It's darn hard to call a retail turnaround. And these days, turnarounds aren't just about fickle shoppers or improved merchandise. There's also the very real specter of an economic slowdown and the credit crisis leading to consumers who are reluctant to spend. But take a deep breath and swallow your fear: These troubled times are likely the best times to find some great deals.  

There are plenty of retail stocks that have gotten trounced -- for example, Chico's (Nasdaq: CHS) (down 56% over the last 12 months), Coldwater Creek (Nasdaq: CWTR) (down 71%), and Ann Taylor (NYSE: ANN) (down 34%). And of course, there are some seemingly perpetual turnaround stocks like Gap (NYSE: GPS) and Talbots, both of which have had a hard time turning things around over the last couple of years. I'm not tempted by any of those yet, though. I don't feel I've seen enough heartening signs that their turnarounds really are forthcoming.

All of the above companies strike me as still struggling with their brand identities and merchandise, and seem to have lost touch with their own customers, to boot. That's why I'm interested in a potential turnaround that actually seems to be working on concrete plans to right the ship: Liz Claiborne (NYSE: LIZ).  

Learning to like Liz again
I've often preferred consumer-goods rival VF (NYSE: VFC) to Liz Claiborne as an investing idea, but both may soon make the grade. Liz Claiborne has tons of brands, and some have lost their luster. Liz Claiborne's earnings were lackluster in 2005, decreased 16.3% in 2006, and are expected to drop 42% for 2007. No wonder this stock's down 52% this year. (It's got only two stars in Motley Fool CAPS.)  

However, Liz Claiborne has been in the process of shedding the weak brands in its portfolio in order to focus on the strong, higher-growth brands (which also have higher margins), including Kate Spade, Juicy Couture, Lucky Brand, and Mexx. When all is said and done, Liz Claiborne will purge its closet of some clutter it can't use, axing 16 of 36 brands.

In addition, I recently noticed Liz Claiborne has wooed designer Isaac Mizrahi away from Target (NYSE: TGT), which I found to be a compelling piece of news. He will now function as Liz Claiborne's creative director. If you follow Target at all, you know Mizrahi has been given a lot of credit for helping jazz up the retailer's selection with hip, reasonably priced merchandise. It's quite possible Liz Claiborne could get some fashion sense back. (Of course, while heartening, it's no sure thing -- Gap has often hired new designers and creative gurus during its ongoing turnaround, and it hasn't made much headway yet.)

A bargain, or cheap for a reason?
After a difficult couple of years, it's understandable that many investors probably aren't yet sold on a Liz Claiborne makeover. After all, some stocks that look "cheap" turn out to be value traps.

Liz Claiborne shares do look cheap, though: They are trading at just 11 times forward earnings, even though the company is expected to increase earnings by 15% in 2008. Its long-term PEG ratio is just 0.91. To sweeten the deal, it also has a dividend yield of 1.10%. It's got positive free cash flow -- for the last 12 months, it generated $157 million -- but admittedly, its capital expenditures have more than doubled since 2002, meaning that it has been generating dwindling amounts of free cash flow over the last couple of years.   

And there are risks. There's no guarantee Liz Claiborne won't make strategic mistakes as it tries to cut costs and properly draft and allocate talent. (My Foolish colleague David Meier pointed out last May that while Liz Claiborne has improved gross margin over the years, its selling, general, and administrative expenses have also increased. Its share price has tanked since then.) Its debt-to-equity ratio of 47.5% for the trailing 12 months might make some of us a bit nervous, too. Despite the fact that it has some retail stores, its department-store channels are a tough niche these days.

Still, there are some compelling reasons to keep an eye on Liz Claiborne as a potential stock idea. Some of its bold, aggressive moves to become leaner and meaner may very well add up to the catalysts needed to transform this into a chic stock idea for the long term, especially given the beating its share price has taken.

See what else is hanging on the racks:

VF is a Motley Fool Income Investor recommendation. Gap has been recommended by Motley Fool Stock Advisor and Motley Fool Inside Value. You can take a free 30-day trial subscription to any of these newsletters.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.