1 Retail Stock to Short

By CAPS' Weekly Top Stock Idea | More Articles
April 8, 2011 | Comments (2)

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Company	Liz Claiborne (NYSE: LIZ )
Submitted by	ksiu1
Member Rating	92.97
Submitted on	4/2/2011
Stock Price at Recommendation	$5.30

Liz Claiborne Profile

Star Rating (out of 5)	**
Headquarters	New York City
Industry	Apparel
Market Cap	$538 million
Competitors	Cherokee (Nasdaq: CHKE ) Aeropostale (NYSE: ARO ) Urban Outfitters (Nasdaq: URBN )

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This week's pitch:
Keeping my focus within my sphere of knowledge. I think Liz will continue to struggle as it's caught between two conflicting forces. First is its agent agreement with Li & Fung which is a public company listed in Hong Kong. Li and Fung's primary source of manufacturing is Asia. As inflation on that continent increase, so will costs and Li & Fung isn't going to be the one taking the hit on that. They're simply going to tell Liz "Here's the price" and Liz will be paying a % of it to Li & Fung. And it's not like Liz can shop around since according to their annual report they [are] pretty locked in. Further conflict of interest is that Li&Fung owns brands that they sell to dept stores themselves. It's in their best interest to use their best suppliers and lock up the most affordable raw material prices for their own brands.

If that wasn't bad enough Liz also has to contend with their retail partners J.C. Penney [ (NYSE: JCP ) ] and QVC. While I'm not a retail expert I know that retailers these days aren't partners with their wholesale sources. They will squeeze first and ask questions later. They may even be justified in doing so given Liz's challenges in sourcing quality product at reasonable prices that I mentioned above.

Finally they're operating from a position of weakness when their fundamental focus has to be on managing their brands and merchandising. Their exec's are busy trying to manage cash flow and are probably distracted. It's a vicious little cycle. Soon they'll be selling brands to raise money.

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The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. The Fool owns shares of Aeropostale. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

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Report this Comment On April 08, 2011, at 8:06 PM, mhyman7874 wrote:

liz is in big trouble they have not one executive that understands the appparel industry, selling asprin is not the same as changing product mix 4 to 5 times per year. untill they hire management that understands this concept they will repeat the same mistakes that they have over the past 5 years driving the stock from 40 to 5.50
great job by the board of directors
Report this Comment On April 12, 2011, at 12:52 PM, ACM666 wrote:

Many investors in this stock are hoping that LIZ does sell / spin-off a couple of brands to raise money.
Kate Spade (a wholly owned LIZ brand) is comping nearly 100% in the first quarter 2011 and they're building stores so actual sales will be higher. What's a brand worth that's comping triple digits that will do $270m of revenue this year?
Kate Spade is growing 4x as fast as the hottest retail stock in the market - LULU. Give Kate Spade half of LULU's forward EV/Sales multiple (6.7x / 2 = 3.3) and Kate could command a nearly $900m valuation alone. This is significant when compared to LIZ's enterprise value (equity+total debt) of $1.1bn.
Therefore you are potentially paying only $200m for Juicy, Lucky, Mexx, Liz Claiborne and a host of other household names that will generate over $2bn of revenue this year. If you give those brands a multiple in-line with the worst operators in the industry (0.3x sales) you could be looking at a valuation of $2bn * 0.3 = $600m.
Add that to $900m for a total value of $1.5bn. Subtract out the $475m long-term debt = $1.0bn market value.
The current market value however, is $650m or 120m fully diluted shares * $5.45 = $650m.
Therefore, if LIZ were just to spin-off Kate Spade, the shares could see a 50% pop.
If you read the most recent earnings release (Q410) you will see the last thought in paragraph 5: "We recognize that we have a very diverse and valuable portfolio of brands, and appreciate that there are many different ways to create value for our shareholders over time.Today, our initiatives will be aimed at strengthening these options and asset values..."
Further, if you listen to McComb's presentation at BofA in November '10, he clearly states that "we want the ability, if right for our stakeholders down the road to partially or fully IPO any of these businesses..."
Oh, by the way, Juicy Couture is a much sought after brand by its target demographic and does nearly $600m of revenue. Putting a better multiple on this stronger brand (say 1.5x sales) and you're looking at a nearly $900m valuation for Juicy. This would bump the overall 50% gain from above to 165% but it's best to remain conservative :)

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