions. Net interest includes $4.4 million and $2.6 million of interest income in 2006 and
2005, respectively.
Provision for Income Taxes
The income tax rate in 2006 increased to 37.2% from 35.2% in 2005. Taxes on earnings were affected
by the impact of discrete tax events as well as a shift in earnings to jurisdictions with higher
statutory tax rates.
Income from Continuing Operations
Income from continuing operations in 2006 decreased to $220.9 million, or 4.8% of net sales, from
$291.8 million in 2005, or 6.4% of net sales. EPS from continuing operations decreased to $2.13 in
2006 from $2.70 in 2005.
Income from Discontinued Operations, Net of Tax
Income from discontinued operations in 2006 increased to $33.8 million, from $25.6 million in 2005.
Diluted EPS from discontinued operations increased to $0.33 in 2006 from $0.24 in 2005.
Net Income
Net income decreased in 2006 to $254.7 million, or 5.5% of net sales, from $317.4 million in 2005,
or 6.9% of net sales. EPS decreased to $2.46 in 2006, from $2.94 in 2005, a 16.3% decrease. The
impact of the 2005 reimbursement from a customer of improperly collected markdown allowances was
approximately $8.0 million, net of taxes, which increased EPS in 2006 by $0.07. Our average diluted
shares outstanding decreased by 4.4 million shares in 2006 on a year-over-year basis to 103.5
million as a result of the repurchase of common shares, partially offset by the exercise of stock
options and the effect of dilutive securities. Shares repurchased during 2006 increased EPS by
approximately $0.03 in 2006.
41
FORWARD OUTLOOK
We remain confident that the strategies we outlined in July 2007 will drive sustained long-term
improvement in operating performance, however, we have observed the significant recent
deterioration in the macroeconomic environment in the U.S. and abroad, causing a notable slowdown
in consumer spending. In this environment, department store traffic and profitability are more
difficult to forecast.
Facing these challenges, we are planning our business conservatively, projecting fiscal 2008 EPS in
the range of $1.50 — $1.70, which excludes the results of the following brands for which we have
completed the strategic review: TAPEMEASURE, INTUITIONS, J.H. COLLECTIBLES, EMMA JAMES, FIRST
ISSUE, C&C CALIFORNIA, LAUNDRY BY DESIGN and SIGRID OLSEN; expenses associated with expected
additional streamlining initiatives in 2008; and the potential impact of any acquisition,
additional divestiture or share repurchases. We will continue to monitor the environment closely as
we progress through the year.
All of these forward-looking statements exclude the impact of any future acquisitions or additional
stock repurchases. The foregoing forward-looking statements are qualified in their entirety by
reference to the risks and uncertainties set forth under the headings “STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS” and “Item 1A—Risk Factors.”
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
Cash Requirements. Our primary ongoing cash requirements are to fund growth in working
capital (primarily accounts receivable and inventory), to invest in
our supply chain and information systems, to fund investment in marketing
and capital expenditures and to fund our anticipated retail store
expansion, as well as expenditures for in-store merchandise shops and normal maintenance activities. We also require cash to
fund potential acquisitions and payments related to earn-out provisions of recent acquisition
agreements. In addition, we will require cash to fund any repurchase of Company stock under our
previously announced share repurchase programs. On November 12, 2007 and May 18, 2006, the
Company’s Board of Directors authorized us to purchase up to an additional $100 million and $250
million, respectively, of our common stock for cash in open market purchases and privately
negotiated transactions. As of February 15, 2008, we had $28.7 million remaining in buyback
authorization under the share repurchase program.
Sources of Cash. Our historical sources of liquidity to fund ongoing cash requirements
include cash flows from operations, cash and cash equivalents and securities on hand, as well as
borrowings through our commercial paper program and bank lines of credit (which include revolving
and trade letter of credit facilities). We anticipate that cash flows from operations, our
bank and letter of credit facilities will be sufficient to fund our
liquidity requirements for the next twelve months and that we will be able to adjust the amounts
available under these facilities if necessary (see “Commitments and Capital Expenditures” for more
information on future requirements). Such sufficiency and availability may be adversely affected by
a variety of factors, including, without limitation, our ability to execute our strategy, retailer
and consumer acceptance of our products, which may impact our financial performance, maintenance of
our investment-grade credit rating, maintenance of financial covenants (as amended) of our debt and
credit facilities, as well as interest rate and exchange rate fluctuations. On August 8, 2007 and
September 10, 2007 Moody’s and Standard & Poor’s (“S&P”), respectively, completed a review of our
credit rating. Moody’s lowered the senior unsecured debt rating to Baa3 from Baa2 and the
commercial paper rating to Prime-3 from Prime-2. S&P affirmed our BBB unsecured debt rating and
lowered the commercial paper rating to A-3 from A-2. On February 15, 2008, Moody’s placed our Baa3
senior unsecured and Prime-3 commercial paper ratings under review for possible downgrade.
2007 vs. 2006
Cash and Debt Balances. We ended 2007 with $205.7 million in cash and marketable
securities, compared to $195.1 million at the end of 2006 and with $887.7 million of debt
outstanding, compared to $592.7 million at the end of 2006. This $284.4 million increase in our net
debt (total debt less cash and marketable securities) position on a year-over-year basis is
primarily attributable to $300.5 million in share repurchases, $181.0 million in capital and
in-store expenditures, $48.3 million in acquisition-related payments and the effect of foreign
currency translation on our Eurobond (which increased our debt balance by $53.0 million), partially
offset by cash flows from operations for the last twelve months of $273.9 million. We ended the
year with $1.516 billion in stockholders’ equity, giving us a total debt to total capital ratio of
36.9% at the end of 2007, compared to $2.130 billion in stockholders’ equity at the end of 2006
with a total debt to capital ratio of 21.8%.
Accounts Receivable decreased $58.9 million, or 11.8%, at year-end 2007 compared to
year-end 2006, primarily due to a $127.1 million reduction in receivables in our Partnered Brands
segment due to reduced sales, and the impacts of brands sold, discontinued or classified as held
for sale during 2007, as well as decreases in the fragrance operations of both our Direct Brands
and Partnered Brands segments, partially offset by increases in our Direct Brands segment and the
inclusion of an additional $3.9 million of receivables
42
from our acquired KATE SPADE and NARCISO RODRIGUEZ brands. The year-over-year change in foreign
currency exchange rates primarily relates to the strengthening of the euro, which increased
accounts receivable by $19.6 million.
Inventories decreased $52.6 million,
or 8.9% at year-end 2007 compared to year-end 2006,
primarily due to the
impact of brands sold, discontinued, or classified as held for sale
during 2007, as well as
aggressive liquidation and write-downs resulting from our decision to exit certain cosmetics
product offerings, partially offset by increases due to retail
expansion in our Direct Brands
segment and the increase in our LIZ & CO. and CONCEPTS BY CLAIBORNE brands. Foreign
currency exchange rate fluctuations, primarily due to the strengthening of the euro, increased
inventories by $20.2 million. Our average inventory turnover for 2007 was 3.9 times compared to
4.2 times in 2006. The reduction in inventory turnover is attributable to retail expansion in our
Direct Brands Segment as retail inventories turnover at a slower rate.
Borrowings under our revolving credit facility and other credit facilities peaked at $473.7
million during 2007; at year-end 2007, our borrowings under these facilities were $348.0 million.
Net cash provided by operating activities was $273.9 million in 2007, compared to $394.0
million in 2006. This $120.1 million decrease was primarily due to reduced net income offset by
changes in accounts receivable due to reduced shipments in our Partnered Brands segment as well as
inventory reductions in our Partnered Brands segment.
Net cash used in investing activities was $219.9 million in 2007, compared to $435.4
million in 2006. Net cash used in 2007 primarily reflected $181.0 million for capital and in-store
expenditures and $48.3 million in acquisition-related payments. Net cash used in 2006 primarily
reflected $266.8 million in acquisition-related payments and $181.1 million for capital and
in-store expenditures, partially offset by proceeds from the sale of equity investments and the
sale of property and equipment.
Net cash used in financing activities was $37.2 million in 2007, compared to $89.8 million
in 2006. The $52.6 million year-over-year decrease in use of cash primarily reflected a $359.9
million increase in proceeds from short-term borrowings, partly offset by a $126.4 million
increase in cash used for stock repurchases, a $164.2 million decrease in proceeds from commercial
paper and an $18.8 million decrease in proceeds from the exercise of stock options.
2006 vs. 2005
Cash and Debt Balances. We ended 2006 with $195.1 million in cash and marketable
securities, compared to $343.2 million at year-end 2005 and with $592.7 million of debt
outstanding, compared to $466.6 million at year-end 2005. This $274.2 million increase in our net
debt position on a year-over-year basis is primarily attributable to $174.1 million in share
repurchases, $182.4 million in capital and in-store expenditures, $266.8 million in
acquisition-related payments and the effect of foreign currency translation on our Eurobond (which
increased our debt balance by $48.5 million), partially offset by cash flow from operations for the
last twelve months of $394.0 million. We ended the year with $2.130 billion in stockholders’
equity, giving us a total debt to total capital ratio of 21.8% at the end of 2006, compared to
$2.003 billion in stockholders’ equity at the 2005 year-end with a total debt to total capital
ratio of 18.9%.
Accounts receivable increased $83.2 million, or 20.0%, at year-end 2006 compared to
year-end 2005, primarily due to increased shipments in our domestic non-apparel businesses of both
our Direct Brands and Partnered Brands segments and the timing of shipments in the fourth quarter
of 2006 and 2005, the inclusion of $13.0 million of receivables from our acquired prAna, MAC & JAC and KATE SPADE brands, the impact of foreign currency exchange rates of $15.3 million primarily
related to the strengthening of the euro, partially offset by a $5.9 million reduction in
receivables in our domestic Partnered Brands segment.
Inventories increased $57.1 million, or 10.7%, at year-end 2006 compared to year-end 2005,
primarily due to a $35.2 million increase resulting from acquisitions, new business initiatives and
the expansion of our Direct Brands retail business, net of Partnered Brands discontinued lines, a
$14.8 million increase resulting from the impact of foreign currency exchange rate fluctuations,
primarily due to the strengthening of the euro in our international businesses, partially offset by
decreases in our domestic better woman’s apparel and domestic outlet operations in our Partnered
Brands Segment. Our average inventory turnover rate for 2006 was 4.3 times compared to 4.4 times
in 2005.
Borrowings under our revolving credit facility and other credit facilities peaked at $314.2
million during 2006; at year-end 2006, our borrowings under these facilities were $104.4 million.
Net cash provided by operating activities was $394.0 million in 2006, compared to $440.6
million in 2005. This $46.6 million decrease in cash flow was primarily due to reduced net income
resulting from the impact of our streamlining initiatives, as well as changes in accounts
receivable due to timing of shipments in our Domestic Partnered Brands segment, partially offset by
changes in
43
accounts payable due to the timing of payments and changes in accrued expenses primarily as a
result of accruals relating to our streamlining initiatives, as well as increases in depreciation
and amortization mostly due to retail expansion in our Direct Brands Segment.
Net cash used in investing activities was $435.4 million in 2006, compared to $298.8
million in 2005. Net cash used in 2006 primarily reflected $266.8 million in acquisition-related
payments and $181.1 million for capital and in-store expenditures, partially offset by proceeds
from the sale of certain equity investments and the sale of our former distribution center in
Alabama. Net cash used in 2005 reflected payments of $157.7 million for capital and in-store
expenditures, $37.1 million to complete the acquisition of MEXX Canada, $35.0 million for the
acquisition of the additional 8.25 percent of minority interest in LUCKY BRAND and payments of
$29.3 million for the acquisition of C & C CALIFORNIA and $32.4 million for the acquisition of
prAna.
Net cash used in financing activities was $89.8 million in 2006, compared to $199.5 million
provided in 2005. The $109.7 million year-over-year decrease was primarily due to commercial paper
outstanding at year-end, increased proceeds from exercise of stock options and decreased common
stock repurchases.
Commitments and Capital Expenditures
We may be required to make the following additional payments in connection with our acquisitions.
If paid in cash, these payments will be funded with cash provided by operating activities, our
revolving credit and other credit facilities and/or the issuance of debt:
• |
|
The prAna acquisition agreement requires us to make contingent
payments to the former owners of prAna based on certain performance
parameters of prAna over a pre-determined time frame. In connection
with the sale of the prAna brand, we agreed to satisfy such
contingent obligation for $18.4 million, which will be paid
concurrently with the closing of the sale of the prAna brand and will
be recorded as an expense within our Consolidated Statement of
Operations in 2008. |
• |
|
On January 16, 2007 and January 17, 2006, we purchased 1.5 percent and
1.9 percent, respectively, of the remaining outstanding shares of
LUCKY BRAND for a payment of $10.0 million each. We will acquire 0.4%
in each of January of 2008, 2009 and 2010 of the equity interest in
Lucky for payments of $5.0 million each. The remaining 2.28% of the
original shares outstanding will be settled for an aggregate purchase
price composed of the following two installments: (i) the 2008 payment
of $14.4 million will be made in the first half of 2008 based on a
multiple of LUCKY BRAND’s 2007 earnings and (ii) the 2011 payment will
be based on a multiple of LUCKY BRAND’s 2010 earnings, net of the 2008
payment which we estimate will be in the range of $9-12 million. |
• |
|
The Juicy Couture acquisition agreement provides for a contingent
payment to the former owners of Juicy Couture to be determined as a
multiple of Juicy Couture’s earnings for one of the years ended 2005,
2006 or 2007. This payment will be made in either cash or shares of
our common stock at our option. In March of 2005, the contingent
payment agreement was amended to include an advance option for the
sellers provided that (i) if the 2005 measurement year is not
selected, the sellers may elect to receive up to 70 percent of the
estimated contingent payment based upon 2005 results; and (ii) if the
2005 and 2006 measurement years are not selected, the sellers may
elect to receive up to 85 percent of the estimated contingent payment
based on the 2006 measurement year net of any 2005 advances. In April
2006, the sellers elected to receive a 70 percent advance against the
contingent purchase price and were paid $80.3 million on April 20,
2006. In May of 2007, the sellers elected to receive an 85 percent
advance against the contingent purchase price and were paid $19.9
million on May 23, 2007. These payments were accounted for as
additional purchase price and increases to goodwill. The 2008 payment
of $72.9 million will be made in the first half of 2008 based on a
multiple of Juicy Couture’s 2007 earnings, which we have accounted for
as additional purchase price. |
• |
|
On January 26, 2006, we acquired 100 percent of the equity interests
of Westcoast Contempo Fashions Limited and Mac & Jac Holdings Limited
for an initial payment of 26.2 million Canadian dollars (or $22.7
million). The Mac & Jac acquisition agreement provides for contingent
payments in fiscal years 2006, 2008, 2009 and 2010 that will be based
upon a multiple of Mac & Jac’s earnings in each year. There was no
contingent payment made based on 2006 fiscal year earnings. We
currently estimate that the aggregate of these contingent payments
will be in the range of approximately $10-12 million and will be
accounted for as additional purchase price when paid. |
We lease retail stores under leases with terms that are typically five or ten years. We amortize
leasehold improvements, as well as rental abatements, construction allowances and other rental
concessions classified as deferred rent, on a straight-line basis over the initial term of the
lease or estimated useful lives of the assets, whichever is less. The initial lease term can
include one renewal under limited circumstances if the renewal is reasonably assured, based on
consideration of all of the following factors: (i) a written renewal at the Company’s option or an
automatic renewal, (ii) there is no minimum sales requirement that could impair our ability to
renew, (iii) failure to renew would subject us to a substantial penalty and (iv) there is an
established history of renewals in the format or location.
44
Our capital expenditures for 2008 are expected to approximate $200 million. These expenditures
primarily relate to our retail expansion strategy including our plan to open 110 — 125 specialty
retail stores globally, with the majority of the store openings focused on the JUICY COUTURE, LUCKY
BRAND, MEXX and KATE SPADE formats, and the continued technological upgrading and expansion of our
management information systems and distribution facilities (including certain building and
equipment expenditures). Capital expenditures and working capital cash needs will be financed with
net cash provided by operating activities and our revolving credit and other credit facilities.
The following table summarizes as of December 29, 2007 our contractual cash obligations by future
period (see Notes 2, 4, 11 and 12 of Notes to the Consolidated Financial Statements):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
Contractual cash obligations * |
|
Less than |
|
|
|
|
|
|
|
|
|
After |
|
|
(In millions) |
|
1 year |
|
1-3 years |
|
4-5 years |
|
5 years |
|
Total |
|
Operating lease commitments |
|
$ |
221.3 |
|
|
$ |
391.8 |
|
|
$ |
304.8 |
|
|
$ |
433.3 |
|
|
$ |
1,351.2 |
|
Capital lease obligations |
|
|
5.4 |
|
|
|
10.7 |
|
|
|
10.7 |
|
|
|
4.9 |
|
|
|
31.7 |
|
Inventory purchase commitments |
|
|
405.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
405.6 |
|
5% Notes |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
513.9 |
|
|
|
513.9 |
|
Interest on 5% Notes (a) |
|
|
25.7 |
|
|
|
51.4 |
|
|
|
51.4 |
|
|
|
25.7 |
|
|
|
154.2 |
|
Guaranteed minimum licensing
royalties |
|
|
14.0 |
|
|
|
28.0 |
|
|
|
26.5 |
|
|
|
— |
|
|
|
68.5 |
|
Revolving credit facility and
other borrowings (b) |
|
|
46.9 |
|
|
|
301.6 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
|
349.0 |
|
Synthetic lease |
|
|
— |
|
|
|
— |
|
|
|
32.8 |
|
|
|
— |
|
|
|
32.8 |
|
Synthetic lease interest |
|
|
1.7 |
|
|
|
3.5 |
|
|
|
1.6 |
|
|
|
— |
|
|
|
6.8 |
|
Additional acquisition purchase
price payments |
|
|
110.2 |
|
|
|
15.0 |
|
|
|
15.5 |
|
|
|
— |
|
|
|
140.7 |
|
|
|
|
* |
|
The table above does not include amounts recorded in accordance with Financial
Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income
Taxes.” We cannot estimate the amounts or timing of payments related to uncertain tax
positions as we have not yet entered into substantive settlement discussions with taxing
authorities. |
|
(a) |
|
Interest on the 5% Notes is fixed at 5% per annum and assumes an exchange rate of
1.4683 U.S. dollars per euro. |
|
(b) |
|
Interest on all of these borrowings is estimated at a rate of 5.65%, or
approximately $33.9 million. |
On October 13, 2004, we entered into a $750 million, five-year revolving credit agreement (the
“Agreement”). A portion of the funds available under the Agreement not in excess of $250 million is
available for the issuance of letters of credit. Additionally, at our request, the amount of funds
available under the Agreement may be increased at any time or from time to time by an aggregate
principal amount of up to $250 million with only the consent of the lenders (which may include new
lenders) participating in such increase. The Agreement includes a $150 million multi-currency
revolving credit line, which permits us to borrow in U.S. dollars, Canadian dollars and euro. The
Agreement has two borrowing options, an “Alternative Base Rate” option, as defined in the Agreement
and a Eurocurrency rate option with a spread based on our long-term credit rating. The Agreement
contains certain customary covenants, including financial covenants requiring us to maintain
specified debt leverage and fixed charge coverage ratios and covenants restricting our ability to,
among other things, incur indebtedness, grant liens, make investments and acquisitions and sell
assets. The funds available under the Agreement may be used to refinance existing debt, to provide
working capital and for our general corporate purposes, including, without limitation, the
repurchase of capital stock and the support of our $750 million commercial paper program. On
February 29, 2008, we entered into an amendment to our revolving credit facility, whereby the fixed
charge coverage ratio was modified and certain definitions were revised so that certain cash
restructuring charges are excluded from the revised calculation. We were also provided a waiver of
any potential prior defaults for failure to be in compliance with the fixed charge coverage ratio
provided that we were in compliance with the amended fixed charge coverage ratio as of the end of
fiscal 2007. As of December 29, 2007, we were in compliance with such covenants, as amended. A
copy of such amendment was filed on Form 8-K, dated February 29, 2008. Both S&P and Moody’s credit
rating services placed our ratings under review in May 2007 based on the 2007 outlook provided as
part of our first quarter 2007 earnings release. During the third quarter of 2007, Moody’s
completed its review and lowered our senior unsecured debt rating to Baa3 from Baa2 and our commercial
paper rating to Prime-3 from Prime-2. Also during the third quarter of 2007, S&P completed its
review, affirmed our BBB unsecured debt rating and lowered our commercial paper rating to A-3 from
A-2. On February 15, 2008, Moody’s placed our Baa3 senior unsecured and Prime-3 commercial paper
ratings under review for possible downgrade.
On July 6, 2006, we completed the issuance of 350 million euro (or $446.9 million based on the
exchange rate in effect on such date) 5% Notes (the “Notes”) due July 8, 2013. The net proceeds of
the offering were used to refinance our outstanding 350 million euro 6.625% Notes due August 7,
2006, which were originally issued on August 7, 2001. The Notes bear interest from and including
July
45
6, 2006, payable annually in arrears on July 8 of each year beginning on July 8, 2007. The Notes
have been listed on the Luxembourg Stock Exchange and received a credit rating of BBB from Standard
& Poor’s and Baa2 from Moody’s Investor Services. During the third quarter of 2007, Moody’s lowered
the rating to Baa3 and S&P affirmed the BBB rating. These Notes are designated as a hedge of our
net investment in a foreign subsidiary.
On November 21, 2006, we entered into a seven year capital lease with a financial institution
totaling $30.6 million. The purpose of the lease was to finance the equipment associated with our
distribution facilities in Ohio and Rhode Island, which had been previously financed through our
2001 synthetic lease, which matured in 2006 (see Note 11 of Notes to Consolidated Financial
Statements).
As of December 29, 2007, the revolving credit facility and commercial paper program, letter of
credit facilities and other borrowing facilities available to us were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
Letters of Credit |
|
Available |
In thousands |
|
Total Capacity |
|
Borrowings |
|
Issued |
|
Capacity |
Revolving credit facility and
commercial paper program
(a) |
|
$ |
750,000 |
|
|
$ |
301,200 |
|
|
$ |
— |
|
|
$ |
448,800 |
|
Letter of credit facility |
|
|
400,000 |
|
|
|
— |
|
|
|
197,115 |
|
|
|
202,885 |
|
Short-term borrowing facilities |
|
|
195,871 |
|
|
|
46,799 |
|
|
|
18,420 |
|
|
|
130,652 |
|
|
|
|
(a) |
|
The Company’s $750 million revolving credit facility has a final maturity date of
October 2009 and contains the committed capacity to issue $250 million in letters of credit. |
Off-Balance Sheet Arrangements
On May 22, 2001, we entered into an off-balance sheet financing arrangement (commonly referred to
as a “synthetic lease”) to acquire various land and equipment and construct buildings and real
property improvements associated with warehouse and distribution facilities in Ohio and Rhode
Island totaling $63.7 million. The synthetic lease expired on November 22, 2006. On November 21,
2006, we entered into a new synthetic lease with a financial institution for a five—year period,
totaling $32.8 million to refinance the land and buildings referred to above. The lessor is a
wholly owned subsidiary of a publicly traded corporation. The lessor is a sole member, whose
ownership interest is without limitation as to profits, losses and distribution of the lessor’s
assets. Our lease represents less than 1% of the lessor’s assets. The leases include our guarantees
for a substantial portion of the financing and options to purchase the facilities at original cost;
the maximum guarantee is approximately $27 million. The lessor’s risk included an initial capital
investment in excess of 10% of the total value of the lease, which is at risk during the entire
term of the lease. The equipment portion of the original synthetic lease was sold to another
financial institution and leased back to us through a seven-year capital lease totaling $30.6
million. The lessor does not meet the definition of a variable interest entity under Financial
Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest
Entities” and therefore consolidation is not required.
Hedging Activities
At December 29, 2007, we had various Canadian currency collars outstanding with a notional amount
of $7.5 million, maturing through September 2008 and with contract rates ranging between 0.96 and
1.09 Canadian dollars per U.S. dollar. We had $8.7 million and 45.3 million Hong Kong dollars in
Canadian currency collars and 23.3 million Hong Kong dollars in euro currency collars at December
30, 2006. At December 29, 2007, we also had forward contracts maturing through December 2008 to
sell 14.4 million Canadian dollars for $14.3 million, to sell 24.2 million Canadian dollars for
185.1 million Hong Kong dollars and to sell 68.7 million euro for 736.3 million Hong Kong dollars.
The notional value of the foreign exchange forward contracts at December 29, 2007 was $132.3
million, as compared with $97.5 million at December 30, 2006. Unrealized losses for outstanding
foreign exchange forward contracts and currency options were $7.1 million at December 29, 2007 and
$1.6 million at December 30, 2006. The ineffective portion of these trades is recognized currently
in earnings and was $(1.6) million for the twelve months ended December 29, 2007. The ineffective portion of such trades was not material for the years ended December 30, 2006 and December 31,2005. In addition, for the years ended December 29, 2007, December 30, 2006, and December 31, 2005, we recorded approximately $1.0 million, $1.0 million and $0.5 million, respectively, as expense for derivative instruments that no longer qualified for hedge accounting treatment. Approximately
$6.5 million in Accumulated other comprehensive loss relating to cash flow hedges will be
reclassified into earnings in the next twelve months as the inventory is sold.
In connection with the variable rate financing under the 2001 synthetic lease agreement, we entered
into two interest rate swap agreements with an aggregate notional amount of $40.0 million that
began in January 2003 and terminated in May 2006, in order to fix the interest component of rent
expense at a rate of 5.56%. We entered into these arrangements to hedge against potential future
interest rate increases. The ineffective portion of these swaps recognized in earnings was not
material during 2006 or 2005.
We hedge our net investment position in euro functional subsidiaries by designating the 350 million
euro-denominated bonds as the hedging instrument in a net investment hedge. As a result, the
foreign currency transaction gains and losses that are recognized on the
46
euro-denominated bonds in accordance with SFAS No. 52, “Foreign Currency Translation,” are
accounted for as a component of accumulated other comprehensive loss rather than recognized
currently in income. The unrealized losses recorded to Cumulative translation adjustment were $53.0
million and $48.5 million for the years ended December 29, 2007 and December 30, 2006,
respectively.
On February 11, 2004, we entered into interest rate swap agreements for the notional amount of 175
million euro in connection with its 350 million Eurobonds that matured on August 7, 2006. This
converted a portion of the fixed rate Eurobonds interest expense to floating rate at a spread over
six month EURIBOR. This was designated as a fair value hedge. The first interest rate setting
occurred on August 7, 2004 and was reset each six-month period thereafter until maturity. Interest
accrued related to these swaps was not material for the periods presented.
In May 2006, we entered into multiple forward starting swaps to lock the underlying interest rate
on the notional amount of 175 million euro in connection with the July 6, 2006 issuance of the
Notes (see Note 12 of Notes to Consolidated Financial Statements). These swaps were terminated on
June 29, 2006 and we subsequently received payment of 1.0 million euro. This amount, net of tax,
was recorded in Accumulated other comprehensive loss and will continue to be reclassified into
earnings over the seven year term of the Notes. The amount reclassified out of Accumulated other
comprehensive loss was not significant for the years ended December 29, 2007 and December 30, 2006.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements. These estimates and assumptions also affect the reported
amounts of revenues and expenses. Significant accounting policies employed by the Company,
including the use of estimates, are presented in the Notes to Consolidated Financial Statements in
this Annual Report on Form 10-K.
Critical accounting policies are those that are most important to the portrayal of our financial
condition and the results of operations and require management’s most difficult, subjective and
complex judgments as a result of the need to make estimates about the effect of matters that are
inherently uncertain. Our most critical accounting policies, discussed below, pertain to revenue
recognition, income taxes, accounts receivable — trade, net, inventories, net, the valuation of
goodwill and intangible assets with indefinite lives, accrued expenses, derivative instruments and
share-based compensation. In applying such policies, management must use some amounts that are
based upon its informed judgments and best estimates. Because of the uncertainty inherent in these
estimates, actual results could differ from estimates used in applying the critical accounting
policies. Changes in such estimates, based on more accurate future information, may affect amounts
reported in future periods.
Use of Estimates
Estimates by their nature are based on judgments and available information. The estimates that we
make are based upon historical factors, current circumstances and the experience and judgment of
our management. We evaluate our assumptions and estimates on an ongoing basis and may employ
outside experts to assist in our evaluations. Therefore, actual results could materially differ
from those estimates under different assumptions and conditions.
For accounts receivable, we estimate the net collectibility, considering both historical and
anticipated trends as well as an evaluation of economic conditions and the financial positions of
our customers. For inventory, we review the aging and salability of our inventory and estimate the
amount of inventory that we will not be able to sell in the normal course of business. This
distressed inventory is written down to the expected recovery value to be realized through
off-price channels. If we incorrectly anticipate these trends or unexpected events occur, our
results of operations could be materially affected. We utilize various valuation methods to
determine the fair value of acquired tangible and intangible assets. For inventory, the method
uses the expected selling prices of finished goods and intangible assets acquired are valued using
a discounted cash flow model. Should any of the assumptions used in these projections differ
significantly from actual results, material impairment losses could result where the estimated fair
values of these assets become less than their carrying amounts. The significant reductions in the
carrying values of certain of our intangible assets were the result of the impairment testing we
performed at year-end (See Note 8 of Notes to Consolidated Financial Statements). For accrued
expenses related to items such as employee insurance, workers’ compensation and similar items,
accruals are assessed based on outstanding obligations, claims experience and statistical trends;
should these trends change significantly, actual results would likely be impacted. Derivative
instruments in the form of forward contracts and options are used to hedge the exposure to
variability in probable future cash flows associated with inventory purchases and sales collections
primarily associated with our European and Canadian entities. If fluctuations in the relative
value of the currencies involved in the hedging activities were to move dramatically, such movement
could have a significant impact on our results. Changes in such estimates, based on more accurate
47
information, may affect amounts reported in future periods. We are not aware of any reasonably
likely events or circumstances, which would result in different amounts being reported that would
materially affect our financial condition or results of operations.
Revenue Recognition
Revenue is recognized from our wholesale, retail and licensing operations. Revenue within our
wholesale operations is recognized at the time title passes and risk of loss is transferred to
customers. Wholesale revenue is recorded net of returns, discounts and allowances. Returns and
allowances require pre-approval from management. Discounts are based on trade terms. Estimates
for end-of-season allowances are based on historical trends, seasonal results, an evaluation of
current economic conditions and retailer performance. We review and refine these estimates on a
monthly basis based on current experience, trends and retailer performance. Our historical
estimates of these costs have not differed materially from actual results. Retail store revenues
are recognized net of estimated returns at the time of sale to consumers sales tax collected from customers is excluded from revenue. Proceeds received from
the sale of gift cards are recorded as a liability and recognized as sales when redeemed by the
holder. Licensing revenues are recorded based upon contractually guaranteed minimum levels and
adjusted as actual sales data is received from licensees.
Income Taxes
Income taxes are accounted for under SFAS No. 109, “Accounting for Income Taxes.” In accordance
with SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, as measured by enacted tax rates
that are expected to be in effect in the periods when the deferred tax assets and liabilities are
expected to be realized or settled. Significant judgment is required in determining the worldwide
provision for income taxes. Changes in estimates may create volatility in our effective tax rate
in future periods due to settlements with various tax authorities, either favorable or unfavorable,
the expiration of the statute of limitations on some tax positions or obtaining new information
about particular tax positions that may cause management to change its estimates. In the ordinary
course of a global business, the ultimate tax outcome is uncertain for many transactions. It is our
policy to recognize, at the largest amount that is more-likely-than-not to be sustained upon audit
by the relevant taxing authority, the impact of an uncertain income tax position on its income tax
return. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. We establish the provisions based upon our assessment of exposure
associated with permanent tax differences, tax credits and interest expense applied to temporary
difference adjustments. The tax provisions are analyzed periodically (at least quarterly) and
adjustments are made as events occur that warrant adjustments to those provisions. We record
interest expense and penalties payable to relevant tax authorities as income tax expense. In
fiscal 2007, a 1% increase in the effective tax rate would have impacted Loss from Continuing
Operations by $4.7 million.
Accounts Receivable — Trade, Net
In the normal course of business, we extend credit to customers that satisfy pre-defined credit
criteria. Accounts receivable — trade, net, as shown on the Consolidated Balance Sheets, is net
of allowances and anticipated discounts. An allowance for doubtful accounts is determined through
analysis of the aging of accounts receivable at the date of the financial statements, assessments
of collectibility based on an evaluation of historical and anticipated trends, the financial
condition of our customers and an evaluation of the impact of economic conditions. An allowance
for discounts is based on those discounts relating to open invoices where trade discounts have been
extended to customers. Costs associated with potential returns of products as well as allowable
customer markdowns and operational charge backs, net of expected recoveries, are included as a
reduction to sales and are part of the provision for allowances included in Accounts receivable —
trade, net. These provisions result from seasonal negotiations with our customers, as well as
historical deduction trends, net of expected recoveries and the evaluation of current market
conditions. Should circumstances change or economic or distribution channel conditions deteriorate
significantly, we may need to increase our provisions. Our historical estimates of these costs have
not differed materially from actual results.
Inventories, Net
Inventories for seasonal merchandise are recorded at actual average cost. Inventories for
replenishment and on-going merchandise are recorded at lower of cost (using the first-in, first-out
method) or market value. We continually evaluate the composition of our inventories assessing
slow-turning, ongoing product as well as prior seasons’ fashion product. Market value of
distressed inventory is valued based on historical sales trends for this category of inventory of
our individual product lines, the impact of market trends and economic conditions and the value of
current orders in-house relating to the future sales of this type of inventory. Estimates may
differ from actual results due to quantity, quality and mix of products in inventory, consumer and
retailer preferences and market conditions. We review our inventory position on a monthly basis
and adjust our estimates based on revised projections and current market conditions. If economic
conditions worsen, we incorrectly anticipate trends or unexpected events occur, our estimates could
be proven overly optimistic and required adjustments could materially adversely affect future
results of operations. Our historical estimates of these costs and our provisions have not differed
materially from actual results.
48
Goodwill and Other Intangibles, Net
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible
assets with indefinite lives are not amortized, but rather tested for impairment at least annually.
A two-step impairment test is performed on goodwill. In the first step, we compare the fair value
of each reporting unit to its carrying value. We determine the fair value of our reporting units
using the market approach, as is typically used for companies providing products where the value of
such a company is more dependent on the ability to generate earnings than the value of the assets
used in the production process. Under this approach, we estimate fair value based on market
multiples of revenues and earnings for comparable companies. If the fair value of the reporting
unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not
impaired and we are not required to perform further testing. If the carrying value of the net
assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must
perform the second step in order to determine the implied fair value of the reporting unit’s
goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in
the second step include valuing the tangible and intangible assets of the impaired reporting unit
based on their fair value and determining the fair value of the impaired reporting unit’s goodwill
based upon the residual of the summed identified tangible and intangible assets.
We completed our annual goodwill impairment tests as of the first day of the third quarter of
fiscal 2007. No impairment of goodwill was recognized at that date as a result of such tests.
However, as a result of the sale or probable sale of brands under strategic review in our Partnered Brands segment and the decline in the actual and projected performance and cash flows of such segment, we determined that a goodwill impairment test was required to be performed as of December 29, 2007, in accordance with SFAS No. 142. In performing this evaluation, we considered declines in the Company's market value, which
began in the second half of 2007 and reconciled the sum of the estimated fair values of our five reporting units to the Company's market value (based on its stock price), plus an estimated control premium.
Accordingly, this assessment compared the carrying value of each of our reporting units with its estimated fair value using discounted cash flow models and market approaches. As a result, we determined that the goodwill of our Partnered Brands segment, which is a reporting unit, was impaired and recorded a pretax impairment charge of $450.8 million ($343.1 million, after tax) during the fourth quarter of 2007.
Owned trademarks that have been determined to have indefinite lives are also not subject to
amortization and are reviewed at least annually for potential impairment in accordance with SFAS
No. 142, as mentioned above. The fair value of purchased intangible assets with indefinite lives,
primarily trademarks and trade names, are estimated and compared to their carrying value. We
estimate the fair value of these intangible assets based on an income approach using the
relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party
would be willing to pay a royalty in order to exploit the related benefits of these types of
assets. This approach is dependent on a number of factors, including estimates of future growth and
trends, royalty rates in the category of intellectual property, discount rates and other variables.
We base our fair value estimates on assumptions we believe to be reasonable, but which are
unpredictable and inherently uncertain. Actual future results may differ from those estimates. We
recognize an impairment loss when the estimated fair value of the intangible asset is less than the
carrying value.
As a result of the impairment analysis performed in connection with our purchased trademarks with
indefinite lives, we determined that the carrying value of such intangible asset related to our
ELLEN TRACY brand exceeded its estimated fair value. Accordingly, during 2007, we recorded pre-tax
charges of $36.3 million ($22.0 million after-tax) to reduce the value of the ELLEN TRACY trademark
to its estimated fair value. This impairment resulted from a decline in future anticipated cash
flows of the ELLEN TRACY brand.
Intangible assets with finite lives are amortized over their respective lives to their estimated
residual values and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.”
Trademarks having finite lives are amortized over their estimated useful lives. Acquired trademarks
are valued using the relief-from-royalty method. Trademarks that are licensed by us from third
parties are amortized over the individual terms of the respective license
49
agreements, which range from 5 to 15 years. Intangible merchandising rights are amortized over a
period of 3 to 4 years. Customer relationships are amortized assuming gradual attrition over time.
Existing relationships are amortized over periods ranging from 5 to 25 years.
The recoverability of the carrying values of all long-lived assets with finite lives is
re-evaluated when changes in circumstances indicate the assets’ value may be impaired. Impairment
testing is based on a review of forecasted operating cash flows and the profitability of the
related brand.
Accrued Expenses
Accrued expenses for employee insurance, workers’ compensation, profit sharing, contracted
advertising, professional fees and other outstanding obligations are assessed based on claims
experience and statistical trends, open contractual obligations and estimates based on projections
and current requirements. If these trends change significantly, then actual results would likely be
impacted. Our historical estimates of these costs and our provisions have not differed materially
from actual results.
Derivative Instruments
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and
interpreted, requires that each derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the Consolidated Balance Sheets as either an asset or
liability and measured at its fair value. The statement also requires that changes in the
derivative’s fair value be recognized currently in earnings in either (Loss) Income from Continuing
Operations or Accumulated other comprehensive income (loss), depending on whether the derivative
qualifies for hedge accounting treatment. Hedge accounting requires that we test each derivative
for effectiveness at inception of each hedge and at the end of each reporting period.
We use foreign currency forward contracts and options for the purpose of hedging the specific
exposure to variability in forecasted cash flows associated primarily with inventory purchases
mainly by our European and Canadian entities. These instruments are designated as cash flow
hedges. To the extent the hedges are highly effective, the effective portion of the changes in fair
value is included are Accumulated other comprehensive income (loss), net of related tax effects,
with the corresponding asset or liability recorded in the Consolidated Balance Sheets. The
ineffective portion of the cash flow hedge is recognized primarily as a component of Cost of goods
sold in current period earnings or, in the case of the swaps, if any, within SG&A expenses. Amounts
recorded in Accumulated other comprehensive income (loss) are reflected in current period earnings
when the hedged transaction affects earnings. If fluctuations in the relative value of the
currencies involved in the hedging activities were to move dramatically, such movement could have a
significant impact on our results of operations. We are not aware of any reasonably likely events
or circumstances, which would result in different amounts being reported that would materially
affect our financial condition or results of operations.
Hedge accounting requires that at the beginning of each hedge period, we justify an expectation
that the hedge will be highly effective. This effectiveness assessment also involves an estimation
of the probability of the occurrence of transactions for cash flow hedges. The use of different
assumptions and changing market conditions may impact the results of the effectiveness assessment
and ultimately the timing of when changes in derivative fair values and underlying hedged items are
recorded in earnings.
We hedge our net investment position in euro functional subsidiaries by borrowing directly in
foreign currency and designating a portion of foreign currency debt as a hedge of net investments.
The foreign currency transaction gain or loss recognized for a foreign currency denominated debt
instrument that is designated as the hedging instrument in a net investment hedge is recorded as a
translation adjustment. We also use derivative instruments to hedge the changes in the fair value
of debt due to interest rates with the change in fair value recognized currently in Interest
expense, net together with the change in fair value of the hedged item attributable to interest
rates.
Occasionally, we purchase short-term foreign currency contracts and options outside of the cash
flow hedging program to neutralize quarter-end balance sheet and other expected exposures. These
derivative instruments do not qualify as cash flow hedges under SFAS No. 133 and are recorded at
fair value with all gains or losses, which have not been significant, recognized as a component of
SG&A expenses in current period earnings.
Share-Based Compensation
On July 3, 2005, we adopted SFAS No. 123(R) “Share-Based Payment,” requiring the recognition of
compensation expense in the Consolidated Statements of Operations related to the fair value of
employee share-based awards, including stock options and restricted stock. Determining the fair
value of options at the grant date requires judgment, including estimating the expected term that
stock options will be outstanding prior to exercise, the associated volatility and the expected
dividends. Prior to adopting SFAS No. 123(R), we applied Accounting Principles Board (“APB”)
Opinion No. 25 and related Interpretations, in accounting for its share-based compensation plans.
All employee stock options were granted at or above the grant date market price. Accordingly, no
compensation cost was recognized for share-based awards prior to July 3, 2005. In accordance with
SFAS No. 123(R), judgment is required in
50
estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual
forfeitures differ significantly from these estimates, share-based compensation expense could be
materially impacted.
Inflation
The rate of inflation over the past few years has not had a significant impact on our sales or
profitability.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements.” SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial
Statements” and requires (i) classification of noncontrolling interests, commonly referred to as
minority interests, within stockholders’ equity, (ii) net income to include the net income
attributable to the noncontrolling interest and (iii) enhanced disclosure of activity related to
noncontrolling interests. Currently, we classify noncontrolling interests as liabilities and
exclude net income attributable to noncontrolling interests from net income. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact
of SFAS No. 160 on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations,” which provides
revised guidance for how an acquirer in a business combination recognizes and measures in its
financial statements (i) identifiable assets acquired, (ii) liabilities assumed, (iii)
noncontrolling interests in the acquiree and (iv) goodwill or a gain from a bargain purchase. SFAS
No. 141(R) also sets forth the disclosures required to be made in the financial statements related
to effects of a business combination. SFAS No. 141(R) applies to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. We will adopt the provisions of SFAS No. 141(R) as required.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS No. 159 allows
companies the choice to measure financial instruments and certain other items at fair value. This
allows the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We do not believe
adopting the provisions of SFAS No. 159 will have a significant impact on our consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair
value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We do
not believe adopting the provisions of SFAS No. 157 will have a significant impact on our
consolidated financial statements.
On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109,” which clarifies the accounting for
uncertainty in tax positions. This interpretation requires recognition in the financial statements
of the impact of a tax position, if that position is more likely than not of being sustained on
audit, based on the technical merits of the position. We adopted the provisions of FIN 48 on
December 31, 2006, the first day of the 2007 fiscal year, as required, and recorded a cumulative
effect charge to retained earnings of $10.5 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have exposure to interest rate volatility primarily relating to interest rate changes applicable
to our revolving credit facility and other credit facilities. These loans bear interest at rates
that vary with changes in prevailing market rates.
We do not speculate on the future direction of interest rates. As of December 29, 2007 and
December 30, 2006, our exposure to changing market rates was as follows:
|
|
|
|
|
|
|
|
|
Dollars in millions |
|
December 29, 2007 |
|
December 30, 2006 |
|
Variable rate debt |
|
$ |
348.0 |
|
|
$ |
100.6 |
|
Average interest rate |
|
|
5.65 |
% |
|
|
5.14 |
% |
A ten percent change in the average interest rates of the variable debt would have resulted in a
$1.6 million change in interest expense during 2007.
51
We finance our capital needs through available cash and marketable securities, operating cash
flows, letters of credit, synthetic lease and bank revolving credit facilities, other credit
facilities and commercial paper issuances. Our floating rate revolving credit facility, bank lines
and commercial paper program expose us to market risk for changes in interest rates. As of December
29, 2007, we have not employed interest rate hedging to mitigate such risks with respect to our
floating rate facilities. We believe that our Eurobond offering, which is a fixed rate obligation,
partially mitigates the risks with respect to our variable rate financing.
MEXX transacts business in multiple currencies, resulting in exposure to exchange rate
fluctuations. We mitigate the risks associated with changes in foreign currency rates through the
use of foreign exchange forward contracts and collars to hedge transactions denominated in foreign
currencies for periods of generally less than one year and to hedge expected payment of
intercompany transactions with our non-U.S. subsidiaries. Gains and losses on contracts which hedge
specific foreign currency denominated commitments are recognized in the period in which the
underlying hedged item affects earnings.
At December 29, 2007 and December 30, 2006, we had outstanding foreign currency collars with net
notional amounts aggregating $7.5 million and $17.5 million, respectively. We had forward
contracts aggregating to $132.3 million at December 29, 2007 and $97.5 million at December 30,
2006. Unrealized losses for outstanding foreign currency options and foreign exchange forward
contracts were approximately $7.1 million at December 29, 2007 and $1.6 million at December 30,
2006. A sensitivity analysis to changes in the foreign currencies when measured against the U.S.
dollar indicates that if the U.S. dollar uniformly weakened by 10% against all of the hedged
currency exposures, the fair value of instruments would decrease by $14.9 million. Conversely, if
the U.S. dollar uniformly strengthened by 10% against all of the hedged currency exposures, the
fair value of these instruments would increase by $13.8 million. Any resulting changes in the fair
value of the hedged instruments would be partially offset by changes in the underlying balance
sheet positions. The sensitivity analysis assumes a parallel shift in foreign currency exchange
rates. The assumption that exchange rates change in a parallel fashion may overstate the impact of
changing exchange rates on assets and liabilities denominated in foreign currency. We do not hedge
all transactions denominated in foreign currency.
The table below presents the amount of contracts outstanding, the contract rate and unrealized gain
or (loss), as of December 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollar |
|
Hong Kong |
|
Contract |
|
Unrealized |
Currency in thousands |
|
Amount |
|
Dollar Amount |
|
Rate |
|
Gain (Loss) |
|
Forward Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro |
|
|
|
|
|
|
736,250 |
|
|
|
0.0877 to 0.0991 |
|
|
$ |
(6,179 |
) |
Canadian Dollars |
|
$ |
14,279 |
|
|
|
|
|
|
|
0.9393 to 1.0234 |
|
|
|
— |
|
Canadian Dollars |
|
|
|
|
|
|
185,082 |
|
|
|
0.1272 to 0.1367 |
|
|
|
(894 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Collar Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro |
|
|
|
|
|
|
— |
|
|
|
0.0000 to 0.0000 |
|
|
$ |
— |
|
Canadian Dollars |
|
$ |
7,505 |
|
|
|
|
|
|
|
0.9174 to 1.0417 |
|
|
|
— |
|
Canadian Dollars |
|
|
|
|
|
|
— |
|
|
|
0.0000 to 0.0000 |
|
|
|
— |
|
The table below presents the amount of contracts outstanding, the contract rate and unrealized gain
or (loss), as of December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Dollar |
|
Hong Kong |
|
Contract |
|
Unrealized |
Currency in thousands |
|
Amount |
|
Dollar Amount |
|
Rate |
|
Gain (Loss) |
|
Forward Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro |
|
|
|
|
|
|
589,000 |
|
|
|
0.0973 to 0.1067 |
|
|
$ |
(1,368 |
) |
Canadian Dollars |
|
$ |
8,190 |
|
|
|
|
|
|
|
0.8702 to 0.8728 |
|
|
|
— |
|
Canadian Dollars |
|
|
|
|
|
|
105,980 |
|
|
|
0.1480 to 0.1482 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Collar Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Euro |
|
|
|
|
|
|
23,250 |
|
|
|
0.0980 to 0.1007 |
|
|
$ |
(506 |
) |
Canadian Dollars |
|
$ |
8,659 |
|
|
|
|
|
|
|
0.8547 to 0.8925 |
|
|
|
— |
|
Canadian Dollars |
|
|
|
|
|
|
45,345 |
|
|
|
0.1454 to 0.1508 |
|
|
|
107 |
|
Item 8. Financial Statements and Supplementary Data.
See the “Index to Consolidated Financial Statements and Schedule” appearing at the end of this
Annual Report on Form 10-K for information required under this Item 8.
52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item 9A. Controls and Procedures.
Our management, under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated our disclosure controls and procedures at the end of each of
our fiscal quarters. Our Chief Executive Officer and Chief Financial Officer concluded that, as of
December 29, 2007, our disclosure controls and procedures were effective to ensure that all
information required to be disclosed is recorded, processed, summarized and reported within the
time periods specified, and that information required to be filed in the reports that we file or
submit under the Exchange Act is accumulated and communicated to our management, including our
principal executive and principal financial officers, to allow timely decisions regarding required
disclosure. There were no changes in our internal control over financial reporting that have
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended December 29, 2007
that has materially affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
See “Index to Consolidated Financial Statements and Schedule” appearing at the end of this Annual
Report on Form 10-K for Management’s Report on Internal Control Over Financial Reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
With respect to our Executive Officers, see “Executive Officers of the Registrant” in Part I of
this Annual Report on Form 10-K.
Information regarding Section 16 (a) compliance, the Audit Committee (including membership and
Audit Committee Financial Experts but excluding the “Audit Committee Report”), our code of ethics
and background of our Directors appearing under the captions “Section 16 (a) Beneficial Ownership
Reporting Compliance”, “Corporate Governance”, “Additional Information-Company Code of Ethics and
Business Practices” and “Election of Directors” in our Proxy Statement for the 2008 Annual Meeting
of Shareholders (the “2008 Proxy Statement”) is hereby incorporated by reference.
Item 11. Executive Compensation.
Information called for by this Item 11 is incorporated by reference to the information set forth
under the headings “Compensation Discussion and Analysis” and “Executive Compensation” (other than
the Board Compensation Committee Report) in the 2008 Proxy Statement.
53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
EQUITY COMPENSATION
The following table summarizes information about the stockholder approved Liz Claiborne, Inc.
Outside Directors’ 1991 Stock Ownership Plan (the “Outside Directors’ Plan”); Liz Claiborne, Inc.
1992 Stock Incentive Plan; Liz Claiborne, Inc. 2000 Stock Incentive Plan (the “2000 Plan”); Liz
Claiborne, Inc. 2002 Stock Incentive Plan (the “2002 Plan”); and Liz Claiborne, Inc. 2005 Stock
Incentive Plan (the “2005 Plan”), which together comprise all of our existing equity compensation
plans, as of December 29, 2007. In January 2006, we adopted the Liz Claiborne, Inc. Outside
Directors’ Deferral Plan, which amended and restated the Outside Directors’ Plan by eliminating
equity grants under the Outside Directors’ Plan, including the annual grant of shares of Common
Stock. The last grant under the Outside Directors’ Plan was on January 10, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
(a) |
|
(b) |
|
Remaining Available for |
|
|
Number of Securities to |
|
Weighted Average |
|
Future Issuance Under |
|
|
be Issued Upon Exercise |
|
Exercise Price of |
|
Equity Compensation Plans |
|
|
of Outstanding Options, |
|
Outstanding Options, |
|
(Excluding Securities |
Plan Category |
|
Warrants and Rights |
|
Warrants and Rights |
|
Reflected in Column (a)) |
Equity Compensation
Plans Approved by
Stockholders |
|
|
4,636,409 |
|
|
$ |
34.33 |
(1) |
|
|
7,876,832 |
(2)(3) |
|
Equity Compensation
Plans Not Approved
by Stockholders |
|
|
— |
|
|
|
N/A |
|
|
|
— |
|
|
|
TOTAL |
|
|
4,636,409 |
|
|
$ |
34.33 |
(1) |
|
|
7,876,832 |
(2)(3) |
|
|
|
|
(1) |
|
Performance Shares and shares of Common Stock issuable under the 2000, 2002 and 2005
Plans pursuant to participants’ election there under to defer certain director compensation
were not included in calculating the Weighted Average Exercise Price. |
|
(2) |
|
In addition to options, warrants and rights, the 2000 Plan, the 2002 Plan and the
2005 Plan authorize the issuance of restricted stock, unrestricted stock and performance
stock. Each of the 2000 and the 2002 Plans contains a sub-limit on the aggregate number of
shares of restricted Common Stock, which may be issued; the sub-limit under the 2000 Plan is
set at 1,000,000 shares and the sub-limit under the 2002 Plan is set at 1,800,000 shares. The
2005 Plan contains an aggregate 2,000,000 shares sub-limit on the number of shares of
restricted stock, restricted stock units, unrestricted stock and performance shares that may
be awarded. |
|
(3) |
|
Includes 126,916 shares of Common Stock issuable under the 2000, 2002 and 2005 Plans
pursuant to participants’ elections there under to defer certain director compensation. |
Security ownership information of certain beneficial owners and management as called for by this
Item 12 is incorporated by reference to the information set forth under the heading “Security
Ownership of Certain Beneficial Owners and Management” in the 2008 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information called for by this Item 13 is incorporated by reference to the information set
forth under the headings “Certain Relationships and Related Transactions” in the 2008 Proxy
Statement.
Item 14. Principal Accounting Fees and Services.
Information called for by this Item 14 is incorporated by reference to the information set
forth under the heading “Ratification of the Appointment of the Independent Registered Public
Accounting Firm” in the 2008 Proxy Statement.
54
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements.
|
|
|
|
|
PAGE REFERENCE |
|
|
2007 FORM 10-K |
MANAGEMENT’S REPORTS AND REPORTS OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
|
F-2 to F-5 |
|
|
|
FINANCIAL STATEMENTS
|
|
|
Consolidated Balance Sheets as of
December 29, 2007 and December 30, 2006 |
|
F-6 |
|
|
|
Consolidated Statements of Operations for the
Three Fiscal Years Ended December 29, 2007 |
|
F-7 |
|
|
|
Consolidated Statements of Retained Earnings,
Comprehensive Loss and Changes in Capital
Accounts for the Three Fiscal Years Ended December 29, 2007 |
|
F-8 to F-9 |
|
|
|
Consolidated Statements of Cash Flows for the
Three Fiscal Years Ended December 29, 2007 |
|
F-10 to F-11 |
|
|
|
Notes to Consolidated Financial Statements |
|
F-12 to F-50 |
|
|
|
2. Schedule. |
|
|
|
|
|
SCHEDULE II — Valuation and Qualifying Accounts |
|
F-51 |
|
|
|
NOTE: Schedules other than those referred to above and parent company condensed financial
statements have been omitted as inapplicable or not required under the instructions contained in
Regulation S-X or the information is included elsewhere in the financial statements or the notes
thereto.
55
3. Exhibits.
|
|
|
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
|
|
|
2(a)
|
|
-
|
|
Share Purchase Agreement, dated as of May 15, 2001, among Liz Claiborne, Inc., Liz Claiborne 2 B.V., LCI
Acquisition U.S., and the other parties signatory thereto (incorporated herein by reference from Exhibit
2.1 to Registrant’s Form 8-K dated May 23, 2001 and amended on July 20, 2001). |
|
|
|
|
|
3(a)
|
|
-
|
|
Restated Certificate of Incorporation of Registrant (incorporated herein by reference from Exhibit 3(a) to
Registrant’s Quarterly Report on Form 10-Q for the period ended June 26, 1993). |
|
|
|
|
|
3(b)
|
|
-
|
|
By-laws of Registrant, as amended through February 25, 2008 (incorporated herein by reference from
Exhibit 3(b) to Registrant’s Current Report on Form 8-K dated February 29, 2008). |
|
|
|
|
|
4(a)
|
|
-
|
|
Specimen certificate for Registrant’s Common Stock, par value $1.00 per share (incorporated herein by
reference from Exhibit 4(a) to the 1992 Annual Report). |
|
|
|
|
|
4(b)
|
|
-
|
|
Rights Agreement, dated as of December 4, 1998, between Registrant and First Chicago Trust Company of New
York (incorporated herein by reference from Exhibit 1 to Registrant’s Form 8-A dated as of December 4,
1998). |
|
|
|
|
|
4(b)(i)
|
|
-
|
|
Amendment to the Rights Agreement, dated November 11, 2001, between Registrant and The Bank of New York,
appointing The Bank of New York as Rights Agent (incorporated herein by reference from Exhibit 1 to
Registrant’s Form 8-A12B/A dated as of January 30, 2002). |
|
|
|
|
|
10(a)
|
|
-
|
|
Reference is made to Exhibit 4(b) filed hereunder, which is incorporated herein by this reference. |
|
|
|
|
|
10(b)
|
|
-
|
|
Lease, dated as of January 1, 1990 (the “1441 Lease”), for premises located at 1441 Broadway, New York, New
York between Registrant and Lechar Realty Corp. (incorporated herein by reference from Exhibit 10(n) to
Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 1990). |
|
|
|
|
|
10(b)(i)
|
|
-
|
|
First Amendment: Lease Extension and Modification Agreement, dated as of January 1, 1998, to the 1441 Lease
(incorporated herein by reference from Exhibit 10(k) (i) to the 1999 Annual Report). |
|
|
|
|
|
10(b)(ii)
|
|
-
|
|
Second Amendment to Lease, dated as of September 19, 1998, to the 1441 Lease (incorporated herein by
reference from Exhibit 10(k) (ii) to the 1999 Annual Report). |
|
|
|
|
|
10(b)(iii)
|
|
-
|
|
Third Amendment to Lease, dated as of September 24, 1999, to the 1441 Lease (incorporated herein by
reference from Exhibit 10(k) (iii) to the 1999 Annual Report). |
|
|
|
|
|
10(b)(iv)
|
|
-
|
|
Fourth Amendment to Lease, effective as of July 1, 2000, to the 1441 Lease (incorporated herein by
reference from Exhibit 10(j)(iv) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 28, 2002 [the “2002 Annual Report"]). |
|
|
|
|
|
10(b)(v)
|
|
-
|
|
Fifth Amendment to Lease (incorporated herein by reference from Schedule 10(b)(v) to Registrant’s Annual
Report on Form 10-K for the fiscal year ended January 3, 2004 [the “2003 Annual Report"]). |
|
|
|
|
|
10(c)+
|
|
-
|
|
National Collective Bargaining Agreement, made and entered into as of June 1, 2006, by and between Liz
Claiborne, Inc. and UNITE HERE for the period June 1, 2006 through May 31, 2009 (incorporated herein by
reference from Exhibit 10(c) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended
December 30, 2006 [the “2006 Annual Report"]). |
|
|
|
|
|
10(d)+*
|
|
-
|
|
Description of Liz Claiborne, Inc. 2007 Salaried Employee Incentive Bonus Plan. |
|
|
|
+ |
|
Compensation plan or arrangement required to be noted as provided in Item 14(a)(3). |
|
* |
|
Filed herewith. |
56
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
|
|
|
10(e)+
|
|
-
|
|
The Liz Claiborne 401(k) Savings and Profit Sharing
Plan, as amended and restated (incorporated herein by
reference from Exhibit 10(g) to Registrant’s Annual
Report on Form 10-K for the fiscal year ended
December 28, 2002). |
|
|
|
|
|
10(e)(i)+
|
|
-
|
|
First Amendment to the Liz Claiborne 401(k) Savings
and Profit Sharing Plan (incorporated herein by
reference from Exhibit 10(e)(i) to the 2003 Annual
Report). |
|
|
|
|
|
10(e)(ii)+
|
|
-
|
|
Second Amendment to the Liz Claiborne 401(k) Savings
and Profit Sharing Plan (incorporated herein by
reference from Exhibit 10(e)(ii) to the 2003 Annual
Report). |
|
|
|
|
|
10(e)(iii)+
|
|
-
|
|
Third Amendment to the Liz Claiborne 401(k) Savings
and Profit Sharing Plan (incorporated herein by
reference from Exhibit 10(e)(iii) to the 2003 Annual
Report). |
|
|
|
|
|
10(e)(iv)+
|
|
-
|
|
Trust Agreement (the “401(k) Trust Agreement”) dated
as of October 1, 2003 between Liz Claiborne, Inc. and
Fidelity Management Trust Company (incorporated
herein by reference from Exhibit 10(e)(iv) to the
2003 Annual Report). |
|
|
|
|
|
10(e)(v)+
|
|
-
|
|
First Amendment to the 401(k) Trust Agreement
(incorporated herein by reference from Exhibit
10(e)(v) to Registrant’s Annual Report on Form 10-K
for the fiscal year ended January 1, 2005 (the “2004
Annual Report”). |
|
|
|
|
|
10(e)(vi)+
|
|
-
|
|
Second Amendment to the 401(k) Trust Agreement
(incorporated herein by reference from Exhibit
10(e)(vi) to the 2004 Annual Report). |
|
|
|
|
|
10(f)+
|
|
-
|
|
Liz Claiborne, Inc. Amended and Restated Outside
Directors’ 1991 Stock Ownership Plan (the “Outside
Directors’ 1991 Plan”) (incorporated herein by
reference from Exhibit 10(m) to Registrant’s Annual
Report on Form 10-K for the fiscal year ended
December 30, 1995 [the “1995 Annual Report"]). |
|
|
|
|
|
10(f)(i)+
|
|
-
|
|
Amendment to the Outside Directors’ 1991 Plan,
effective as of December 18, 2003 (incorporated
herein by reference from Exhibit 10(f)(i) to the 2003
Annual Report). |
|
|
|
|
|
10(f)(ii)+
|
|
-
|
|
Form of Option Agreement under the Outside Directors’
1991 Plan (incorporated herein by reference from
Exhibit 10(m)(i) to the 1996 Annual Report). |
|
|
|
|
|
10(f)(iii)+
|
|
-
|
|
Liz Claiborne, Inc. Outside Directors’ Deferral Plan
(incorporated herein by reference from Exhibit
10(f)(iii) to Registrant’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2005 [the
“2005 Annual Report"]). |
|
|
|
|
|
10(g)+
|
|
-
|
|
Liz Claiborne, Inc. 1992 Stock Incentive Plan (the
“1992 Plan”) (incorporated herein by reference from
Exhibit 10(p) to Registrant’s Annual Report on Form
10-K for the fiscal year ended December 28, 1991). |
|
|
|
|
|
10(g)(i)+
|
|
-
|
|
Form of Restricted Career Share Agreement under the
1992 Plan (incorporated herein by reference from
Exhibit 10(a) to Registrant’s Quarterly Report on
Form 10-Q for the period ended September 30, 1995). |
|
|
|
|
|
10(g)(ii)+
|
|
-
|
|
Form of Restricted Transformation Share Agreement
under the 1992 Plan (incorporated herein by reference
from Exhibit 10(s) to the 1997 Annual Report). |
|
|
|
|
|
10(h)+
|
|
-
|
|
Liz Claiborne, Inc. 2000 Stock Incentive Plan (the
“2000 Plan”) (incorporated herein by reference from
Exhibit 4(e) to Registrant’s Form S-8 dated as of
January 25, 2001). |
|
|
|
|
|
10(h)(i)+
|
|
-
|
|
Amendment No. 1 to the 2000 Plan (incorporated herein
by reference from Exhibit 10(h)(i) to the 2003 Annual
Report). |
|
|
|
+ |
|
Compensation plan or arrangement required to be noted as provided in Item 14(a)(3). |
57
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
|
|
|
10(h)(ii)+
|
|
-
|
|
Form of Option Grant Certificate under the 2000 Plan
(incorporated herein by reference from Exhibit
10(z)(i) to the 2000 Annual Report). |
|
|
|
|
|
10(h)(iii)+
|
|
-
|
|
Form of Executive Team Leadership Restricted Share
Agreement under the Liz Claiborne, Inc. 2000 Stock
Incentive Plan (the “2000 Plan”) (incorporated herein
by reference from Exhibit 10(a) to Registrant’s Form
10-Q for the period ended September 29, 2001 [the
“3rd Quarter 2001 10-Q”]). |
|
|
|
|
|
10(h)(iv)+
|
|
-
|
|
Form of Restricted Key Associates Performance Shares
Agreement under the 2000 Plan (incorporated herein by
reference from Exhibit 10(b) to the 3rd Quarter 2001
10-Q). |
|
|
|
|
|
10(h)(v)+
|
|
-
|
|
Form of 2006 Special Performance-Based Restricted
Stock Confirmation under the 2000 Plan (incorporated
herein by reference from Exhibit 10(h)(v) to the 2005
Annual Report). |
|
|
|
|
|
10(i)+
|
|
-
|
|
Liz Claiborne, Inc. 2002 Stock Incentive Plan (the
“2002 Plan”) (incorporated herein by reference from
Exhibit 10(y)(i) to Registrant’s Form 10-Q for the
period ended June 29, 2002 [the “2nd Quarter 2002
10-Q”]). |
|
|
|
|
|
10(i)(i)+
|
|
-
|
|
Amendment No. 1 to the 2002 Plan (incorporated herein
by reference from Exhibit 10(y)(iii) to the 2nd
Quarter 2002
10-Q). |
|
|
|
|
|
10(i)(ii)+
|
|
-
|
|
Amendment No. 2 to the 2002 Plan (incorporated herein
by reference from Exhibit 10(i)(ii) to the 2003
Annual Report). |
|
|
|
|
|
10(i)(iii)+
|
|
-
|
|
Amendment No. 3 to the 2002 Plan (incorporated herein
by reference from Exhibit 10(i)(iii) to the 2003
Annual Report). |
|
|
|
|
|
10(i)(iv)+
|
|
-
|
|
Form of Option Grant Certificate under the 2002 Plan
(incorporated herein by reference from Exhibit
10(y)(ii) to the 2nd Quarter 2002 10-Q). |
|
|
|
|
|
10(i)(v)+
|
|
-
|
|
Form of Restricted Share Agreement for Registrant’s
“Growth Shares” program under the 2002 Plan
(incorporated herein by reference from Exhibit
10(i)(v) to the 2003 Annual Report). |
|
|
|
|
|
10(j)+
|
|
-
|
|
Description of Supplemental Life Insurance Plans
(incorporated herein by reference from Exhibit 10(q)
to the 2000 Annual Report). |
|
|
|
|
|
10(k)+
|
|
-
|
|
Amended and Restated Liz Claiborne §162(m) Cash Bonus
Plan (incorporated herein by reference from Exhibit
10.1 to Registrant’s Form 10Q filed August 15, 2003). |
|
|
|
|
|
10(l)+
|
|
-
|
|
Liz Claiborne, Inc. Supplemental Executive Retirement
Plan effective as of January 1, 2002, constituting an
amendment, restatement and consolidation of the Liz
Claiborne, Inc. Supplemental Executive Retirement
Plan and the Liz Claiborne, Inc. Bonus Deferral Plan
(incorporated herein by reference from Exhibit
10(t)(i) to Registrant’s Annual Report on Form 10-K
for the fiscal year ended December 29, 2001). |
|
|
|
|
|
10(l)(i)+
|
|
-
|
|
Trust Agreement dated as of January 1, 2002, between
Liz Claiborne, Inc. and Wilmington Trust Company
(incorporated herein by reference from Exhibit
10(t)(i) to the 2002 Annual Report). |
|
|
|
|
|
10(m)
|
|
-
|
|
Five-Year Credit Agreement, dated as of October 13,
2004, (the “Credit Agreement”) among Liz Claiborne,
Inc., the Lenders party thereto, Bank of America,
N.A., Citibank, N.A., SunTrust Bank and Wachovia
Bank, National Association, as Syndication Agents,
and JPMorgan Chase Bank, as Administrative Agent
(incorporated herein by reference to Exhibit 10.1 to
Registrant’s Current Report on Form 8-K dated October
13, 2004). |
|
|
|
+ |
|
Compensation plan or arrangement required to be noted as provided in Item 14(a)(3). |
58
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
|
|
|
10(m)(i)
|
|
-
|
|
First Amendment and Waiver to the Credit Agreement, entered into by the Registrant on February 29, 2008
(incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated March 6,
2008). |
|
|
|
|
|
10(n)+
|
|
-
|
|
Form of Restricted Stock Grant Certificate (incorporated herein by reference to Exhibit 10(a) to
Registrant’s Quarterly Report on Form 10-Q for the period ended April 2, 2005). |
|
|
|
|
|
10(o)+
|
|
-
|
|
Liz Claiborne, Inc. Section 162(m) Long Term Performance Plan (incorporated herein by reference to Exhibit
10.1(a) to Registrant’s Current Report on Form 8-K dated May 26, 2005 [the “May 26, 2005 Form 8-K”]). |
|
|
|
|
|
10(p)+
|
|
-
|
|
Liz Claiborne, Inc. 2005 Stock Incentive Plan (incorporated herein by reference to Exhibit
10.1(b) to the May 26, 2005 Form 8-K). |
|
|
|
|
|
10(q)+
|
|
-
|
|
Amendment No. 1 to the Liz Claiborne, Inc. 2005 Stock
Incentive Plan (incorporated herein by reference to
Exhibit 10.1 to Registrant’s Current Report on Form 8-K
dated July 12, 2005). |
|
|
|
|
|
10(r)+
|
|
-
|
|
Form of Section 162(m) Long Term Performance Plan
(incorporated herein by reference to Exhibit 10 to
Registrant’s Quarterly Report on Form 10-Q for the period
ended October 1, 2005). |
|
|
|
|
|
10(s)+
|
|
-
|
|
Form of Executive Severance Agreement (incorporated
herein by reference from Exhibit 10(a) to Registrant’s
Quarterly Report on Form 10-Q for the period ended April
1, 2006 [the “1st Quarter 2006 10-Q”]). |
|
|
|
|
|
10(t)+
|
|
-
|
|
Employment Agreement, by and between Registrant and
William L. McComb, dated October 13, 2006 (incorporated
herein by reference from Exhibit 99.2 to Registrant’s
Current Report on Form 8-K dated October 18, 2006 [the
“October 18, 2006 Form 8-K”]). |
|
|
|
|
|
10(u)+
|
|
-
|
|
Executive Terminations Benefits Agreement, by and between
Registrant and William L. McComb, dated as of October 13,
2006 (incorporated herein by reference from Exhibit 99.3
to the October 18, 2006 Form 8-K). |
|
|
|
|
|
10(v)+
|
|
-
|
|
Retirement and Consulting Agreement, by and between
Registrant and Paul R. Charron, dated as of October 13,
2006 (incorporated herein by reference from Exhibit 99.4
to the October 18, 2006 Form 8-K). |
|
|
|
|
|
21*
|
|
-
|
|
List of Registrant’s Subsidiaries. |
|
|
|
|
|
23*
|
|
-
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
|
|
31(a)*
|
|
-
|
|
Rule 13a-14(a) Certification of Chief Executive Officer
of the Company in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31(b)*
|
|
-
|
|
Rule 13a-14(a) Certification of Chief Financial Officer
of the Company in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32(a)*#
|
|
-
|
|
Certification of Chief Executive Officer of the Company
in accordance with Section 906 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
|
|
32(b)*#
|
|
-
|
|
Certification of Chief Financial Officer of the Company
in accordance with Section 906 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
|
|
99*
|
|
-
|
|
Undertakings. |
|
|
|
+ |
|
Compensation plan or arrangement required to be noted as provided in Item 14(a)(3). |
|
* |
|
Filed herewith. |
|
# |
|
A signed original of this written statement required by Section 906 has been provided by the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission
or its staff upon request. |
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 13, 2008.
|
|
|
|
|
|
|
|
|
|
|
LIZ CLAIBORNE, INC. |
|
|
|
LIZ CLAIBORNE, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Andrew Warren
Andrew Warren,
Chief Financial Officer
(principal financial officer)
|
|
|
|
By:
|
|
/s/ Elaine H. Goodell
Elaine H. Goodell,
Vice President — Corporate Controller
and Chief Accounting Officer
(principal accounting officer)
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on
Form 10-K has been signed below by the following persons on behalf of the registrant and in the
capacities indicated, on March 13, 2008.
|
|
|
|
|
Signature |
|
|
|
Title |
|
|
|
|
|
/s/ William L. McComb
William L. McComb
|
|
|
|
Chief Executive Officer and Director (principal
executive officer) |
|
|
|
|
|
/s/ Bernard W. Aronson
Bernard W. Aronson
|
|
|
|
Director |
|
|
|
|
|
/s/ Daniel A. Carp
Daniel A. Carp
|
|
|
|
Director |
|
|
|
|
|
/s/ Raul J. Fernandez
Raul J. Fernandez
|
|
|
|
Director |
|
|
|
|
|
/s/ Kenneth B. Gilman
Kenneth B. Gilman
|
|
|
|
Director |
|
|
|
|
|
/s/ Nancy J. Karch
Nancy J. Karch
|
|
|
|
Director |
|
|
|
|
|
/s/ Kenneth P. Kopelman
Kenneth P. Kopelman
|
|
|
|
Director |
|
|
|
|
|
/s/ Kay Koplovitz
Kay Koplovitz
|
|
|
|
Director and Chairman of the Board |
|
|
|
|
|
/s/ Arthur C. Martinez
Arthur C. Martinez
|
|
|
|
Director |
|
|
|
|
|
/s/ Oliver R. Sockwell
Oliver R. Sockwell
|
|
|
|
Director |
60
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
|
|
|
|
Page |
|
|
Number |
|
|
F-2 to F-5 |
|
|
|
FINANCIAL STATEMENTS |
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
|
|
|
|
|
F-8 to F-9 |
|
|
|
|
|
F-10 to F-11 |
|
|
|
|
|
F-12 to F-50 |
|
|
|
|
|
F-51 |
F-1
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a – 15(f) under the Securities and Exchange Act of 1934. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States. The
Company’s system of internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States, and
that receipts and expenditures of the Company are being made only in accordance with authorizations
of management and directors of the Company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s
assets that could have a material effect on the financial statements.
Management has evaluated the effectiveness of the Company’s internal control over financial
reporting as of December 29, 2007 based upon criteria for effective internal control over financial
reporting described in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (''COSO’’). Based on our evaluation, management
determined that the Company’s internal control over financial reporting was effective as of
December 29, 2007 based on the criteria in Internal Control – Integrated Framework issued by COSO.
The Company’s internal control over financial reporting as of December 29, 2007 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their
attestation report which appears herein.
Dated March 13, 2008
F-2
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Liz Claiborne, Inc. is responsible for the preparation, objectivity and integrity
of the consolidated financial statements and other information contained in this Annual Report.
The consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States and include some amounts that are based on management’s
informed judgments and best estimates.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited these
consolidated financial statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and has expressed herein their unqualified opinion on those
financial statements.
The Audit Committee of the Board of Directors, which oversees all of the Company’s financial
reporting process on behalf of the Board of Directors, consists solely of independent directors,
meets with the independent registered public accounting firm, internal auditors and management
periodically to review their respective activities and the discharge of their respective
responsibilities. Both the independent registered public accounting firm and the internal auditors
have unrestricted access to the Audit Committee, with or without management, to discuss the scope
and results of their audits and any recommendations regarding the system of internal controls.
|
|
|
/s/ William L. McComb
|
|
/s/ Andrew Warren |
|
|
|
William L. McComb
Chief Executive Officer
|
|
Andrew Warren
Chief Financial Officer |
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Liz Claiborne, Inc.:
We have audited the internal control over financial reporting of Liz Claiborne, Inc. and
subsidiaries (the “Company”) as of December 29, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control
based on the assessed risk and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons
performing similar functions, and effected by the company’s board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 29, 2007, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as of
and for the year ended December 29, 2007 of the Company and our report dated March 13, 2008
expressed an unqualified opinion on those financial statements and financial statement schedule and
included an explanatory paragraph regarding the Company’s adoption of Financial Accounting
Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement 109,” effective December 31, 2006.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 13, 2008
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Liz Claiborne, Inc.:
We have audited the accompanying consolidated balance sheets of Liz Claiborne, Inc. and
subsidiaries (the “Company”) as of December 29, 2007 and December 30, 2006, and the related
consolidated statements of operations, retained earnings, comprehensive loss and changes in capital
accounts, and cash flows for each of the three years in the period ended December 29, 2007. Our
audits also included the financial statement schedule listed in the Index at Item 15(a)2. These
financial statements and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Liz Claiborne, Inc. and subsidiaries as of December 29, 2007 and December
30, 2006, and the results of their operations and their cash flows for each of the three years in
the period ended December 29, 2007, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Financial
Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement 109,” effective December 31, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) the Company’s internal control over financial reporting as of December 29,
2007, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13,
2008 expressed an unqualified opinion on the Company’s
internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 13, 2008
F-5
CONSOLIDATED BALANCE SHEETS
Liz Claiborne, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
In thousands except share data |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
205,401 |
|
|
$ |
185,645 |
|
Marketable securities |
|
|
328 |
|
|
|
9,451 |
|
Accounts receivable – trade, net |
|
|
440,160 |
|
|
|
499,012 |
|
Inventories, net |
|
|
540,807 |
|
|
|
593,445 |
|
Deferred income taxes |
|
|
103,288 |
|
|
|
60,627 |
|
Other current assets |
|
|
209,525 |
|
|
|
121,937 |
|
Assets held for sale |
|
|
65,332 |
|
|
|
— |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,564,841 |
|
|
|
1,470,117 |
|
Property and Equipment, Net |
|
|
580,733 |
|
|
|
581,992 |
|
Goodwill, Net |
|
|
677,852 |
|
|
|
1,007,859 |
|
Intangibles, Net |
|
|
347,119 |
|
|
|
413,962 |
|
Deferred Income Taxes |
|
|
75,445 |
|
|
|
— |
|
Other Assets |
|
|
22,477 |
|
|
|
21,838 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
3,268,467 |
|
|
$ |
3,495,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Short term borrowings |
|
$ |
50,828 |
|
|
$ |
22,266 |
|
Accounts payable |
|
|
223,522 |
|
|
|
281,413 |
|
Accrued expenses |
|
|
459,309 |
|
|
|
336,773 |
|
Income taxes payable |
|
|
32,266 |
|
|
|
33,470 |
|
Deferred income taxes |
|
|
497 |
|
|
|
— |
|
Liabilities held for sale |
|
|
3,963 |
|
|
|
— |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
770,385 |
|
|
|
673,922 |
|
Long-Term Debt |
|
|
836,883 |
|
|
|
570,469 |
|
Other Non-Current Liabilities |
|
|
140,764 |
|
|
|
63,565 |
|
Deferred Income Taxes |
|
|
1,111 |
|
|
|
54,571 |
|
Commitments and Contingencies (Note 11) |
|
|
|
|
|
|
|
|
Minority Interest |
|
|
3,760 |
|
|
|
3,260 |
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value,
authorized shares – 50,000,000,
issued shares – none |
|
|
— |
|
|
|
— |
|
Common stock, $1 par value,
authorized shares – 250,000,000,
issued shares – 176,437,234 |
|
|
176,437 |
|
|
|
176,437 |
|
Capital in excess of par value |
|
|
296,158 |
|
|
|
249,573 |
|
Retained earnings |
|
|
2,948,085 |
|
|
|
3,354,081 |
|
Accumulated other comprehensive loss |
|
|
(24,582 |
) |
|
|
(56,156 |
) |
|
|
|
|
|
|
|
|
|
|
3,396,098 |
|
|
|
3,723,935 |
|
Common stock in treasury, at cost –
81,695,077 shares in 2007 and
73,281,103 shares in 2006 |
|
|
(1,880,534 |
) |
|
|
(1,593,954 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
1,515,564 |
|
|
|
2,129,981 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity |
|
$ |
3,268,467 |
|
|
$ |
3,495,768 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
F-6
CONSOLIDATED STATEMENTS OF OPERATIONS
Liz Claiborne, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands except per common share data |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
December 31, 2005 |
|
|
Net Sales |
|
$ |
4,577,251 |
|
|
$ |
4,643,936 |
|
|
$ |
4,586,187 |
|
Cost of goods sold |
|
|
2,411,525 |
|
|
|
2,383,697 |
|
|
|
2,386,273 |
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
2,165,726 |
|
|
|
2,260,239 |
|
|
|
2,199,914 |
|
Selling, general & administrative expenses |
|
|
2,104,420 |
|
|
|
1,878,725 |
|
|
|
1,715,708 |
|
Trademark impairment |
|
|
36,300 |
|
|
|
— |
|
|
|
— |
|
Goodwill impairment |
|
|
450,819 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income |
|
|
(425,813 |
) |
|
|
381,514 |
|
|
|
484,206 |
|
Other (expense) income, net |
|
|
(4,459 |
) |
|
|
5,357 |
|
|
|
(2,264 |
) |
Interest expense, net |
|
|
(42,188 |
) |
|
|
(34,898 |
) |
|
|
(31,798 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) Income before Provision for Income Taxes |
|
|
(472,460 |
) |
|
|
351,973 |
|
|
|
450,144 |
|
(Benefit) provision for income taxes |
|
|
(102,440 |
) |
|
|
131,057 |
|
|
|
158,372 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from Continuing Operations |
|
|
(370,020 |
) |
|
|
220,916 |
|
|
|
291,772 |
|
Income from discontinued operations, net of tax |
|
|
4,495 |
|
|
|
33,769 |
|
|
|
25,594 |
|
Loss on disposal of discontinued operations, net of tax |
|
|
(7,273 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
$ |
(372,798 |
) |
|
$ |
254,685 |
|
|
$ |
317,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from Continuing Operations |
|
$ |
(3.71 |
) |
|
$ |
2.17 |
|
|
$ |
2.74 |
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
$ |
(3.74 |
) |
|
$ |
2.50 |
|
|
$ |
2.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from Continuing Operations |
|
$ |
(3.71 |
) |
|
$ |
2.13 |
|
|
$ |
2.70 |
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income |
|
$ |
(3.74 |
) |
|
$ |
2.46 |
|
|
$ |
2.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares, Basic |
|
|
99,800 |
|
|
|
101,989 |
|
|
|
106,354 |
|
Weighted Average Shares, Diluted |
|
|
99,800 |
|
|
|
103,483 |
|
|
|
107,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Paid per Common Share |
|
$ |
0.23 |
|
|
$ |
0.23 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
F-7
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE LOSS AND CHANGES IN CAPITAL ACCOUNTS
Liz Claiborne, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK |
|
|
Capital in |
|
|
|
|
|
|
Other |
|
|
Unearned |
|
|
TREASURY SHARES |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Excess of |
|
|
Retained |
|
|
Comprehensive |
|
|
Compen- |
|
|
Number of |
|
|
|
|
|
|
|
In thousands except share data |
|
Shares |
|
|
Amount |
|
|
Par Value |
|
|
Earnings |
|
|
Loss |
|
|
sation |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
|
BALANCE, JANUARY 1, 2005 |
|
|
176,437,234 |
|
|
$ |
176,437 |
|
|
$ |
176,182 |
|
|
$ |
2,828,968 |
|
|
$ |
(63,650 |
) |
|
$ |
(36,793 |
) |
|
|
67,703,065 |
|
|
$ |
(1,269,355 |
) |
|
$ |
1,811,789 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
317,366 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
317,366 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,968 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,968 |
|
Gains (losses) on cash flow hedging
derivatives, net of income tax provision
of $4,666 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,515 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,515 |
|
Adjustment to unrealized gains on
available-for-sale securities, net of
income tax provision of $783 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,429 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347,278 |
|
Exercise of stock options and related tax
benefits |
|
|
— |
|
|
|
— |
|
|
|
26,113 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,318,382 |
) |
|
|
14,610 |
|
|
|
40,723 |
|
Excess tax benefits related to stock options |
|
|
— |
|
|
|
— |
|
|
|
897 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
897 |
|
Cash dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,847 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,847 |
) |
Purchase of common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,442,500 |
|
|
|
(198,208 |
) |
|
|
(198,208 |
) |
Issuance of common stock under restricted
stock and employment agreements, net |
|
|
— |
|
|
|
— |
|
|
|
17,332 |
|
|
|
— |
|
|
|
— |
|
|
|
3,958 |
|
|
|
(375,633 |
) |
|
|
2,784 |
|
|
|
24,074 |
|
Reclassification of unamortized restricted
stock expense |
|
|
— |
|
|
|
— |
|
|
|
(32,835 |
) |
|
|
— |
|
|
|
— |
|
|
|
32,835 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2005 |
|
|
176,437,234 |
|
|
|
176,437 |
|
|
|
187,689 |
|
|
|
3,122,487 |
|
|
|
(33,738 |
) |
|
|
— |
|
|
|
71,451,550 |
|
|
|
(1,450,169 |
) |
|
|
2,002,706 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
254,685 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
254,685 |
|
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(20,722 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(20,722 |
) |
Gains (losses) on cash flow hedging
derivatives, net of income tax provision
of $(782) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,120 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,120 |
) |
Adjustment to unrealized gains on
available-for-sale securities, net of
income tax provision of $(344) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(576 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,267 |
|
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
38,470 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,275,662 |
) |
|
|
23,629 |
|
|
|
62,099 |
|
Excess tax benefits related to stock options |
|
|
— |
|
|
|
— |
|
|
|
10,319 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,319 |
|
Cash dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,091 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(23,091 |
) |
Purchase of common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,688,000 |
|
|
|
(174,071 |
) |
|
|
(174,071 |
) |
Issuance of common stock under
restricted stock and employment
agreements, net |
|
|
— |
|
|
|
— |
|
|
|
(9,591 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(582,785 |
) |
|
|
6,657 |
|
|
|
(2,934 |
) |
Amortization — share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
22,686 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
22,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 30, 2006 |
|
|
176,437,234 |
|
|
|
176,437 |
|
|
|
249,573 |
|
|
|
3,354,081 |
|
|
|
(56,156 |
) |
|
|
— |
|
|
|
73,281,103 |
|
|
|
(1,593,954 |
) |
|
|
2,129,981 |
|
F-8
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE LOSS AND CHANGES IN CAPITAL ACCOUNTS
(continued)
Liz Claiborne, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
COMMON STOCK |
|
|
Capital in |
|
|
|
|
|
|
Other |
|
|
TREASURY SHARES |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Excess of |
|
|
Retained |
|
|
Comprehensive |
|
|
Number of |
|
|
|
|
|
|
|
In thousands except share data |
|
Shares |
|
|
Amount |
|
|
Par Value |
|
|
Earnings |
|
|
Loss |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
|
BALANCE, DECEMBER 30, 2006 |
|
|
176,437,234 |
|
|
$ |
176,437 |
|
|
$ |
249,573 |
|
|
$ |
3,354,081 |
|
|
$ |
(56,156 |
) |
|
|
73,281,103 |
|
|
$ |
(1,593,954 |
) |
|
$ |
2,129,981 |
|
Adoption of
Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes
- an interpretation of FASB Statement
No. 109” (“FIN 48”) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,494 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED BALANCE,
DECEMBER 30, 2006 |
|
|
176,437,234 |
|
|
|
176,437 |
|
|
|
249,573 |
|
|
|
3,343,587 |
|
|
|
(56,156 |
) |
|
|
73,281,103 |
|
|
|
(1,593,954 |
) |
|
|
2,119,487 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(372,798 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(372,798 |
) |
Other comprehensive loss, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation
adjustment, net of income tax benefit of $19,410 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
36,999 |
|
|
|
— |
|
|
|
— |
|
|
|
36,999 |
|
Losses on cash flow hedging derivatives,
net of income tax benefit of $1,826 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,459 |
) |
|
|
— |
|
|
|
— |
|
|
|
(5,459 |
) |
Adjustment to unrealized gains on
available-for-sale securities, net of
income tax provision of $(32) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(341,224 |
) |
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
29,064 |
|
|
|
— |
|
|
|
— |
|
|
|
(1,560,987 |
) |
|
|
14,198 |
|
|
|
43,262 |
|
Excess tax benefits related to stock options |
|
|
— |
|
|
|
— |
|
|
|
5,999 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,999 |
|
Cash dividends declared |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22,704 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22,704 |
) |
Purchase of common stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,913,000 |
|
|
|
(300,488 |
) |
|
|
(300,488 |
) |
Issuance of common stock under
restricted stock and employment
agreements, net |
|
|
— |
|
|
|
— |
|
|
|
(7,890 |
) |
|
|
— |
|
|
|
— |
|
|
|
61,961 |
|
|
|
(290 |
) |
|
|
(8,180 |
) |
Amortization — share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
19,412 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 29, 2007 |
|
|
176,437,234 |
|
|
$ |
176,437 |
|
|
$ |
296,158 |
|
|
$ |
2,948,085 |
|
|
$ |
(24,582 |
) |
|
|
81,695,077 |
|
|
$ |
(1,880,534 |
) |
|
$ |
1,515,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
F-9
CONSOLIDATED STATEMENTS OF CASH FLOWS
Liz Claiborne, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
December 31, 2005 |
|
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(372,798 |
) |
|
$ |
254,685 |
|
|
$ |
317,366 |
|
Adjustments to arrive at (loss) income from continuing operations |
|
|
2,778 |
|
|
|
(33,769 |
) |
|
|
(25,594 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
|
(370,020 |
) |
|
|
220,916 |
|
|
|
291,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile (loss) income from continuing operations
to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
162,178 |
|
|
|
136,719 |
|
|
|
125,278 |
|
Goodwill and trademark impairment |
|
|
487,119 |
|
|
|
— |
|
|
|
— |
|
Streamlining initiatives; asset write-down |
|
|
14,940 |
|
|
|
2,577 |
|
|
|
— |
|
Loss on asset disposals |
|
|
26,191 |
|
|
|
17,678 |
|
|
|
— |
|
Deferred income taxes |
|
|
(143,454 |
) |
|
|
(9,848 |
) |
|
|
1,824 |
|
Share-based compensation |
|
|
19,114 |
|
|
|
22,513 |
|
|
|
23,444 |
|
Tax benefit on exercise of stock options |
|
|
3,492 |
|
|
|
7,852 |
|
|
|
5,779 |
|
Gain on sale of securities |
|
|
(364 |
) |
|
|
(3,583 |
) |
|
|
— |
|
Other, net |
|
|
(558 |
) |
|
|
275 |
|
|
|
(633 |
) |
Changes in assets and liabilities, exclusive of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable – trade, net |
|
|
76,117 |
|
|
|
(56,788 |
) |
|
|
1,677 |
|
Decrease (increase) in inventories, net |
|
|
48,397 |
|
|
|
(26,557 |
) |
|
|
(3,472 |
) |
Decrease (increase) in other current and non-current assets |
|
|
9,106 |
|
|
|
(3,189 |
) |
|
|
(23,488 |
) |
(Decrease) increase in accounts payable |
|
|
(57,626 |
) |
|
|
14,981 |
|
|
|
(3,861 |
) |
Increase in accrued expenses |
|
|
19,770 |
|
|
|
19,109 |
|
|
|
5,280 |
|
(Decrease) increase in income taxes payable |
|
|
(25,130 |
) |
|
|
12,973 |
|
|
|
(11,116 |
) |
Net cash provided by operating activities of discontinued operations |
|
|
4,604 |
|
|
|
38,409 |
|
|
|
28,068 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
273,876 |
|
|
|
394,037 |
|
|
|
440,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investment instruments |
|
|
(40 |
) |
|
|
(154 |
) |
|
|
(4,611 |
) |
Proceeds from sales of securities |
|
|
9,616 |
|
|
|
8,054 |
|
|
|
— |
|
Purchases of property and equipment |
|
|
(173,032 |
) |
|
|
(168,060 |
) |
|
|
(139,888 |
) |
Sale of property and equipment |
|
|
1,410 |
|
|
|
5,711 |
|
|
|
— |
|
Payments for acquisitions, net of cash acquired |
|
|
(48,262 |
) |
|
|
(266,775 |
) |
|
|
(139,815 |
) |
Payments for in-store merchandise shops |
|
|
(7,927 |
) |
|
|
(13,080 |
) |
|
|
(17,840 |
) |
Other, net |
|
|
1,104 |
|
|
|
160 |
|
|
|
4,448 |
|
Net cash used in investing activities of discontinued operations |
|
|
(2,725 |
) |
|
|
(1,289 |
) |
|
|
(1,141 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(219,856 |
) |
|
|
(435,433 |
) |
|
|
(298,847 |
) |
|
|
|
|
|
|
|
|
|
|
F-10
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Liz Claiborne, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
December 31, 2005 |
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Short term borrowings, net |
|
|
329,651 |
|
|
|
(30,214 |
) |
|
|
(7,389 |
) |
Principal payments under capital lease obligations |
|
|
(6,368 |
) |
|
|
(3,338 |
) |
|
|
(5,871 |
) |
Commercial paper, net |
|
|
(82,075 |
) |
|
|
82,075 |
|
|
|
— |
|
Proceeds from exercise of common stock options |
|
|
43,262 |
|
|
|
62,099 |
|
|
|
34,944 |
|
Purchase of common stock |
|
|
(300,488 |
) |
|
|
(174,071 |
) |
|
|
(198,208 |
) |
Dividends paid |
|
|
(22,541 |
) |
|
|
(23,091 |
) |
|
|
(23,847 |
) |
Excess tax benefits related to stock options |
|
|
2,507 |
|
|
|
2,467 |
|
|
|
897 |
|
Proceeds from issuance of 5% euro Notes, net |
|
|
— |
|
|
|
445,099 |
|
|
|
— |
|
Repayment of 6.625% euro Notes |
|
|
— |
|
|
|
(449,505 |
) |
|
|
— |
|
Other, net |
|
|
(1,137 |
) |
|
|
(1,292 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(37,189 |
) |
|
|
(89,771 |
) |
|
|
(199,474 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
|
2,925 |
|
|
|
(11,715 |
) |
|
|
659 |
|
Net Change in Cash and Cash Equivalents |
|
|
19,756 |
|
|
|
(142,882 |
) |
|
|
(57,110 |
) |
Cash and Cash Equivalents at Beginning of Year |
|
|
185,645 |
|
|
|
328,527 |
|
|
|
385,637 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year |
|
$ |
205,401 |
|
|
$ |
185,645 |
|
|
$ |
328,527 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Liz Claiborne, Inc. and its wholly owned and majority owned subsidiaries (the “Company”) are
engaged primarily in the design and marketing of a broad range of apparel, accessories and
fragrances. In the second quarter of 2007, the Company revised its segment reporting structure to
reflect the strategic realignment of its businesses and internal reporting. The strategic
realignment reflects a brand-focused approach, designed to optimize the operational coordination
and resource allocation of the Company’s businesses across multiple functional areas including
specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce and
licensing. Prior periods have been conformed to the current period’s presentation. The two
reportable segments described below represent the Company’s brand based activities for which
separate financial information is available and which is utilized on a regular basis by its chief
operating decision maker (“CODM”) to evaluate performance and allocate resources. In identifying
its reportable segments, the Company considers economic characteristics, as well as products,
customers, sales growth potential and long-term profitability. The Company aggregates its five
operating segments to form reportable segments, where applicable. As such, the Company now reports
its operations in two reportable segments as follows:
|
• |
|
The Direct Brands segment — consists of the specialty retail, outlet, wholesale apparel,
wholesale non-apparel (including accessories, jewelry, handbags and fragrances), e-commerce
and licensing operations of the Company’s four retail-based operating segments: JUICY
COUTURE, KATE SPADE, LUCKY BRAND and MEXX; and |
|
|
• |
|
The Partnered Brands segment — consists of one operating segment including the wholesale
apparel, wholesale non-apparel, outlet and specialty retail, e-commerce and licensing
operations of the Company’s wholesale-based brands including: AXCESS, CLAIBORNE
(men’s), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, ELLEN TRACY, ENYCE, KENSIE, LIZ & CO., LIZ
CLAIBORNE, MAC & JAC, MARVELLA, MONET, NARCISO RODRIGUEZ, SIGRID OLSEN, TRIFARI, VILLAGER,
the Company’s licensed DKNY® JEANS and DKNY® ACTIVE brands as well as the Company’s other
non-Direct Brands fragrances including: CLAIBORNE, CURVE, ELLEN TRACY, LIZ CLAIBORNE and our
licensed USHER fragrance. |
In July 2007, the Company announced its long-term strategic plan, which included a strategic
review and potential divestiture or closure of 16 of its brands. On October 4, 2007, the Company
completed the first phase of such review by finalizing the disposal of certain assets of its former
EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands in a single transaction. The
Company completed the second phase of such review by disposing
of certain assets and liabilities of its C&C CALIFORNIA
and LAUNDRY BY DESIGN brands on February 4, 2008 and by entering into a definitive agreement on
February 1, 2008 to dispose of substantially all of the assets and liabilities of its prAna brand, which is expected
to close in the first quarter of 2008. Also in 2007, the Company closed a distribution center and
implemented a plan to sell the building, land and other assets associated with such facility.
Pursuant to Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” certain assets and liabilities of the C&C CALIFORNIA, LAUNDRY BY
DESIGN and prAna brands, as well as the assets associated with the Company’s closed distribution
center, have been segregated and reported as held for sale as of December 29, 2007. The activities
of these brands, as well as those of EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE
brands, have been segregated and reported as discontinued operations for all periods presented.
Summarized financial data for the aforementioned brands are provided in Note 3 — Discontinued
Operations. During 2007, the Company decided to close the SIGRID OLSEN brand, which is expected to
occur in the first half of 2008.
On January 17, 2008, the Company announced that it entered into an exclusive license agreement with
Kohl’s, whereby Kohl’s will source and sell products under
the DANA BUCHMAN brand, and on February
14, 2008, the Company announced an agreement to sell substantially all of the assets and liabilities of ELLEN TRACY
(see Note 26 — Subsequent Events).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company. All intercompany
balances and transactions have been eliminated in consolidation.
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
FISCAL YEAR
The Company’s fiscal year ends on the Saturday closest to December 31. The 2007, 2006 and 2005
fiscal years each reflected a 52-week period.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements. These estimates and assumptions also affect
the reported amounts of revenues and expenses. Estimates by their nature are based on judgments
and available information. Therefore, actual results could materially differ from those estimates
under different assumptions and conditions.
Critical accounting policies are those that are most important to the portrayal of the Company’s
financial condition and the results of operations and require management’s most difficult,
subjective and complex judgments as a result of the need to make estimates about the effect of
matters that are inherently uncertain. The Company’s most critical accounting policies, discussed
below, pertain to revenue recognition, income taxes, accounts receivable — trade, net,
inventories, net, the valuation of goodwill and intangible assets with indefinite lives, accrued
expenses, derivative instruments and share-based compensation. In applying such policies,
management must use some amounts that are based upon its informed judgments and best estimates.
Because of the uncertainty inherent in these estimates, actual results could differ from estimates
used in applying the critical accounting policies. Changes in such estimates, based on more
accurate future information, may affect amounts reported in future periods.
Revenue Recognition
Revenue is recognized from its wholesale, retail and licensing operations. Revenue within the
Company’s wholesale operations is recognized at the time title passes and risk of loss is
transferred to customers. Wholesale revenue is recorded net of returns, discounts and allowances.
Returns and allowances require pre-approval from management. Discounts are based on trade terms.
Estimates for end-of-season allowances are based on historical trends, seasonal results, an
evaluation of current economic conditions and retailer performance. The Company reviews and
refines these estimates on a monthly basis based on current experience, trends and retailer
performance. The Company’s historical estimates of these costs have not differed materially from
actual results. Retail store revenues are recognized net of estimated returns at the time of sale
to consumers; sales tax collected from customers is excluded from
revenue. Proceeds received from the sale of gift cards are recorded as a liability and
recognized as sales when redeemed by the holder. Licensing revenues, which amounted to $55.8
million, $45.4 million and $41.0 million during 2007, 2006 and 2005, respectively, are recorded
based upon contractually guaranteed minimum levels and adjusted as actual sales data is received
from licensees.
Income Taxes
Income taxes are accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes.” In accordance with SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases, as measured by enacted tax rates that are expected to be in effect in the periods when the
deferred tax assets and liabilities are expected to be realized or settled. Significant judgment
is required in determining the worldwide provision for income taxes. Changes in estimates may
create volatility in the Company’s effective tax rate in future periods due to settlements with
various tax authorities, either favorable or unfavorable, the expiration of the statute of
limitations on some tax positions or obtaining new information about particular tax positions that
may cause management to change its estimates. In the ordinary course of a global business, the
ultimate tax outcome is uncertain for many transactions. It is the Company’s policy to recognize,
at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant
taxing authority, the impact of an uncertain income tax position on its income tax return. An
uncertain income tax position will not be recognized if it has less than a 50% likelihood of being
sustained. The Company establishes the provisions based upon management’s assessment of exposure
associated with permanent tax differences, tax credits and interest expense applied to temporary
difference adjustments. The tax provisions are analyzed periodically (at least quarterly) and
adjustments are made as events occur that warrant adjustments to those provisions. The Company
records interest expense and penalties payable to relevant tax authorities as income tax expense.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Accounts Receivable — Trade, Net
In the normal course of business, the Company extends credit to customers that satisfy pre-defined
credit criteria. Accounts receivable — trade, net, as shown on the Consolidated Balance Sheets,
is net of allowances and anticipated discounts. An allowance for doubtful accounts is determined
through analysis of the aging of accounts receivable at the date of the financial statements,
assessments of collectibility based on an evaluation of historical and anticipated trends, the
financial condition of the Company’s customers, and an evaluation of the impact of economic
conditions. An allowance for discounts is based on those discounts relating to open invoices where
trade discounts have been extended to customers. Costs associated with potential returns of
products as well as allowable customer markdowns and operational charge backs, net of expected
recoveries, are included as a reduction to sales and are part of the provision for allowances
included in Accounts receivable — trade, net. These provisions result from seasonal negotiations
with the Company’s customers as well as historical deduction trends net of expected recoveries and
the evaluation of current market conditions. The Company’s historical estimates of these costs
have not differed materially from actual results.
Inventories, Net
Inventories for seasonal merchandise are recorded at actual average cost. Inventories for
replenishment and on-going merchandise are recorded at lower of cost (using the first-in, first-out
method) or market value. The Company continually evaluates the composition of its inventories
assessing slow-turning, ongoing product as well as prior seasons’ fashion product. Market value of
distressed inventory is valued based on historical sales trends for this category of inventory of
the Company’s individual product lines, the impact of market trends and economic conditions, and
the value of current orders in-house relating to the future sales of this type of inventory.
Estimates may differ from actual results due to quantity, quality and mix of products in inventory,
consumer and retailer preferences and market conditions. The Company’s historical estimates of
these costs and its provisions have not differed materially from actual results.
Goodwill and Other Intangibles, Net
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible
assets with indefinite lives are not amortized, but rather tested for impairment at least annually.
A two-step impairment test is performed on goodwill. In the first step, the Company compares the
fair value of each reporting unit to its carrying value. The Company determines the fair value of
its reporting units using the market approach, as is typically used for companies providing
products where the value of such a company is more dependent on the ability to generate earnings
than the value of the assets used in the production process. Under this approach, the Company
estimates fair value based on market multiples of revenues and earnings for comparable companies.
If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to
that reporting unit, goodwill is not impaired and the Company is not required to perform further
testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair
value of the reporting unit, then the Company must perform the second step in order to determine
the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the
reporting unit’s goodwill. The activities in the second step include valuing the tangible and
intangible assets of the impaired reporting unit based on their fair value and determining the fair
value of the impaired reporting unit’s goodwill based upon the residual of the summed identified
tangible and intangible assets.
The Company completed its annual goodwill impairment tests as of the first day of the third quarter
of fiscal 2007. No impairment of goodwill was recognized at that date as a result of such tests.
However,
in accordance with SFAS No. 142, the Company performed an additional
goodwill impairment test as of December 29, 2007 and recorded a
pretax impairment charge of $450.8 million related to goodwill
previously recorded in its Partnered Brands segment, which is a
reporting unit (see Note 8 — Goodwill and Intangible Assets).
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Owned trademarks that have been determined to have indefinite lives are also not subject to
amortization and are reviewed at least annually for potential impairment in accordance with SFAS
No. 142, as mentioned above. The fair value of purchased intangible assets with indefinite lives,
primarily trademarks and trade names, are estimated and compared to their carrying value. The
Company estimates the fair value of these intangible assets based on an income approach using the
relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party
would be willing to pay a royalty in order to exploit the related benefits of these types of
assets. This approach is dependent on a number of factors, including estimates of future growth and
trends, royalty rates in the category of intellectual property, discount rates and other variables.
The Company bases its fair value estimates on assumptions it believes to be reasonable, but which
are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
The Company recognizes an impairment loss when the estimated fair value of the intangible asset is
less than the carrying value.
As a result of the impairment analysis performed in connection with the Company’s purchased
trademarks with indefinite lives, the Company determined that the carrying value of such intangible
asset related to the Company’s ELLEN TRACY brand exceeded its estimated fair value. Accordingly,
during 2007, the Company recorded pre-tax charges of $36.3 million ($22.0 million after-tax) to
reduce the value of the ELLEN TRACY trademark to its estimated fair value. This impairment resulted
from a decline in future anticipated cash flows of the ELLEN TRACY brand.
Intangible assets with finite lives are amortized over their respective lives to their estimated
residual values and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.”
Trademarks having finite lives are amortized over their estimated useful lives. Acquired trademarks
are valued using the relief-from-royalty method. Trademarks that are licensed by the Company from
third parties are amortized over the individual terms of the respective license agreements, which
range from 5 to 15 years. Intangible merchandising rights are amortized over a period of 3 to 4
years. Customer relationships are amortized assuming gradual attrition over time. Existing
relationships are amortized over periods ranging from 5 to 25 years.
The recoverability of the carrying values of all long-lived assets with finite lives is
re-evaluated when changes in circumstances indicate the assets’ value may be impaired. Impairment
testing is based on a review of forecasted operating cash flows and the profitability of the
related brand.
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Accrued Expenses
Accrued expenses for employee insurance, workers’ compensation, profit sharing, contracted
advertising; professional fees and other outstanding Company obligations are assessed based on
claims experience and statistical trends, open contractual obligations and estimates based on
projections and current requirements. If these trends change significantly, then actual results
would likely be impacted.
Derivative Instruments
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and
interpreted, requires that each derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the Consolidated Balance Sheets as either an asset or
liability and measured at its fair value. The statement also requires that changes in the
derivative’s fair value be recognized currently in earnings in either (Loss) Income from Continuing
Operations or Accumulated other comprehensive income (loss), depending on whether the derivative
qualifies for hedge accounting treatment. Hedge accounting requires the Company to test each
derivative for effectiveness at inception of each hedge and at the end of each reporting period.
The Company uses foreign currency forward contracts and options for the purpose of hedging the
specific exposure to variability in forecasted cash flows associated primarily with inventory
purchases mainly by the Company’s European and Canadian entities. These instruments are designated
as cash flow hedges. To the extent the hedges are highly effective, the effective portion of the
changes in fair value are included in Accumulated other comprehensive income (loss), net of related
tax effects, with the corresponding asset or liability recorded in the Consolidated Balance Sheets.
The ineffective portion of the cash flow hedge is recognized primarily as a component of Cost of
goods sold in current period earnings. Amounts recorded in Accumulated other comprehensive income
(loss) are reflected in current period earnings when the hedged transaction affects earnings. If
fluctuations in the relative value of the currencies involved in the hedging activities were to
move dramatically, such movement could have a significant impact on the Company’s results of
operations.
The Company hedges its net investment position in euro functional subsidiaries by borrowing
directly in foreign currency and designating a portion of foreign currency debt as a hedge of net
investments. The foreign currency transaction gain or loss recognized for a foreign currency
denominated debt instrument that is designated as the hedging instrument in a net investment hedge
is recorded as a translation adjustment. The Company also uses derivative instruments to hedge the
changes in the fair value of the debt due to interest rates, with the change in fair value
recognized currently in Interest expense, net together with the change in fair value of the hedged
item attributable to interest rates.
Occasionally, the Company purchases short-term foreign currency contracts and options outside of
the cash flow hedging program to neutralize quarter-end balance sheet and other expected exposures.
These derivative instruments do not qualify as cash flow hedges under SFAS No. 133 and are
recorded at fair value with all gains or losses, which have not been significant, recognized as a
component of SG&A expenses in current period earnings.
Share-Based Compensation
On July 3, 2005, the Company adopted SFAS No. 123(R) “Share-Based Payment” requiring the
recognition of compensation expense in the Consolidated Statements of Operations related to the
fair value of employee share-based awards, including stock options and restricted stock.
Determining the fair value of options at the grant date requires judgment, including estimating the
expected term that stock options will be outstanding prior to exercise, the associated volatility
and the expected dividends. Prior to adopting SFAS No. 123(R), the Company applied Accounting
Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees”, and related
Interpretations, in accounting for its share-based compensation plans. All employee stock options
were granted at or above the grant date market price. Accordingly, no compensation cost was
recognized for share-based awards prior to July 3, 2005. In accordance with SFAS No. 123(R),
judgment is required in estimating the amount of share-based awards expected to be forfeited prior
to vesting. If actual forfeitures differ significantly from these estimates, share-based
compensation expense could be materially impacted.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
OTHER SIGNIFICANT ACCOUNTING POLICIES
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, receivables, short-term borrowings and accounts
payable approximates their carrying values due to the short-term nature of these instruments. The
fair value of variable rate long-term debt instruments approximates the carrying value and is
estimated based on the current rates offered to the Company for debt of similar maturities.
Fixed-rate long-term debt is carried at its value on date of issuance. Fair values for derivatives
are either obtained from counter parties or developed using dealer quotes or cash flow models.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less at the date of
purchase are classified as cash equivalents.
Marketable Securities
Investments are stated at market. The estimated fair value of the marketable securities is based
on quoted prices in an active market. Gains and losses on investment transactions are determined
using the specific identification method and are recognized in income based on settlement dates.
Unrealized gains and losses on securities available-for-sale are included in Accumulated other
comprehensive loss until realized. Interest is recognized when earned. All marketable securities
are considered available-for-sale. Management evaluates securities held with unrealized losses for
other-than-temporary impairment at least on a quarterly basis. Consideration is given to (a) the
length of time and the extent to which the fair value has been less than cost; (b) the financial
condition and near-term prospects of the issuer; and (c) the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value.
Property and Equipment, Net
Property and equipment is stated at cost less accumulated depreciation and amortization. Buildings
and building improvements are depreciated using the straight-line method over their estimated
useful lives of 20 to 39 years. Machinery and equipment and furniture and fixtures are depreciated
using the straight-line method over their estimated useful lives of three to seven years.
Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated
useful lives of the assets. Improvements are capitalized and depreciated in accordance with the
Company’s policies; costs for maintenance and repairs are expensed as incurred. Leased property
meeting certain capital lease criteria is capitalized and the present value of the related lease
payments is recorded as a liability. Amortization of capitalized leased assets is computed on the
straight-line method over the shorter of the estimated useful life or the initial lease term. The
Company recognizes a liability for the fair value of a conditional asset retirement obligation
(“ARO”) if the fair value can be reasonably estimated. The Company’s ARO’s are primarily
associated with the removal and disposal of leasehold improvements at the end of a lease term when
the Company is contractually obligated to restore the facility back to a condition specified in the
lease agreement. Amortization of ARO’s is recorded on a straight-line basis over the life of the
lease term.
The Company capitalizes the costs of software developed or obtained for internal use in accordance
with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.” Capitalization of software developed or obtained for internal use
commences during the development phase of the project. The Company amortizes software developed or
obtained for internal use on a straight-line basis over five years, when such software is
substantially ready for use.
The Company evaluates the recoverability of property and equipment if circumstances indicate an
impairment may have occurred, pursuant to SFAS No. 144. This analysis is performed by comparing
the respective carrying values of the assets to the current and expected future cash flows, on an
undiscounted basis, to be generated from such assets. Property and equipment is evaluated
separately within each brand. If such analysis indicates that the carrying value of these assets is
not recoverable, the carrying value of such assets is reduced to fair value through a charge to the
Company’s Consolidated Statements of Operations. As a result of an impairment analysis performed
on property and equipment of the Company’s SIGRID OLSEN brand, the Company determined that the
carrying value of such assets exceeded their fair value. Accordingly, during the fourth quarter of
2007, the Company recorded a pre-tax charge of $14.9 million within SG&A on the accompanying
Consolidated Statement of
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Operations in order to reduce the carrying value of such assets to their
estimated fair value. The impairment resulted from a decline in future anticipated cash flows of
Sigrid Olsen retail stores due to various factors, including the Company’s decision to close the
SIGRID OLSEN brand.
Operating Leases
The Company leases office space, retail stores and distribution facilities. Many of these operating
leases provide for tenant improvement allowances, rent increases and/or contingent rent provisions.
Rental expense is recognized on a straight-line basis commencing with the possession date of the
property which is typically the earlier of the lease commencement date or the date when the company
takes possession of the property. Certain store leases include contingent rents that are based on
a percentage of retail sales over stated thresholds. The current portion of the tenant allowances
is included in accrued liabilities, while the long-term portion is recorded as a deferred lease
credit. These allowances are amortized on a straight-line basis over the life of the lease as a
reduction of rent expense and are included in SG&A expense.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries have been translated at year-end exchange rates.
Revenues and expenses have been translated at average rates of exchange in effect during the year.
Resulting translation adjustments have been included in Accumulated other comprehensive loss.
Gains and losses on translation of intercompany loans with foreign subsidiaries of a long-term
investment nature are also included in this component of Stockholders’ Equity.
Foreign Currency Transactions
Outstanding balances in foreign currencies are translated at the end of period exchange rates. Revenues and expenses for each month are translated using that month’s average exchange rate and then are combined for the period totals. The resulting exchange differences are recorded in the statement of operations or other comprehensive income, as appropriate.
Cost of Goods Sold
Cost of goods sold for wholesale operations include the expenses incurred to acquire and produce
inventory for sale, including product costs, freight-in, import costs, third-party inspection
activities, buying agent commissions and provisions for shrinkage. For retail operations, in-bound
freight from the Company’s warehouse to its own retail stores is also included. Warehousing
activities including receiving, storing, picking, packing and general warehousing charges are
included in SG&A and, as such, the Company’s gross profit may not be comparable to others who may
include these expenses as a component of Cost of goods sold.
Advertising, Promotion and Marketing
All costs associated with advertising, promoting and marketing of Company products are expensed
during the periods when the activities take place. Costs associated with cooperative advertising
programs involving agreements with customers, whereby customers are required to provide documentary
evidence of specific performance and when the amount of consideration paid by the Company for these
services are at or below fair value, are charged to SG&A. Costs associated with customer
cooperative advertising allowances without specific performance guidelines are reflected as a
reduction of sales revenue. Cooperative advertising expenses with specific agreements with
customers were $51.8 million in 2007, $40.4 million in 2006 and $31.4 million in 2005. Advertising
and promotion expenses were $146.9 million in 2007,
$130.7 million in 2006 and $122.9 million in
2005. Marketing expenses, including in-store and other
Company-sponsored activities, were
$64.4 million in 2007, $55.4 million in 2006 and $53.7 million in 2005.
Shipping and Handling Costs
Shipping and handling costs, which are mostly comprised of warehousing activities, are included as
a component of SG&A in the Consolidated Statements of Operations. In fiscal years 2007, 2006 and
2005, shipping and handling costs approximated $259.6 million, $232.2 million and $219.0 million,
respectively.
Cash Dividend and Common Stock Repurchase
On January 23, 2008, the Company’s Board of Directors declared a quarterly cash dividend on the
Company’s common stock at the rate of $0.05625 per share, to be paid on March 17, 2008 to
stockholders of record at the close of business on February 22, 2008. On November 12, 2007, the
Company’s Board of Directors authorized the Company to purchase up to an additional $100 million of
its common stock for cash in open market purchases and privately negotiated transactions. As of
December 29, 2007, the Company had $28.7 million remaining in buyback authorization under its share
repurchase program.
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 2: ACQUISITIONS
On
May 18, 2007, the Company acquired 50 percent ownership
of the entity that owns the rights to the NARCISO RODRIGUEZ name and trademarks, entered into
an exclusive license to operate the NARCISO RODRIGUEZ business worldwide and formed a new company
to operate the license and develop the NARCISO RODRIGUEZ brand worldwide. The purchase price totaled $13.9 million, which
includes closing fees and certain post-closing adjustments. The Company believes the
addition of Narciso Rodriguez provides an opportunity to build a broad business in the luxury
designer category (a category in which the Company did not previously participate) that is sold in
partnership-oriented, upscale retailers. The Company allocated $8.9 million of purchase price to
the value of trademarks and trade names associated with the business, $0.3 million to the value of
a non-compete agreement, $0.6 million to the value of a beneficial lease and $5.0 million to
goodwill. The $5.0 million of goodwill that was included in the Partnered Brands segment was
subsequently written off as part of our fourth quarter 2007 non-cash
impairment charge and deducted for tax purposes. The value of
trademarks and tradenames, the non-compete agreement and the
beneficial lease are being amortized over 7 years, 3 years and 5
years, respectively. As the
Company maintains control over the assets and activities of the NARCISO RODRIGUEZ brand, the
related financial results have been consolidated from the date of acquisition. Unaudited pro forma
information related to this acquisition is not included, as the impact of this transaction is not
material to the Company’s consolidated results.
On December 13, 2006, the Company acquired 100 percent of the equity of Kate Spade LLC (“Kate
Spade”). Based in New York City, Kate Spade is a designer, marketer, wholesaler and retailer of
fashion accessories for women and men through its KATE SPADE® and JACK SPADE® brands. The Company
believes the KATE SPADE brand enjoys widespread consumer recognition in the accessible luxury
category and provides an opportunity for growth in its direct-to-consumer business. The
purchase price totaled approximately $124 million, plus $3.4 million in fees and for certain
post-closing adjustments and assumption of liabilities that were accounted for as additional
purchase price. The Company allocated $74.9 million of purchase price to the value of trademarks
and trade names associated with the business, $6.5 million to the value of customer relationships,
$2.6 million to the value of beneficial leases and
$36.0 million to goodwill. The trademarks and tradenames are
deemed to have indefinite lives and are subject to an annual
impairment test. The value of customer relationships and beneficial
leases are being amortized over 14 years and from 2 to 9 years,
respectively. Unaudited pro forma
information related to this acquisition is not included, as the impact of this transaction is not
material to the Company’s consolidated results.
On January 26, 2006, the Company acquired 100 percent of the equity of Westcoast Contempo Fashions
Limited and Mac & Jac Holdings Limited, which collectively design, market and sell the Mac & Jac,
Kensie and Kensiegirl apparel lines (“Mac & Jac”), a privately held fashion apparel company. The
purchase price totaled 26.2 million Canadian dollars (or $22.7 million), which includes the
retirement of debt at closing and fees, but excludes contingent payments to be determined based
upon a multiple of Mac & Jac’s earnings in fiscal years 2006, 2008, 2009 and 2010. There was no
contingent payment made based on 2006 fiscal year earnings. The Company allocated $13.9 million of
purchase price to the value of trademarks and trade names associated with the business and $5.6
million to the value of customer relationships. The trademarks and trade names are deemed to have
indefinite lives and are subject to an annual test for impairment. The value of customer
relationships is being amortized over 12 years. The Company currently estimates that the aggregate
of the contingent payments will be in the range of approximately $10-12 million and will be
accounted for as additional purchase price when paid. Unaudited pro forma information related to
this acquisition is not included, as the impact of this transaction is not material to the
Company’s consolidated results.
The prAna
acquisition agreement requires the Company to make contingent payments to the former
owners of prAna based on certain performance parameters of prAna over a pre-determined time frame.
In connection with the sale of the prAna brand, the Company agreed to satisfy such contingent
obligation for $18.4 million, which will be paid concurrently with the closing of the sale of the
prAna brand and will be recorded as an expense within the Company’s Consolidated Statement of
Operations in 2008.
On April 7, 2003, the Company acquired 100 percent of the equity of Juicy Couture, Inc. (formerly,
Travis Jeans, Inc.) (“Juicy Couture”), a privately held fashion apparel company. The total purchase
price consisted of: (i) a payment, including the assumption of debt and fees of $53.1 million and
(ii) a contingent payment to be determined as a multiple of Juicy Couture’s earnings for one of the
years ended 2005, 2006 or 2007. The selection of the measurement year for the contingent payment is
at either party’s option. In March of 2005, the contingent payment agreement was amended to include
an advance option for the sellers providing that (i) if the 2005 measurement year is not selected,
the sellers may elect to receive up to 70 percent of the estimated contingent payment based upon
2005 results; and (ii) if the 2005 and 2006 measurement years are not selected, the sellers are
eligible to elect to receive up to 85 percent of the estimated contingent payment based on the 2006
measurement year
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
net of any 2005 advances. In April 2006, the sellers elected to receive a 70
percent advance against the contingent purchase price and were paid $80.3 million on April 20,
2006. In May 2007, the sellers elected to receive an 85 percent advance against the contingent
purchase price and were paid $19.9 million on May 23, 2007. These payments were accounted for as
additional purchase price and as increases to goodwill. The 2008 payment of $72.9 million will be
made in the first half of 2008 based on a multiple of Juicy Couture’s 2007 earnings, which has been
accounted for as additional purchase price and an increase to goodwill.
On June 8, 1999, the Company acquired 85.0 percent of the equity of Lucky Brand Dungarees, Inc.
(“Lucky Brand”), whose core business consists of the Lucky Brand Dungarees line of women and men’s
denim-based sportswear. The total purchase price consisted of a cash payment made at the closing
date of approximately $85.0 million and a payment made in April 2003 of $28.5 million. An
additional payment of $12.7 million was made in 2000 for tax-related purchase price adjustments.
On January 16, 2007, January 17, 2006 and January 28, 2005, the Company paid $10.0 million, $10.0
million and $35.0 million, respectively, for 1.5 percent, 1.9 percent and 8.25 percent,
respectively, of the equity interest of Lucky Brand. On September 20, 2007, the Company entered
into an agreement to acquire the remaining shares that were owned by the sellers of Lucky Brand,
amending an agreement signed on January 28, 2005. The Company will acquire 0.4% in each of January
of 2008, 2009 and 2010 of the equity interest in Lucky for payments of $5.0 million each. The
Company recorded the present value of fixed amounts owed of $14.0 million in Accrued expenses and
Other Non-Current Liabilities. As of December 29, 2007, the excess of the liability recorded over
the related amount of minority interest has been recorded as goodwill. The remaining 2.28% of the
original shares outstanding will be settled for an aggregate purchase price composed of the
following two installments: (i) the 2008 payment of $14.4 million that will be made in the first
half of 2008 based on a multiple of Lucky Brand’s 2007 earnings, which the Company has accounted
for as additional purchase price and (ii) the 2011 payment that will be based on a multiple of
Lucky Brand’s 2010 earnings, net of the 2008 payment, which the Company estimates will be in the
range of $9-12 million.
NOTE 3: DISCONTINUED OPERATIONS
On October 4, 2007, the Company completed the sale of its former EMMA JAMES, INTUITIONS, J.H.
COLLECTIBLES and TAPEMEASURE brands in a single transaction. Consideration for the sale was
represented by a note that matured in February 2008 and was issued to the Company from the buyer.
The Company has agreed to provide transition services to the buyer through the first quarter of
2008, to ensure a smooth transition for retailers, vendors and employees.
On
January 7, 2008, the Company entered into a definitive agreement
to dispose of certain assets and liabilities of
its C & C CALIFORNIA and LAUNDRY BY DESIGN brands in a single transaction, which closed on February
4, 2008. Also, on February 1, 2008, the Company entered into a definitive agreement to dispose of
substantially all of the assets and liabilities of its prAna brand.
During 2007, the Company recorded a pre-tax non-cash charge of $11.8 million ($7.3 million net of
tax), to reflect the estimated difference between the carrying value of the assets sold and their
estimated fair value, less costs to dispose, including estimated transaction costs.
Assets held for sale on the accompanying consolidated balance sheet for the period ended December
29, 2007 include the following:
|
|
|
|
|
Accounts receivable |
|
$ |
2,452 |
|
Inventories |
|
|
13,444 |
|
Property and equipment |
|
|
7,349 |
|
Intangible assets |
|
|
41,786 |
|
Other assets |
|
|
301 |
|
|
|
|
|
Total assets held for sale |
|
$ |
65,332 |
|
|
|
|
|
Liabilities held for sale consist of accounts payable and accrued expenses.
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Summarized statement of operations data for discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
|
December 29, |
|
|
December 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Net sales |
|
$ |
247,285 |
|
|
$ |
350,382 |
|
|
$ |
261,566 |
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
$ |
7,476 |
|
|
$ |
54,563 |
|
|
$ |
41,134 |
|
Provision for income taxes |
|
|
2,981 |
|
|
|
20,794 |
|
|
|
15,540 |
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of tax |
|
$ |
4,495 |
|
|
$ |
33,769 |
|
|
$ |
25,594 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 4: LICENSING COMMITMENTS
The Company has an exclusive license agreement for the USHER and USHER RAYMOND trademarks to
design, produce, market and sell men’s and women’s fragrances in the US, Canada, Mexico, Europe and
Japan. Under the agreement, the Company is obligated to pay a royalty equal to a percentage of net
sales of the USHER and USHER RAYMOND products. The initial term of the agreement runs through
December 29, 2012.
The Company has an exclusive license agreement with an affiliate of Donna Karan International, Inc.
to design, produce, market and sell men’s and women’s sportswear, jeanswear and activewear products
in the Western Hemisphere under the “DKNY® Jeans” and “DKNY® Active” marks and logos. Under the
agreement, the Company is obligated to pay a royalty equal to a percentage of net sales of the
“DKNY® Jeans” and “DKNY® Active” products. The initial term of the license agreement runs through
December 31, 2012; the Company has an option to renew for an additional 15-year period if certain
sales thresholds are met.
In December 2002, the Company consummated an exclusive license agreement with Kenneth Cole
Productions, Inc. to design, manufacture, market and distribute women’s jewelry in the United
States under the trademarks “Kenneth Cole New York” and “Reaction Kenneth Cole.” Under the
agreement, the Company was obligated to pay a royalty equal to a percentage of net sales of
licensed products. The license agreement terminated in January 2008.
The above licenses are subject to minimum guarantees totaling $68.5 million and running through
2012; there is no maximum limit on the license fees paid by the Company.
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 5: MARKETABLE SECURITIES
In May 2007, the Company sold 69,419 shares of an equity index mutual fund, which was previously
considered available-for-sale. In March 2006, the Company sold 341,246 shares of certain equity
investments, which were previously considered available-for-sale. There were no sales of
investments previously considered available-for-sale for the period ended December 31, 2005.
Total proceeds from sales of investment instruments previously classified as available-for-sale
were $9.6 million and $8.1 million for the years ended December 29, 2007 and December 30, 2006,
respectively. Realized gains of $0.4 million and $3.6 million, previously recognized in
Accumulated other comprehensive loss, were reclassified to Other income (expense), net upon the
sale of the securities for the years ended December 29, 2007 and December 30, 2006.
Unrealized holding gains on available-for-sale securities, net of tax, for the years ended December
29, 2007 and December 30, 2006 were $0.3 million and $1.7 million, respectively, which were
included in Accumulated other comprehensive loss.
The following is a summary of available-for-sale marketable securities at December 29, 2007 and
December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Estimated |
|
In thousands |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
December 29, 2007: |
|
Other investments |
|
$ |
483 |
|
|
$ |
— |
|
|
$ |
(155 |
) |
|
$ |
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
483 |
|
|
$ |
— |
|
|
$ |
(155 |
) |
|
$ |
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2006: |
|
Equity investments |
|
$ |
9,212 |
|
|
$ |
— |
|
|
$ |
(186 |
) |
|
$ |
9,026 |
|
|
|
Other investments |
|
|
458 |
|
|
|
— |
|
|
|
(33 |
) |
|
|
425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,670 |
|
|
$ |
— |
|
|
$ |
(219 |
) |
|
$ |
9,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6: INVENTORIES, NET
Inventories, net consist of the following:
|
|
|
|
|
|
|
|
|
In thousands |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
Raw materials |
|
$ |
28,743 |
|
|
$ |
34,521 |
|
Work in process |
|
|
13,143 |
|
|
|
13,566 |
|
Finished goods |
|
|
498,921 |
|
|
|
545,358 |
|
|
|
|
|
|
|
|
Total |
|
$ |
540,807 |
|
|
$ |
593,445 |
|
|
|
|
|
|
|
|
F-22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 7: PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
In thousands |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
Land and buildings |
|
$ |
108,097 |
|
|
$ |
141,451 |
|
Machinery and equipment |
|
|
385,294 |
|
|
|
407,511 |
|
Furniture and fixtures |
|
|
304,411 |
|
|
|
276,685 |
|
Leasehold improvements |
|
|
529,427 |
|
|
|
460,784 |
|
|
|
|
|
|
|
|
|
|
|
1,327,229 |
|
|
|
1,286,431 |
|
Less: Accumulated depreciation and amortization |
|
|
746,496 |
|
|
|
704,439 |
|
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
580,733 |
|
|
$ |
581,992 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment for the years ended December 29,
2007, December 30, 2006 and December 31, 2005, was $141.5 million, $117.5 million and $106.9
million, respectively, which includes depreciation for property and equipment under capital leases
of $7.2 million, $5.6 million and $5.3 million, respectively. Machinery and equipment under
capital leases was $53.1 million and $50.7 million as of December 29, 2007 and December 30, 2006,
respectively.
F-23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 8: GOODWILL AND INTANGIBLES, NET
The following tables disclose the carrying value of all the intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
December 29, |
|
|
December 30, |
|
In thousands |
|
Period |
|
|
2007 |
|
|
2006 |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount: |
|
|
|
|
|
|
|
|
|
|
|
|
Licensed trademarks |
|
15 years |
| |
$ |
32,749 |
|
|
$ |
32,449 |
|
Owned trademarks |
|
7 years |
| |
|
9,900 |
|
|
|
7,600 |
|
Customer relationships (a) |
|
14 years |
| |
|
30,665 |
|
|
|
49,351 |
|
Merchandising rights |
|
4 years |
| |
|
57,023 |
|
|
|
57,695 |
|
Other (b) |
|
5 years |
| |
|
3,235 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
9 years |
|
|
|
133,572 |
|
|
|
147,095 |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Licensed trademarks |
|
|
|
|
|
|
(16,641 |
) |
|
|
(14,330 |
) |
Owned trademarks |
|
|
|
|
|
|
(901 |
) |
|
|
(752 |
) |
Customer relationships |
|
|
|
|
|
|
(5,875 |
) |
|
|
(6,800 |
) |
Merchandising rights |
|
|
|
|
|
|
(34,246 |
) |
|
|
(29,563 |
) |
Other |
|
|
|
|
|
|
(675 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
(58,338 |
) |
|
|
(51,445 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net: |
|
|
|
|
|
|
|
|
|
|
|
|
Licensed trademarks |
|
|
|
|
|
|
16,108 |
|
|
|
18,119 |
|
Owned trademarks |
|
|
|
|
|
|
8,999 |
|
|
|
6,848 |
|
Customer relationships |
|
|
|
|
|
|
24,790 |
|
|
|
42,551 |
|
Merchandising rights |
|
|
|
|
|
|
22,777 |
|
|
|
28,132 |
|
Other |
|
|
|
|
|
|
2,560 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets, net |
|
|
|
|
|
|
75,234 |
|
|
|
95,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Owned trademarks(c) |
|
|
|
|
|
|
271,885 |
|
|
|
318,312 |
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
347,119 |
|
|
$ |
413,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The change in the balance primarily reflects the inclusion of $22.0 million within
the Assets held for sale line item in the accompanying Consolidated Balance Sheet at December
29, 2007, partially offset by the impact of acquisitions during 2007. |
|
(b) |
|
Relates to the Company’s acquisition of Kate Spade and Narciso Rodriguez. |
|
(c) |
|
The change in the balance reflects (i) the inclusion of $16.7 million within the
Assets held for sale line item on the accompanying Consolidated Balance Sheet at December 29,
2007 and (ii) a non-cash impairment charge of $36.3 million recorded within the Company’s
Partnered Brands segment during 2007 (see Note 1 — Basis of Presentation and Significant
Accounting Policies), partially offset by the impact of acquisitions during 2007. |
F-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Amortization expense of intangible assets was $18.3 million, $16.5 million and $16.3 million for
the years ended December 29, 2007, December 30, 2006 and December 31, 2005, respectively. The
Company reclassified its segment goodwill to conform with its new segment reporting structure,
which is discussed in Note 1 — Basis of Presentation and Significant Accounting Policies.
The estimated amortization expense of intangible assets for the next five years is as follows:
|
|
|
|
|
|
|
Amortization Expense |
Fiscal Year |
|
(In millions) |
2008 |
|
$ |
16.9 |
|
2009 |
|
|
14.4 |
|
2010 |
|
|
10.4 |
|
2011 |
|
|
8.2 |
|
2012 |
|
|
7.0 |
|
The changes in carrying amount of goodwill for the year ended December 29, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct |
|
|
Partnered |
|
|
|
|
In thousands |
|
Brands |
|
|
Brands |
|
|
Total |
|
Balance as of December 30, 2006 |
|
$ |
560,764 |
|
|
$ |
447,095 |
|
|
$ |
1,007,859 |
|
Acquisition of Narciso Rodriguez |
|
|
— |
|
|
|
4,989 |
|
|
|
4,989 |
|
Additional purchase price — Juicy Couture |
|
|
92,759 |
|
|
|
— |
|
|
|
92,759 |
|
Additional purchase price — Lucky Brand |
|
|
18,492 |
|
|
|
— |
|
|
|
18,492 |
|
Kate Spade working capital adjustment |
|
|
1,662 |
|
|
|
— |
|
|
|
1,662 |
|
Kate Spade purchase price allocation |
|
|
(10,379 |
) |
|
|
— |
|
|
|
(10,379 |
) |
Impairment Charge |
|
|
— |
|
|
|
(450,819 |
) |
|
|
(450,819 |
) |
Other |
|
|
— |
|
|
|
(1,265 |
) |
|
|
(1,265 |
) |
Translation difference |
|
|
14,554 |
|
|
|
— |
|
|
|
14,554 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 29, 2007 |
|
$ |
677,852 |
|
|
$ |
— |
|
|
$ |
677,852 |
|
|
|
|
|
|
|
|
|
|
|
As a
result of the sale or probable sale of brands under strategic review
in the Company’s Partnered Brands segment and the decline in the
actual and projected performance and cash flows of such segment, the
Company determined that a goodwill impairment test was required to be
preformed as of December 29, 2007, in accordance with SFAS No.
142. In performing this evaluation, the Company considered declines
in its market value, which began in the second half of 2007 and
reconciled the sum of the estimated fair values of its five reporting
units to the Company’s market value (based on its stock price),
plus an estimated control premium.
Accordingly,
this assessment compared the carrying value of each of the
Company’s reporting units with its estimated fair value using
discounted cash flow models and market approaches. As a result, the
Company determined that the goodwill of its Partnered Brands segment,
which is a reporting unit, was impaired and recorded a pretax impairment charge of $450.8 million
($343.1 million, after tax) during the fourth quarter of 2007.
F-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 9: ACCRUED EXPENSES
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
In thousands |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
Current portion of acquisition related obligations |
|
$ |
92,274 |
|
|
$ |
9,975 |
|
Employee benefits |
|
|
69,658 |
|
|
|
81,594 |
|
Payroll, bonuses and other employment related obligations |
|
|
40,736 |
|
|
|
49,212 |
|
Advertising |
|
|
33,455 |
|
|
|
29,971 |
|
Streamlining initiatives |
|
|
30,615 |
|
|
|
19,852 |
|
Lease obligations |
|
|
30,491 |
|
|
|
22,047 |
|
Taxes, other than taxes on income |
|
|
26,686 |
|
|
|
31,174 |
|
Interest |
|
|
16,421 |
|
|
|
11,811 |
|
Fair value of derivatives |
|
|
7,625 |
|
|
|
2,002 |
|
Other |
|
|
111,348 |
|
|
|
79,135 |
|
|
|
|
|
|
|
|
|
|
$ |
459,309 |
|
|
$ |
336,773 |
|
|
|
|
|
|
|
|
NOTE 10: INCOME TAXES
(Loss) Income before Provision for Income Taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
|
December 29, |
|
|
December 30, |
|
|
December 31, |
|
In thousands |
|
2007 |
|
|
2006 |
|
|
2005 |
|
United States |
|
$ |
(398,088 |
) |
|
$ |
272,136 |
|
|
$ |
343,264 |
|
International |
|
|
(74,372 |
) |
|
|
79,837 |
|
|
|
106,880 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(472,460 |
) |
|
$ |
351,973 |
|
|
$ |
450,144 |
|
|
|
|
|
|
|
|
|
|
|
F-26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The (benefit) provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
December 31, 2005 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
26,469 |
|
|
$ |
87,153 |
|
|
$ |
99,271 |
|
Foreign |
|
|
8,313 |
|
|
|
35,220 |
|
|
|
32,440 |
|
State & local |
|
|
14,594 |
|
|
|
20,768 |
|
|
|
23,510 |
|
|
|
|
|
|
|
|
|
|
|
Total Current |
|
|
49,376 |
|
|
|
143,141 |
|
|
|
155,221 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(120,892 |
) |
|
|
(3,969 |
) |
|
|
(6,823 |
) |
Foreign |
|
|
9 |
|
|
|
(8,224 |
) |
|
|
10,091 |
|
State & local |
|
|
(30,933 |
) |
|
|
109 |
|
|
|
(117 |
) |
|
|
|
|
|
|
|
|
|
|
Total Deferred |
|
|
(151,816 |
) |
|
|
(12,084 |
) |
|
|
3,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(102,440 |
) |
|
$ |
131,057 |
|
|
$ |
158,372 |
|
|
|
|
|
|
|
|
|
|
|
Liz Claiborne, Inc. and its U.S. subsidiaries file a consolidated federal income tax return.
Deferred income tax benefits and deferred income tax liabilities represent the tax effects of revenues, costs
and expenses, which are recognized for tax purposes in different periods from those used for
financial statement purposes.
The effective income tax rate differs from the statutory federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
December 29, 2007 |
|
December 30, 2006 |
|
December 31, 2005 |
Federal tax provision at statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State and local income taxes, net of
federal benefit |
|
|
2.2 |
|
|
|
3.9 |
|
|
|
3.4 |
|
Goodwill impairment |
|
|
(13.0 |
) |
|
|
— |
|
|
|
— |
|
Increase in valuation allowance |
|
|
(1.8 |
) |
|
|
— |
|
|
|
— |
|
Tax on unrecognized tax benefits |
|
|
(2.1 |
) |
|
|
— |
|
|
|
— |
|
Rate differential on foreign income |
|
|
(1.8 |
) |
|
|
— |
|
|
|
— |
|
Other, net |
|
|
3.2 |
|
|
|
(1.7 |
) |
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.7 |
% |
|
|
37.2 |
% |
|
|
35.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The components of net deferred taxes arising from temporary differences as of December 29, 2007 and
December 30, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
|
December 29, |
|
|
December 30, |
|
In thousands |
|
2007 |
|
|
2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Inventory valuation |
|
$ |
27,656 |
|
|
$ |
5,393 |
|
Streamlining initiatives |
|
|
10,212 |
|
|
|
5,495 |
|
Deferred compensation |
|
|
17,205 |
|
|
|
28,859 |
|
Nondeductible accruals |
|
|
40,231 |
|
|
|
7,229 |
|
Unrealized investment losses |
|
|
6,154 |
|
|
|
— |
|
Amortization of compensation expense on stock awards |
|
|
16,873 |
|
|
|
22,359 |
|
Net operating loss carryforward |
|
|
32,349 |
|
|
|
17,437 |
|
Tax credit carryforward |
|
|
10,932 |
|
|
|
675 |
|
Amortization of intangibles |
|
|
25,059 |
|
|
|
— |
|
Other, net |
|
|
9,114 |
|
|
|
4,492 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
195,785 |
|
|
|
91,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Amortization of intangibles |
|
|
— |
|
|
|
(61,173 |
) |
Depreciation |
|
|
(1,900 |
) |
|
|
(18,187 |
) |
Other |
|
|
(8,438 |
) |
|
|
(6,523 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(10,338 |
) |
|
|
(85,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Valuation allowance |
|
|
(8,322 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
177,125 |
|
|
$ |
6,056 |
|
|
|
|
|
|
|
|
As of December 29, 2007, the Company and its domestic subsidiaries had net operating loss
carryforwards for state income tax purposes that will reduce future state taxable income. A
deferred tax asset of $11.5 million has been established however, a valuation allowance of $1.2
million has reduced the deferred tax asset recorded for certain state net operating loss
carryforwards because management believes it is not more likely than not that these assets will be
realized. The remaining $10.3 million net deferred tax asset expires between the years 2012 and
2028.
As of December 29, 2007, foreign subsidiaries had net operating loss carryforwards of approximately
$106.7 million available to reduce future foreign taxable income. A deferred tax asset has been
established however, a valuation allowance of $7.1 million has reduced the deferred tax assets
because it is more likely than not that certain of these assets will
not be realized. These net operating loss carryforwards expire in the
years 2013, 2016 and 2023.
As of December 30, 2006, foreign subsidiaries had net operating loss carryforwards of approximately
$76.5 million available to reduce future foreign taxable income. A deferred tax asset has been
established. No valuation allowance is needed because it is more likely than not that these assets
will be realized.
Foreign unremitted earnings have been retained indefinitely by subsidiary companies for
reinvestment. As of December 29, 2007 and December 30, 2006, the amounts were $450.6 million and
$481.6 million, respectively. It is not practicable to determine the amount of income taxes
payable in the event all such foreign earnings are repatriated.
F-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The income tax rate in 2007 decreased to 21.7% from 37.2% in 2006. Taxes on earnings were affected
by the impact of valuation allowances, goodwill impairment and discrete tax events.
On July 13, 2006, the FASB issued FIN 48, which clarifies the accounting for uncertainty in income
taxes recognized by an entity’s financial statements in accordance with SFAS No. 109 and prescribes
recognition threshold and measurement attributes for financial statement disclosure of tax
positions on the income tax return. Additionally, FIN 48 provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company adopted the provisions of FIN 48 on December 31, 2006 (the first day of the 2007 fiscal
year) and recorded a cumulative effect charge to retained earnings of $10.5 million. Changes in the
amounts of unrecognized tax benefits for the fiscal year ended December 29, 2007 are summarized as
follows:
|
|
|
|
|
|
|
Liability for |
|
|
|
Unrecognized Tax |
|
In thousands |
|
Benefits |
|
Balance as of December 30, 2006 |
|
$ |
38,099 |
|
Increases from prior period positions |
|
|
35,741 |
|
Decreases from prior period positions |
|
|
(4,849 |
) |
Increases from current period positions |
|
|
11,256 |
|
Decreases from current period positions |
|
|
(763 |
) |
Decreases relating to settlements with taxing authorities |
|
|
(4,064 |
) |
Reduction as a result of a lapse of the applicable statute of limitations |
|
|
(214 |
) |
|
|
|
|
Balance as of December 29, 2007 (a) |
|
$ |
75,206 |
|
|
|
|
|
|
|
|
(a) |
|
Included within Income taxes payable and Other non-current liabilities on the
accompanying Consolidated Balance Sheets. |
The Company recognized interest and penalties related to unrecognized tax benefits as a component
of provision for income taxes. As of December 30, 2006, the last day of the 2006 fiscal year, the
Company accrued interest and penalties related to uncertain tax positions in taxes payable and
provision for income taxes of approximately $2.7 million for open tax years in U.S. Federal, state,
local and foreign jurisdictions. Upon adoption of FIN 48, the Company increased its accrual for
interest and penalties to $6.4 million and $2.7 million, respectively. For the year ended December
29, 2007, the Company increased its accrual for interest and
penalties by $16.0 million and $1.5
million, respectively. At December 29, 2007, the accrual for interest and penalties was $22.4
million and $4.2 million, respectively.
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax
rate within the next twelve months is $50.8 million.
The Company files tax returns in the U.S. Federal jurisdiction and various state and foreign
jurisdictions. A number of years may elapse before an uncertain tax position, for which the
Company has unrecognized tax benefits, is audited and finally resolved. While it is difficult to
predict the final outcome or the timing of resolution of any particular uncertain tax position, the
Company believes that the unrecognized tax benefits reflect the most likely outcome. We adjust
these unrecognized tax benefits, as well as the related interest, in light of changing facts and
circumstances. Favorable resolution would be recognized as a reduction to the effective tax rate
in the period of resolution.
The number of years with open tax audits vary depending upon the tax jurisdiction. The major tax
jurisdictions include the U.S. and the Netherlands. The Company is no longer subject to U.S.
Federal examination by the Internal Revenue Service for the years before 2003 and, with a few
exceptions, this also applies to tax examinations by state
F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
authorities
for the years before 2004. The
Company is no longer subject to income tax examination by the Dutch
tax authorities for the years
before 2005. The U.S. and the Netherlands audit issues typically involve the timing of deductions
and transfer pricing.
The Company expects a reduction in the liability for unrecognized tax benefits of approximately
$52.8 million within the next twelve months due to the expiration of the statute of limitations and
various accounting method changes. In addition, other current assets on the accompanying Consolidated Balance Sheet include approximately $81.0 million of taxes receivable from certain state, local and foreign taxing authorities as of December 29, 2007.
NOTE 11: COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
The Company leases office, showroom, warehouse/distribution, retail space and computers and other
equipment under various noncancelable operating lease agreements, which expire through 2025. Rental
expense for 2007, 2006 and 2005 was approximately $222.7 million, $193.8 million and $157.5
million, respectively, excluding certain costs such as real estate taxes and common area
maintenance.
The Company leases retail stores under leases with terms that are typically five or ten years. The
Company amortizes leasehold improvements as well as rental abatements, construction allowances and
other rental concessions classified as deferred rent, on a straight-line basis over the initial
term of the lease or estimated useful lives of the assets, whichever is less. The initial lease
term can include one renewal under limited circumstances if the renewal is reasonably assured,
based on consideration of all of the following factors: (i) a written renewal at the Company’s
option or an automatic renewal, (ii) there is no minimum sales requirement that could impair the
Company’s ability to renew, (iii) failure to renew would subject the Company to a substantial
penalty, and (iv) there is an established history of renewals in the format or location.
At December 29, 2007, minimum aggregate rental commitments under non-cancelable operating and
capital leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In millions |
|
Interest and Principal |
|
Long-Term |
Fiscal Year |
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
Thereafter |
|
Total |
|
Interest |
|
Principal |
Capital Leases |
|
$ |
5.4 |
|
|
$ |
5.4 |
|
|
$ |
5.3 |
|
|
$ |
5.4 |
|
|
$ |
5.3 |
|
|
$ |
4.9 |
|
|
$ |
31.7 |
|
|
|
$ 3.5 |
|
|
|
$ 22.8 |
|
Operating Leases |
|
|
221.3 |
|
|
|
208.1 |
|
|
|
183.7 |
|
|
|
159.8 |
|
|
|
145.0 |
|
|
|
433.3 |
|
|
|
1,351.2 |
|
|
|
— |
|
|
|
— |
|
Certain rental commitments have renewal options extending through the fiscal year 2037. Some of
these renewals are subject to adjustments in future periods. Many of the leases call for additional
charges, some of which are based upon various escalations, and, in the case of retail leases, the
gross sales of the individual stores above base levels. The Company has no material sublease
arrangements.
At December 29, 2007, the Company had entered into short-term commitments for the purchase of raw
materials and for the production of finished goods totaling approximately $405.6 million.
Macy’s, Inc., Kohl’s Corporation
and J.C. Penney Company, Inc. accounted for approximately 14 percent, 5 percent and 4 percent,
respectively, of net sales from continuing operations in 2007.
F-30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Macy’s, Inc. Kohl’s Corporation and Nordstrom, Inc. accounted for approximately 17
percent, 5 percent and 5 percent, respectively, of net sales from continuing operations in 2006.
Macy’s, Inc. Dillard’s Inc. and Kohl’s Corporation accounted for
approximately 19 percent, 5 percent and 5 percent, respectively, of net sales from continuing
operations in 2005. The Company does not believe that this concentration of sales and credit risk
represents a material risk of loss with respect to its financial position as of December 29, 2007.
On May 22, 2001, the Company entered into an off-balance sheet financing arrangement (commonly
referred to as a “synthetic lease”) to acquire various land and equipment and construct buildings
and real property improvements associated with warehouse and distribution facilities in Ohio and
Rhode Island totaling $63.7 million. The synthetic lease expired on November 22, 2006. On November
21, 2006, the Company entered into a new synthetic lease with a financial institution for a
five–year period, totaling $32.8 million to refinance the land and buildings referred to above. The
lessor is a wholly owned subsidiary of a publicly traded corporation. The lessor is a sole member,
whose ownership interest is without limitation as to profits, losses and distribution of the
lessor’s assets. The Company’s lease represents less than 1% of the lessor’s assets. The leases
include guarantees by the Company for a substantial portion of the financing and options to
purchase the facilities at original cost; the maximum guarantee is approximately $27 million. The
lessor’s risk included an initial capital investment in excess of 10% of the total value of the
lease, which is at risk during the entire term of the lease. The equipment portion of the original
synthetic lease was sold to another financial institution and leased back to the Company through a
seven-year capital lease totaling $30.6 million. The lessor does not meet the definition of a
variable interest entity under FASB Interpretation No. 46R, “Consolidation of Variable Interest
Entities” and therefore consolidation by the Company is not required.
See Note 2 — Acquisitions for information regarding contingent payments related to acquisitions
made by the Company.
The Company is a party to several pending legal proceedings and claims. Although the outcome of any
such actions cannot be determined with certainty, management is of the opinion that the final
outcome of any of these actions should not have a material adverse effect on the Company’s
financial position, results of operations, liquidity or cash flows (see Note 25 — Legal
Proceedings).
NOTE 12: DEBT AND LINES OF CREDIT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 29, |
|
|
December 30, |
|
In thousands |
|
2007 |
|
|
2006 |
|
|
|
|
5% Notes |
|
$ |
512,044 |
|
|
$ |
458,907 |
|
Revolving credit facility and
commercial paper program |
|
|
301,200 |
|
|
|
82,075 |
|
Capital lease obligations |
|
|
26,725 |
|
|
|
32,284 |
|
Other (a) |
|
|
47,742 |
|
|
|
19,469 |
|
|
|
|
|
|
|
|
Total debt |
|
|
887,711 |
|
|
|
592,735 |
|
Less: current portion (b) |
|
|
50,828 |
|
|
|
22,266 |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
836,883 |
|
|
$ |
570,469 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
At December 29, 2007, the balance consists primarily of amounts outstanding under
working capital lines of credit. |
|
(b) |
|
At December 29, 2007, the balance consists primarily of borrowings under the working
capital lines of credit and obligations under capital leases. |
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
On October 13, 2004, the Company entered into a $750 million, five-year revolving credit agreement
(the “Agreement”). A portion of the funds available under the Agreement not in excess of $250
million is available for the issuance of letters of credit. Additionally, at the request of the
Company, the amount of funds available under the Agreement may be increased at any time or from
time to time by an aggregate principal amount of up to $250 million with only the consent of the
lenders (which may include new lenders) participating in such increase. The Agreement includes a
$150 million multi-currency revolving credit line, which permits the Company to borrow in U.S.
dollars, Canadian dollars and euros. The Agreement has two borrowing options, an “Alternative Base
Rate” option, as defined in the Agreement and a Eurocurrency rate option with a spread based on the
Company’s long-term credit rating. The Agreement contains certain customary covenants, including
financial covenants requiring the Company to maintain specified debt leverage and fixed charge
coverage ratios and covenants restricting the Company’s ability to, among other things, incur
indebtedness, grant liens, make investments and acquisitions and sell assets. The funds available
under the Agreement may be used to refinance existing debt, to provide working capital and for
general corporate purposes of the Company, including, without limitation, the repurchase of capital
stock and the support of the Company’s $750 million commercial paper program. On February 29, 2008,
the Company entered into an amendment to its revolving credit facility, whereby the fixed charge
coverage ratio was modified and certain definitions were revised so that certain cash restructuring
charges are excluded from the revised calculation. The Company was also provided a waiver of any
potential prior defaults for failure to be in compliance with the fixed charge coverage ratio
provided that the Company was in compliance with the amended fixed charge coverage ratio as of the
end of fiscal 2007. As of December 29, 2007, the Company was in compliance with such covenants, as
amended. A copy of such amendment was filed on Form 8-K, dated February 29, 2008. Both Standard &
Poor’s (“S&P”) and Moody’s credit rating services placed the Company’s ratings under review in May
2007 based on the 2007 outlook provided as part of its first quarter 2007 earnings release. During
the third quarter of 2007, Moody’s completed its review and lowered the Company’s senior unsecured
debt rating to Baa3 from Baa2 and its commercial paper rating to Prime-3 from Prime-2. Also during
the third quarter of 2007, S&P completed its review and affirmed the Company’s BBB unsecured debt
rating and lowered the Company’s commercial paper rating to A-3 from A-2. On February 15, 2008,
Moody’s placed the Company's Baa3 senior unsecured and Prime-3 commercial paper ratings under review for
possible downgrade.
On July 6, 2006, the Company completed the issuance of 350 million euro (or $446.9 million based on
the exchange rate in effect on such date) 5% Notes (the “Notes”) due July 8, 2013. The net proceeds
of the offering were used to refinance the Company’s outstanding 350 million euro 6.625% Notes due
August 7, 2006, which were originally issued on August 7, 2001. The Notes bear interest from and
including July 6, 2006, payable annually in arrears on July 8 of each year beginning on July 8,
2007. The Notes have been listed on the Luxembourg Stock Exchange and received a credit rating of
BBB from Standard & Poor’s and Baa2 from Moody’s Investor Services. During the third quarter of
2007, Moody’s lowered the rating to Baa3 and S&P affirmed the BBB rating. These Notes are
designated as a hedge of the Company’s net investment in a foreign subsidiary.
On November 21, 2006, the Company entered into a seven year capital lease with a financial
institution totaling $30.6 million. The purpose of the lease was to finance the equipment
associated with its distribution facilities in Ohio and Rhode Island, which had been previously
financed through the Company’s 2001 synthetic lease, which matured in 2006 (see Note 11 –
Commitments and Contingencies).
As of December 29, 2007, the revolving credit facility and commercial paper program, letter of
credit facilities and other borrowing facilities available to the Company were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
Letters of Credit |
|
Available |
In thousands |
|
Total Capacity |
|
Borrowings |
|
Issued |
|
Capacity |
|
|
|
Revolving credit facility and
commercial paper program (a) |
|
$ |
750,000 |
|
|
$ |
301,200 |
|
|
$ |
— |
|
|
$ |
448,800 |
|
Letter of credit facility |
|
|
400,000 |
|
|
|
— |
|
|
|
197,115 |
|
|
|
202,885 |
|
Short-term borrowing facilities |
|
|
195,871 |
|
|
|
46,799 |
|
|
|
18,420 |
|
|
|
130,652 |
|
|
|
|
(a) |
|
The Company’s $750 million revolving credit facility has a final maturity date of
October 2009 and contains the committed capacity to issue $250 million in letters of credit. |
F-32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 13: DERIVATIVE INSTRUMENTS
At December 29, 2007, the Company had various Canadian currency collars outstanding with a notional
amount of $7.5 million, maturing through September 2008 and with contract rates ranging between
0.96 and 1.09 Canadian dollars per U.S. dollar. The Company had $8.7 million and 45.3 million Hong
Kong dollars in Canadian currency collars and 23.3 million Hong Kong dollars in euro currency
collars at December 30, 2006. At December 29, 2007, the Company also had forward contracts maturing
through December 2008 to sell 14.4 million Canadian dollars for $14.3 million, to sell 24.2 million
Canadian dollars for 185.1 million Hong Kong dollars and to sell 68.7 million euro for 736.3
million Hong Kong dollars. The notional value of the foreign exchange forward contracts at December
29, 2007 was $132.3 million, as compared with $97.5 million at December 30, 2006. Unrealized losses
for outstanding foreign exchange forward contracts and currency options were $7.1 million at
December 29, 2007 and $1.6 million at December 30, 2006. The ineffective portion of these trades is
recognized currently in earnings and was $(1.6) million for the twelve months ended December 29,
2007. Approximately $6.5 million in Accumulated other comprehensive loss relating to cash flow
hedges will be reclassified into earnings in the next twelve months as the inventory is sold.
In connection with the variable rate financing under the 2001 synthetic lease agreement, the
Company entered into two interest rate swap agreements with an aggregate notional amount of $40.0
million that began in January 2003 and terminated in May 2006, in order to fix the interest
component of rent expense at a rate of 5.56%. The Company entered into these arrangements to hedge
against potential future interest rate increases. The ineffective portion of these swaps recognized
in earnings was not material during 2006 or 2005.
The Company hedges its net investment position in euro functional subsidiaries by designating the
350 million euro-denominated bonds as the hedging instrument in a net investment hedge. As a
result, the foreign currency transaction gains and losses that are recognized on the
euro-denominated bonds in accordance with SFAS No. 52, “Foreign Currency Translation,” are
accounted for as a component of accumulated other comprehensive loss rather than recognized
currently in income. The unrealized losses recorded to Cumulative translation adjustment were $53.0
million and $48.5 million for the years ended December 29, 2007 and December 30, 2006,
respectively.
On February 11, 2004, the Company entered into interest rate swap agreements for the notional
amount of 175 million euro in connection with its 350 million Eurobonds that matured on August 7,
2006. This converted a portion of the fixed rate Eurobonds interest expense to floating rate at a
spread over six month EURIBOR. This was designated as a fair value hedge. The first interest rate
setting occurred on August 7, 2004 and was reset each six-month period thereafter until maturity.
Interest accrued related to these swaps was not material for the periods presented.
In May 2006, the Company entered into multiple forward starting swaps to lock the underlying
interest rate on the notional amount of 175 million euro in connection with the July 6, 2006
issuance of the Notes (see Note 12 – Debt and Lines of Credit). These swaps were terminated on June
29, 2006 and the Company subsequently received payment of 1.0 million euro. This amount, net of
tax, was recorded in Accumulated other comprehensive loss and will continue to be reclassified into
earnings over the seven year term of the Notes. The amount reclassified out of Accumulated other
comprehensive loss was not significant for the years ended December 29, 2007 and December 30, 2006.
F-33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 14: STREAMLINING INITIATIVES
2007
Actions
On July 11, 2007, the Company provided details of its long-term strategic plan. The major elements of the Company’s
strategy include the following:
|
– |
|
Realigning its organization into two new reporting segments: Direct Brands (comprised of
our JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX retail-based lifestyle brands) and
Partnered Brands (comprised of LIZ CLAIBORNE and other Company-owned and licensed
wholesale-based brands). The strategic realignment reflects a brand-focused approach,
designed to optimize the operational coordination and resource allocation of the Company’s
businesses across multiple functional areas including specialty retail, retail outlets,
wholesale apparel, wholesale non-apparel, e-commerce and licensing; |
|
|
– |
|
Conducting a review of strategic alternatives, including possible divestiture,
discontinuation or licensing of sixteen of the Company’s brands: |
|
– |
|
On October 4, 2007, the Company completed the sale of its EMMA JAMES,
INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands. The Company also announced the
consolidation of its TINT brand into LIZ & CO. and STAMP 10 brand into AXCESS
and the closure of its FIRST ISSUE brand. |
|
|
– |
|
On February 4, 2008, the Company completed the sale of its C & C CALIFORNIA and
LAUNDRY BY DESIGN brands. The Company also announced retention of ENYCE and closure of
SIGRID OLSEN, expected to be completed in the first half of 2008. |
|
|
– |
|
On January 17, 2008, the Company announced an exclusive license agreement with
Kohl’s, naming Kohl’s as the exclusive retailer for the DANA BUCHMAN brand. |
|
|
– |
|
On February 1, 2008, the Company announced the sale of its prAna brand, which is expected to close in the first quarter of 2008. |
|
|
– |
|
On February 14, 2008, the Company announced the sale of its ELLEN TRACY brand, which is expected to close in the second quarter of 2008. |
|
|
– |
|
The remaining brands currently under review are KENSIE and MAC & JAC, which review is expected to be completed in the first quarter of 2008. |
|
– |
|
Implementing and maintaining a more competitive cost structure: the Company has
accelerated its structural realignment and other initiatives to achieve cost savings targets
through staff reductions, closing and consolidations of distribution facilities and office space,
discretionary expense cuts, process re-engineering and supply chain cost rationalization. |
The above mentioned announcements followed the Company’s streamlining activities announced in 2006.
2006
Actions
In February 2006 and October 2006, the Company announced initiatives to streamline its operations
to increase efficiency and more closely align its businesses with customer and consumer needs.
These efforts included the redeployment of resources in order to better capitalize on compelling
growth opportunities across a number of our brands.
For the period ended December 29, 2007, the Company recorded $120.7 million ($78.0 million
after-tax) related to this initiative, including $49.8 million of payroll and
related costs, $20.7 million of lease termination costs, $44.0 million of fixed asset write-downs
and disposals and $6.1 million of other costs. Approximately $44.7 million of these charges were
non-cash. The Company expects to pay substantially all accrued streamlining costs by the end of
the first half of 2008. For the year ended December 30, 2006, the Company recorded $81.6 million
($51.3 million after-tax) related to this initiative, including $41.9 million of payroll and
related costs, $10.2
F-34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
million of lease termination costs, $22.6 million of fixed asset write-downs
and disposals and $7.0 million of other costs. Approximately $22.6 million of these charges were
non-cash.
For the years ended December 29, 2007 and December 30, 2006, these expenses, primarily recorded in
SG&A in the Consolidated Statements of Operations, impacted business segments as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
|
December 29, |
|
|
December 30, |
|
In thousands |
|
2007 |
|
|
2006 |
|
|
|
|
Direct Brands |
|
$ |
37,193 |
|
|
$ |
31,139 |
|
Partnered Brands |
|
|
83,463 |
|
|
|
50,506 |
|
|
|
|
|
|
|
|
Total |
|
$ |
120,656 |
|
|
$ |
81,645 |
|
|
|
|
|
|
|
|
A summary rollforward of streamlining initiatives is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and |
|
|
Termination |
|
|
Fixed Asset |
|
|
|
|
|
|
|
In thousands |
|
Related Costs |
|
|
Costs |
|
|
Write-Downs |
|
|
Other Costs |
|
|
Total |
|
|
|
|
2006 provision |
|
$ |
41,856 |
|
|
$ |
10,202 |
|
|
$ |
22,617 |
|
|
$ |
6,970 |
|
|
$ |
81,645 |
|
2006 fixed asset write-downs |
|
|
— |
|
|
|
— |
|
|
|
(22,596 |
) |
|
|
— |
|
|
|
(22,596 |
) |
Translation difference |
|
|
458 |
|
|
|
35 |
|
|
|
(21 |
) |
|
|
(51 |
) |
|
|
421 |
|
2006 spending |
|
|
(27,944 |
) |
|
|
(4,776 |
) |
|
|
— |
|
|
|
(6,898 |
) |
|
|
(39,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006 |
|
|
14,370 |
|
|
|
5,461 |
|
|
|
— |
|
|
|
21 |
|
|
|
19,852 |
|
2007 provision |
|
|
49,826 |
|
|
|
20,719 |
|
|
|
44,004 |
|
|
|
6,107 |
|
|
|
120,656 |
|
2007 fixed asset write-downs |
|
|
— |
|
|
|
— |
|
|
|
(44,004 |
) |
|
|
— |
|
|
|
(44,004 |
) |
Translation difference |
|
|
604 |
|
|
|
171 |
|
|
|
— |
|
|
|
15 |
|
|
|
790 |
|
2007 spending |
|
|
(46,233 |
) |
|
|
(14,528 |
) |
|
|
— |
|
|
|
(5,918 |
) |
|
|
(66,679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007 |
|
$ |
18,567 |
|
|
$ |
11,823 |
|
|
$ |
— |
|
|
$ |
225 |
|
|
$ |
30,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 15: OTHER INCOME (EXPENSE), NET
Other income (expense), net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
December 31, 2005 |
|
|
Minority interest |
|
$ |
(1,104 |
) |
|
$ |
(1,213 |
) |
|
$ |
(1,813 |
) |
Other investment gain |
|
|
364 |
|
|
|
3,583 |
|
|
|
— |
|
Foreign currency
transaction (losses)
gains |
|
|
(3,719 |
) |
|
|
2,987 |
|
|
|
(451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(4,459 |
) |
|
$ |
5,357 |
|
|
$ |
(2,264 |
) |
|
|
|
|
|
|
|
|
|
|
F-35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 16: SHARE-BASED COMPENSATION
On
July 3, 2005, the Company adopted the provisions of SFAS No.
123(R) and since that time has recognized the cost of all employee share-based awards on a
straight-line attribution basis over their respective vesting periods, net of estimated
forfeitures. The Company selected the modified prospective method of transition; accordingly, prior
periods have not been restated. Prior to adopting SFAS No. 123(R), the Company applied APB Opinion
No. 25 and related Interpretations in accounting for its share-based compensation plans; all
employee stock options were granted at or above the grant date market price; accordingly, no
compensation cost was recognized for fixed stock option grants in prior to the adoption of SFAS
No.123(R).
The Company issues stock options and restricted shares as well as shares with performance features
to employees under share-based compensation plans. Stock options are issued at the current market
price, have a three-year vesting period and a contractual term of 7-10 years. As of December 29,
2007, the Company has not changed the terms of any outstanding awards.
Compensation expense for restricted stock awards is measured at fair value on the date of grant
based on the number of shares granted and the quoted market price of the Company’s common stock.
Such value is recognized as expense over the vesting period of the award, net of estimated
forfeitures.
The following table details the effect on net income and earnings per share “as reported” as if
compensation expense had been recorded for the period of January 2, 2005 through July 3, 2005 based
on the fair value method under SFAS No. 123, “Accounting for Stock-Based Compensation” (“pro
forma”). The reported and pro forma net income and earnings per share for the years ended December
29, 2007 and December 30, 2006 are the same since share-based compensation expense is calculated
under the provisions of SFAS No. 123(R) for such fiscal years.
|
|
|
|
|
|
|
Fiscal Year Ended |
|
In thousands except per share data |
|
December 31, 2005 |
|
|
Net income: |
|
|
|
|
As reported |
|
$ |
317,366 |
|
Add: Share-based employee compensation expense
included in reported net income, net of taxes
of $8,385 |
|
|
15,303 |
|
Less: Total share-based employee compensation
expense determined under fair value based
method for all awards*, net of taxes of $12,733 |
|
|
(23,235 |
) |
|
|
|
|
Pro forma |
|
$ |
309,434 |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
As reported |
|
$ |
2.98 |
|
Pro forma |
|
$ |
2.91 |
|
Diluted earnings per share: |
|
|
|
|
As reported |
|
$ |
2.94 |
|
Pro forma |
|
$ |
2.88 |
|
|
|
|
* |
|
“All awards” refers to awards granted, modified, or settled in fiscal periods beginning after
December 15, 1994 – that is, awards for which the fair value was required to be measured under
SFAS No. 123. |
F-36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Total share-based compensation expense was $19.4 million, $22.7 million and $23.7 million
for the fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005,
respectively, and $11.8 million, $14.2 million and $15.3 million net of tax for the fiscal years
ended December 29, 2007, December 30, 2006 and December 31, 2005, respectively. All share-based
compensation expense is inclusive of amounts related to discontinued operations, which are
insignificant for all periods presented.
The Company utilizes the Binomial lattice pricing model to estimate the fair value of options
granted. The Company believes this model provides the best estimate of fair value due to its
ability to incorporate inputs that change over time, such as volatility and interest rates, and to
allow for actual exercise behavior of option holders.
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Assumptions: |
|
December 29, 2007 |
|
December 30, 2006 |
|
December 31, 2005 |
|
Weighted-average fair
value of options granted |
|
$ |
10.06 |
|
|
$ |
10.05 |
|
|
$ |
12.91 |
|
Expected volatility |
|
23.1% to 39.5% |
|
23.1% to 39.5% |
|
28.8% to 42.0% |
Weighted-average volatility |
|
|
25.6% |
|
|
|
23.9% |
|
|
|
29.4% |
|
Expected term (in years) |
|
|
4.5 |
|
|
|
4.6 |
|
|
|
5.2 |
|
Dividend yield |
|
|
0.63% |
|
|
|
0.59% |
|
|
|
0.55% |
|
Risk-free rate |
|
4.4% to 5.2% |
|
4.4% to 5.1% |
|
3.2% to 4.6% |
Expected annual forfeiture |
|
|
10.0% |
|
|
|
7.9% |
|
|
|
9.3% |
|
Expected volatilities are based on a term structure of implied volatility, which assumes changes in
volatility over the life of an option. The Company utilizes historical optionee behavioral data to
estimate the option exercise and termination rates that are used in the valuation model. The
expected term represents an estimate of the period of time options are expected to remain
outstanding. The expected term provided in the above table represents an option weighted-average
expected term based on the estimated behavior of distinct groups of employees who received options
in 2007, 2006 and 2005. The range of risk-free rates is based on a forward curve of interest rates
at the time of option grant.
Stock
Plans
In March 1992, March 2000, March 2002 and March 2005, the Company adopted the “1992 Plan,” the
“2000 Plan,” the “2002 Plan” and the “2005 Plan” respectively, under which options (both
nonqualified options and incentive stock options) to acquire shares of common stock may be granted
to officers, other key employees, consultants and, in the case of the 1992, 2000 and 2005 plans,
outside directors, in each case as selected by the Company’s Compensation Committee (the
“Committee”). Payment by option holders upon exercise of an option may be made in cash or, with
the consent of the Committee, by delivering previously acquired shares of Company common stock or
any other method approved by the Committee. If previously acquired shares are tendered as payment,
the shares are subject to a six-month holding period, as well as specific authorization by the
Committee. To date, this type of exercise has not been approved or transacted. The Committee has
the authority under all of the plans to allow for a cashless exercise option, commonly referred to
as a “broker-assisted exercise.” Under this
method of exercise, participating employees must
make a valid exercise of their stock options through a designated broker. Based on the exercise and
information provided by the Company, the broker sells the shares on
the open market. The employees
receive cash upon settlement, some of which is used to pay the purchase price. Neither the
stock-for-stock nor broker-assisted cashless exercise option are generally available to executive
officers or directors of the Company. Although there are none currently outstanding, stock
appreciation rights may be granted in connection with all or any part of any option granted under
the plans, and may also be granted without a grant of a stock option. Vesting schedules will be
accelerated upon a change of control of the Company. Options and stock appreciation rights generally may
not be transferred during the lifetime of a holder.
Awards under the 2000, 2002 and 2005 Plans may also be made in the form of stock options, dividend
equivalent rights, restricted stock, unrestricted stock and performance shares, and in the case of
the 2005 Plan, restricted stock units. Exercise prices for awards under the 2000, 2002 and 2005
Plans are determined by the Committee; to date, all stock options have been granted at an exercise
price not less than the closing market value of the underlying shares on the date of grant.
F-37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The 2000 Plan provides for the issuance of up to 10,000,000 shares of common stock with respect to
options, stock appreciation rights and other awards. No incentive stock options may be granted
under the 2000 Plan after March 9, 2010. Upon shareholder approval of the 2000 Plan in May 2000,
the Company ceased issuing grants under the 1992 Plan; awards made there under prior to its
termination remain in effect in accordance with their terms. The 2002 Plan provides for the
issuance of up to 9,000,000 shares of common stock with respect to options, stock appreciation
rights and other awards. The 2002 plan expires in 2012. The 2005 Plan provides for the issuance
of up to 5,000,000 shares of common stock with respect to options, stock appreciation rights and
other awards. The 2005 plan expires in 2015, but no performance-based awards may be granted after
the fifth anniversary of the 2005 Plan’s adoption. As of
December 29, 2007, 7,876,532 shares were available
for future grant under the 2000, 2002 and 2005 Plans.
The Company delivers treasury shares upon the exercise of stock options. The difference between the
cost of the treasury shares, on a first-in, first-out basis, and the exercise price of the options
has been reflected in Stockholders’ Equity. If the exercise price of the options is higher than
the cost of the treasury shares, the amount is reflected in Capital in excess of par value. If the
exercise price of the options is lower than the cost of the treasury shares, the amount is
reflected in Retained earnings.
Stock Options
Changes in common shares under option for the fiscal year ended December 29, 2007 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Aggregate |
|
|
|
|
|
|
Weighted Average |
|
Remaining |
|
Intrinsic Value |
|
|
Shares |
|
Exercise Price |
|
Contractual Term |
|
($000) |
|
|
|
Beginning of year |
|
|
5,889,216 |
|
|
$ |
32.58 |
|
|
|
5.8 |
|
|
$ |
64,519 |
|
Granted |
|
|
809,600 |
|
|
|
36.51 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,560,987 |
) |
|
|
27.71 |
|
|
|
|
|
|
$ |
22,592 |
|
Cancelled |
|
|
(501,420 |
) |
|
|
37.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
|
4,636,409 |
|
|
$ |
34.33 |
|
|
|
5.3 |
|
|
$ |
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest |
|
|
4,457,586 |
|
|
$ |
34.22 |
|
|
|
5.2 |
|
|
$ |
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
3,390,971 |
|
|
$ |
32.98 |
|
|
|
5.0 |
|
|
$ |
204 |
|
The total intrinsic value of options exercised during the fiscal years ended December 29, 2007,
December 30, 2006 and December 31, 2005 was $22.6 million, $29.1 million, and $19.1 million,
respectively.
As of December 29, 2007, there was $8.1 million of total unrecognized compensation cost related to
nonvested stock options granted under the Company’s stock option plans. That cost is expected to be
recognized over a weighted average period of 2.1 years. The total fair value of shares vested for
the years ended December 29, 2007, December 30, 2006 and December 31, 2005 was $19.0 million, $21.8
million and $28.0 million, respectively.
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
Restricted Stock
From 2001 through 2004, the Committee granted a total of 233,966 shares of restricted stock under
the 2000 Plan to a group of key executives. In 2005, the committee granted an additional 10,000
shares under the 2002 Plan to a key executive. As of December 29, 2007, 10,000 of these shares
remained outstanding. These shares are subject to restrictions on transfer and risk of forfeiture
until earned by continued service and vest as follows: 20 percent on each of the third, fourth and
fifth grant date anniversary, and the remaining 40 percent on the sixth grant date anniversary,
with acceleration of vesting upon the achievement of certain financial and non-financial goals. The
unearned compensation is being amortized over a period equal to the anticipated vesting period.
The Company’s former CEO retired at the end of 2006 when his contract expired. Upon his
retirement, all restricted shares previously awarded vested as of
December 30, 2006 and were released,
net of shares withheld for taxes, at that time. Additionally, in January 2007, 119,391 shares were
released, net of shares withheld for taxes, based on the Committee’s assessment of the extent to
which the performance targets related to previously granted restricted shares were achieved. These
net shares issued, as well as all options outstanding, continue to be subject to certain holding
requirements.
In November 2006, pursuant to the terms of his employment agreement, the Company’s CEO and member
of its Board of Directors, William L. McComb, was granted by the Committee: (a) options to purchase
185,200 shares of the Company’s common stock that will vest 25% on the first anniversary of the
grant date, 25% on the second anniversary and 50% on the third anniversary; (b) “premium priced”
options (options with an exercise price equal to 120% of the closing price on the date of grant) to
purchase 63,150 shares of the Company’s common stock that will vest 25% on the first anniversary of
the grant date, 25% on the second anniversary and 50% on the third anniversary; (c) 76,355
restricted shares, which vest in three equal installments on the first three anniversaries
of grant; and (d) 62,500 restricted shares which shares vested in full on the fifth anniversary of
grant. The shares received upon exercise of the options, as well as the other restricted
shares, are subject to certain transfer restrictions that will lapse in full on December 31, 2010.
The
Company’s non-employee Directors receive an annual grant of
shares of Common Stock with a value of $100,000 as part of
their annual retainer for serving on the Board of Directors. Retainer
share grants to non-employee Directors are made pursuant to the 2000 Plan, the 2002 Plan or the
2005 Plan. Retainer shares are non-transferable until the first anniversary of the grant, with 25
percent becoming transferable on each of the first and second anniversary of the grant and 50
percent becoming transferable on the third anniversary, subject to certain exceptions.
In 2004, the Committee granted 724,000 restricted shares to a group of key executives. As of
December 29, 2007, 227,500 of these shares remained outstanding. These shares are subject to
restrictions on transfer and subject to risk of forfeiture until earned by continued employment.
The restrictions expire in January 2010. The expiration of restrictions may be accelerated if the
total return on the Company’s common stock exceeds that of a predetermined group of competitors or
upon the occurrence of certain other events. The unearned compensation is being amortized over a
period equal to the anticipated vesting period.
In January 2006, the Committee granted 166,500 shares of restricted stock to a group of key
executives. As of December 29, 2007, 27,800 shares remained outstanding and 122,550 shares have
vested. Shares vest in equal installments based upon achievement of certain financial performance
metrics during the third and fourth quarters of 2006, with one-half of the shares vesting on or
before March 31, 2007 and one-half vesting on January 1, 2008, subject to continued employment with
the Company and confirmation by the Committee that the performance metrics were achieved.
In July 2007, the Committee approved the issuance of Performance Share Awards to certain of its
employees, including the Company’s executive officers. Performance Shares are earned based on the
achievement of certain profit generation, profitability and return on
capital targets aligned with the Company’s strategy, for performance through fiscal year 2009,
with the number of shares earned ranging from 0 to 150% of the target amount, or 190,000 shares.
In fiscal years 2007, 2006 and 2005, the Committee granted a total of 1,702,500 restricted
shares to a group of domestic and international employees who, in previous years, would have been
entitled to a grant of stock options. As of December 29, 2007, 954,610 of these shares remained
outstanding. These shares are subject to
F-39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
restrictions on transfer and subject to risk of
forfeiture until earned by continued employment and vest 50 percent on each of the second and third
grant date anniversary. The unearned compensation is being amortized over a period equal to the
anticipated vesting period.
The change in restricted shares for the year ended December 29, 2007 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Shares |
|
Grant Price |
|
Beginning of year |
|
|
1,718,493 |
|
|
$ |
37.63 |
|
Granted |
|
|
905,918 |
|
|
|
40.36 |
|
Vested |
|
|
(513,852 |
) |
|
|
39.38 |
|
Cancelled |
|
|
(572,180 |
) |
|
|
38.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
|
1,538,379 |
|
|
$ |
38.42 |
|
|
|
|
|
|
|
|
|
|
The weighted average grant date fair value of restricted shares granted in the years ended December
29, 2007, December 30, 2006 and December 31, 2005 was $40.36, $38.89 and $40.72, respectively.
As of December 29, 2007, there was $23.2 million of total unrecognized compensation cost related to
nonvested restricted share awards granted under the restricted stock plans. That cost is expected
to be recognized over a weighted average period of 1.9 years. The total fair value of shares vested
during the years ended December 29, 2007, December 30, 2006 and December 31, 2005 was $20.2
million, $5.8 million and $0.7 million, respectively.
NOTE 17: PROFIT-SHARING RETIREMENT, SAVINGS AND DEFERRED COMPENSATION PLANS
The Company maintains a qualified defined contribution plan (the “401(k)/Profit Sharing Plan”) for
eligible U.S. employees of the Company and adopting affiliates, which has two component parts: a
cash or deferred arrangement under section 401(k) of the Internal Revenue Code, and employee
matching contributions including a discretionary profit sharing component. To be eligible to
participate in either component of the 401(k)/Profit Sharing Plan, employees must be at least age
21 and not covered by a collective bargaining agreement. There are additional eligibility and
vesting rules for each of the 401(k)/Profit Sharing Plan components. Full-time employees may begin
to make pre-tax contributions and receive employer-matching contributions to the 401(k) component
of the 401(k)/Profit Sharing Plan after six months of employment with the Company, while part-time
employees must complete a 12-month period in which they are credited with 1,000 hours of service.
An employee becomes eligible for the profit sharing component upon completion of 12 months and
1,000 hours of service. Once eligible, a participant must be credited with 1,000 hours of service
during a plan year and be employed by the Company, or one of its affiliates, on the last day of
the calendar year to share in the profit sharing contribution for that year.
The Company’s aggregate 401(k)/Profit Sharing Plan contribution expense for 2007, 2006 and 2005,
which is included in SG&A expenses, was $4.4 million, $7.0 million and $11.0 million, respectively.
F-40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The Company has a non-qualified supplemental retirement plan for certain employees whose benefits
under the 401(k)/Profit Sharing Plan are expected to be constrained by the operation of certain
Internal Revenue Code limitations. The supplemental plan provides a benefit equal to the difference
between the contribution that would be made for an employee under the tax-qualified plan absent
such limitations and the actual contribution under that plan. The supplemental plan also allows
certain employees to defer up to 50 percent of their base salary and up to 100 percent of their
annual bonus. The Company established an irrevocable “rabbi” trust to which the Company made
periodic contributions to provide a source of funds to assist in meeting its obligations under the
supplemental plan. The principal of the trust and earnings thereon, are to be used exclusively for
the participants under the plan, subject to the claims of the Company’s general creditors.
NOTE 18: STOCKHOLDER RIGHTS PLAN
In December 1998, the Company adopted a new Stockholder Rights Plan to replace the then expiring
plan originally adopted in December 1988. Under the new Plan, one preferred stock purchase right is
attached to each share of common stock outstanding. The rights are nominally exercisable under
certain circumstances, to buy 1/100 share of a newly created Series A Junior Participating
Preferred Stock for $150. If any person or group (referred to as an “Acquiring Person”) becomes the
beneficial owner of 15 percent or more of the Company’s common stock (20 percent or more in the
case of certain acquisitions by institutional investors), each right, other than rights held by the
Acquiring Person which become void, will become exercisable for common stock having a market value
of twice the exercise price of the right. If anyone becomes an Acquiring Person and afterwards the
Company or 50 percent or more of its assets is acquired in a merger, sale or other business
combination, each right (other than voided rights) will become exercisable for common stock of the
acquirer having a market value of twice the exercise price of the right. The rights, which expire
on December 21, 2008, do not have voting rights and may be amended by the Company’s Board of
Directors and redeemed by the Company at $0.01 per right at any time before any person or group
becomes an Acquiring Person.
F-41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 19: EARNINGS PER COMMON SHARE
The following is an analysis of basic and diluted (loss) earnings per common share (“EPS”) in
accordance with SFAS No. 128, “Earnings per Share.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands except per share data |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
December 31, 2005 |
|
(Loss) income from continuing operations |
|
$ |
(370,020 |
) |
|
$ |
220,916 |
|
|
$ |
291,772 |
|
Income from discontinued operations, net of tax |
|
|
4,495 |
|
|
|
33,769 |
|
|
|
25,594 |
|
Loss on disposal of discontinued operations, net of tax |
|
|
(7,273 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(372,798 |
) |
|
$ |
254,685 |
|
|
$ |
317,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding (a) |
|
|
99,800 |
|
|
|
101,989 |
|
|
|
106,354 |
|
Stock options and restricted stock grants (a)(b)(c) |
|
|
— |
|
|
|
1,494 |
|
|
|
1,565 |
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding (a) |
|
|
99,800 |
|
|
|
103,483 |
|
|
|
107,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(3.71 |
) |
|
$ |
2.17 |
|
|
$ |
2.74 |
|
Income from discontinued operations |
|
|
0.04 |
|
|
|
0.33 |
|
|
|
0.24 |
|
Loss on disposal of discontinued operations |
|
|
(0.07 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3.74 |
) |
|
$ |
2.50 |
|
|
$ |
2.98 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations |
|
$ |
(3.71 |
) |
|
$ |
2.13 |
|
|
$ |
2.70 |
|
Income from discontinued operations |
|
|
0.04 |
|
|
|
0.33 |
|
|
|
0.24 |
|
Loss on disposal of discontinued operations |
|
|
(0.07 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(3.74 |
) |
|
$ |
2.46 |
|
|
$ |
2.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Because the Company incurred a loss from continuing operations in 2007, outstanding
stock options and restricted shares are anti-dilutive. Accordingly, basic and diluted
weighted average shares outstanding are equal for such period. |
|
(b) |
|
Options to purchase 63,000 and 2,957,000 shares of common stock were outstanding as
for fiscal years 2006 and 2005, respectively, but were not included in the computation of
diluted EPS for the years then ended because such options were anti-dilutive. |
|
(c) |
|
Excludes restricted stock for which the performance period has not yet lapsed and
criteria have not yet been achieved. |
F-42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 20: CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During fiscal 2007, 2006 and 2005, the Company made income tax payments of approximately $63.7
million, $141.0 million and $174.2 million, respectively. The Company made interest payments of
approximately $49.6 million, $36.7 million and $33.0 million in 2007, 2006 and 2005, respectively.
On November 21, 2006, the Company entered into a seven year capital lease with a financial
institution totaling $30.6 million. The purpose of the lease was to finance the equipment
associated with its distribution facilities in Ohio and Rhode Island, which had been previously
financed through our 2001 synthetic lease, which matured in 2006. There were no other non-cash
activities in the years ended December 29, 2007, December 30, 2006 or December 31, 2005.
NOTE 21: SEGMENT REPORTING
In the second quarter of 2007, the Company revised its segment reporting structure to reflect the
strategic realignment of its businesses and internal reporting. The strategic realignment reflects
a brand-focused approach, designed to optimize the operational coordination and resource allocation
of the Company’s businesses across multiple functional areas including specialty retail, retail
outlets, wholesale apparel, wholesale non-apparel, e-commerce and licensing. Prior periods have
been conformed to the current period’s presentation. The two reportable segments described below
represent the Company’s brand based activities for which separate financial information is
available and which is utilized on a regular basis by its CODM to evaluate performance and allocate
resources. In identifying its segments, the Company considers economic characteristics, as well as
products, customers, sales growth potential and long-term profitability. The Company aggregates its
operating segments to form reportable segments, where applicable. As such, the Company reports its
operations in two reportable segments as follows:
|
• |
|
The Direct Brands segment — consists of the specialty retail, outlet, wholesale
apparel, wholesale non-apparel (including accessories, jewelry, handbags and fragrances),
e-commerce and licensing operations of the Company’s four retail-based brands: JUICY
COUTURE, KATE SPADE, LUCKY BRAND and MEXX; and |
|
|
• |
|
The Partnered Brands segment — consists of the wholesale apparel, wholesale non-apparel,
outlet and specialty retail, e-commerce and licensing operations of the Company’s
wholesale-based brands including: AXCESS, CLAIBORNE (men’s), CONCEPTS BY CLAIBORNE,
DANA BUCHMAN, ELLEN TRACY, ENYCE, KENSIE, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA,
MONET, NARCISO RODRIGUEZ, SIGRID OLSEN, TRIFARI, VILLAGER, the Company’s licensed DKNY®
JEANS and DKNY® ACTIVE brands as well as the Company’s other non-Direct Brands fragrances
including: CLAIBORNE, CURVE, ELLEN TRACY, LIZ CLAIBORNE and our licensed USHER fragrance. |
As
discussed in Note 1 – Basis of Presentation and Significant
Accounting Policies, certain assets
and liabilities of the C & C CALIFORNIA, LAUNDRY BY DESIGN and prAna brands, as well as the assets
associated with the Company’s closed distribution center, have been segregated and reported as held
for sale as of December 29, 2007. The activities of these brands, as well as those of EMMA JAMES,
INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE, previously included in the Partnered Brands Segment,
have been segregated and reported as discontinued operations for all periods presented. Summarized
financial data for the aforementioned brands are provided in Note 3 — Discontinued Operations.
The Company also announced the consolidation of its STAMP 10 and TINT brands into its
AXCESS and LIZ & CO. brands, respectively, and the closure of its FIRST ISSUE brand, which
occurred in early 2008.
F-43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
The Company’s Chief Executive Officer has been identified as the CODM. The CODM evaluates
performance and allocates resources based primarily on operating income of each reportable
segment. The accounting policies of the Company’s reportable segments are the same as those
described in Note 1 – Basis of Presentation and Significant Accounting Policies. There are no
inter-segment sales or transfers. The Company also presents its results on a geographic basis
based on selling location, between Domestic (wholesale customers, Company specialty retail and
outlet stores located in the United States and e-commerce sites) and International (wholesale
customers and Company specialty retail, outlet and concession stores located outside of the
United States). The Company, as licensor, also licenses to third parties the right to produce and
market products bearing certain Company-owned trademarks; the resulting royalty income is included
within the results of the associated segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
December 29, 2007 |
|
December 30, 2006 |
|
December 31, 2005 |
|
|
Direct |
|
Partnered |
|
|
|
|
|
Direct |
|
Partnered |
|
|
|
|
|
Direct |
|
Partnered |
|
|
In thousands |
|
Brands |
|
Brands |
|
Totals |
|
Brands |
|
Brands |
|
Totals |
|
Brands |
|
Brands |
|
Totals |
|
Total net sales |
|
$ |
2,257,874 |
|
|
$ |
2,319,377 |
|
|
$ |
4,577,251 |
|
|
$ |
1,883,991 |
|
|
$ |
2,759,945 |
|
|
$ |
4,643,936 |
|
|
$ |
1,625,307 |
|
|
$ |
2,960,880 |
|
|
$ |
4,586,187 |
|
% to total |
|
|
49.3 |
% |
|
|
50.7 |
% |
|
|
100 |
% |
|
|
40.6 |
% |
|
|
59.4 |
% |
|
|
100 |
% |
|
|
35.4 |
% |
|
|
64.6 |
% |
|
|
100 |
% |
Depreciation and
amortization expense |
|
$ |
79,113 |
|
|
$ |
83,065 |
|
|
$ |
162,178 |
|
|
$ |
59,332 |
|
|
$ |
77,387 |
|
|
$ |
136,719 |
|
|
$ |
49,280 |
|
|
$ |
75,998 |
|
|
$ |
125,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
(loss) (a) |
|
$ |
205,927 |
|
|
$ |
(631,740 |
) |
|
$ |
(425,813 |
) |
|
$ |
205,625 |
|
|
$ |
175,889 |
|
|
$ |
381,514 |
|
|
$ |
242,720 |
|
|
$ |
241,486 |
|
|
$ |
484,206 |
|
% of sales |
|
|
9.1 |
% |
|
|
(27.2 |
)% |
|
|
(9.3 |
)% |
|
|
10.9 |
% |
|
|
6.4 |
% |
|
|
8.2 |
% |
|
|
14.9 |
% |
|
|
8.2 |
% |
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets (b) |
|
$ |
1,813,055 |
|
|
$ |
1,339,994 |
|
|
|
|
|
|
$ |
1,622,205 |
|
|
$ |
1,810,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for long-lived
assets |
|
$ |
161,191 |
|
|
$ |
68,029 |
|
|
$ |
229,220 |
|
|
$ |
357,901 |
|
|
$ |
59,936 |
|
|
$ |
417,837 |
|
|
$ |
159,432 |
|
|
$ |
115,011 |
|
|
$ |
274,443 |
|
|
|
|
(a) |
|
The Partnered Brands operating loss includes pre-tax, non-cash impairment
charges of (i) $36.3 million related to the Company’s ELLEN TRACY trademark and (ii)
$14.9 million related to property and equipment of the Company’s SIGRID OLSEN brand
and, (iii) $450.8 million related to the impairment of goodwill (see Note 1 – Basis of
Presentation and Summary of Significant Accounting Policies). |
|
(b) |
|
Amounts exclude unallocated Corporate assets of $50.1 million and $63.5
million at December 29, 2007 and December 30, 2006, respectively, and assets held for
sale of $65.3 million at December 29, 2007. |
F-44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
GEOGRAPHIC DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
|
|
December 29, 2007 |
|
December 30, 2006 |
|
December 31, 2005 |
|
|
Domestic |
|
International |
|
Domestic |
|
International |
|
Domestic |
|
International |
|
Total net sales |
|
$ |
3,092,752 |
|
|
$ |
1,484,499 |
|
|
$ |
3,249,001 |
|
|
$ |
1,394,935 |
|
|
$ |
3,324,482 |
|
|
$ |
1,261,705 |
|
% to total |
|
|
67.6 |
% |
|
|
32.4 |
% |
|
|
70.0 |
% |
|
|
30.0 |
% |
|
|
72.5 |
% |
|
|
27.5 |
% |
Depreciation and
amortization
expense |
|
$ |
104,850 |
|
|
$ |
57,328 |
|
|
$ |
87,537 |
|
|
$ |
49,182 |
|
|
$ |
80,645 |
|
|
$ |
44,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
income (loss)
(a) |
|
$ |
(476,782 |
) |
|
$ |
50,969 |
|
|
$ |
306,247 |
|
|
$ |
75,267 |
|
|
$ |
376,704 |
|
|
$ |
107,502 |
|
% of sales |
|
|
(15.4 |
)% |
|
|
3.4 |
% |
|
|
9.4 |
% |
|
|
5.4 |
% |
|
|
11.3 |
% |
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
2,002,687 |
|
|
$ |
1,200,448 |
|
|
$ |
2,268,333 |
|
|
$ |
1,227,435 |
|
|
|
|
|
|
|
|
|
Expenditures for
long-lived assets |
|
$ |
161,039 |
|
|
$ |
68,181 |
|
|
$ |
317,418 |
|
|
$ |
100,419 |
|
|
$ |
172,876 |
|
|
$ |
101,567 |
|
|
|
|
(a) |
|
The Domestic operating loss includes pre-tax, non-cash impairment charges of
(i) $36.3 million related to the Company’s ELLEN TRACY
trademark, (ii) $14.9 million
related to property and equipment of the Company’s SIGRID OLSEN brand and (iii) $450.8
million related to the impairment of goodwill (see Note 1 – Basis of Presentation and
Summary of Significant Accounting Policies). |
In connection with the realignment of its segment reporting structure, the Company reclassified its
segment assets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands |
| | | | |
December 29, 2007 |
|
|
December 30, 2006 |
|
SEGMENT ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct Brands |
|
|
|
|
|
$ |
1,813,055 |
|
|
$ |
1,622,205 |
|
Partnered Brands |
|
|
|
|
|
|
1,339,994 |
|
|
|
1,810,077 |
|
Corporate |
|
|
|
|
|
|
50,086 |
|
|
|
63,486 |
|
|
|
|
|
|
|
|
|
|
|
|
Assets of continuing operations |
|
|
|
|
|
|
3,203,135 |
|
|
|
3,495,768 |
|
Assets held for sale |
|
|
|
|
|
|
65,332 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
|
|
|
|
$ |
3,268,467 |
|
|
$ |
3,495,768 |
|
|
|
|
|
|
|
|
|
|
|
|
F-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 22: ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is comprised of the effects of foreign currency translation
and changes in unrealized gains and losses on securities, as detailed below:
|
|
|
|
|
|
|
|
|
In thousands |
|
December 29, 2007 |
|
|
December 30, 2006 |
|
|
Cumulative translation adjustment |
|
$ |
(18,272 |
) |
|
$ |
(55,271 |
) |
Losses on cash flow hedging derivatives, net of taxes of $2,321 and $495 |
|
|
(6,202 |
) |
|
|
(743 |
) |
Unrealized losses on securities, net of taxes of $46 and $99 |
|
|
(108 |
) |
|
|
(142 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of tax |
|
$ |
(24,582 |
) |
|
$ |
(56,156 |
) |
|
|
|
|
|
|
|
The losses on cash flow hedging derivatives are reclassified to current year gain or loss each year
due to the short lives of these instruments.
As
discussed in Note 13—Derivative Instruments, the Company hedges
its net investment position in euro functional subsidiaries by
designating the 350 million euro-denominated bonds as the hedging
instrument in a net investment hedge. As a result, the foreign
currency transaction gains and losses that are recognized on the
euro-denominated bonds in accordance with SFAS No. 52 are accounted
for as a component of accumulated other comprehensive loss. As of
December 29, 2007, the Company recorded a tax benefit of $19.4
million related to such foreign currency transaction gains and losses
in the cumulative translation adjustment account in other
comprehensive loss (a component of shareholders’ equity). This
tax benefit reduced taxes payable, the current year comprehensive
loss and accumulated comprehensive loss by an equal amount. Tax
benefits related to the cumulative translation account were not
reflected in the reported amounts for prior periods, and, as a result,
accumulated comprehensive loss and taxes payable at December 30,
2006 were overstated by approximately $16.2 million. The
Company’s results of operations and cash flows were not affected by this adjustment for the periods presented.
NOTE 23: RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements.” SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial
Statements” and requires (i) classification of noncontrolling interests, commonly referred to as
minority interests, within stockholders’ equity, (ii) net income to include the net income
attributable to the noncontrolling interest and (iii) enhanced disclosure of activity related to
noncontrolling interests. Currently, the Company classifies noncontrolling interests as
liabilities and excludes net income attributable to noncontrolling interests from net income. SFAS
No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently
assessing the impact of SFAS No. 160 on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations,” which provides
revised guidance for how an acquirer in a business combination recognizes and measures in its
financial statements (i) identifiable assets acquired, (ii) liabilities assumed, (iii)
noncontrolling interests in the acquiree and (iv) goodwill or a gain from a bargain purchase. SFAS
No. 141(R) also sets forth the disclosures required to be made in the financial statements related
to effects of a business combination. SFAS No. 141(R) applies to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Company will adopt the provisions of SFAS No. 141(R) as required.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS No. 159 allows
companies the choice to measure financial instruments and certain other items at fair value. This
allows the opportunity to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge accounting provisions.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not
believe adopting the provisions of SFAS No. 159 will have a significant impact on its consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair
value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The
Company does not believe adopting the provisions of SFAS No. 157 will have a significant impact on
its consolidated financial statements.
F-46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 24: RELATED PARTY TRANSACTIONS
During 2007, 2006 and 2005, the Company paid the law firm, Kramer, Levin, Naftalis & Frankel LLP,
of which Kenneth P. Kopelman (a Director of the Company) is a partner, approximately $0.8 million,
$2.0 million and $3.9 million, respectively, for fees incurred in connection with legal services
provided to the Company. The 2007 amount represents less than one percent of such firm’s 2007 fee
revenue. The foregoing transactions between the Company and this entity were effected on an
arm’s-length basis, with services provided at fair market value.
During 2007, 2006 and 2005, the Company leased a certain office facility from Amex Property B.V.
(“Amex”), a company whose principal owner is Rattan Chadha, former President and Chief Executive
Officer of Mexx, under a 20-year lease agreement, which commenced in 2001. The space houses the
principal headquarters of Mexx Group B.V. in Voorschoten, Netherlands. The rental paid to Amex
during fiscal years 2007, 2006 and 2005 was $0.7 million, $0.7 million and $0.7 million,
respectively, excluding a $1.6 million charge to terminate the lease in 2007.
The Company believes that each of the transactions described above was effected on terms no less
favorable to the Company than those that would have been realized in transactions with unaffiliated
entities or individuals.
NOTE 25: LEGAL PROCEEDINGS
The Company's previously owned Augusta, Georgia facility became listed during 2004 on the State of Georgia’s
Hazardous Site Inventory of environmentally impacted sites due to the detection of certain
chemicals at the site. In November 2005, the Georgia Department of Natural Resources requested
that the Company submit a compliance status report and compliance status certification regarding the site.
The Company submitted the requested materials in the second quarter of 2006. In October 2006, the
Company received a letter from the Department of Natural Resources
requesting that the Company provide
additional information and perform additional tests to complete the compliance status report, which
was previously submitted. Additional testing was completed and the Company submitted the results in the
second quarter of 2007. The Georgia Department of Natural Resources
has reviewed the Company’s submission
and has requested certain modifications to the response and some minimal additional testing. The Company
has submitted the modified response and additional testing results.
The Company is a party to several pending legal proceedings and claims. Although the outcome of any
such actions cannot be determined with certainty, management is of the opinion that the final
outcome of any of these actions should not have a material adverse effect on the Company’s
financial position, results of operations, liquidity or cash flows.
F-47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 26: SUBSEQUENT EVENTS
On
January 17, 2008, the Company entered into an exclusive license
agreement with Kohl’s, naming
Kohl’s as the exclusive retailer for the DANA BUCHMAN brand.
Under the arrangement, the DANA BUCHMAN brand will be designed by the
Company, and Kohl’s will lead the manufacturing, production,
distribution and marketing of the brand. As a result, the Company
expects to close our current DANA BUCHMAN operations in the first half of 2008 and that the launch
of the DANA BUCHMAN line in Kohl’s stores will occur no later than the first quarter of 2009.
On February 1, 2008, the Company entered a definitive agreement to sell substantially all of the assets and
liabilities of its prAna brand to the former owners of prAna and Steelpoint Capital Partners for
consideration of $36.5 million and a contingent payment of up to $4.0 million based on 2008 EBITDA.
In connection with the disposition, the Company will settle the contingent earn out obligation
resulting from its 2005 acquisition of prAna with an $18.4 million payment to the prAna founders.
On February 4, 2008, the Company completed the sale of substantially all of the assets and liabilities of its former C&C CALIFORNIA
and LAUNDRY brands for net cash proceeds of $33.1 million.
Also, on February 14, 2008, the Company entered a definitive agreement to sell substantially all of the assets and
liabilities of its ELLEN TRACY brand to a group of investors, including Radius Partners, LLC, for
consideration of $27.3 million, subject to adjustment, and a contingent cash payment of up to $15.0
million based on performance from 2008 through 2012.
F-48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
NOTE 27: UNAUDITED QUARTERLY RESULTS
Unaudited quarterly financial information for 2007 and 2006 is set forth in the table below.
Certain amounts relating to the first and second quarters of 2007 and 2006 have been revised from
those previously reported in the Company’s quarterly filings on Form 10-Q in order to present the
C&C CALIFORNIA, LAUNDRY BY DESIGN, prAna, EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE
brands as discontinued operations. Certain amounts relating to the third quarter of 2007 and 2006
have been revised from those previously reported in the Company’s quarterly filings on Form 10-Q in
order to present the C&C CALIFORNIA, LAUNDRY BY DESIGN and prAna brands as discontinued operations.
See Note 3 — Discontinued Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March |
|
|
June |
|
|
September |
|
|
December |
|
In thousands except per share data |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
Net sales |
|
$ |
1,073,428 |
|
|
$ |
1,072,393 |
|
|
$ |
1,059,222 |
|
|
$ |
1,044,724 |
|
|
$ |
1,236,533 |
|
|
$ |
1,278,840 |
|
|
$ |
1,208,068 |
|
|
$ |
1,247,979 |
|
Gross profit |
|
|
501,475 |
|
|
|
506,721 |
|
|
|
523,771 |
|
|
|
516,644 |
|
|
|
597,515 |
|
|
|
616,671 |
|
|
|
542,965 |
|
|
|
620,203 |
|
Income (loss) from continuing operations,
net of tax |
|
|
10,884 |
(2) |
|
|
35,245 |
(3) |
|
|
10,479 |
(4) |
|
|
31,630 |
(5) |
|
|
32,839 |
(6) |
|
|
86,801 |
(7) |
|
|
(424,222 |
)(8) |
|
|
67,240 |
(9) |
Income (loss) from discontinued
operations, net of tax |
|
|
5,314 |
|
|
|
11,692 |
|
|
|
3,152 |
|
|
|
7,785 |
|
|
|
2,680 |
|
|
|
8,369 |
|
|
|
(6,651 |
) |
|
|
5,923 |
|
Loss on disposal of discontinued
operations, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,468 |
) |
|
|
— |
|
|
|
(4,805 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
16,198 |
|
|
$ |
46,937 |
|
|
$ |
13,631 |
|
|
$ |
39,415 |
|
|
$ |
33,051 |
|
|
$ |
95,170 |
|
|
$ |
(435,678 |
) |
|
$ |
73,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations |
|
$ |
0.11 |
(2) |
|
$ |
0.34 |
(3) |
|
$ |
0.10 |
(4) |
|
$ |
0.31 |
(5) |
|
$ |
0.33 |
(6) |
|
$ |
0.86 |
(7) |
|
$ |
(4.43 |
)(8) |
|
$ |
0.66 |
(9) |
Income (loss) from discontinued
operations |
|
|
0.05 |
|
|
|
0.11 |
|
|
|
0.03 |
|
|
|
0.07 |
|
|
|
0.02 |
|
|
|
0.08 |
|
|
|
(0.07 |
) |
|
|
0.06 |
|
Loss on disposal of discontinued
operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.02 |
) |
|
|
— |
|
|
|
(0.05 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.16 |
|
|
$ |
0.45 |
|
|
$ |
0.13 |
|
|
$ |
0.38 |
|
|
$ |
0.33 |
|
|
$ |
0.94 |
|
|
$ |
(4.55 |
) |
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per
share:
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations |
|
$ |
0.11 |
(2) |
|
$ |
0.34 |
(3) |
|
$ |
0.10 |
(4) |
|
$ |
0.31 |
(5) |
|
$ |
0.33 |
(6) |
|
$ |
0.85 |
(7) |
|
$ |
(4.43 |
)(8) |
|
$ |
0.65 |
(9) |
Income (loss) from discontinued
operations |
|
|
0.05 |
|
|
|
0.11 |
|
|
|
0.03 |
|
|
|
0.07 |
|
|
|
0.02 |
|
|
|
0.08 |
|
|
|
(0.07 |
) |
|
|
0.06 |
|
Loss on disposal of discontinued
operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.02 |
) |
|
|
— |
|
|
|
(0.05 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.16 |
|
|
$ |
0.45 |
|
|
$ |
0.13 |
|
|
$ |
0.38 |
|
|
$ |
0.33 |
|
|
$ |
0.93 |
|
|
$ |
(4.55 |
) |
|
$ |
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share |
|
$ |
.06 |
|
|
$ |
.06 |
|
|
$ |
.06 |
|
|
$ |
.06 |
|
|
$ |
.06 |
|
|
$ |
.06 |
|
|
$ |
.06 |
|
|
$ |
.06 |
|
F-49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Liz Claiborne, Inc. and Subsidiaries
|
|
|
(1) |
|
Because the Company incurred a loss from continuing operations for the 4th quarter
of 2007, outstanding stock options and restricted shares are anti-dilutive. Accordingly,
basic and diluted weighted average shares outstanding are equal for such period. |
|
(2) |
|
Includes the after-tax effect of expenses related to streamlining initiatives of
$4.5 million ($7.0 million pre-tax) or $0.04 per share. |
|
(3) |
|
Includes the after-tax effect of expenses related to streamlining initiatives of
$15.5 million ($24.2 million pre-tax) or $0.15 per share. |
|
(4) |
|
Includes the after-tax effect of expenses related to streamlining initiatives of
$13.2 million ($20.5 million pre-tax) or $0.13 per share |
|
(5) |
|
Includes the after-tax effect of expenses related to streamlining initiatives of
$5.5 million ($9.2 million pre-tax) or $0.05 per share. |
|
(6) |
|
Includes the after-tax effect of expenses related to streamlining initiatives of
$13.5 million ($21.4 million pre-tax) or $0.13 per share and a non-cash impairment charge of
$7.5 million ($12.3 million pre-tax) or $0.07 per share related to the Company’s ELLEN TRACY
trademark. |
|
(7) |
|
Includes the after-tax effect of expenses related to streamlining initiatives of
$8.1 million ($12.7 million pre-tax) or $0.08 per share. |
|
(8) |
|
Includes (i) the after-tax effect of a non-cash goodwill impairment charge of $343.1
million ($450.8 million pre-tax) or $3.58 per share, (ii) the after-tax effect of expenses
related to streamlining initiatives of $46.8 million ($71.8 million pre-tax) or $0.49 per
share and (iii) a non-cash impairment charge of $14.5 million ($24.0 million pre-tax) or $0.15
per share related to the Company’s ELLEN TRACY trademark. |
|
(9) |
|
Includes the after-tax effect of expenses related to streamlining initiatives of
$22.2 million ($35.6 million pre-tax) or $0.22 per share. |
F-50
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Liz Claiborne, Inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
Balance at |
|
Charged |
|
|
|
|
|
|
|
|
(In thousands) |
|
Beginning |
|
to Costs and |
|
Charged to |
|
|
|
|
|
Balance at |
Description |
|
of Period |
|
Expenses |
|
Other Accounts |
|
Deductions |
|
End of Period |
|
YEAR ENDED DECEMBER 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable -
allowance for doubtful
accounts |
|
$ |
4,930 |
|
|
$ |
3,809 |
|
|
$ |
— |
|
|
$ |
2,118 |
(A) |
|
$ |
6,621 |
|
Allowance for Returns |
|
$ |
43,036 |
|
|
$ |
246,343 |
|
|
$ |
— |
|
|
$ |
238,691 |
|
|
$ |
50,688 |
|
Allowance for Discounts |
|
$ |
9,842 |
|
|
$ |
73,979 |
|
|
$ |
— |
|
|
$ |
76,765 |
|
|
$ |
7,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable -
allowance for doubtful
accounts |
|
$ |
4,443 |
|
|
$ |
1,410 |
|
|
$ |
— |
|
|
$ |
923 |
(A) |
|
$ |
4,930 |
|
Allowance for Returns |
|
$ |
34,647 |
|
|
$ |
184,849 |
|
|
$ |
— |
|
|
$ |
176,460 |
|
|
$ |
43,036 |
|
Allowance for Discounts |
|
$ |
13,476 |
|
|
$ |
87,442 |
|
|
$ |
— |
|
|
$ |
91,076 |
|
|
$ |
9,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Receivable -
allowance for doubtful
accounts |
|
$ |
2,450 |
|
|
$ |
4,144 |
|
|
$ |
— |
|
|
$ |
2,151 |
(A) |
|
$ |
4,443 |
|
Allowance for Returns |
|
$ |
40,387 |
|
|
$ |
173,407 |
|
|
$ |
— |
|
|
$ |
179,147 |
|
|
$ |
34,647 |
|
Allowance for Discounts |
|
$ |
14,969 |
|
|
$ |
114,265 |
|
|
$ |
— |
|
|
$ |
115,758 |
|
|
$ |
13,476 |
|
|
|
|
(A) |
|
Uncollectible accounts written off, less recoveries. |
F-51