Liz Claiborne Takeover Seen With Allure of Kate Spade: Real M&A

Liz Claiborne Takeover Seen With Allure of Kate Spade
Liz Claiborne tags appear on garments at a J.C.Penney Co. department store. Photographer: Emile Wamsteker/Bloomberg

Even after losing more money last year than any other U.S. clothing retailer, Liz Claiborne Inc. could still be a bargain in a takeover.

The $1.3 billion owner of the Kate Spade brand will return to profitability in 2012, reversing five years of losses that topped $2 billion, according to analysts’ estimates compiled by Bloomberg. With revenue projected to rise 14 percent next year, New York-based Liz Claiborne still closed yesterday at $12.36 a share, a 28 percent discount to 2013 sales. That’s cheaper than 94 percent of similar-sized U.S. apparel companies, data compiled by Bloomberg show.

Liz Claiborne, which is changing its name to Fifth & Pacific Cos. next month, may lure buyers from private-equity firms to Warnaco Group Inc. or VF Corp., according to Imperial Capital LLC, after selling its namesake brand and other units last year. The remaining lines -- Kate Spade, Juicy Couture and Lucky Brand, which are higher priced and contemporary -- could fetch $20 a share in a takeover, said Monness, Crespi, Hardt & Co. An acquirer could then benefit from splitting the three brands into separate companies, said Jim Chartier at Monness.

“It’s a completely different company now than six months ago,” Casey Flavin, an analyst at Hedgeye Risk Management LLC, an independent equities research firm in New Haven, Connecticut, said in a telephone interview. “You are left with three brands that are very attractive and so are inherently attractive to M&A because of the discount to their value.”

‘Executing Our Strategies’

Today, Liz Claiborne rose 5 percent to $12.98, the seventh-biggest gain among 108 companies in the Standard & Poor’s SmallCap Consumer Discretionary Index.

“Our stock has been trading up significantly since we announced initiatives to focus the portfolio, reduce operating risk, and pay down debt back in October,” Jane Randel, a spokeswoman for Liz Claiborne, said in an e-mailed statement. “We are comfortable that the market can and will continue to respond to the growth in sales and profits as we make even further progress in executing our strategies.”

Shares of Liz Claiborne rose 13 percent on March 30, the biggest gain in four weeks, after the Wall Street Journal reported the company held talks with private-equity firms about a possible buyout at $20 a share. While Liz Claiborne isn’t currently considering a sale, KKR & Co., Permira and Warburg Pincus LLC remain interested in taking the company private, the newspaper reported, citing people familiar with the matter.

“There is currently no contemplation of any strategy for the company other than executing against the operating plan we have already discussed,” Liz Claiborne said in a statement the same day in response to the report.

Staging a Turnaround

Liz Claiborne got its start as a single namesake brand in 1976. When Chief Executive Officer Bill McComb joined in November 2006 from Johnson & Johnson, he inherited a company that had expanded into more than 40 labels, some of which targeted the floundering mid-priced department store channel, Flavin said.

McComb, 49, has been narrowing the company’s focus to Kate Spade, Juicy Couture and Lucky Brand, which all sell higher-priced goods to younger consumers and are able to sustain retail stores of their own. Last year the company’s divestitures included the namesake Liz Claiborne brand to J.C. Penney Co., the Mexx business to private equity firm Gores Group LLC and the Dana Buchman label to Kohl’s Corp., and the proceeds were used to help reduce debt.

‘Undervalued Portfolio’

Liz Claiborne reported a net loss of $172 million in 2011, the only U.S. company in the apparel, footwear and accessories industry with a market value greater than $1 billion to lose money last year, data compiled by Bloomberg show. Analysts on average project the company will post net income of $15.7 million this year, its first annual profit since 2006.

While Liz Claiborne shares had gained 123 percent in the last year, the stock price as of yesterday was still 73 percent less than its peak of $46.64 in February 2007. The company was trading yesterday at 0.72 times projected sales of $1.7 billion in 2013, based on analysts’ estimates compiled by Bloomberg. That’s less expensive than 16 of the 17 other companies in the industry greater than $1 billion, the data show. The group has an average price-to-sales ratio of 1.49.

“This is still an undervalued portfolio,” Hedgeye’s Flavin said. “Kate Spade has continued to stay very strong and you are starting to see an inflection point at both Juicy Couture and Lucky Brand. Those brands are at an early stage of turnaround.”

Juicy Couture

Designer Deborah Lloyd, who helped rejuvenate Burberry Group Plc, has turned the Kate Spade brand around with more- sophisticated handbags, costume jewelry and apparel such as bright, printed dresses. Fourth-quarter sales at Kate Spade, which now has 50 full-priced stores, soared 73 percent to $110 million from a year earlier.

Juicy Couture, which posted a 15 percent drop in sales to $161 million last quarter, was showing encouraging sales trends in the first few months of this year, McComb said Feb. 29. Known for its velour sweatsuits, Juicy Couture operates 78 stores.

The 179-store Lucky Brand business posted a 23 percent gain to $137 million in sales in the most recent quarter. A revitalization of the denim-based business has been spearheaded by David DeMattei, who was hired away from Williams-Sonoma Inc.

Liz Claiborne’s product lines could lure strategic bidders such as VF or Warnaco, said Mary Ross Gilbert, an analyst at Imperial in Los Angeles. New York-based Warnaco, which has controlled the license to sell Calvin Klein jeans since the 1990s, said last month that it wants to add “another power brand or brands” to its portfolio.

VF as Buyer

“They could have interest in any one of these brands,” Gilbert said in a phone interview. Kate Spade and Juicy Couture could attract VF and possibly Warnaco because of the “huge opportunities for growth globally, not only within the core business as it stands today, but the prospects of having subcategory brands and continued category expansion.”

VF could also benefit from adding each of Liz Claiborne’s three premium brands to its apparel lines, which include the Ella Moss and Wrangler labels, said Monness’s Chartier, who is based in New York.

“They have a denim business that Lucky could fit in and they’re looking to expand their offering of high-end brands, where Juicy and Kate would fit,” he said in a phone interview.

Wendi Kopsick, a spokeswoman for Warnaco, said the company doesn’t comment on speculation. Cindy Knoebel, a spokeswoman for Greensboro, North Carolina-based VF, said the company doesn’t comment on specific acquisition opportunities.

Blood, Sweat

“Having said that, we have also stated that we remain interested in pursuing additional acquisitions, but primarily in the outdoor and action sports category,” she said in an e-mail.

While the company’s valuation and its brands may attract buyers, Liz Claiborne may not be a willing seller right now, said Corinna Freedman, an analyst at Wedbush Securities Inc. in New York.

“I don’t think that Bill McComb, who’s put in blood, sweat and tears over the last five to six years, would be willing to walk away after finally getting the company in the position where he wants it to be,” Freedman said in a phone interview. “Now, since they’ve whittled the company down to these three brands, it’s a totally new ballgame.”

Still, an acquirer may be willing to pay more than $20 a share for Liz Claiborne, according to Imperial’s Gilbert and Hedgeye’s Flavin, a 62 percent premium to yesterday’s closing price. Chartier at Monness said a takeout price of $20 is “definitely reasonable.”

‘Tremendous Growth’

Private-equity firms could bid as much as $21 a share, Gilbert estimates, using a sum-of-the-parts analysis.

“What private equity sees is an opportunity to capture the tremendous growth opportunity for themselves,” Gilbert said. “The stock trades at a big discount to its implied value. They would take it private, let the company realize their growth strategy, and then bring it to market later.”

Each of Liz Claiborne’s labels functions independently and has its own brand-level executives, which could entice a private-equity firm looking to buy the whole company and then sell the individual brands, said Chartier. Kate Spade is worth $2 billion, Juicy Couture $350 million and Lucky Brand $250 million, Flavin estimated.

“They’re all standalone businesses,” Chartier said. “Private equity could buy the company and then sell off parts of the acquisition whenever they see fit. So they’d pay for Kate Spade, but you’re getting a big opportunity to do something with Lucky and Juicy and turn those businesses around.”

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