Investors Shred Liz Claiborne

Shares plummeted Tuesday after the apparel company announced sharply lower earnings

Liz Claiborne (LIZ) has been struggling to sell its clothing to retail customers amid cut-throat competition, even as it tries to cope by building up new distribution channels. Shares of the New York apparel company lost nearly one-fifth of their value on May 1 after it said that its profits plunged and gave a disappointing forecast for the year.

Net income fell to $16 million during the three months ended Mar. 31, from $47 million during the same period of 2006. "Our first quarter results reflect significant challenges in our domestic wholesale business, partially offset by improved direct to consumer performance," CEO William L. McComb said in a press release May 1.

The company earned 16 cents per share during the first quarter. Excluding the impact of expenses related to the company's efforts to streamline operations in 2007 and last year, Liz Claiborne earned 22 cents per share. Analysts surveyed by Thomson Financial had forecast 60 cents per share.

Liz Claiborne has long sold its products to companies like Federated Department Stores FD -- but such department-store chains have suffered slow growth themselves in the face tough price competition from rivals like the discounters Wal-Mart WMT and Target TGT as well as warehouse clubs like Costco COST (see, 03/01/2005, "Retailers Shop -- or They'll Drop?".)

Not helping matters during recent months, retailers changed their calendars, so that Liz Claiborne's fiscal March ended March 31, but retailers' ended on Apr. 7. As a result, Liz Claiborne products that would normally have been shipped in the last week of March ended up getting delayed until early April as a way to prevent the fresh supplies from being included as retailers' month end inventory. Also, retailers ended up marking down some of the inventory. Liz Claiborne's Sigrid Olsen, J.H. Collectibles and Ellen Tracy businesses contributed to the recent losses. Overall the company's net sales for the first quarter sank 1.6% year over year to $1.153 billion, while the sales in one of its most important segments, Wholesale Apparel, fell 7.4% to $701 million.

But there were bright points. Liz Claiborne fared much better at selling its products directly to consumers through its own outlets. The company's retail segment saw sales rise 15.6% year over year to $305 million during the March quarter, after its net addition over the last 12 months of 30 Lucky Brand, 10 Sigrid Olsen and 19 Juicy Couture specialty retail stores. Those sales also benefited from another 10 Liz Claiborne outlet stores in the United States, Canada and Europe. Another $9 million of sales came from the handbag designer Kate Spade, which Liz Claiborne acquired in Dec. 2006.

Now the company expects its earnings to range between $1.90 and $2.05 per share during 2007, excluding expenses such as those associated with business streamlining efforts. The consensus estimate had been for $3.12 per share.

Investors sold the stock nearly 19% to $36.23 per share on the New York Stock Exchange.

"It is clear that these projected results mark a sea change in how we must run our wholesale business," CEO McComb said. "We expect to build on our strengths, particularly our high-potential brands and rapidly growing retail segment. The actions we are taking are aimed at building the business not for one quarter but for the long haul."

Before it's here, it's on the Bloomberg Terminal.