Nothing Fashionable About Liz's Results

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Fashion-conscious consumers won't be quite as well-dressed while the economy's in the doldrums, but at least the captains of the Liz Claiborne (NYSE: LIZ) team are under no illusions about it.

On Monday, Liz announced that it posted a net operating GAAP loss of $0.10 per share. Operating margins were thin to begin with -- about 1.6% of revenue -- but $59 million in losses tied to discontinued operations bumped up the net loss to $0.73 per share on a GAAP basis. That's pretty ugly, although the company trumpeted its adjusted non-GAAP profit of $0.39 per share as an accomplishment -- and it was a couple pennies better than analysts had expected.

You may already suspect the reason for Liz's woes. Strapped consumers have less money to spend, so they're avoiding higher-end name brands at Macy's (NYSE: M) and Saks (NYSE: SKS) and moving down to lower-end retailers like Wal-Mart (NYSE: WMT). Liz's sales were down about 16% from last year's levels.

Bad news is already an old trend
I could actually be forgiving of a loss in the most recent quarter. I can't be as lenient when we've seen four straight quarterly GAAP losses.

If consumers just won't spend, there's no amount of "prettying up" you can do to merchandise to grab that last dollar out of a consumer's hand. Just ask Best Buy (NYSE: BBY), which sees its comparables undergoing a "seismic" shift downward in the coming months.

One thing I like about Liz is that it at least recognizes that the best way to solve the problem of dwindling profits in a recession is by focusing on the expense lines, rather than by trying to pump up the top line.

As CEO William McComb said on the conference call, "Our total capital expenditure is planned down 50% in total versus 2008 levels. In addition to the reduced retail expansion, capital at Mexx is cut by 50% and systems and facilities across the corporation by 30%."

A long road ahead
I applaud the company's effort to "get real." But my primary concern is that investors may not be as patient as Liz's management.

This wave of forced cost-cutting will ultimately make Liz a lean contender, poised for a wide net margin once consumers come out of their coma … and once the company can start making money on a GAAP basis. I expect to see marked improvement in both areas by mid-2009 or so -- but until a recovery comes, real worries in high-end retail will make Liz Claiborne tough to own in the meantime.