UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 2, 2010
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 1-10689
LIZ CLAIBORNE, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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13-2842791
(I.R.S. Employer Identification Number) |
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1441 Broadway, New York, New York
(Address of principal executive offices)
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10018
(Zip Code) |
Registrants telephone number, including area code: 212-354-4900
Securities registered pursuant to Section 12(b) of the Act:
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Title of class
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Name of each exchange on
which registered |
Common Stock, par value $1 per share
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 (the Act). Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
Based upon the closing sale price on the New York Stock Exchange on July 2, 2009, the last business
day of the registrants most recently completed second fiscal quarter, which quarter ended July 4,
2009, the aggregate market value of the registrants Common Stock, par value $1 per share, held by
non-affiliates of the registrant on such date was approximately $268,207,000. For purposes of this
calculation, only executive officers and directors are deemed to be the affiliates of the
registrant.
Number of shares of the registrants Common Stock, par value $1 per share, outstanding as of
February 12, 2010: 94,821,168 shares.
Documents Incorporated by Reference:
Registrants Proxy Statement relating to its Annual Meeting of Stockholders to be held on May 27,
2010-Part III.
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Statements
contained in, or incorporated by reference into, this Annual Report on Form 10-K, future
filings by us with the Securities and Exchange Commission (SEC), our press releases, and oral
statements made by, or with the approval of, our authorized personnel, that relate to our future
performance or future events are forward-looking statements under the Private Securities Litigation
Reform Act of 1995. Such statements are indicated by words or phrases such as intend,
anticipate, plan, estimate, project, expect, believe, we are optimistic that we can,
current visibility indicates that we forecast or currently envisions and similar phrases.
Forward-looking statements include statements regarding, among other items:
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our ability to continue to have the liquidity necessary, through cash flows from
operations and availability under our amended and restated revolving credit facility, which
may be adversely impacted by a number of factors, including the level of our operating cash
flows, our ability to maintain established levels of availability under, and to comply with
the financial and other covenants included in, our amended and restated revolving credit
facility and the borrowing base requirement in our amended and restated revolving credit
facility that limits the amount of borrowings we may make based on a formula of, among
other things, eligible accounts receivable and inventory; the timing of an anticipated
$166.7 million of income tax refunds, which are expected by the end of the first quarter of
2010; the minimum availability covenant in our amended and restated revolving credit
facility that requires us to maintain availability in excess of an agreed upon level and
whether holders of our Convertible Notes issued in June 2009 will, if and when such notes
are convertible, elect to convert a substantial portion of such notes, the par value of
which we must currently settle in cash; |
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general economic conditions in the United States, Europe and other parts of the world; |
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lower levels of consumer confidence, consumer spending and purchases of discretionary
items, including fashion apparel and related products, such as ours; |
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continued restrictions in the credit and capital markets, which would impair our ability
to access additional sources of liquidity, if needed; |
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changes in the cost of raw materials, labor, advertising and transportation; |
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our dependence on a limited number of large US department store customers, and the risk
of consolidations, restructurings, bankruptcies and other ownership changes in the retail
industry and financial difficulties at our larger department store customers; |
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our ability to successfully implement our long-term strategic plans; |
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our ability to effect a turnaround of our MEXX Europe business; |
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our ability to respond to constantly changing consumer demands and tastes and fashion
trends, across multiple product lines, shopping channels and geographies; |
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our ability to attract and retain talented, highly qualified executives, and maintain
satisfactory relationships with our employees, both union and non-union; |
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our ability to adequately establish, defend and protect our trademarks and other
proprietary rights; |
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our ability to successfully develop or acquire new product lines or enter new markets or
product categories, and risks related to such new lines, markets or categories; |
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risks associated with the
implementation of the licensing arrangements with J.C. Penney
Corporation, Inc. and J.C. Penney
Company, Inc. and with QVC, Inc. discussed in this report, including, without limitation, our
ability to efficiently change our operational model and infrastructure as a result of such
licensing arrangements, our ability to continue a good working relationship with these
licensees and possible changes in our other brand relationships or relationships with other
retailers as a result; |
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the impact of the highly competitive nature of the markets within which we operate, both
within the US and abroad; |
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our reliance on independent foreign manufactures, including the risk of their failure to
comply with safety standards or our policies regarding labor practices; |
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risks associated with our agreement with Li & Fung Limited, which results in a single
foreign sourcing agent for a significant portion of our products; |
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a variety of legal, regulatory, political
and economic risks, including risks related to the importation and
exportation of product, to which our international operations are
subject; |
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our ability to adapt to and compete effectively in the current quota environment in
which general quota has expired on apparel products but political activity seeking to
re-impose quota has been initiated or threatened; |
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our exposure to domestic and foreign currency fluctuations; |
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our ability to utilize all or a portion of our US deferred tax assets may be limited
significantly if we experience an ownership change; and |
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the outcome of current and
future litigations and other proceedings in which we are
involved may have a material adverse effect on our results of
operations and cash flows. |
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Forward-looking statements are based on current expectations only and are not guarantees of future
performance, and are subject to certain risks, uncertainties and assumptions, including those
described in this report in Item 1A Risk Factors. We may change our intentions, beliefs or
expectations at any time and without notice, based upon any change in our assumptions or otherwise.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those anticipated, estimated or projected.
In addition, some factors are beyond our control. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or
otherwise.
WEBSITE ACCESS TO COMPANY REPORTS
Our
investor website can be accessed at www.lizclaiborneinc.com under Investor Relations. Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our investor website
under the caption SEC Filings promptly after we electronically file such materials with, or
furnish such materials to, the SEC. No information contained on any of our websites is intended to
be included as part of, or incorporated by reference into, this Annual Report on Form 10-K.
Information relating to corporate governance at our Company, including our Corporate Governance
Guidelines, our Code of Ethics and Business Practices for all directors, officers, and employees,
and information concerning our directors, Committees of the Board, including Committee charters,
and transactions in Company securities by directors and executive officers, is available at our
investor website under the captions Corporate Governance and SEC Filings. Paper copies of these
filings and corporate governance documents are available to stockholders free of charge by written
request to Investor Relations, Liz Claiborne, Inc., 1441 Broadway, New York, New York 10018.
Documents filed with the SEC are also available on the SECs
website at www.sec.gov.
We were incorporated in January 1976 under the laws of the State of Delaware. In this Form 10-K,
unless the context requires otherwise, references to Liz Claiborne, our, us, we and the
Company mean Liz Claiborne, Inc. and its consolidated subsidiaries. Our fiscal year ends on the
Saturday closest to January 1. All references to Fiscal 2009 represent the 52 week fiscal year
ended January 2, 2010. All references to Fiscal 2008 represent the 53 week fiscal year ended
January 3, 2009. All references to Fiscal 2007 represent the 52 week fiscal year ended December
29, 2007.
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PART I
OVERVIEW AND NARRATIVE DESCRIPTION OF BUSINESS
General
Liz Claiborne, Inc. designs and markets a global portfolio of retail-based premium brands including
JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX. We also have a group of department store-based
brands with consumer franchises including the LIZ CLAIBORNE and MONET families of brands, MAC &
JAC, KENSIE and DANA BUCHMAN and the licensed DKNY® JEANS, DKNY® ACTIVE and DKNY® MENS brands.
Our operations and management structure reflect a brand-centric approach, designed to optimize the
operational coordination and resource allocation of our businesses across multiple functional areas
including specialty retail, outlet, wholesale apparel, wholesale non-apparel, e-commerce and
licensing. For a discussion of our segment reporting structure, see Business Segments below.
Recent Initiatives
The economic environment that we experienced in 2008 and which continued throughout 2009 was characterized by, among other things,
a dramatic reduction in consumer spending and substantial tightening of credit markets. Accordingly, our priorities in 2009
included: (i) adapting our Liz Claiborne brand distribution strategies; (ii) further expense reduction and cost structure
rationalization; and (iii) securing adequate liquidity.
Distribution of Our Liz Claiborne Brands
On October 7, 2009, in an effort to revitalize our LIZ CLAIBORNE brand franchise, reduce working
capital needs and increase earnings and profitability, we entered
into licensing arrangements with J.C. Penney Corporation, Inc. and
J.C. Penney Company, Inc. (collectively, JCPenney) and with QVC, Inc.
(QVC) for such brands.
Our multi-year license agreement with JCPenney granted JCPenney an exclusive right and license
(subject to pre-existing licenses and certain limited exceptions) to use the LIZ CLAIBORNE, LIZ &
CO., CLAIBORNE and CONCEPTS BY CLAIBORNE trademarks with respect to covered product categories and
included the worldwide manufacturing of the licensed products and the sale, marketing,
merchandising, advertising and promotion of the licensed products in the United States and Puerto
Rico. Under the agreement, JCPenney will only use designs provided or
approved by us. The agreement has a term that may remain in effect up to July
31, 2020. Sales by JCPenney under the agreement are anticipated to commence in August 2010. At the
end of year five, JCPenney will have the option to acquire the trademarks and other Liz Claiborne
brands for use in the United States and Puerto Rico. JCPenney will also have the option to take
ownership of the trademarks in the same territory at the end of year 10. The license agreement
provides for the payment to us of royalties based on net sales of licensed products by JCPenney and
a portion of the related gross profit when the gross profit percentage exceeds a specified rate,
subject to a minimum annual payment.
We also entered into a multi-year license agreement with QVC, granting rights (subject to
pre-existing licenses) to certain of our trademarks and other intellectual property rights. QVC has
the rights to use the LIZ CLAIBORNE NEW YORK brand with Isaac Mizrahi as creative director on any
apparel, accessories, or home categories in its US and international markets. QVC will merchandise
and source the product and we will provide brand management oversight. The agreement provides for
the payment to us of a royalty based on net sales.
Cost Reduction Initiatives
Our cost reduction efforts have included tighter controls surrounding discretionary spending, a
freeze in merit compensation increases in 2009, the cessation of our quarterly dividend and
streamlining initiatives that have included rationalization of distribution centers and office
space, store closures and staff reductions, including consolidation of certain support and
production functions and outsourcing certain corporate functions. These actions, in conjunction
with more extensive use of direct shipments and third party arrangements, have enabled us to
significantly reduce our reliance on owned or leased distribution centers. Including the closure of
our Santa Fe Springs, California distribution center in January 2010 and the announced closure
of our Lincoln, Rhode Island distribution center, which is expected to occur on or about April 30,
2010, we have closed eight distribution centers since 2007.
In connection with the license agreements with JCPenney and QVC discussed above, we expect to
further consolidate office space and reduce staff in certain support functions. We anticipate that
these actions will be completed by the end of the second quarter of 2010. We will also continue to
closely manage spending, with a slight increase in projected 2010 capital expenditures to
approximately $85.0 million, compared to $72.6 million in 2009.
On January 8, 2010, we entered into an agreement with Lauras Shoppe (Canada) Ltd. and Lauras
Shoppe (P.V.) Inc. (collectively, Laura Canada), pursuant to which up to 38 Liz Canada store
leases will be assigned and title for certain property and equipment will
be transferred to Laura Canada, in each case, subject to the satisfaction of certain conditions. We
expect to recognize a pretax charge of approximately $12.0 million related to this transaction in
the first quarter of 2010.
5
Liquidity
We enhanced our liquidity by completing the issuance of $90.0 million of 6.0% Convertible Senior
Notes due June 15, 2014 (the Convertible Notes) in the second quarter of 2009. The Convertible
Notes are unsecured, senior obligations; pay interest semi-annually at a rate of 6.0% per annum;
and will be convertible, under certain circumstances, into cash, shares of our common stock, or a
combination of cash and shares, at our option. The issuance of the Convertible Notes extended the
weighted average maturity of our debt and increased borrowing availability under our amended and
restated revolving credit facility, since we used the net proceeds from the offering to repay a
portion of the outstanding borrowings under such facility.
In January 2009, we completed an amendment to and extension of our revolving credit agreement, and
in May and November 2009, we completed additional amendments to such agreement (as amended, the
Amended Agreement). Under the Amended Agreement, we are subject to a fixed charge coverage
covenant as well as various other covenants and other requirements, such as financial requirements,
reporting requirements and various negative covenants. Pursuant to the May 2009 amendment, we are
subject to a minimum aggregate borrowing availability covenant. Our borrowing availability under
the Amended Agreement is determined primarily by the level of our eligible accounts receivable and
inventory balances. In addition, the Amended Agreement requires the application of substantially
all cash collected, including any net proceeds received with respect to certain permitted disposals
and acquisitions, to reduce outstanding borrowings under the Amended
Agreement. The November 2009 amendment provides that
through the maturity date of the Amended Agreement, the fixed charge coverage covenant would apply
only if borrowing availability under the Amended Agreement falls below certain designated levels.
The November 2009 amendment also provides for, among other things, the approval of (i) a grant to
JCPenney of an option to acquire the intellectual property and related rights to certain brands in
the US and Puerto Rico (see Note 17 of Notes to Consolidated Financial Statements); (ii) the
related sale by the Company to JCPenney of such property and rights; (iii) upon the consummation of
such sale, the release of any liens on such property and rights in favor of the lenders under the
Amended Agreement; and (iv) certain defined payments, indebtedness and guarantees.
For further information concerning our debt and credit facilities, see Note 9 of Notes to
Consolidated Financial Statements and Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations Financial Position, Liquidity and Capital Resources.
By the end of the first quarter of 2010, we expect to receive $166.7 million of income tax refunds
on previously paid taxes due to a Federal law change allowing our 2008 or 2009 domestic losses to
be carried back for five years, with the fifth year limited to 50.0% of taxable income. As a
condition of the Amended Agreement, we are required to repay amounts outstanding thereunder with
the amount of such refunds. Based on our forecast of borrowing availability, and subject to the
expected timing of the receipt of the anticipated tax refunds, we anticipate that cash flows from
operations and the projected borrowing availability under our Amended Agreement will be sufficient
to fund our liquidity requirements for at least the next 12 months. For a discussion of risks
related to our liquidity, including our inability to comply with the
fixed charge coverage covenant that would be triggered if we fail to
maintain the minimum borrowing availabilty requirement under the
Amended Agreement, see Item
1A Risk Factors, and Item 7 Managements Discussion and Analysis of Financial Condition and
Results of Operations Financial Position, Liquidity and Capital Resources.
Sourcing
We have also sought to implement supply chain and overhead initiatives that are aimed at driving
efficiencies, as well as improving gross margins, working capital and/or operating cash flows.
As discussed below in the section entitled Manufacturing, we entered into a sourcing agency
agreement with Hong Kong-based, global consumer goods exporter Li & Fung Limited (Li & Fung),
whereby Li & Fung serves as the primary sourcing agent for all brands and products in our
portfolio, other than jewelry.
For a discussion of certain risks relating to our business, see Item 1A Risk Factors.
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Business Segments
Our segment reporting structure reflects a brand-focused approach, designed to optimize the
operational coordination and resource allocation of our businesses across multiple functional areas
including specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce
and licensing. The three reportable segments described below represent our brand-based activities
for which separate financial information is available and which is utilized on a regular basis by
our chief operating decision maker to evaluate performance and allocate resources. In identifying
our reportable segments, we consider economic characteristics, as well as products,
customers, sales growth potential and long-term profitability. We aggregate our five operating
segments to form reportable segments, where applicable. As such, we report our operations in three
reportable segments as follows:
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Domestic-Based Direct Brands segment consists of the specialty retail, outlet,
wholesale apparel, wholesale non-apparel (including accessories, jewelry and handbags),
e-commerce and licensing operations of our three domestic, retail-based operating segments:
JUICY COUTURE, KATE SPADE and LUCKY BRAND. |
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International-Based Direct Brands segment consists of the specialty retail,
outlet, concession, wholesale apparel, wholesale non-apparel (including accessories,
jewelry and handbags), e-commerce and licensing operations of MEXX, our international,
retail-based operating segment. |
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Partnered Brands segment consists of one operating segment including the
wholesale apparel, wholesale non-apparel, specialty retail, outlet, e-commerce and
licensing operations of our wholesale-based brands including: AXCESS, CLAIBORNE
(mens), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, KENSIE, LIZ & CO., LIZ CLAIBORNE, MAC & JAC,
MARVELLA, MONET, TRIFARI and our licensed DKNY® JEANS, DKNY® ACTIVE and DKNY® MENS brands. |
We, as licensor, also license to third parties the right to produce and market products bearing
certain Company-owned trademarks; the resulting royalty income is included within the results of
the associated segment.
International sales represented 33.0% of our total sales in 2009. Our international operations are
subject to the impact of fluctuations in foreign currency exchange rates and consist principally of
our MEXX Europe and MEXX Canada operations, as well as the introduction of certain of our US-based
brands into Europe, Canada and, to a lesser extent, Asia.
See Notes 1 and 18 of Notes to Consolidated Financial Statements and Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations.
Domestic-Based Direct Brands segment includes the following brands:
JUICY COUTURE
Our JUICY COUTURE brand offers luxurious, casual and fun womens and childrens apparel, as well as
accessories and jewelry under various JUICY COUTURE trademarks. JUICY COUTURE products are sold
predominately through wholly-owned specialty retail and outlet stores, select upscale specialty
retail stores and department stores throughout the US, as well as through a network of distributors
and owned and licensed retail stores in Asia, Canada, Europe and the Middle East. In addition,
JUICY COUTURE has existing licensing agreements for fragrances, footwear, optics, watches, swimwear
and baby products.
KATE SPADE
Our KATE SPADE brand offers fashion products (accessories, apparel and jewelry) for women and men
under the KATE SPADE and JACK SPADE trademarks, respectively. These products are sold primarily in
the US through wholly-owned specialty retail and outlet stores, select specialty retail and upscale
department stores, through a network of distributors in Asia and through our e-commerce website, as
well as through a joint venture in Japan formed in November 2009. KATE SPADEs product line
includes handbags, small leather goods, fashion accessories, jewelry, apparel and fragrances. In
addition, KATE SPADE has existing licensing agreements for footwear, optics, tabletop products,
paper products and strollers/rockers. JACK SPADE products include briefcases, travel bags and small
leather goods.
LUCKY BRAND
Our LUCKY BRAND offers womens, mens and childrens denim and casual sportswear, as well as
accessories and jewelry, under various LUCKY BRAND trademarks. LUCKY BRAND products are available
for sale at wholly-owned specialty retail and outlet stores in the US and Canada, select department
and better specialty stores, through distributors in the Middle East and Asia and our e-commerce
website. In addition, LUCKY BRAND has existing licensing agreements for fragrances, neckwear,
swimwear, hats and footwear.
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International-Based Direct Brands segment includes our MEXX brand.
MEXX
Our MEXX brand, which is headquartered in the Netherlands, offers a wide range of mens, womens
and childrens fashion apparel under several trademarks for sale outside of the US, principally in
Europe and Canada. MEXX has existing licensing agreements for fragrances, eyewear, watches, bed and
bath products, carpets, socks, stationery and footwear.
Partnered Brands segment includes the following brands:
LIZ CLAIBORNE FAMILY OF BRANDS
AXCESS, fashion-forward mens and womens apparel and accessories sold principally in
Kohls department stores.
CLAIBORNE, mens business-casual apparel and sportswear, accessories and fragrances.
CONCEPTS BY CLAIBORNE, mens casual separates sold exclusively in JCPenney stores.
LIZ & CO, womens casual apparel and accessories sold exclusively in JCPenney stores.
LIZ
CLAIBORNE and CLAIBORNE, merchandise in the product categories
covered by the JCPenney license will be sold exclusively through
JCPenney (subject to pre-existing licenses and certain limited exceptions) in the US and Puerto
Rico beginning in August 2010.
LIZ CLAIBORNE NEW YORK, womens career and casual sportswear, in misses, plus and petite sizes,
accessories and fragrances. This brand also offers a line of womens performance wear under the LIZ
GOLF trademark. In August 2010, QVC, with Isaac Mizrahi as creative director, will launch the LIZ
CLAIBORNE NEW YORK brand for sale on its television network. In addition, LIZ CLAIBORNE NEW YORK
will continue to be sold in the US at our owned outlet stores.
MONET FAMILY OF BRANDS
MARVELLA, a jewelry line sold primarily at Target Corporation stores.
MONET, a signature jewelry brand for women sold in department stores as well as in our own outlet
stores and online.
TRIFARI, a signature jewelry brand for women sold primarily in mid-tier department stores.
OTHER BRANDS
DANA BUCHMAN, a classic lifestyle collection of womens sportswear, accessories, intimate apparel
and footwear. Pursuant to an exclusive license agreement with Kohls Corporation (Kohls), which
names Kohls as the exclusive retailer of the DANA BUCHMAN brand, we design the products under the
license and Kohls leads the manufacturing, production, distribution and marketing of product.
However, we continue to source and distribute jewelry under the DANA BUCHMAN brand.
MAC & JAC offers modern, fashionable, high-quality apparel for women and men primarily through
select specialty and department stores in the US and Canada.
KENSIE offers modern, fashionable, high-quality, contemporary apparel for women primarily through
select specialty and department stores in the US and Canada.
DKNY® ACTIVE, DKNY® JEANS AND DKNY® MENS LICENSES
DKNY® ACTIVE offers juniors, mens and womens activewear for sale at department stores, specialty
stores and our own outlet stores in the Western Hemisphere, pursuant to the exclusive license we
hold to design, produce, market and sell these products.
DKNY® JEANS offers juniors, mens and womens sportswear and jeans for sale at department stores,
specialty stores and our own outlet stores in the Western Hemisphere, pursuant to the exclusive
license we hold to design, produce, market and sell these products.
DKNY® MENS offers mens sportswear apparel for career and casual wear for sale at department stores
and specialty stores in the US, Puerto Rico, Mexico and Canada, pursuant to the exclusive license
we hold to design, produce, market and sell these products.
8
See Note 8 of Notes to Consolidated Financial Statements for a description of our commitments under
our DKNY® ACTIVE, DKNY® JEANS and DKNY® MENS license agreements.
Specialty Retail Stores:
As of January 2, 2010, we operated a total of 458 specialty retail stores under various Company
trademarks, consisting of 285 retail stores within the US and 173 retail stores outside of the US
(primarily in Western Europe and Canada).
The following table sets forth select information, as of January 2, 2010, with respect to our
specialty retail stores:
US Specialty Retail Stores
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Approximate Average Store |
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Specialty Store Format |
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Number of Stores |
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Size (Square Feet) |
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LUCKY BRAND |
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182 |
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2,400 |
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JUICY COUTURE |
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65 |
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3,600 |
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KATE SPADE |
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36 |
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2,000 |
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JACK SPADE |
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2 |
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700 |
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Foreign Specialty Retail Stores
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Approximate Average Store |
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Specialty Store Format |
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Number of Stores |
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Size (Square Feet) |
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MEXX Europe |
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118 |
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4,600 |
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MEXX Canada |
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39 |
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5,400 |
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LUCKY BRAND Canada |
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12 |
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2,400 |
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MONET Europe |
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3 |
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1,100 |
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JUICY COUTURE Europe |
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1 |
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2,800 |
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Outlet Stores:
As of January 2, 2010, we operated a total of 363 outlet stores under various
Company-owned and licensed trademarks, consisting of 215 outlet stores within the US and
148 outlet stores outside of the US (primarily in Western Europe and Canada).
The following table sets forth select information, as of January 2, 2010, with respect to our
outlet stores:
US Outlet Stores
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Approximate Average Store |
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Outlet Store Format |
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Number of Stores |
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Size (Square Feet) |
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LIZ CLAIBORNE |
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92 |
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9,400 |
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LUCKY BRAND |
|
|
46 |
|
|
|
2,900 |
|
JUICY COUTURE |
|
|
33 |
|
|
|
2,900 |
|
KATE SPADE |
|
|
29 |
|
|
|
2,100 |
|
DKNYÒ JEANS |
|
|
14 |
|
|
|
2,800 |
|
KENSIE |
|
|
1 |
|
|
|
2,500 |
|
Foreign Outlet Stores
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Average Store |
|
Outlet Store Format(a) |
|
Number of Stores |
|
|
Size (Square Feet) |
|
MEXX Canada |
|
|
58 |
|
|
|
5,500 |
|
MEXX Europe |
|
|
43 |
|
|
|
3,300 |
|
LIZ CLAIBORNE Canada (b) |
|
|
47 |
|
|
|
4,400 |
|
|
|
|
(a) |
|
LIZ CLAIBORNE Europe closed its 8 outlet stores during 2009. |
|
(b) |
|
Up to 38 of the leases for these outlet stores will be assigned to Laura
Canada, subject to the satisfaction of certain conditions, pursuant to the above-noted
agreement entered into in January 2010. |
Concession Stores:
Outside of North America, we operate concession stores in select retail stores, which are either
owned or leased by a third-party department store or specialty store retailer. As of January 2,
2010, the Company operated a total of 566 concession stores in Europe.
9
The following table sets forth select information, as of January 2, 2010, with respect to our
concession stores:
Foreign Concessions
|
|
|
|
|
Concession Store Format |
|
Number of Stores |
|
MONET Jewelry |
|
|
270 |
|
MEXX Europe |
|
|
206 |
|
LIZ CLAIBORNE Apparel |
|
|
90 |
|
E-Commerce:
Our products are sold on a number of branded websites. In addition, we operate several websites
that only provide information about our merchandise but do not sell directly to customers.
The following table sets forth select information concerning our branded websites:
|
|
|
|
|
|
|
|
|
Information and Direct to |
Website |
|
Information Only |
|
Consumer Sales |
www.dknyjeans.com
|
|
Ö |
|
|
www.jackspade.com
|
|
|
|
Ö |
www.juicycouture.com
|
|
|
|
Ö |
www.katespade.com
|
|
|
|
Ö |
www.kensieclothing.com
|
|
Ö |
|
|
www.kensiegirl.com
|
|
Ö |
|
|
www.lizclaiborneinc.com (a)
|
|
Ö |
|
|
www.lizoutlet.com
|
|
Ö |
|
|
www.loveisnotabuse.com (b)
|
|
Ö |
|
|
www.luckybrand.com
|
|
|
|
Ö |
www.macandjac.com
|
|
Ö |
|
|
www.mexx.com
|
|
|
|
Ö |
www.mexx-canada.com
|
|
Ö |
|
|
www.monet.com
|
|
|
|
Ö |
|
|
|
(a) |
|
This website offers investors information concerning the Company. |
|
(b) |
|
This website provides information and resources to address domestic violence matters. |
Licensing:
We license many of our brands to third parties with expertise in certain specialized products
and/or market segments, thereby extending each licensed brands market presence. We currently have
63 license arrangements pursuant to which third-party licensees produce merchandise under Company
trademarks in accordance with designs furnished or approved by us, the present terms of which (not
including renewal terms) expire at various dates through 2020. Each of the licenses earns revenue
based on a percentage of the licensees sales of the licensed products against a guaranteed minimum
royalty, which generally increases over the term of the agreement. Income from our licensing
operations is included in Net sales for the segment under which the license resides. As discussed
above, products under our licenses with JCPenney and QVC will be offered beginning in August 2010.
10
The following table sets forth information with respect to select aspects of our licensed brands:
|
|
|
Products |
|
Brands |
Baby Buggies/Rockers/Carriers
|
|
JUICY COUTURE; KATE SPADE |
Bed & Bath
|
|
KATE SPADE; LIZ CLAIBORNE; MEXX |
Belts
|
|
AXCESS; CLAIBORNE; CONCEPTS BY CLAIBORNE; KENSIE; LIZ CLAIBORNE |
Cold Weather Accessories
|
|
KENSIE; LIZ CLAIBORNE; LUCKY BRAND |
Cosmetics & Fragrances
|
|
BORA BORA; CURVE; JUICY COUTURE; KATE SPADE; LUCKY BRAND; MAMBO; MEXX; REALITIES |
Costume Jewelry
|
|
KENSIE GIRL |
Decorative Fabrics
|
|
LIZ CLAIBORNE |
Denim
|
|
KENSIE |
Dress Shirts
|
|
AXCESS; CLAIBORNE; CONCEPTS BY CLAIBORNE |
Electronic Cases
|
|
JUICY COUTURE |
Flooring/Area Rugs
|
|
MEXX |
Footwear
|
|
AXCESS; CLAIBORNE; CONCEPTS BY CLAIBORNE; JUICY COUTURE; KATE SPADE; KENSIE
GIRL; LIZ CLAIBORNE; LIZ CLAIBORNE NY; LIZ CLAIBORNE FLEX; LUCKY BRAND; MEXX |
Handbags
|
|
KENSIE GIRL |
Hard Tabletop
|
|
KATE SPADE |
Intimate Apparel/Underwear
|
|
LIZ CLAIBORNE; LIZ & CO.; LUCKY BRAND |
Kids/Baby
|
|
CLAIBORNE BOYS; JUICY COUTURE |
Legwear and Socks
|
|
AXCESS; CLAIBORNE; CONCEPTS BY CLAIBORNE; KATE SPADE; LUCKY BRAND; MEXX |
Luggage
|
|
CLAIBORNE; LIZ CLAIBORNE; LIZ & CO. |
Mens Accessories
|
|
AXCESS; CLAIBORNE; CONCEPTS BY CLAIBORNE |
Neckwear/Scarves
|
|
AXCESS; CLAIBORNE; CONCEPTS BY CLAIBORNE; KENSIE; LUCKY BRAND |
Optics
|
|
CLAIBORNE; COMPOSITES A CLAIBORNE CO; COMPOSITES A LIZ CLAIBORNE CO;
CONCEPTS BY CLAIBORNE; CRAZY HORSE; DANA BUCHMAN; JUICY COUTURE;
KATE SPADE; KENSIE; LIZ CLAIBORNE; LIZ & CO.; LIZWEAR; LUCKY BRAND; MEXX;
SIGRID OLSEN |
Outerwear
|
|
AXCESS; CLAIBORNE; CONCEPTS BY CLAIBORNE; KENSIE; LIZ CLAIBORNE; LIZWEAR; LIZ &
CO.; MAC & JAC |
School Uniforms
|
|
CLAIBORNE; LIZWEAR |
Sleepwear/Loungewear
|
|
AXCESS; CLAIBORNE; CONCEPTS BY CLAIBORNE; KENSIE; LIZ CLAIBORNE; LIZWEAR; LIZ &
CO.; LUCKY BRAND |
Stationery and Paper Goods
|
|
KATE SPADE; MEXX |
Sunglasses
|
|
CLAIBORNE; COMPOSITES A CLAIBORNE CO.; COMPOSITES A LIZ CLAIBORNE CO.;
CONCEPTS BY CLAIBORNE; DANA BUCHMAN; JUICY COUTURE; KATE SPADE; KENSIE; LIZ
CLAIBORNE; LIZWEAR; LIZ & CO.; LUCKY BRAND; MAC & JAC; MEXX; SIGRID OLSEN |
Swimwear
|
|
JUICY COUTURE; LIZ CLAIBORNE; LIZ CLAIBORNE WOMAN; LIZ & CO.; LUCKY BRAND; MEXX |
Tailored Clothing
|
|
AXCESS; CLAIBORNE; CONCEPTS BY CLAIBORNE |
Watches
|
|
JUICY COUTURE; LUCKY BRAND; MEXX |
Window Treatments
|
|
KATE SPADE |
SALES AND MARKETING
Domestic sales accounted for 67.0%
of our 2009 and 64.5% of our 2008 net sales. Our domestic wholesale sales are made primarily to department store chains and
specialty store customers. Retail sales are made through our own retail and outlet stores.
Wholesale sales are also made to international customers, military exchanges and to other channels
of distribution.
International
sales accounted for 33.0% of 2009 net sales, as compared
to 35.5% in 2008. In Europe, wholesale sales are made primarily to department store and specialty
store customers, while retail sales are made through concession stores within department store
locations, as well as our own retail and outlet stores. In Canada, wholesale sales are made
primarily to department store chains and specialty stores, and retail sales are made through our
own retail and outlet stores. In other international markets, including Asia, the Middle East and
Central and South America, we operate principally through third party licensees, virtually all of
which purchase products from us for re-sale at freestanding retail stores and dedicated department
store shops they operate. We also sell to distributors who resell our products in these
territories.
11
Wholesale sales (before allowances) to our 100 largest customers
accounted for 74.0% of 2009 wholesale sales (before allowances) (or
53.2% of net sales), as compared to 70.6% of 2008 wholesale sales
(before allowances) (or 53.9% of net sales).
No single customer accounted for more than 7.2% of wholesale sales
(before allowances) for 2009 and 2008, (or 5.1% of net sales for 2009 and 2008),
except for Macys, Inc., which accounted for 13.0% and 13.5% of wholesale sales (before allowances)
for 2009 and 2008, respectively, or 9.3% and 10.3% of net sales for 2009 and 2008, respectively (see Note 8 of Notes to Consolidated
Financial Statements). Many major department store groups make centralized buying decisions;
accordingly, any material change in our relationship with any such group could have a material
adverse effect on our operations. We expect that our largest customers will continue to account for
a significant percentage of our wholesale sales. Sales to our domestic department and specialty
store customers are made primarily through our New York City showrooms. Internationally, sales to
our department and specialty store customers are made through several of our showrooms, including
those in the Netherlands, Germany, Spain, Canada and the United Kingdom.
For further information concerning our domestic and international sales, see Note 18 of Notes to
Consolidated Financial Statements and Item 7 Managements Discussion and Analysis of Financial
Condition and Results of Operations Overview.
Orders from our customers generally precede the related shipping periods by several months. Our
largest customers discuss with us retail trends and their plans regarding their anticipated levels
of total purchases of our products for future seasons. These discussions are intended to assist us
in planning the production and timely delivery of our products. We continually monitor retail sales
in order to directly assess consumer response to our products.
We utilize in-stock reorder programs in several divisions to enable customers to reorder certain
items through electronic means for quick delivery, as discussed below in the section entitled
Manufacturing. Many of our customers participate in our in-stock reorder programs through their
own internal replenishment systems.
During 2009, we continued our domestic in-store sales, marketing and merchandising programs
designed to encourage multiple item regular price sales, build one-on-one relationships with
consumers and maintain our merchandise presentation standards. These programs train sales
associates on suggested selling techniques, product, merchandise presentation and client
development strategies and are offered for many of our brands, including JUICY COUTURE, KATE SPADE,
LIZ CLAIBORNE and LUCKY BRAND and our licensed DKNY® JEANS brand.
In 2009, we continued the expansion of our domestic in-store shop and fixture programs, which is
designed to enhance the presentation of our products on department store selling floors generally
through the use of proprietary fixturing, merchandise presentations and graphics. In-store shops
operate under the following brand names: AXCESS, DKNY® JEANS, DKNY® MENS, JACK SPADE, JUICY
COUTURE, KATE SPADE, KENSIE, KENSIE GIRL, LUCKY BRAND and MEXX. Our accessories operations also
offer an in-store shop and fixture program. In 2009, we installed an aggregate of 203 in-store
shops, including 122 LIZ CLAIBORNE and 3 CLAIBORNE in-store shops which are expected to close in
2010 as a result of the JCPenney license agreement. We plan to install an aggregate of 127
additional in-store shops in 2010.
We spent $92.6 million on advertising, marketing and promotion expenditures for all of our brands
in 2009, including $36.8 million on national advertising, compared to aggregate advertising,
marketing and promotion expenditures in 2008 of $135.4 million, including $57.7 million on national
advertising.
MANUFACTURING
Pursuant to a sourcing agency agreement, Li & Fung acts as the primary global apparel and
accessories sourcing agent for all brands in our portfolio, with the exception of our jewelry
product lines. Pursuant to the agreement, we received a payment of $75.0 million at closing and an
additional payment of $8.0 million in the second quarter of 2009 to offset specific, incremental,
identifiable expenses associated with the transaction. Our agreement with Li & Fung provides for a
refund of a portion of the closing payment in certain limited circumstances, including a change of
control of the Company, the sale or discontinuation of any current brand, or certain termination
events. We are also obligated to use Li & Fung as our sourcing agent for a minimum value of
inventory purchases each year through the termination of the agreement in 2019. The licensing
arrangements with JCPenney and QVC will result in the removal of sourcing for a number of LIZ
CLAIBORNE branded products sold under these licenses from the Li & Fung sourcing arrangement. As a
result, under our agreement with Li & Fung, we are required to refund $24.3 million of the closing
payment received from Li & Fung, payable on or before April 15, 2010, with applicable late fees if
paid after that date. Such amount was included in Accrued expenses at January 2, 2010. We pay to Li
& Fung an agency commission based on the cost of product purchases using Li & Fung as our sourcing
agent. Our agreement with Li & Fung is not exclusive; however, we are required to source a
specified percentage of product purchases from Li & Fung.
Products produced in Asia represent a substantial majority of our purchases. We also source product
in the US and other regions. During 2009, several hundred suppliers located in approximately 44
countries manufactured our products, with the largest finished goods supplier accounting for less
than 6.0% of the total of finished goods we purchased. Purchases from our suppliers are processed
utilizing individual purchase orders specifying the price and quantity of the items to be produced.
12
Most of our products are purchased as completed product packages from our manufacturing
contractors, where the contractor purchases all necessary raw materials and other product
components, according to our specifications. When we do not purchase packages, we obtain
fabrics, trimmings and other raw materials in bulk from various foreign and domestic
suppliers, which are delivered to our manufacturing contractors for use in our products. We do not
have any long-term, formal arrangements with any supplier of raw materials. To date, we have
experienced little difficulty in satisfying our raw material requirements and consider our sources
of supply adequate.
We operate under substantial time constraints in producing each of our collections. In order to
deliver, in a timely manner, merchandise which reflects current tastes, we attempt to schedule a
substantial portion of our materials and manufacturing commitments relatively late in the
production cycle, thereby favoring suppliers able to make quick adjustments in response to changing
production needs and in time to take advantage of favorable (cost effective) shipping alternatives.
However, in order to secure necessary materials and to schedule production time at manufacturing
facilities, we must make substantial advance commitments, often up to five months prior to the
receipt of firm orders from customers for the items to be produced. We continue to seek to reduce
the time required to move products from design to the customer.
If we misjudge our ability to sell our products, we could be faced with substantial outstanding
fabric and/or manufacturing commitments, resulting in excess inventories. See Item 1A Risk
Factors.
Our arrangements with Li & Fung and with our foreign suppliers are subject to the risks of doing
business abroad, including currency fluctuations and revaluations, restrictions on the transfer of
funds, terrorist activities, pandemic disease and, in certain parts of the world, political,
economic and currency instability. Our operations have not been materially affected by any such
factors to date. However, due to the very substantial portion of our products that are produced
abroad, any substantial disruption of our relationships with our foreign suppliers could adversely
affect our operations. In addition, as Li & Fung is the sourcing agent for a significant portion of
our products, we are subject to the risk of having to rebuild such sourcing capacity or find
another agent or agents to replace Li & Fung in the event the agreement with Li & Fung terminates,
or if Li & Fung is unable to fulfill its obligations under the agreement.
In addition, as we rely on independent manufacturers, a manufacturers failure to ship product to
us in a timely manner, or to meet quality or safety standards, could cause us to miss delivery
dates to our customers. Failure to make deliveries could cause customers to cancel orders, refuse
deliveries or seek reduced prices, all of which could have a material adverse affect on us. We
maintain internal staff responsible for overseeing product safety compliance, irrespective of our
agency agreement with Li & Fung.
Additionally, we are a certified and validated member of the United States Customs and Border
Protections Customs-Trade Partnership Against Terrorism (C-TPAT) program and expect all of our
suppliers shipping to the United States to adhere to our C-TPAT requirements, including standards
relating to facility security, procedural security, personnel security, cargo security and the
overall protection of the supply chain. In the event a supplier does not comply with our C-TPAT
requirements, or if we determine that the supplier will be unable to correct a deficiency, we may
terminate our business relationship with the supplier.
IMPORTS AND IMPORT RESTRICTIONS
Virtually all of our merchandise imported into the United States, Canada and Europe is subject to
duties. The United States may unilaterally impose additional duties in response to a particular
product being imported (from China or other countries) in such increased quantities as to cause (or
threaten) serious damage to the relevant domestic industry (generally known as anti-dumping
actions). Furthermore, additional duties, generally known as countervailing duties, can also be
imposed by the US Government to offset subsidies provided by a foreign government to foreign
manufacturers if the importation of such subsidized merchandise injures or threatens to injure a US
industry. Legislative proposals have been put forward which, if adopted, would treat a manipulation
by China of the value of its currency as actionable under the antidumping or countervailing duty
laws. On January 26, 2010, the US Bureau of Customs and Border Protection (CBP) began enforcement
of a new import regulation of Importer Security Filing (ISF) and Additional Carrier Requirements
also known as the 10+2 rule. This new rule requires both importers and carriers to submit
additional cargo information before the cargo is loaded onto an ocean vessel bound for the United
States. CBPs goal is to: (i) improve the ability to identify high-risk shipments; (ii) prevent
smuggling and ensure cargo safety and security; (iii) strengthen security precautions aimed at
preventing terrorists weapons from potentially being transported into the US; and (iv) fulfill the
requirements of the SAFE Port Act of 2006. All importers were required to comply with this rule and
to have an effective process in place for submitting filings. Incorrect or late filings or failure
to file result in the imposition of penalties on the importer and/or delays in the loading or
release of cargo. Throughout 2009, ISF transmissions for filings were tested and a corporate
process was put into effect in the last half of 2009 in advance of regulation requirement.
13
We are also subject to other international trade agreements and regulations, such as the North
American Free Trade Agreement, the Central American Free Trade Agreement and the Caribbean Basin
Initiative and other special trade programs. Each of the countries in which our products are sold
has laws and regulations covering imports. Because the US and the other countries into which our
products are imported and sold may, from time to time, impose new duties, tariffs, surcharges or
other import controls or restrictions, including the imposition of safeguard quota, safeguard
duties, or adjust presently prevailing duty or tariff rates or levels on products being imported
from other countries, we maintain a program of intensive monitoring of import restrictions and
opportunities. We strive to reduce our potential exposure to import related risks through, among
other things, adjustments in product design and fabrication and shifts of production among
countries and manufacturers.
In light of the very substantial portion of our products that is manufactured by foreign
suppliers, the enactment of new legislation or the administration of current international trade
regulations, executive action affecting textile agreements, or changes in sourcing patterns or
quota provisions, could adversely affect our operations. Although we generally expect that the
elimination of quota will result, over the long term, in an overall reduction in the cost of
apparel produced abroad, the implementation of any safeguard quota provisions, countervailing
duties, any anti-dumping actions or any other actions impacting international trade may result,
over the near term, in cost increases for certain categories of products and in disruption of the
supply chain for certain product categories. See Item 1A Risk Factors.
Apparel and other products sold by us are also subject to regulation in the US and other countries
by other governmental agencies, including, in the US, the Federal Trade Commission, US Fish and
Wildlife Service and the Consumer Products Safety Commission. These regulations relate principally
to product labeling, content and safety requirements, licensing requirements and flammability
testing. We believe that we are in substantial compliance with those regulations, as well as
applicable federal, state, local, and foreign regulations relating to the discharge of materials
hazardous to the environment. We do not estimate any significant capital expenditures for
environmental control matters either in the current year or in the near future. Our licensed
products and licensing partners are also subject to regulation. Our agreements require our
licensing partners to operate in compliance with all laws and regulations and we are not aware of
any violations which could reasonably be expected to have a material adverse effect on our business
or financial position, results of operations, liquidity or cash flows.
Although we have not suffered any material inhibition from doing business in desirable markets in
the past, we cannot assure that significant impediments will not arise in the future as we expand
product offerings and introduce additional trademarks to new markets.
DISTRIBUTION
We distribute a substantial portion of our products through leased facilities. Our principal
distribution facilities are located in Ohio, the Netherlands and
California, as discussed in Item 2
Properties.
BACKLOG
On February 12, 2010, our order book reflected unfilled customer orders for approximately $480.6
million of merchandise, as compared to approximately $640.0 million at February 13, 2009. These
orders represent our order backlog. The amounts indicated include both confirmed and unconfirmed
orders, which we believe, based on industry practice and our past
experience, will be confirmed. We
expect that substantially all such orders will be filled within the 2010 fiscal year. We note that
the amount of order backlog at any given date is materially affected by a number of factors,
including seasonality, the mix of product, the timing of the receipt and processing of customer
orders and scheduling of the manufacture and shipping of the product, which in some instances is
dependent on the desires of the customer. Accordingly, order book data should not be taken as
providing meaningful period-to-period comparisons. However, the decline in the value of unfilled
customer orders reflects (i) general economic conditions and (ii) the reduction in wholesale
operations related to exiting the department store distribution for our Liz Claiborne brands as we
transition to license arrangements for this family of brands.
TRADEMARKS
We own most of the trademarks used in connection with our businesses and products. We also act as
licensee of certain trademarks owned by third parties.
14
The following table summarizes the principal trademarks we own and/or use in connection with our
businesses and products:
Owned Trademarks
|
|
|
|
|
|
|
AXCESS
|
|
LIZ |
|
|
BIRD BY JUICY COUTURE
|
|
LIZ & CO (a) |
|
|
BORA BORA
|
|
LIZ CLAIBORNE (a) |
|
|
CLAIBORNE (a)
|
|
LIZ CLAIBORNE NEW YORK (c) |
|
|
CONCEPTS BY CLAIBORNE (a)
|
|
LUCKY BRAND |
|
|
COUTURE COUTURE
|
|
LUCKY YOU LUCKY BRAND |
|
|
CURVE
|
|
MAC & JAC |
|
|
DANA BUCHMAN (b)
|
|
MARVELLA |
|
|
DIRTY ENGLISH
|
|
MEXX |
|
|
JACK SPADE
|
|
MONET |
|
|
JUICY COUTURE
|
|
REALITIES |
|
|
KATE SPADE
|
|
SIGRID OLSEN |
|
|
KENSIE
|
|
TRIFARI |
Licensed Trademarks
|
|
|
|
|
|
|
DKNYÒ ACTIVE
|
|
|
|
|
DKNYÒ JEANS |
|
|
|
|
DKNYÒ MENS |
|
|
|
|
|
(a) |
|
As discussed above, JCPenney will become the exclusive department store
destination in the US and Puerto Rico for LIZ CLAIBORNE, LIZ & CO., CLAIBORNE and CONCEPTS BY
CLAIBORNE merchandise in the product categories covered by the
JCPenney license agreement (which is subject to pre-existing license
agreements) for up to ten years, beginning in August 2010.
JCPenney has an option to purchase these trademarks under certain circumstances. |
|
(b) |
|
As discussed above, Kohls is the exclusive retailer for our DANA BUCHMAN brand,
pursuant to an exclusive license agreement. |
|
(c) |
|
As discussed above, QVC will become the exclusive
specialty retailer for LIZ
CLAIBORNE NEW YORK merchandise in the product categories covered by the QVC license agreement
(which is subject to pre-existing license agreements) in the US beginning in August 2010. |
In addition, we own and/or use many other logos and secondary trademarks, such as the JUICY
COUTURE crest and the LUCKY BRAND clover mark, associated with the above mentioned trademarks.
We have registered, or applied for registration of, a multitude of trademarks throughout the world,
including those referenced above, for use on a variety of apparel and apparel-related products,
including accessories, home furnishings, cosmetics and jewelry, as well as for retail services. We
regard our trademarks and other proprietary rights as valuable assets and believe that they have
significant value in the marketing of our products. We vigorously protect our trademarks and other
intellectual property rights against infringement.
In general, trademarks remain valid and enforceable as long as the marks are used in connection
with the related products and services and the required registration renewals are filed. We regard
the license to use the trademarks and our other proprietary rights in and to the trademarks as
valuable assets in marketing our products and, on a worldwide basis, vigorously seek to protect
them against infringement. As a result of the appeal of our brands, our products have from time to
time been the object of counterfeiting. We have implemented an enforcement program, which we
believe has been generally effective in controlling the sale of counterfeit products in the US and
in major markets abroad.
In markets outside of the US, our rights to some or all of our trademarks may not be clearly
established. In the course of our international expansion, we have experienced conflicts with
various third parties who have acquired ownership rights in certain trademarks, which would impede
our use and registration of some of our principal trademarks. While such conflicts are common and
may arise again from time to time as we continue our international expansion, we have generally
successfully resolved such conflicts in the past through both legal action and negotiated
settlements with third-party owners of the conflicting marks. Although we have not in the past
suffered any material restraints or restrictions on doing business in desirable markets or in new
product categories, we cannot assure that significant impediments will not arise in the future as
we expand product offerings and introduce additional brands to new markets.
15
COMPETITION
Notwithstanding our position as one of the largest fashion apparel and related accessories
companies in the US, we are subject to intense competition as the apparel and related product
markets are highly competitive, both within the US and abroad. We compete with numerous retailers,
designers and manufacturers of apparel and accessories, both domestic and foreign. We compete
primarily on the basis of fashion, quality and price and our ability to compete successfully depends upon a
variety of factors, including, among other things, our ability to:
|
|
|
anticipate and respond to changing consumer demands in a timely manner; |
|
|
|
develop quality and differentiated products that appeal to consumers; |
|
|
|
appropriately price products; |
|
|
|
establish and maintain favorable brand name and recognition; |
|
|
|
maintain and grow market share; |
|
|
|
establish and maintain acceptable relationships with our retail customers; |
|
|
|
provide appropriate service and support to retailers; |
|
|
|
provide effective marketing support and brand promotion; |
|
|
|
appropriately determine the size and identify the location of our retail stores and
department store selling space; |
|
|
|
protect our intellectual property; and |
|
|
|
optimize our retail and supply chain capabilities. |
See Item 1A Risk Factors.
Within our retail-focused Domestic-Based Direct Brands segment, our principal competitors vary by
brand and include the following:
|
|
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For JUICY COUTURE: Marc by Marc Jacobs, Theory, Twisted Hearts, Abercrombie & Fitch and
Coach |
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For LUCKY BRAND: Diesel, Guess, True Religion, 7 for all Mankind and Free People |
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For KATE SPADE: Coach, Cole Haan, Marc by Marc Jacobs, Michael Kors and Tory Burch |
The principal competitors of our retail-focused International-Based Direct Brands segment include
Esprit, Zara, Marc OPolo, S. Oliver, H&M, Tommy Hilfiger, InWear/Matinique and other global
European brands.
Our principal competitors in the United States for the majority of the wholesale-based Partnered
Brands segment (LIZ CLAIBORNE and MONET families of brands and our licensed DKNY® JEANS, DKNY®
ACTIVE and DKNY® MENS brands) include Jones Apparel Group, Inc. and Polo Ralph Lauren Corporation,
as well as department store private label brands.
EMPLOYEES
At January 2, 2010, we had approximately 11,500 full-time employees worldwide, as compared to
approximately 15,000 full-time employees at January 3, 2009.
In the US and Canada, we are bound by the following collective bargaining agreements:
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Number of |
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Union |
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Employees |
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Expiration |
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Location |
Chicago and Midwest Regional Joint Board, Workers United |
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305 |
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June 2011 |
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West Chester, Ohio |
New England Joint Board, UNITE HERE |
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90 |
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May 2012 |
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Lincoln, Rhode Island (a) |
Industrial Professional and Technical Workers International
Union |
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89 |
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May 2010 |
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Santa Fe Springs, California (b) |
Western States Regional Joint Board, Workers United (c) |
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85 |
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May 2012 |
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Vernon, California |
Affiliates of Workers United |
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62 |
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May 2011 |
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Montreal, Quebec (d) |
Locals 10 and 23-25, New York Metropolitan Area Joint Board,
Workers United and Local 99, Metropolitan Distribution and
Trucking Joint Board, Workers United (c) |
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31 |
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May 2012 |
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New York, New York and North Bergen, New Jersey |
Affiliates of Workers United |
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7 |
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May 2010 |
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Burnaby, British Columbia |
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(a) |
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This facility is expected to be closed on or about April 30, 2010. |
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(b) |
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This facility was closed in January of 2010. |
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(c) |
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Subject to renegotiation on each of the first and second anniversaries of the effective date. |
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(d) |
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Excludes a bargaining unit of 15 employees that has not agreed upon a first
collective bargaining agreement. The Union has invoked its rights under the labor laws
governing the province to refer the matter to mediation, and failing agreement, final and
binding arbitration. |
16
While relations between us and these unions have historically been amicable, and we do not
anticipate an economic dispute when the contracts reopen or expire, we cannot rule out the
possibility of a labor dispute at one or more of these facilities.
The local or regional unions affiliated with Workers United were previously affiliated with UNITE
HERE but disaffiliated from UNITE HERE during 2009. These two unions are engaged in extensive
litigation against each other. We believe we have complied with our contractual commitments and
statutory obligations and currently have no disputes with either union. However, we may in the
future be involved in disputes as a result of the ongoing litigation between the unions.
CORPORATE SOCIAL RESPONSIBILITY
We are committed to responsible corporate citizenship and giving back to our communities through a
variety of avenues and have several programs in place that support this commitment.
Monitoring Global Working Conditions
We are committed to taking the actions we believe are necessary to ensure that our products are
made in contracted factories with fair and decent working conditions. We continue this commitment
as we operate under our sourcing arrangement with Li & Fung, collaborating with Li & Fung to develop mutually
acceptable audit documents and processes, training the Li & Fung audit staff on our compliance program
and communicating our standards to Li & Fung suppliers and their workers.
The major components of our compliance program are: (i) communicating our Standards of Engagement
to workers, suppliers and associates; (ii) auditing and monitoring against those standards; (iii)
providing workers with a confidential reporting channel; (iv) working with non-governmental
organizations; and, most recently, (v) working closely with factory management to develop
sustainable compliance programs. Suppliers are required to post our Standards of Engagement in the
workers native language at all factories where our merchandise is being made. We have used various
methods to educate workers regarding our standards and their rights, including development of
booklets to better illustrate those standards and involving non-governmental organizations to train
workers. The Standards of Engagement, along with detailed explanations of each standard, are
included in our suppliers website. All new suppliers must acknowledge our standards and agree to
our monitoring requirements. Additionally, in 2009, the Liz Claiborne and the Li & Fung compliance
teams began holding supplier conferences in person and via teleconference to review our Standards
of Engagement and monitoring requirements.
We have been a participating company in the Fair Labor Association (FLA) since its inception. The
FLA is a collaborative effort comprised of socially responsible companies, colleges and
universities and civil society organizations whose collective purpose is to improve working
conditions at factories around the world. The FLA has developed a Workplace Code of Conduct, based
on International Labor Organization standards and has created benchmarks to monitor adherence to
those standards, or to perform remediation. Its monitoring program is a brand accountability system
that places responsibility on companies to voluntarily achieve desired workplace standards in
factories manufacturing their goods. In May 2005, we were in the first group of six companies
accredited by the FLA, and we were reaccredited in June 2008. Re-accreditation signifies that we
continue to focus our labor compliance program around FLA standards, benchmarks and protocols and
have met the requirements of FLA participation.
As of January 2, 2010, we had approximately 470 active factories on our roster. A total of
approximately 360 were subject to audits conducted by our internal auditors, Li & Fung auditors or
external auditors. In many cases, we will be relying on our agents audit reports. As such, we will
be conducting shadow audits to confirm that audit protocols and findings are consistent between the
two companies. Additionally, as a participating company in the FLA, our suppliers factories are
also subject to independent, unannounced audits by accredited FLA monitors.
We are aware that auditing only confirms compliance at the time of the audit, and we continue to
look for ways to improve our monitoring program and work with suppliers to create sustainable
compliance at their factories. Creating workers awareness and establishing a channel of
communication for reporting issues of non-compliance are two important steps. We have begun to
focus on programs which generally concentrate on educating workers on their rights and coaching
factory management to create effective internal grievance procedures. For several high risk
factories in China, we have collaborated with a local non-governmental organization to provide
workers rights training.
17
Philanthropic Programs
We have a number of philanthropic programs that support the nonprofit sector in our major operating
communities and beyond.
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The Liz Claiborne Foundation, established in 1981, is a separate nonprofit legal entity
supporting nonprofit organizations working with women to achieve economic independence. The
Foundation supports programs in the US communities where our primary offices are located that
offer essential job readiness training and increase access to tools that help women, including
those affected by domestic violence, transition from poverty into successful independent
living. |
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Liz Claiborne Associates Committed to Service (LizACTS) is our company-wide volunteer
program that allows our associates to work collectively to respond to community needs. Our
associates identify and design volunteer projects through community organizations to address
the pressing needs of women and families. LizACTS teams typically coordinate volunteer
activities under the general program areas of HIV/AIDS, health, the environment, homelessness,
womens issues and the needs of youth. Thousands of associates and executives join together,
along with their families and friends, to contribute their time and talents. |
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The Merchandise Donation Program provides direct charitable support to meet community
needs, primarily in the form of merchandise donations and limited monetary contributions. We
donate product, samples, fixtures and furniture to several types of organizations, including
clothing banks, programs for women and certain charitable interests of our associates. |
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The Matching Gift Program supports and encourages the charitable interests of our
associates. Our flexible program matches associates gifts in the areas of arts, health and
safety, education, human services, the environment and contributions to organizations where
associates serve as voluntary board members. |
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The Liz Claiborne, Inc. Scholarship Program provides one-time scholarships to children of
our associates who have demonstrated outstanding academic achievement. We awarded 45
scholarships in the programs first five years. |
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Love Is Not Abuse is a long-term campaign that uses our corporate profile and influence to
advocate anti-violence messages to the general public. One of the first major corporate
programs in the US to take a stand on the issue of domestic violence, Love is Not Abuse has
targeted everyday Americans who, with the right tools and information, can help prevent
violent relationships. This program is focused on providing educational resources to help
young boys and girls, teenagers, educators, parents, corporate executives and employees learn
what they can do, individually and collectively, to curtail abuse. |
Environmental Initiatives
We are committed to a long-term sustainable approach to caring for and safeguarding the
environment. As such, we endeavor to balance environmental considerations and social responsibility
with our business goals, consistently evolving and implementing our Corporate Environmental Policy,
in addition to complying with environmental laws and regulations. Our current sustainability policy
focuses on three major components reducing waste, reusing and recycling to help minimize our
impact on the environment and achieve our environmental objectives (additional details are
available on our website). As our business, the economy, and the environment in which we operate
evolve, we will remain aware of the impact our actions have on the environment and revise and
enhance our corporate environmental strategy, as appropriate.
You should carefully consider the following risk factors, in addition to other information included
in this Annual Report on Form 10-K and in other documents we file with the SEC, in evaluating the
Company and its business. If any of the following risks occur, our business, financial condition,
liquidity and results of operations could be materially adversely affected. We caution the reader
that these risk factors may not be exhaustive. We operate in a continually changing business
environment, and new risks emerge from time to time. Management cannot predict such new risk
factors, nor can we assess the impact, if any, of such new risk factors on our business or the
extent to which any factor or combination of factors may impact our business.
18
Our ability to continue to have the liquidity necessary, through cash flows from operations and
availability under our amended and restated revolving credit facility, may be adversely impacted by
a number of factors, including the level of our operating cash flows, our ability to maintain
established levels of availability under, and to comply with the financial and other covenants
included in, our amended and restated revolving credit facility and the borrowing base requirement
in our amended and restated revolving credit facility that limits the amount of borrowings we may
make based on a formula of, among other things, eligible accounts receivable and inventory; the
timing of an anticipated $166.7 million of income tax refunds, which are expected by the end of the
first quarter of 2010; the minimum availability covenant in our amended and restated revolving
credit facility that requires us to maintain availability in excess of an agreed upon level and
whether holders of our Convertible Notes issued in June 2009 will, if and when such notes are
convertible, elect to convert a substantial portion of such notes, the par value of which we must
currently settle in cash.
Our primary ongoing cash requirements are to: (i) fund seasonal working capital needs (primarily
accounts receivable and inventory); (ii) fund capital expenditures related to the opening and
refurbishing of our specialty and outlet stores and normal maintenance activities; (iii) fund
remaining efforts associated with our streamlining initiatives, which include consolidation of
office space and distribution centers and reductions in staff; (iv) invest in our information
systems; and (v) fund operational and contractual obligations,
including the refund payable to Li & Fung
discussed below. We also require cash to fund payments related to outstanding earn-out provisions
of certain of our previous acquisitions.
In January 2009, we completed the amendment and extension of our revolving credit agreement (the
Amended Agreement), which was previously scheduled to expire in October 2009, with the Amended
Agreement expiring in May 2011. On November 2, 2009, we completed a third amendment to our Amended
Agreement, which (i) provides that through the maturity date of the Amended Agreement, the fixed
charge coverage covenant will be in effect only when availability under the amended and restated
revolving credit facility fails to exceed $75.0 million on any date on or after the first day of
the October fiscal month and prior to the first day of the December fiscal month, $120.0 million on
any date from December 15 of a calendar year through January 30 of the following year or $90.0
million on any other date; (ii) amends the prepayment requirements whereby any net proceeds
received by or on behalf of the Company or its subsidiaries in respect of any permitted disposition
transactions shall be used to repay the outstanding borrowings under the Amended Agreement and, to
the extent that such net proceeds exceed the amount of such outstanding borrowings, cash
collateralize outstanding exposure in an aggregate amount equal to 100% of such net proceeds; (iii)
permits indebtedness and guarantees by certain parties noted in the Amended Agreement; and (iv)
permits the grant of the purchase option and the sale of certain assets, including the trademarks
that were licensed to JCPenney on October 7, 2009.
By the end of the first quarter of 2010, we expect to receive $166.7 million of income tax refunds
on previously paid taxes due to a Federal law change allowing our 2008 or 2009 domestic losses to be
carried back for five years, with the fifth year limited to 50.0% of taxable income. As a condition
of the Amended Agreement, we are required to repay amounts outstanding thereunder with the amount
of such refunds.
As a result of the US Federal tax law change extending the carryback period from two to five years
and our carryback of our 2009 tax loss to 2004 and 2005, the IRS has the ability to re-open its
past examinations of 2004 and 2005.
As discussed above, under our Amended
Agreement, we are subject to a fixed charge coverage covenant through May 2011 in the event our
borrowing availability falls below certain designated levels. We are also subject to minimum
borrowing availability levels and various other covenants and other requirements, such as financial
requirements, reporting requirements and various negative covenants. There can be no certainty that
availability under the Amended Agreement will be sufficient to fund our liquidity needs, or meet
minimum requirements or remain at levels that will keep the fixed charge coverage covenant from
springing into effect. Based upon our current projections, subject to
the expected timing of the receipt of the anticipated tax refunds, we currently anticipate that our borrowing availability will be sufficient to avoid
springing the fixed charge coverage covenant for at least the next 12 months. The sufficiency and
availability of our sources of liquidity may be affected by a variety of factors, including,
without limitation: (i) the level of our operating cash flows, which will be impacted by retailer
and consumer acceptance of our products, general economic conditions and the level of consumer
discretionary spending; (ii) the status of, and any further adverse changes in, our credit ratings;
(iii) our ability to maintain required levels of borrowing availability and to comply with
applicable financial covenants (as amended) and other covenants included in our debt and credit
facilities; (iv) the financial wherewithal of our larger department store and specialty store
customers; (v) our ability to successfully execute on the licensing arrangements with JCPenney and
QVC with respect to the LIZ CLAIBORNE family of brands; (vi) the timing of the receipt of the
anticipated tax refunds; (vii) interest rate and exchange rate fluctuations; and (viii) whether
holders of the Convertible Notes, if and when such notes are convertible, elect to convert a
substantial portion of such notes, the par value of which we must currently settle in cash. Also,
our agreement with Li & Fung provides for a refund of a portion of the $75.0 million closing
payment in certain limited circumstances, including a change in control of our Company, the sale or
discontinuation of any of our current brands, or certain termination events. The licensing
arrangements with JCPenney and QVC will result in the removal of sourcing for a number of LIZ
CLAIBORNE branded products sold under these licenses from the Li & Fung sourcing arrangement. As a
result, under our agreement with Li & Fung, we are required to refund $24.3 million of the closing
payment received from Li & Fung, payable by April 15, 2010, with applicable late fees if paid after
that date. Our agreement with Li & Fung is not exclusive; however, we are required to source
a specified percentage of product purchases from Li & Fung.
19
In addition, our Amended Agreement contains a borrowing base that is determined primarily by the
level of our eligible accounts receivable and inventory. If we do not have a sufficient borrowing
base at any given time, borrowing availability under our Amended Agreement may trigger application
of the fixed charge coverage covenant or default and also may not be sufficient to support our
liquidity needs. Insufficient borrowing availability under our Amended Agreement would likely have
a material adverse effect on our business, financial condition, liquidity and results of
operations. An acceleration of amounts outstanding under the Amended Agreement would likely cause
cross-defaults under the Companys other outstanding indebtedness, including the 6.0% Convertible
Senior Notes due June 15, 2014 (the Convertible Notes) and our 5.0% 350.0 million euro Notes due
2013. We currently believe that the financial institutions under the Amended Agreement are able to
fulfill their commitments, although such ability to fulfill commitments will depend on the
financial condition of our lenders at the time of borrowing.
The Convertible Notes become convertible during any fiscal quarter if the last reported sale price
of our common stock during 20 out of the last 30 trading days in the prior fiscal quarter equals or
exceeds $4.2912 (which is 120% of the conversion price). As a result of stock price performance
during the quarter ended January 2, 2010, the Convertible Notes are convertible during the first
quarter of 2010. As previously disclosed in connection with the issuance of the Convertible Notes,
we have not yet obtained stockholder approval under the rules of the New York Stock Exchange for
the issuance of the full amount of common stock issuable upon conversion of the Convertible Notes.
Until such approval is obtained, if the Convertible Notes are surrendered for conversion, we must
pay the $1,000 principal amount of the conversion value of the Convertible Notes in cash and may
settle the remaining conversion value in the form of cash, stock or a combination of cash and
stock. Although we consider the conversion of a material amount of the Convertible Notes in the
near future to be unlikely, if all or a substantial portion of the outstanding Convertible Notes
were so converted and we were required to settle all of the converted Convertible Notes in cash,
then we might not have sufficient liquidity to meet our obligations to pay the amounts required
upon conversion of the Convertible Notes and maintain the requisite levels of availability required
under the Amended Agreement.
As discussed above, through May 2011, we are subject to a fixed charge coverage covenant under the
Amended Agreement in the event borrowing availability falls below the levels described above. We
are also subject to minimum borrowing levels, which require us to maintain availability at the
levels described above. We are also subject to various other covenants and other requirements, such
as financial requirements, reporting requirements and various negative covenants. Based on our
forecast of borrowing availability under the Amended Agreement, and subject to the expected timing
of the receipt of the anticipated tax refunds, we anticipate that cash flows from operations and
the projected borrowing availability under our Amended Agreement will be sufficient to fund our
liquidity requirements for at least the next 12 months. While we might not be able to maintain the
borrowing availability levels necessary to avoid application of the fixed charge coverage covenant,
we currently anticipate that, based on the expected timing of the
receipt of the anticipated tax refunds,
our borrowing availability will be sufficient to avoid springing the fixed charge coverage
covenant. If such covenant takes effect during such period, we currently project that we would not
be in compliance with such covenant through such period. Compliance with the fixed charge coverage
covenant is dependent on the results of our operations, which are subject to a number of factors
including current economic conditions and levels of consumer spending. The recent economic
environment has resulted in significantly lower employment levels, disposable income and actual
and/or perceived wealth, significantly lower consumer confidence and significantly reduced retail
sales. Further reductions in consumer spending, as well as a failure of consumer spending levels to
rise to previous levels, or a continuation or worsening of current economic conditions would
adversely impact our net sales and cash flows, which could adversely affect our compliance with the
fixed charge coverage covenant of the Amended Agreement, if it became applicable. Should we be
unable to comply with the requirements in the Amended Agreement, we would be unable to borrow under
such agreement, and any amounts outstanding would become immediately due and payable unless we were
able to secure a waiver or an amendment under the Amended Agreement. Should we be unable to borrow
under the Amended Agreement, or if outstanding borrowings thereunder become immediately due and
payable, our liquidity would be significantly impaired, which would have a material adverse effect
on our business, financial condition and results of operations. In addition, an acceleration of
amounts outstanding under the Amended Agreement would likely cause cross-defaults under our other
outstanding indebtedness, including the Convertible Notes and the 5.0% Notes.
Because of the continuing uncertainty and risks relating to future economic conditions, including
consumer spending in particular, we may, from time to time, explore various initiatives to improve
our liquidity, including sales of various assets, additional cost reductions and other measures. In
addition, where conditions permit, we may also, from time to time, seek to retire, exchange or
purchase our outstanding debt in privately negotiated transactions or otherwise. We may not be able
to successfully complete any of such actions if necessary.
20
General economic conditions in the United States, Europe and other parts of the world, including a
continued weakening of such economies, restricted credit markets and lower levels of consumer
spending, can affect consumer confidence and consumer purchases of discretionary items, including
fashion apparel and related products, such as ours.
The economies of the United States, Europe and other parts of the world in which we operate have
weakened significantly as a result of the recent global economic crisis. Our results are dependent
on a number of factors impacting consumer spending, including, but not limited to: (i) general
economic and business conditions both in the US and abroad; (ii) consumer confidence; (iii) wages
and current and expected employment levels; (iv) the housing market; (v) consumer debt levels; (vi)
availability of consumer credit; (vii) credit and interest rates; (viii) fluctuations in foreign
currency exchange rates; (ix) fuel and energy costs; (x) energy shortages; (xi) the performance of
the financial, equity and credit markets; (xii) taxes; (xiii) general political conditions, both
domestic and abroad; and (xiv) the level of customer traffic within department stores, malls and
other shopping and selling environments.
Recent global economic conditions have included significant recessionary pressures and declines in
employment levels, disposable income and actual and/or perceived wealth and further declines in
consumer confidence and economic growth. These conditions have led and could lead to continued
substantial declines in consumer spending over the foreseeable future and may have resulted in a
resetting of consumer spending habits that makes it unlikely that spending will return to prior
levels for the foreseeable future. The current depressed economic environment has been
characterized by a dramatic decline in consumer discretionary spending and has disproportionately
affected retailers and sellers of consumer goods, particularly those whose goods represent
discretionary purchases, including fashion apparel and related products such as ours. A number of
our markets continue to suffer particularly severe downturns, including our Eastern European
markets, which have been particularly adversely affected by conditions in the world economy, and we
have experienced, and expect to continue to experience, significant declines in revenues.
Profitability of our MEXX business has been, and is expected to continue to be, even more affected
by such downturn as such regions account for a significant amount of MEXXs profitability. We
expect such declines to continue as the adverse impacts of the economic downturn continue to be
felt. Economic conditions have also led to a highly promotional environment and strong discounting
pressure from both our wholesale and retail customers, which have had a negative effect on our
revenues and profitability. This promotional environment may likely continue even after economic
growth returns, as we expect that consumer spending trends are likely to remain at historically
depressed levels for the foreseeable future. The domestic and international political situation
also affects consumer confidence. The threat, outbreak or escalation of terrorism, military
conflicts or other hostilities could lead to further decreases in consumer spending. The recent
downturn and uncertain outlook in the global economy will likely continue to have a material
adverse impact on our business, financial condition, liquidity and results of operations.
Fluctuations in the price, availability and quality of the fabrics or other raw materials used to
manufacture our products, as well as the price for labor, marketing and transportation, could have
a material adverse effect on our cost of sales or our ability to meet our customers demands. The
prices for such fabrics depend largely on the market prices for the raw materials used to produce
them. Such factors may be exacerbated by legislation and regulations associated with global climate
change. The price and availability of such raw materials may fluctuate significantly, depending on
many factors. In the future, we may not be able to pass all or a portion of such higher prices on
to our customers.
The wholesale businesses in our Direct Brands and Partnered Brands segments are dependent to a
significant degree on sales to a limited number of large US department store customers, and our
business could suffer as a result of consolidations, restructurings, bankruptcies and other
ownership changes in the retail industry, financial difficulties at our large department store
customers and negative reaction to our licensing arrangements with JCPenney and QVC.
Many major department store groups make centralized buying decisions. Accordingly, any material
change in our relationship with any such group could have a material adverse effect on our
operations. We expect that our largest customers will continue to account for a significant
percentage of our wholesale sales. The implementation of our licensing arrangements with JCPenney
and QVC changed the business model of our LIZ CLAIBORNE brands from a wholesale model, in which the
Company and a limited number of licensees manufactured goods to be sold through various retail
channels to a license model where we will not be sourcing or selling products, but instead
receiving a royalty based on net sales by our license partner, and in the case of our JCPenney
license, a share in gross profits over agreed upon levels. The goals of these arrangements, which
are to revitalize the LIZ CLAIBORNE franchise, reduce working capital needs and increase earnings,
might not be met as we seek to implement this new business model and face risks associated with the
reception of this new direction among other customers, who may, among other things, seek to change
their relationships with our other brands or may de-emphasize our other brands, in response to our
LIZ CLAIBORNE brand arrangements, which, in the case of JCPenney,
include an exclusive right and license
(subject to pre-existing licenses and certain limited exceptions) for the sale, marketing,
merchandising, advertising and promotion of the LIZ CLAIBORNE, LIZ & CO., CLAIBORNE and CONCEPTS BY
CLAIBORNE merchandise in the covered product categories in the United States and Puerto Rico. In addition, sales of the licensed brands
may suffer during the period leading up to the expected commencement of sales under the agreements
in the third quarter of 2010 as certain of our customers may seek to phase out the brands that have
been licensed to JCPenney or QVC in anticipation of the changes. In addition, our arrangements with
JCPenney and QVC will make us more dependent on the financial and operational health of those
companies.
21
Our continued dependence on sales to a limited number of large US department store customers is
subject to our ability to respond effectively to, among other things: (i) these customers buying
patterns, including their purchase and retail floor space commitments for apparel in general
(compared with other product categories they sell) and our products specifically (compared with
products offered by our competitors, including with respect to customer and consumer acceptance,
pricing and new product introductions); (ii) these customers strategic and operational
initiatives, including their continued focus on further development of their private label
initiatives; (iii) these customers desire to have the Company provide them with exclusive and/or
differentiated designs and product mixes; (iv) these customers requirements for vendor margin
support; (v) any credit risks presented by these customers, especially given the significant
proportion of the Companys accounts receivable they represent; and (vi) the effect of any potential
consolidation among these larger customers. In addition, our sales to such customers
will depend on the reaction of those customers to our licensing arrangements for the LIZ CLAIBORNE
brands.
We do not enter into long-term agreements with any of our wholesale customers. Instead, we enter
into a number of purchase order commitments with our customers for each of our lines every season.
A decision by the controlling owner of a group of stores or any other significant customer, whether
motivated by competitive conditions, financial difficulties or otherwise, to decrease or eliminate
the amount of merchandise purchased from us or to change their manner of doing business with us
could have a material adverse effect on our business, financial condition, liquidity and results of
operations. As a result of the recent unfavorable economic environment, we have experienced a
softening of demand from a number of wholesale customers, such as large department stores, who have
been highly promotional and have aggressively marked down all of their merchandise, including our
products. Any promotional pricing or discounting in response to softening demand may also have a
negative effect on brand image and prestige, which may be difficult to counteract once the economy
improves. Furthermore, this promotional activity may lead to requests from those customers for
increased markdown allowances at the end of the season. Promotional activity at our wholesale
customers will also often result in promotional activity at our retail stores, further eroding
revenues and profitability.
We sell our wholesale merchandise primarily to major department stores across the US and Europe and
extend credit based on an evaluation of each customers financial condition, usually without
requiring collateral. However, the financial difficulties of a customer could cause us to curtail
or eliminate business with that customer. We may also assume more credit risk relating to our
receivables from that customer. Our inability to collect on our trade accounts receivable from any
of our largest customers could have a material adverse effect on our business, financial condition,
liquidity and results of operations. Moreover, the difficult macroeconomic conditions and
uncertainties in the global credit markets could negatively impact our customers and consumers
which, in turn, could have an adverse impact on our business, financial condition, liquidity and
results of operations.
We may not be able to effect a turnaround of our MEXX Europe business.
We are in the process of implementing initiatives announced in September 2008 to accelerate the
turnaround of the MEXX business in Europe. These initiatives focus on enhancing the brand by
improving product appeal, more closely linking the wholesale and retail presentations,
strengthening retail operations and improving our supply chain model. As part of this effort,
Thomas J. Grote became CEO of MEXX effective October 1, 2009. However, these initiatives might not
maintain or improve the operating results of our MEXX Europe operations.
We cannot assure the successful implementation and results of our long-term strategic plans.
Our ability to execute our long-term growth plan and achieve our projected results is subject to a
variety of risks, including the following:
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Our strategic plan contemplated a significant expansion of our
specialty retail business in our Domestic-Based Direct Brands and
International-Based Direct Brands segments. The successful operation
and expansion of our specialty retail business in our Direct Brands
segments is subject to, among other things, our ability to: (i) successfully expand the specialty store base of our Direct Brands
segments; (ii) successfully find appropriate sites;
(iii) negotiate favorable leases; (iv) design and create appealing
merchandise; (v) manage inventory levels; (vi) install and operate
effective retail systems; (vii) apply appropriate pricing strategies;
and (viii) integrate such stores into our overall business mix. We may
not be successful in this regard, and our inability to successfully
expand our specialty retail business would have a material adverse
effect on our business, financial condition, liquidity and results of
operations. In 2009, in light of the current economic conditions
and the dramatic decline in consumer spending, especially for fashion
apparel and related products such as ours, we significantly decreased capital expenditures and
opened
24 retail stores (excluding the conversion of 29 concession stores to specialty retail formats).
In 2010, we are slightly increasing
our capital expenditure budget and are planning on opening
approximately 25 to 30 retail stores. |
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In 2007, we announced a number of initiatives designed to achieve
greater collaboration with our wholesale customers and to improve
results of our wholesale-based Partnered Brands. These initiatives
include design agreements with Isaac Mizrahi with respect to our LIZ
CLAIBORNE brand and with John Bartlett with respect to our CLAIBORNE
(mens) brand. Our wholesale customers had been seeking differentiated
products, and we believed that these design agreements would enable us
to distinguish our product offering. Over time, we realized that these
arrangements and the traditional wholesale business model would not be
the solution to improving results for our LIZ CLAIBORNE brands. In
October 2009, we changed the business model for our LIZ CLAIBORNE
brands from a wholesale model selling to department stores, to a
license model where we will not be sourcing or selling products, but
instead will be receiving a royalty based on net sales by our license
partner and, in the case of our JCPenney license agreement, a share in
gross profits over agreed upon levels. Our failure to successfully
implement this new model, including as a result of any terminations of
these new licensing arrangements, would have a material adverse effect
on our business and results. |
22
To help us improve our sourcing and supply chain capabilities at our MEXX Europe business, in 2008,
we entered into an agreement with Hong Kong-based, global consumer goods exporter Li & Fung,
whereby Li & Fung acts as the primary global apparel sourcing agent for the MEXX brand and MEXXs
existing sourcing agent offices were integrated into the Li & Fung organization. On February 23,
2009, we entered into a long-term, sourcing agency agreement with Li & Fung, pursuant to which Li &
Fung acts as the primary global apparel and accessories sourcing agent for all brands in our
portfolio, with the exception of our jewelry product lines. Li & Fung continues as the primary
sourcing agent for MEXX. Pursuant to the agreement, we received at closing on March 31, 2009 a
payment of $75.0 million and an additional payment of $8.0 million to offset specific, incremental,
identifiable expenses associated with the transaction. We now pay to Li & Fung an agency commission
based on the cost of our product purchases made through Li & Fung. Our sourcing agent offices in
Hong Kong, India, Indonesia, Shanghai and Shenzhen have been substantially integrated into the Li &
Fung organization. We might not be successful in these efforts, and our failure to evolve our supply chain capabilities and reduce costs in this
area will have a material adverse impact on our business and results. In addition, our agreement
with Li & Fung provides for a refund of a portion of the closing payment under certain limited
circumstances, including a change in control of the Company, the sale or discontinuation of any of
our current brands, certain termination events and the failure to maintain certain levels of
business. We are also obligated to use Li & Fung as our sourcing agent for a minimum value of
inventory purchases each year through the termination of the agreement in 2019. The licensing
arrangements with JCPenney and QVC will result in the removal of sourcing for a number of LIZ
CLAIBORNE branded products sold under these licenses from the Li & Fung sourcing arrangement. As a
result, under our agreement with Li & Fung, we are required to refund $24.3 million of the closing
payment received from Li & Fung, payable on or before April 15, 2010, with applicable late fees if
paid after that date. Our agreement with Li & Fung is not exclusive; however, we are required to source a specified
percentage of product purchases from Li & Fung. We continue to assess various streamlining
opportunities to reduce costs associated with our distribution process, which could result in
additional outsourcing agreements in the future.
The successful implementation and execution of the licensing arrangements with JCPenney and QVC
presents risks, including, without limitation, our ability to efficiently change our operational
model and infrastructure as a result of such licensing arrangements, our ability to continue a good
working relationship with those licensees and possible changes in our other brand relationships or
relationships with other retailers as a result.
On October 7, 2009, we entered into a multi-year license agreement with JCPenney, which granted
JCPenney an exclusive right and license (subject to pre-existing licenses and certain limited
exceptions) to use the LIZ CLAIBORNE, LIZ & CO., CLAIBORNE and CONCEPTS BY CLAIBORNE trademarks
with respect to covered product categories. The scope of the license is worldwide for the
manufacture of the licensed products and limited to JCPenneys operations in the US and Puerto Rico
for the sale, marketing, merchandising, advertising and promotion of
the licensed products. Under the agreement, JCPenney will only use
designs provided or approved by us. The
license agreement provides for the payment to us of royalties based on net sales of licensed
products by JCPenney and a portion of the related gross profit when the gross profit percentage
exceeds a specified rate, subject to a minimum annual payment. We also entered into a multi-year
license agreement with QVC, granting rights (subject to pre-existing licenses) to certain of our
trademarks and other intellectual property rights. QVC has the rights to use the LIZ CLAIBORNE NEW
YORK brand with Isaac Mizrahi as creative director on any apparel, accessories, or home categories
in its US and international markets. QVC will merchandise and source the products and we will
provide brand management oversight. The QVC agreement provides for the payment to us of a royalty
based on net sales. We expect products under these agreements to be introduced in the third quarter
of 2010.
In connection with these license agreements, we will be required to adjust our operational model
and infrastructure to accommodate the reduction in our requirements to source the products that are
the subject of these licenses, which will involve the consolidation of office space and reduction
in staff in certain related support functions. As a result, we may incur further charges related to
the reduction of leased space, impairments of property and equipment and other assets, severance
and other restructuring costs. These actions are expected to be completed in the second quarter of
2010. Most of our existing product licensees will now need to work with QVC and JCPenney directly.
Such existing licensees and JCPenney and/or QVC might not be able to successfully work together on
the license product categories.
Although we have had business dealings with each of JCPenney and QVC prior to entering into these
license agreements, these agreements create new business
relationships, including certain levels of exclusivity. Although each agreement
provides for the payment to us by the respective licensees of certain annual minimum royalties, we
believe that, specifically with respect to the JCPenney agreement, the successful implementation of
this significant change in the nature of our wholesale business and expanding our relationship with
JCPenney presents certain risks to us, including our ability to obtain the maximum value from each of these
agreements and our ability for our design, merchandising and other philosophies to mesh with those
of our licensees. Moreover, given the exclusive nature of a number of aspects of these transactions and our
reliance on the licensees payments of the respective annual minimum royalties, we are assuming
more credit risk relating to our receivables from these business partners. Our inability to collect
the annual minimum royalties from JCPenney could have a material adverse effect on our business,
financial condition, results of operations, cash flows and liquidity.
23
Our decision to enter into the JCPenney license agreement and the QVC license agreement with their
respective exclusivity provisions for the stated brands may have an adverse impact on sales of our
other brands to our US department store customers. We operate in a highly competitive retail
environment. As a result of the exclusive license to JCPenney of the sale, marketing,
merchandising, advertising and promotion of the LIZ CLAIBORNE, LIZ & CO., CLAIBORNE and CONCEPTS BY
CLAIBORNE trademarks, sales of the licensed brands may suffer during the period leading up to the
expected commencement of sales under the agreements in the third quarter of 2010 as certain of our
US department store customers may seek to phase out the brands. Domestic retailers selling LIZ
CLAIBORNE products before the exclusive arrangements were announced did continue to purchase units
through the Holiday 2009 season in accordance with their buying plans. Although our other brands
have not been adversely impacted to date, certain of our other US department store customers may
elect not to purchase our other products if such customers are unable to purchase the complete line
of our branded products. Such a decision by a group of US department stores or any other
significant customers to decrease or eliminate the amount of merchandise purchased from us or to
change their manner of doing business with us as a result of the JCPenney license or QVC license
could have a material adverse effect on our business, financial condition, results of operations,
cash flows and liquidity.
The JCPenney license and the QVC license provide the licensees with the option, under certain
circumstances, to terminate the license. Any such termination could result in a material adverse
effect on our business and results. Furthermore, the JCPenney license provides an option to
JCPenney to purchase the licensed trademarks and certain other trademarks under certain
circumstances. The exercise of such option may require us to incur material costs and expenses to
comply with our obligations under the JCPenney license agreement and certain other license
agreements.
The success of our business depends on our ability to anticipate and respond to constantly changing
consumer demands and tastes and fashion trends, across multiple product lines, shopping channels
and geographies.
The apparel and accessories industries have historically been subject to rapidly changing consumer
demands and tastes and fashion trends and to levels of discretionary spending, especially for
fashion apparel and related products, which levels are currently weak. We believe
that our success is largely dependent on our ability to effectively anticipate, gauge and respond
to changing consumer demands and tastes across multiple product lines, shopping channels and
geographies, in the design, pricing, styling and production of our products (including products we
will design for JCPenney under our licensing arrangement and products to be designed by Isaac
Mizrahi under the QVC arrangement) and in the merchandising and pricing of products in our retail
stores. Our brands and products must appeal to a broad range of consumers whose preferences cannot
be predicted with certainty and are subject to constant change. Also, we must maintain and enhance
favorable brand recognition, which may be affected by consumer attitudes towards the desirability
of fashion products bearing a mega brand label and which are widely available at a broad range of
retail stores.
We attempt to schedule a substantial portion of our materials and manufacturing commitments
relatively late in the production cycle. However, in order to secure necessary materials and ensure availability of
manufacturing facilities, we must make substantial advance commitments, often as much as five
months prior to the receipt of firm orders from customers for the items to be produced. We need to
translate market trends into appropriate, saleable product offerings relatively far in advance,
while minimizing excess inventory positions, and correctly balance the level of our fabric and/or
merchandise commitments with actual customer orders. We cannot assure that we will be able to
continue to develop appealing styles and brands or successfully meet changing customer and consumer
demands in the future. In addition, we cannot assure any new products or brands that we introduce
will be successfully received and supported by our wholesale customers or consumers. Our failure to
gauge consumer needs and fashion trends and respond appropriately, and to appropriately forecast
our ability to sell products, could adversely affect retail and consumer acceptance of our products
and leave us with substantial outstanding fabric and/or manufacturing commitments, resulting in
increases in unsold inventory or missed opportunities. If that occurs, we may need to employ
markdowns or promotional sales to dispose of excess inventory, which may harm our business and
results. At the same time, our focus on inventory management may result, from time to time, in our
not having a sufficient supply of products to meet demand and cause us to lose potential sales.
24
We cannot assure that we can attract and retain talented highly qualified executives, or maintain
satisfactory relationships with our employees, both union and non-union.
Our success depends, to a significant extent, both upon the continued services of our executive
management team, as well as our ability to attract, hire, motivate and retain additional talented
and highly qualified management in the future, including the areas of design, merchandising, sales,
supply chain, marketing, production and systems, as well as our ability to hire and train qualified
retail management and associates. In addition, we will need to provide for the succession of senior
management. The loss of key members of management and our failure to successfully plan for
succession could disrupt our operations and our ability to successfully operate our business and
execute our strategic plan.
We are bound by a variety of collective bargaining agreements with two unions, mostly in our
warehouse and distribution facilities. We consider our relations with our nonunion and union
employees to be satisfactory and to date we have not experienced any interruption of our operations
due to labor disputes. While our relations with the unions have historically been amicable, we
cannot rule out the possibility of a labor dispute at one or more of our facilities relating to any
facility closings, outsourcing or ongoing negotiations with respect to contracts that expire. Any
such dispute could have a material adverse impact on our business.
Our business could suffer if we cannot adequately establish, defend and protect our trademarks and
other proprietary rights.
We believe that our trademarks and other proprietary rights are significantly important to our
success and competitive position. Accordingly, we devote substantial resources to the establishment
and protection of our trademarks and anti-counterfeiting activities. Counterfeiting of our
products, particularly our JUICY COUTURE, LUCKY BRAND and KATE SPADE brands, continues, however,
and in the course of our international expansion we have experienced conflicts with various third
parties that have acquired or claimed ownership rights in some of our trademarks or otherwise have
contested our rights to our trademarks. We have, in the past, resolved certain of these conflicts
through both legal action and negotiated settlements, none of which, we believe, has had a material
impact on our financial condition, liquidity or results of operations. However, the actions taken
to establish and protect our trademarks and other proprietary rights might not be adequate to
prevent imitation of our products by others or to prevent others from seeking to block sales of our
products as a violation of their trademarks and proprietary rights. Moreover, in certain countries
others may assert rights in, or ownership of, our trademarks and other proprietary rights or we may
not be able to successfully resolve such conflicts, or resolving such conflicts may require us to
make significant monetary payments. In addition, the laws of certain foreign countries may not
protect proprietary rights to the same extent as do the laws of the United States. The loss of such
trademarks and other proprietary rights, or the loss of the exclusive use of such trademarks and
other proprietary rights, could have a material adverse effect on us. Any litigation regarding our
trademarks or other proprietary rights could be time consuming and costly.
Our success will depend on our ability to successfully develop or acquire new product lines or
enter new markets or product categories.
We have in the past, and may, from time to time, acquire or develop new product lines, enter new markets or product categories, including through
licensing arrangements (such as the license of our DANA BUCHMAN brand to Kohls), and/or implement
new business models (such as the licensing arrangements with JCPenney and QVC for the LIZ CLAIBORNE
brands). Such activities are accompanied by a variety of risks inherent in any such new business
venture, including the following:
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Our ability to identify appropriate business development opportunities, including new product lines and markets; |
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New businesses, business models, product lines or market activities may require methods of operations,
investments and marketing and financial strategies different from those employed in our other businesses, and
may also involve buyers, store customers and/or competitors different from our historical buyers, store
customers and competitors; |
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Consumer acceptance of the new products or lines; |
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We may not be able to generate projected or satisfactory levels of sales, profits and/or return on investment
for a new business or product line, and may also encounter unanticipated events and unknown or uncertain
liabilities that could materially impact our business; |
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We may experience possible difficulties, delays and/or unanticipated costs in integrating the business,
operations, personnel and/or systems of an acquired business and may also not be able to retain and
appropriately motivate key personnel of an acquired business; |
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We may not be able to maintain product licenses, which are subject to agreement with a variety of terms and
conditions, or to enter into new licenses to enable us to launch new products and lines; and |
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With respect to a business where we act as licensee, such as our licensed DKNY® JEANS,
DKNY® ACTIVE and DKNY® MENS brands, there are a number of inherent risks, including,
without limitation, compliance with terms set forth in the applicable license agreements, including among other
things the maintenance of certain levels of sales and the public perception and/or acceptance of the licensors
brands or other product lines, which are not within our control. |
25
The markets in which we operate are highly competitive, both within the United States and abroad.
We face intense competitive challenges from other domestic and foreign fashion apparel and
accessories producers and retailers. Competition is based on a number of factors, including the
following:
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Anticipating and responding to changing consumer demands in a timely manner; |
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Establishing and maintaining favorable brand name and recognition; |
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Product quality; |
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Maintaining and growing market share; |
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Developing quality and differentiated products that appeal to consumers; |
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Establishing and maintaining acceptable relationships with our retail customers; |
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Pricing products appropriately; |
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Providing appropriate service and support to retailers; |
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Optimizing our retail and supply chain capabilities; |
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Size and location of our retail stores and department store selling space; and |
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Protecting intellectual property. |
Any increased competition, or our failure to adequately address these competitive factors, could
result in reduced sales or prices, or both, which could have a material adverse effect on us. We
also believe there is an increasing focus by the department stores to concentrate an increasing
portion of their product assortments within their own private label products. These private label
lines compete directly with our product lines and may receive prominent positioning on the retail
floor by department stores. Finally, in the current economic environment, which is characterized by
softening demand for discretionary items, such as apparel and related products, there has been a
consistently increased level of promotional activity, both at our retail stores and at department
stores, which has had an adverse effect on our revenues and profitability.
Our reliance on independent foreign manufacturers could cause delay and loss and damage our
reputation and customer relationships. Also, there are risks associated with our agreement with Li
& Fung, which results in a single foreign sourcing agent for a significant portion of our products.
We do not own any product manufacturing facilities; all of our products are manufactured in
accordance with our specifications through arrangements with independent suppliers. Products
produced in Asia represent a substantial majority of our sales. We also source product in the
United States and other regions, including several hundred suppliers manufacturing our products. At
the end of fiscal 2009 such suppliers were located in approximately 44 countries, with the largest
finished goods supplier at such time accounting for less than 6.0% of the total of finished goods
we purchased in fiscal 2009. A suppliers failure to manufacture and deliver products to us in a
timely manner or to meet our quality standards could cause us to miss the delivery date
requirements of our customers for those items. The failure to make timely deliveries may drive
customers to cancel orders, refuse to accept deliveries or demand reduced prices, any of which
could have a material adverse effect on us and our reputation in the marketplace. Also, a
manufacturers failure to comply with safety and content regulations and standards, including with
respect to childrens product and fashion jewelry, could result in substantial liability and damage
to our reputation. While we provide our manufacturers with standards, and we employ independent
testing for safety and content issues, we might not be able to prevent or detect all failures of
our manufacturers to comply with such standards and regulations.
We require our independent manufacturers (as well as our licensees) to operate in compliance with
applicable laws and regulations. While our internal and vendor operating guidelines promote ethical
business practices and our staff periodically visits and monitors the operations of our independent
manufacturers, we do not control these manufacturers or their labor practices. The violation of
labor or other laws by an independent manufacturer used by us (or any of our licensees), or the
divergence of an independent manufacturers (or licensees) labor practices from those generally
accepted as ethical in the US, could interrupt, or otherwise disrupt the shipment of finished
products to us or damage our reputation. Any of these, in turn, could have a material adverse
effect on our business, financial condition, liquidity and results of operations.
In 2008, we entered into an agreement with Hong Kong-based, global consumer goods exporter Li &
Fung, whereby Li & Fung acts as the primary global apparel sourcing agent for the MEXX brand and
MEXXs existing sourcing agent offices were integrated into the Li & Fung organization. On February
23, 2009, we entered into a long-term, sourcing agency agreement with Li & Fung, pursuant to which
Li & Fung acts as the primary global apparel and accessories sourcing agent for all brands in our
portfolio, with the exception of our jewelry product lines. Li & Fung continues as the primary
sourcing agent for MEXX. Pursuant to the agreement, we received at closing on March 31, 2009 a
payment of $75.0 million and an additional payment of $8.0 million to offset specific,
identifiable, incremental expenses associated with the transaction. We now pay to Li & Fung an
agency commission based on the cost of our product purchases through Li & Fung. Our sourcing agent
offices In Hong Kong, India, Indonesia, Shanghai and Shenzhen have been substantially integrated
into the Li & Fung organization. The transition with Li & Fung might not be successful, and
problems encountered in such transition could have a material adverse effect on our business,
financial condition, liquidity and results of operations. The licensing arrangements with JCPenney
and QVC will result in the removal of sourcing for a number of LIZ CLAIBORNE branded products sold
under these licenses from the Li & Fung sourcing arrangement. As a result, under our agreement with
Li & Fung, we are required to refund $24.3 million of the closing payment received from Li & Fung,
payable on or before April 15, 2010, with applicable late fees if paid after that date. Our agreement with Li & Fung is not exclusive;
however, we are required to source a specified percentage of product purchases from Li & Fung.
26
Our arrangements with foreign suppliers and with our foreign sourcing agents are subject generally
to the risks of doing business abroad, including currency fluctuations and revaluations,
restrictions on the transfer of funds, terrorist activities, pandemic disease and, in certain parts
of the world, political, economic and currency instability. Our operations have not been materially
affected by any such factors to date. However, due to the very substantial portion of our products
that are produced abroad, any substantial disruption of our relationships with our foreign
suppliers could adversely effect our operations. Moreover, difficult macroeconomic conditions and
uncertainties in the global credit markets could negatively impact our suppliers, which in turn,
could have an adverse impact on our business, financial position, liquidity and results of
operations.
Our international operations are subject to a variety of legal, regulatory, political and economic
risks, including risks relating to the importation and exportation of product.
We source most of our products outside the US through arrangements with independent suppliers in
approximately 44 countries as of January 2, 2010. There are a number of risks associated with
importing our products, including but not limited to the following:
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The potential reimposition of quotas, which could limit the amount and type of
goods that may be imported annually from a given country, in the context of a
trade retaliatory case; |
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Changes in social, political, legal and economic conditions or terrorist acts that
could result in the disruption of trade from the countries in which our
manufacturers or suppliers are located; |
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The imposition of additional regulations, or the administration of existing
regulations, relating to products which are imported, exported or otherwise
distributed; |
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The imposition of additional duties, taxes and other charges on imports or exports; |
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Risks of increased sourcing costs, including costs for materials and labor and such
increases potentially resulting from the elimination of quota on apparel products; |
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Our ability to adapt to and compete effectively in the current quota environment,
in which general quota has expired on apparel products, resulting in changing in
sourcing patterns and lowered barriers to entry, but political activities which
could result in the reimposition of quotas or other restrictive measures have been
initiated or threatened; |
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Significant delays in the delivery of cargo due to security considerations; |
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The imposition of antidumping or countervailing duty proceedings resulting in the
potential assessment of special antidumping or countervailing duties; and |
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The enactment of new legislation or the administration of current international
trade regulations, or executive action affecting international textile agreements,
including the United States reevaluation of the trading status of certain
countries and/or retaliatory duties, quotas or other trade sanctions, which, if
enacted, would increase the cost of products purchased from suppliers in such
countries. |
Any one of these or similar factors could have a material adverse effect on our business, financial
condition, liquidity, results of operations and current business practices.
Our ability to realize growth in new international markets and to maintain the current level of
sales in our existing international markets is subject to risks associated with international
operations. These include complying with a variety of foreign laws and regulations; unexpected
changes in regulatory requirements; new tariffs or other barriers in some international markets;
political instability and terrorist attacks; changes in diplomatic and trade relationships; and
general economic fluctuations in specific countries, markets or currencies.
Our business and balance sheets are exposed to domestic and foreign currency fluctuations,
including with respect to the outstanding euro-denominated notes.
While we generally purchase our products in US dollars, we source most of our products overseas. As
a result, the cost of these products may be affected by changes in the value of the relevant
currencies, including currency devaluations. Changes in currency exchange rates may also affect the
US dollar value of the foreign currency denominated prices at which our international businesses
sell products. Furthermore, our international sales represented approximately 33.0% of our total
sales in fiscal 2009 and 35.5% in fiscal 2008. Such sales were derived from sales in foreign
currencies, primarily the euro. Our international sales, as well as our
international businesses inventory and accounts receivable levels, could be materially affected
by currency fluctuations. Although we hedge some exposures to changes in foreign currency exchange
rates arising in the ordinary course of business, we cannot assure that foreign currency
fluctuations will not have a material adverse impact on our business, financial condition,
liquidity or results of operations. In addition, we have outstanding 350.0 million euro of
euro-denominated Notes, which could further expose our business and balance sheets to foreign
currency fluctuations.
27
Our ability to utilize all or a portion of our US deferred tax assets may be limited significantly
if we experience an ownership change.
As of January 2, 2010, we had US federal deferred tax assets of $297.1 million, which include net operating
loss (NOL) carryforwards and other items which could be considered net unrealized built in losses
(NUBIL). Among other factors, our ability to utilize our NOL and/or our NUBIL items to offset
future taxable income may be limited significantly if we experience an ownership change as
defined in section 382 of the Internal Revenue Code of 1986, as amended. In general, an ownership
change will occur if there is a cumulative change in our ownership by 5.0% shareholders (as
defined in the Internal Revenue Code) that exceeds 50 percentage points over a rolling three-year
period. The limitation arising from an ownership change under section 382 of the Internal Revenue
Code on our ability to utilize our US deferred tax assets depends on the value of our stock at the
time of the ownership change. We continue to monitor changes in our ownership and do not believe we
have a change in control as of January 2, 2010. If all or a portion of our deferred tax assets are
subject to limitation because we experience an ownership change, depending on the value of our
stock at the time of the ownership change, our future cash flows could be adversely impacted due to
increased tax liability. As of January 2, 2010, substantially all tax benefit of the US deferred
tax assets has been offset with a full valuation allowance that was recognized in our financial
statements during the years ended January 2, 2010 and January 3, 2009.
The outcome of current and future litigations and other
proceedings in which we are involved may have a material adverse effect on our results of operations and cash flows.
We are subject to various litigations and other
proceedings in our business which, if determined unfavorably to us, could have a material adverse
effect on our results of operations and cash flows. For a more detailed discussion of these litigations
and other proceedings, see Item 3 Legal Proceedings. We may in the future be subject to claims by
other licensees of our merchandise that may be similar to those we have disclosed in this annual report,
and we may also become party to other claims and legal actions in the future which, either individually
or in the aggregate, could have a material adverse effect on our results of operations and cash flows. In
addition, any of the current or possible future legal proceedings in which we may be involved could require
significant management and financial resources, which could otherwise be devoted to the operation of our business.
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Item 1B. |
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Unresolved Staff Comments. |
None.
Our distribution and administrative functions are conducted in both leased and owned facilities. We
also lease space for our retail specialty, outlet and concession stores. We believe that our
existing facilities are well maintained, in good operating condition and are adequate for our
present level of operations, although from time to time we use unaffiliated third parties to
provide distribution services to meet our distribution requirements.
Our principal executive offices and showrooms, as well as sales, merchandising and design staffs,
are located at 1441 Broadway, New York, New York, where we lease and occupy approximately 157,000
square feet under a master lease which expires at the end of 2012 and contains certain renewal
options and rights of first refusal for additional space. Most of our business segments use the
1441 Broadway facility. We own and operate a 285,000 square foot office building in North Bergen,
New Jersey, which houses operational staff. The following table sets forth information with respect
to our key properties:
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Approximate |
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Square |
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Leased/ |
Location (a) |
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Primary Use |
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Footage |
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Owned |
West Chester, Ohio(b) |
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Apparel Distribution Center |
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601,000 |
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Leased |
Voorschoten, Netherlands (c) |
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Offices/Apparel Distribution Center |
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350,000 |
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Leased |
North Bergen, New Jersey |
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Offices |
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285,000 |
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Owned |
Vernon, California |
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Offices/Apparel Distribution Center |
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225,000 |
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Leased |
St. Laurent, Canada |
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Office/Apparel & Non-Apparel Distribution Center |
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160,000 |
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Leased |
New York, New York |
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Offices |
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157,000 |
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Leased |
Lincoln, Rhode Island(d) |
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Non-Apparel Distribution Center |
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115,000 |
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Leased |
Amsterdam, Netherlands (c) |
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Offices |
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109,000 |
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Leased |
1440 Broadway, New York, NY |
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Offices |
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93,000 |
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Leased |
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(a) |
|
We also lease showroom, warehouse and office space in various other domestic and
international locations. During 2008, we closed our Allentown, Pennsylvania and Dayton, New
Jersey distribution centers, for which we remain obligated under the respective leases. During
2009, we closed two Mt. Pocono distribution centers and initiated actions to sell the owned
facility. We remain obligated under a lease for the second facility. In addition, the lease on
our former Santa Fe Springs, California distribution center expired and such facility was
closed in January of 2010. |
|
(b) |
|
We operate the Ohio facility under a synthetic lease that expires in May of 2011. |
|
(c) |
|
These properties are used for our European operations. |
|
(d) |
|
We expect to close our Lincoln, Rhode Island distribution center on our about April
30, 2010, however, we remain obligated under a synthetic lease expiring in May of 2011. |
28
Pursuant to financing obtained through an off-balance sheet arrangement commonly referred to
as a synthetic lease, we have constructed the West Chester, Ohio and Lincoln, Rhode Island
facilities. See Item 7 Managements Discussion and Analysis of Financial Condition and Results
of Operations Financial Position, Liquidity and Capital Resources and Note 8 of Notes to
Consolidated Financial Statements for a discussion of this arrangement. We maintain ownership of 80
acres of land in Montgomery, Alabama, which we are seeking to sell. In the first quarter of 2007,
we completed the sale of our approximately 270,000 square foot facility in Augusta, Georgia
(located on a 98-acre site and previously used in connection with a dyeing and finishing joint
venture).
|
|
|
Item 3. |
|
Legal Proceedings |
A complaint captioned The Levy Group, Inc.
v. L.C. Licensing, Inc. and Liz Claiborne, Inc.
was filed in the New York Supreme Court in New York County on
January 21, 2010. The complaint alleges claims for breach of contract,
breach of the implied covenant of good faith and fair dealing, promissory
estoppel and tortious interference against L.C. Licensing, Inc. and the Company
in connection with a trademark licensing agreement between L.C. Licensing, Inc. and
its licensee, The Levy Group, Inc. The Levy Group, Inc.s alleged claims purportedly
arise from the Companys decision to sign a long-term licensing agreement with JCPenney.
The complaint seeks an award of $100.0 million in compensatory damages plus punitive damages.
The Company believes the allegations in the complaint are without
merit and intends to defend this lawsuit vigorously.
A purported class action complaint captioned Angela Tyler (individually and on behalf of all
others similarly situated) v. Liz Claiborne, Inc, Trudy F. Sullivan and William L. McComb, was
filed in the United States District Court in the Southern District of New York on April 28, 2009
against the Company, its Chief Executive Officer, William L. McComb and Trudy Sullivan, a former
President of the Company. The complaint alleges certain violations of the federal securities laws,
claiming misstatements and omissions surrounding the Companys wholesale business. The Company
believes that the allegations contained in the complaint are without merit, and the Company intends
to defend this lawsuit vigorously. The Company has not yet responded to the complaint; the current
schedule provides for an amended complaint to be filed on April 19, 2010, and the Companys
responsive pleading to be filed on June 18, 2010.
Our previously owned Augusta, Georgia facility became listed during 2004 on the State of
Georgias Hazardous Site Inventory of environmentally impacted sites due to the detection of
certain chemicals at the site. In November 2005, the Georgia Department of Natural Resources
requested that we submit a compliance status report and compliance status certification regarding
the site. We submitted the requested materials in the second quarter of 2006. In October 2006, we
received a letter from the Department of Natural Resources requesting that we provide additional
information and perform additional tests to complete the compliance status report, which was
previously submitted. Additional testing was completed and we submitted the results in the second
quarter of 2007. The Georgia Department of Natural Resources reviewed our submission and requested
certain modifications to the response and some minimal additional testing. We submitted the
modified response and additional testing results. The Georgia Department of Natural Resources
reviewed our modified response and additional testing results and in the first quarter of 2009,
notified us that it required additional information to complete our compliance status report
submission. In June 2009, we submitted a revised compliance status report to address the Georgia
Department of Natural Resources requests and based on the testing results, we requested that the
site be removed from the Hazardous Sites Inventory. On December 22, 2009, the Georgia Department of
Natural Resources advised us that it had completed the compliance status report and that the site
had been designated as needing no further action and that it was removed from the State of
Georgias Hazardous Site Inventory.
The Company is a party to several other pending legal proceedings and claims. Although the outcome
of any such actions cannot be determined with certainty, management is of the opinion that the
final outcome of any of these actions should not have a material adverse effect on the Companys
financial position, results of operations, liquidity or cash flows (see Notes 8 and 22 of Notes to
Consolidated Financial Statements).
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders. |
No matter was submitted to a vote of security holders, through the solicitation of proxies or
otherwise, during the fourth quarter of the fiscal year covered by this report.
29
Executive Officers of the Registrant.
Information as to the executive officers of the Company, as of February 12, 2010 is set forth
below:
|
|
|
|
|
|
|
Name |
|
Age |
|
Position(s) |
William L. McComb
|
|
|
47 |
|
|
Chief Executive Officer |
|
|
|
|
Andrew Warren
|
|
|
43 |
|
|
Chief Financial Officer |
|
|
|
|
Lisa Piovano Machacek
|
|
|
45 |
|
|
Senior Vice President Chief Human Resources Officer |
|
|
|
|
Nicholas Rubino
|
|
|
48 |
|
|
Senior Vice President Chief Legal Officer, General Counsel and Secretary |
|
|
|
|
Peter Warner
|
|
|
48 |
|
|
Senior Vice President Global Sourcing and Operations |
Executive officers serve at the discretion of the Board of Directors.
Mr. McComb joined the Company as Chief Executive Officer and a member of the Board of Directors on
November 6, 2006. Prior to joining the Company, Mr. McComb was a company group chairman at Johnson
& Johnson. During his 14-year tenure with Johnson & Johnson, Mr. McComb oversaw some of the
companys largest consumer product businesses and brands, including Tylenol, Motrin and Clean &
Clear. He also led the team that repositioned and restored growth to the Tylenol brand and oversaw
the growth of J&Js McNeil Consumer business with key brand licenses such as St. Joseph aspirin,
where he implemented a strategy to grow the brand beyond the over-the-counter market by adding
pediatric prescription drugs. Mr. McComb sits on the Board of the American Apparel & Footwear
Association.
Mr. Warren joined the Company in July 2007 as Chief Financial Officer. Prior to that, he had held
numerous finance positions at General Electric over the prior 18 years, including Senior Vice
President and CFO for NBC Cable from January 2002 to May 2004 and Executive Vice President and
Chief Financial Officer for NBC Universal Television Group from May 2004 to May 2006. Most
recently, he served as Senior Operations Leader, GE Audit Staff, from May 2006 to July 2007 where
he helped lead the divestiture of GEs Plastics division.
Ms. Piovano Machacek was promoted to Senior Vice President and Chief Human Resources Officer in
February 2010. She joined the Company in July 1988. Over the years, she has held various positions
related to product development and later transitioned into the Human Resources department. Ms.
Piovano Machacek held the position of Vice President of Human Resources since 2006, specifically
focused on Partnered Brands. Prior to that she was Director of Human Resources, a role she took on
in 2001.
Mr. Rubino joined the Company in May 1994 as an Associate General Counsel. In May 1996, he was
appointed Deputy General Counsel and in March 1998 became Vice President, Deputy General Counsel.
He was appointed Corporate Secretary in July 2001. Mr. Rubino was promoted to General Counsel in
June 2007 and assumed his current position in October 2008. Prior to joining the
Company, he was a Corporate Associate at Kramer Levin Naftalis & Frankel, LLP.
Mr. Warner joined the Company in June 2008 as Senior Vice President, Global Sourcing and
Operations, after three years at Gap Inc. in its Banana Republic division. Mr. Warner was initially
hired as the Vice President of Production at Gap Inc. in 2005 and in 2007 was promoted to Senior
Vice President of Production for Banana Republic where he was responsible for the apparel,
footwear, and accessories product development and sourcing organizations worldwide. Previously, Mr.
Warner held roles of similar levels at Nike, Foot Locker and Ann Taylor.
30
PART II
|
|
|
Item 5. |
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
MARKET INFORMATION
Our common stock trades on the New York Stock Exchange (NYSE) under the symbol LIZ. The table
below sets forth the high and low closing sale prices of our common stock for the periods
indicated.
|
|
|
|
|
|
|
|
|
Fiscal Period |
|
High |
|
|
Low |
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
$ |
3.84 |
|
|
$ |
1.65 |
|
2nd Quarter |
|
|
6.30 |
|
|
|
2.81 |
|
3rd Quarter |
|
|
6.27 |
|
|
|
2.56 |
|
4th Quarter |
|
|
7.49 |
|
|
|
4.10 |
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
$ |
22.71 |
|
|
$ |
16.04 |
|
2nd Quarter |
|
|
19.54 |
|
|
|
13.08 |
|
3rd Quarter |
|
|
18.82 |
|
|
|
11.44 |
|
4th Quarter |
|
|
14.15 |
|
|
|
1.65 |
|
HOLDERS
On February 12, 2010, the closing sale price of our common stock was $5.75. As of February 12,
2010, the approximate number of record holders of common stock was 4,829.
DIVIDENDS
During the fourth quarter of 2008, we suspended our quarterly cash dividend indefinitely and did
not pay any dividends during 2009. Quarterly dividends for 2008 were paid as follows:
|
|
|
|
|
Fiscal Period |
|
Dividends Paid per Common Share |
|
|
|
|
|
|
1st Quarter |
|
$ |
0.05625 |
|
2nd Quarter |
|
|
0.05625 |
|
3rd Quarter |
|
|
0.05625 |
|
4th Quarter |
|
|
0.05625 |
|
31
PERFORMANCE GRAPH
Comparison of Cumulative Five Year Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Liz Claiborne, Inc. |
|
$ |
100.00 |
|
|
$ |
85.35 |
|
|
$ |
104.17 |
|
|
$ |
49.11 |
|
|
$ |
6.51 |
|
|
$ |
14.09 |
|
S&P 500 Index |
|
|
100.00 |
|
|
|
104.91 |
|
|
|
121.48 |
|
|
|
128.16 |
|
|
|
80.74 |
|
|
|
102.11 |
|
S&P SmallCap 600 |
|
|
100.00 |
|
|
|
107.68 |
|
|
|
123.96 |
|
|
|
123.59 |
|
|
|
85.19 |
|
|
|
106.97 |
|
Benchmarking Group |
|
|
100.00 |
|
|
|
106.07 |
|
|
|
134.93 |
|
|
|
120.24 |
|
|
|
72.96 |
|
|
|
119.97 |
|
G-Share Peer Group |
|
|
100.00 |
|
|
|
99.72 |
|
|
|
123.42 |
|
|
|
105.39 |
|
|
|
63.20 |
|
|
|
111.64 |
|
The line graph above compares the cumulative total stockholder return on the Companys Common Stock
over a 5-year period with the return on (i) the Standard & Poors 500 Stock Index (S&P 500)
(which the Companys shares ceased to be a part of as of the close of business on December 1,
2008); (ii) the Standard & Poors SmallCap 600 Stock Index (S&P SmallCap 600) (which the
Companys shares became a part of on December 2, 2008); (iii) an index comprised of the Company and
the following 16 competitors comprising the peer group for which executive compensation practices
are compared (the Benchmarking Group): Abercrombie & Fitch; American Eagle Outfitters, Inc; Ann
Taylor Store Corporation; Coach, Inc.; Dillards, Inc.; The Gap, Inc.; Jones Apparel Group, Inc.;
Limited Brands, Inc.; NIKE, Inc.; Nordstrom, Inc.; Philips Van-Heusen Corporation; Polo Ralph
Lauren Corporation; Quiksilver, Inc.; Saks Incorporated; The Talbots, Inc.; and VF Corporation and
(iv) an index comprised of the Company and the following 13 competitors comprising the peer group
for the Companys Growth Share restricted stock program granted in 2005 (the G-Share Peer Group):
Ann Taylor Stores Corporation; The Gap, Inc.; Guess, Inc.; Hartmarx Corporation; Jones Apparel
Group, Inc.; Limited Brands, Inc.; Oxford Industries, Inc.; Phillips-Van Heusen Corporation; Polo
Ralph Lauren Corporation; Quiksilver, Inc.; The Talbots, Inc.; V.F. Corporation; and The Warnaco
Group, Inc. The Tarrant Apparel Group was removed from the G-Share Peer Group due to its 2009
acquisition, which resulted in its becoming a privately held company. A description of the
Benchmarking Group and the G-Shares can be found in the section captioned Compensation Discussion
and Analysis in the Companys 2009 Proxy Statement, which the Company expects to file on or about
April 8, 2010.
In accordance with SEC disclosure rules, the measurements are indexed to a value of $100 at
December 31, 2004 (the last trading day before the beginning of the Companys 2005 fiscal year) and
assume that all dividends were reinvested.
32
ISSUER PURCHASES OF EQUITY SECURITIES
The following table summarizes information about our purchases during the quarter ended January 2,
2010, of equity securities that are registered by the Company pursuant to Section 12 of the
Securities Exchange Act of 1934:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Maximum Approximate |
|
|
|
Total Number of |
|
|
|
|
|
|
Purchased as Part of |
|
|
Dollar Value of Shares that |
|
|
|
Shares |
|
|
|
|
|
|
Publicly Announced |
|
|
May Yet Be Purchased |
|
|
|
Purchased |
|
|
Average Price |
|
|
Plans or Programs |
|
|
Under the Plans or Programs |
|
Period |
|
(In thousands)(a) |
|
|
Paid Per Share |
|
|
(In thousands) |
|
|
(In thousands) (b) |
|
October 4, 2009 October 31, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
28,749 |
|
November 1, 2009 December 5, 2009 |
|
|
27.9 |
|
|
|
5.13 |
|
|
|
|
|
|
|
28,749 |
|
December 6, 2009 January 2, 2010 |
|
|
9.7 |
|
|
|
5.08 |
|
|
|
|
|
|
|
28,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 13 Weeks Ended January 2, 2010 |
|
|
37.6 |
|
|
$ |
5.12 |
|
|
|
|
|
|
$ |
28,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes shares withheld to cover tax-withholding
requirements relating to the vesting of restricted
stock issued to employees pursuant to the Companys
shareholder-approved stock incentive plans. |
|
(b) |
|
The Company initially announced the authorization of a
share buyback program in December 1989. Since its
inception, the Companys Board of Directors has
authorized the purchase under the program of an
aggregate of $2.275 billion of the Companys stock. The
Amended Agreement currently restricts the Companys
ability to repurchase stock. |
33
|
|
|
Item 6. |
|
Selected Financial Data. |
The following table sets forth certain information regarding our results of operations and
financial position and is qualified in its entirety by the Consolidated Financial Statements and
notes thereto, which appear elsewhere herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except per common share data) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,011,859 |
|
|
$ |
3,984,946 |
|
|
$ |
4,441,715 |
|
|
$ |
4,497,252 |
|
|
$ |
4,454,627 |
|
Gross profit |
|
|
1,397,750 |
|
|
|
1,903,300 |
|
|
|
2,110,725 |
|
|
|
2,195,409 |
|
|
|
2,144,176 |
|
Operating (loss) income (a) |
|
|
(334,584 |
) |
|
|
(733,780 |
) |
|
|
(419,500 |
) |
|
|
356,039 |
|
|
|
464,270 |
|
(Loss) income from continuing operations |
|
|
(294,060 |
) |
|
|
(813,315 |
) |
|
|
(365,887 |
) |
|
|
206,052 |
|
|
|
280,708 |
|
Net (loss) income |
|
|
(306,410 |
) |
|
|
(951,559 |
) |
|
|
(372,282 |
) |
|
|
255,318 |
|
|
|
318,500 |
|
Net (loss) income attributable to Liz Claiborne, Inc. |
|
|
(305,729 |
) |
|
|
(951,811 |
) |
|
|
(372,798 |
) |
|
|
254,685 |
|
|
|
317,366 |
|
Working capital |
|
|
244,379 |
|
|
|
432,174 |
|
|
|
794,456 |
|
|
|
796,195 |
|
|
|
848,798 |
|
Total assets |
|
|
1,605,903 |
|
|
|
1,905,452 |
|
|
|
3,268,467 |
|
|
|
3,495,768 |
|
|
|
3,152,036 |
|
Total debt |
|
|
658,151 |
|
|
|
743,639 |
|
|
|
887,711 |
|
|
|
592,735 |
|
|
|
466,562 |
|
Total Liz Claiborne, Inc. stockholders equity |
|
|
216,548 |
|
|
|
503,647 |
|
|
|
1,515,564 |
|
|
|
2,129,981 |
|
|
|
2,002,706 |
|
Per common share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
attributable to Liz Claiborne, Inc. |
|
|
(3.13 |
) |
|
|
(8.69 |
) |
|
|
(3.68 |
) |
|
|
2.02 |
|
|
|
2.63 |
|
Net (loss) income attributable to Liz Claiborne, Inc. |
|
|
(3.26 |
) |
|
|
(10.17 |
) |
|
|
(3.74 |
) |
|
|
2.50 |
|
|
|
2.98 |
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
attributable to Liz Claiborne, Inc. |
|
|
(3.13 |
) |
|
|
(8.69 |
) |
|
|
(3.68 |
) |
|
|
1.98 |
|
|
|
2.59 |
|
Net (loss) income attributable to Liz Claiborne, Inc. |
|
|
(3.26 |
) |
|
|
(10.17 |
) |
|
|
(3.74 |
) |
|
|
2.46 |
|
|
|
2.94 |
|
Book value at year end |
|
|
2.28 |
|
|
|
5.29 |
|
|
|
16.00 |
|
|
|
20.65 |
|
|
|
19.08 |
|
Dividends paid |
|
|
|
|
|
|
0.23 |
|
|
|
0.23 |
|
|
|
0.23 |
|
|
|
0.23 |
|
Weighted average shares outstanding, basic |
|
|
93,880 |
|
|
|
93,606 |
|
|
|
99,800 |
|
|
|
101,989 |
|
|
|
106,354 |
|
Weighted average shares outstanding, diluted (b) |
|
|
93,880 |
|
|
|
93,606 |
|
|
|
99,800 |
|
|
|
103,483 |
|
|
|
107,919 |
|
|
|
|
(a) |
|
During 2009, 2008 and 2007, we recorded pretax charges of $166.7 million,
$111.8 million and $110.0 million, respectively, related to our streamlining initiatives,
which are discussed in Note 12 of Notes to Consolidated Financial Statements. The 2009 charges
include a non-cash impairment charge of $4.5 million related to LIZ CLAIBORNE merchandising
rights previously recorded in our Partnered Brands segment, which is discussed in Note 1 of
Notes to Consolidated Financial Statements. |
|
|
|
During 2006, we recorded pretax charges of $81.5 million related to our streamlining
initiatives. |
|
|
|
During 2009, we recorded non-cash pretax impairment charges of $2.8 million related to goodwill
and $14.2 million related to other intangible assets in our Partnered Brands segment. |
|
|
|
During 2008, we sold a distribution center and recorded a gain of $14.3 million. During 2008, we
recorded non-cash pretax impairment charges of (i) $683.1 million related to goodwill previously
recorded in our Domestic-Based and International-Based Direct Brands segments and (ii) $10.0
million in our Partnered Brands segment related to our Villager, Crazy Horse and Russ
trademark. |
|
|
|
During 2007, we recorded non-cash pretax impairment charges of (i) $450.8 million related
to goodwill previously recorded in our Partnered Brands segment and (ii) $36.3 million related
to the Ellen Tracy trademark. |
|
|
|
These impairment charges are discussed in Notes 1 and 5 of Notes to Consolidated Financial
Statements. |
|
|
|
During 2009, we recorded pretax charges of $19.2 million primarily related to retailer assistance
associated with the transition of our LIZ CLAIBORNE brands to license arrangements and other accounts receivable allowances associated with exiting activities. In addition, during 2008 and 2007, we recorded additional pretax
charges related to our strategic review aggregating $58.6 million and $82.0 million,
respectively, primarily related to inventory and accounts receivable allowances associated with
the termination of certain cosmetics product offerings, the closure of certain brands and
various professional and consulting costs. |
|
(b) |
|
Because we incurred losses from continuing operations in 2009, 2008 and 2007,
outstanding stock options, nonvested shares and potentially dilutive
shares issuable upon conversion of the Convertible Notes are antidilutive. Accordingly, basic
and diluted weighted average shares outstanding are equal for such periods. |
34
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
Business/Segments
Our segment reporting structure reflects a brand-focused approach, designed to optimize the
operational coordination and resource allocation of our businesses across multiple functional areas
including specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce
and licensing. The three reportable segments described below represent our brand-based activities
for which separate financial information is available and which is utilized on a regular basis by
our chief operating decision maker to evaluate performance and allocate resources. In identifying
our reportable segments, we consider economic characteristics, as well as products, customers,
sales growth potential and long-term profitability. We aggregate our five operating segments to
form reportable segments, where applicable. As such, we report our operations in three reportable
segments as follows:
|
|
Domestic-Based Direct Brands segment consists of the specialty retail, outlet,
wholesale apparel, wholesale non-apparel (including accessories, jewelry, and handbags),
e-commerce and licensing operations of our three domestic, retail-based operating segments:
JUICY COUTURE, KATE SPADE and LUCKY BRAND. |
|
|
International-Based Direct Brands segment consists of the specialty retail,
outlet, concession, wholesale apparel, wholesale non-apparel (including accessories, jewelry
and handbags), e-commerce and licensing operations of MEXX, our international, retail-based
operating segment. |
|
|
Partnered Brands segment consists of one operating segment including the
wholesale apparel, wholesale non-apparel, specialty retail, outlet, e-commerce and licensing
operations of our wholesale-based brands including: AXCESS, CLAIBORNE (mens),
CONCEPTS BY CLAIBORNE, DANA BUCHMAN, KENSIE, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA,
MONET, TRIFARI, and our licensed DKNY® JEANS, DKNY® ACTIVE and DKNY® MENS brands. |
We also present our results on a geographic basis based on selling location:
|
|
Domestic (wholesale customers, licensing, Company-owned specialty retail and outlet
stores located in the US and e-commerce sites); and |
|
|
International (wholesale customers, licensing, Company-owned specialty retail and
outlet stores, concession stores located outside of the US and e-commerce sites). |
We, as licensor, also license to third parties the right to produce and market products bearing
certain Company-owned trademarks; the resulting royalty income is included within the results of
the associated segment.
Market Environment/Global Economic Uncertainty
The industries in which we operate have historically been subject to cyclical variations, including
recessions in the general economy. Our results are dependent on a number of factors impacting
consumer spending, including but not limited to, general economic and business conditions; consumer
confidence; wages and employment levels; the housing market; levels of perceived and actual
consumer wealth; consumer debt levels; availability of consumer credit; credit and interest rates;
fluctuations in foreign currency exchange rates; fuel and energy costs; energy shortages; the
performance of the financial, equity and credit markets; taxes; general political conditions, both
domestic and abroad; and the level of customer traffic within department stores, malls and other
shopping and selling environments.
The current depressed economic environment reflects declines in employment levels, disposable
income and actual and/or perceived wealth, and has been characterized by a dramatic decline in
consumer discretionary spending and has disproportionately affected retailers and sellers of
consumer goods, particularly those whose goods are viewed as discretionary purchases, including
fashion apparel and related products, such as ours. The reduction in consumer spending will likely
continue to have a material adverse impact on our business, financial condition and results of
operations for fiscal year 2010.
35
Competitive Profile
We operate in global fashion markets that are intensely competitive and subject to, among other
things, macroeconomic conditions and consumer demands, tastes and discretionary spending habits. As
we anticipate that the global economic uncertainty will continue
into the foreseeable future, we are focusing on carefully managing those factors within our
control, most importantly spending. We will continue our streamlining efforts to drive cost out of
our operations through initiatives that are discussed in Recent Initiatives Cost Reduction
Initiatives, below. These initiatives are aimed at driving efficiencies as well as improvements in
working capital and operating cash flows.
We remain cautious about the near-term retail environment due to the slowdown in consumer spending.
In summary, the measure of our success in the future will depend on our ability to navigate through
a difficult macroeconomic environment and challenging market conditions, execute on our strategic
vision, including attracting and retaining the management talent necessary for such execution,
designing and delivering products that are acceptable to the marketplaces that we serve, sourcing
the manufacture and distribution of our products on a competitive and efficient basis and evolving
our retail capabilities.
Reference is also made to the other economic, competitive, governmental and technological factors
affecting our operations, markets, products, services and prices as are set forth in this report,
including, without limitation, under Statement Regarding
ForwardLooking Statements and Item 1A Risk Factors.
Recent Initiatives
Distribution of Our Liz Claiborne Brands
On October 7, 2009, in an effort to revitalize our LIZ CLAIBORNE brand franchise, reduce working
capital needs and increase earnings and profitability, we entered into licensing arrangements with J.C. Penney Corporation, Inc. and
J.C. Penney Company, Inc. (collectively, JCPenney) and with QVC, Inc. (QVC) for such brands.
Our multi-year license agreement with JCPenney granted JCPenney an exclusive right and license
(subject to pre-existing licenses and certain limited exceptions) to use the LIZ CLAIBORNE, LIZ &
CO., CLAIBORNE and CONCEPTS BY CLAIBORNE trademarks with respect to covered product categories and
included the worldwide manufacturing of the licensed products and the sale, marketing,
merchandising, advertising and promotion of the licensed products in the United States and Puerto
Rico. Under the agreement, JCPenney will only use designs provided or
approved by us. The agreement has a term that may remain in effect up to July
31, 2020. Sales by JCPenney under the agreement are anticipated to commence in August 2010. At the
end of year five, JCPenney will have the option to acquire the trademarks and other Liz Claiborne
brands for use in the United States and Puerto Rico. JCPenney will also have the option to take
ownership of the trademarks in the same territory at the end of year 10. The license agreement
provides for the payment to us of royalties based on net sales of licensed products by JCPenney and
a portion of the related gross profit when the gross profit percentage exceeds a specified rate,
subject to a minimum annual payment.
We also entered into a multi-year license agreement with QVC, granting rights (subject to
pre-existing licenses) to certain of our trademarks and other intellectual property rights. QVC has
the rights to use the LIZ CLAIBORNE NEW YORK brand with Isaac Mizrahi as creative director on any
apparel, accessories, or home categories in its US and international markets. QVC will merchandise
and source the product and we will provide brand management oversight. The agreement provides for
the payment to us of a royalty based on net sales.
Cost Reduction Initiatives
Our cost reduction efforts have included tighter controls surrounding discretionary spending, a
freeze in merit compensation increases in 2009, the cessation of our quarterly dividend and
streamlining initiatives that have included rationalization of distribution centers and office
space, store closures and staff reductions, including consolidation of certain support and
production functions and outsourcing certain corporate functions. These actions, in conjunction
with more extensive use of direct shipments and third party arrangements have enabled us to
significantly reduce our reliance on owned or leased distribution centers. Including the closure of
our Santa Fe Springs, California distribution center in January 2010 and the announced closure
of our Lincoln, Rhode Island distribution center, which is expected to occur on or about April 30,
2010, we have closed eight distribution centers since 2007.
In connection with the license agreements with JCPenney and QVC discussed above, we expect to
further consolidate office space and reduce staff in certain support functions. We anticipate that
these actions will be completed by the end of the second quarter of 2010. We will also continue to
closely manage spending, with a slight increase in projected 2010 capital expenditures to
approximately $85.0 million, compared to $72.6 million in 2009.
On January 8, 2010, we entered into an agreement with Lauras Shoppe (Canada) Ltd. and Lauras
Shoppe (P.V.) Inc. (collectively, Laura Canada), pursuant to which up to 38 Liz Canada store
leases will be assigned and title for certain property and equipment will
be transferred to Laura Canada, in each case, subject to the satisfaction of certain conditions. We
expect to recognize a pretax charge of approximately $12.0 million related to this transaction in
the first quarter of 2010.
36
Liquidity
We enhanced our liquidity by completing the issuance of $90.0 million of 6.0% Convertible Senior
Notes due June 15, 2014 (the Convertible Notes) in the second quarter of 2009. The Convertible
Notes are unsecured, senior obligations; pay interest semi-annually at a rate of 6.0% per annum;
and will be convertible, under certain circumstances, into cash, shares of our common stock, or a
combination of cash and shares, at our option. The issuance of the Convertible Notes extended the
weighted average maturity of our debt and increased borrowing availability under our amended and
restated revolving credit facility, since we used the net proceeds from the offering to repay a
portion of the outstanding borrowings under such facility.
In January 2009, we completed an amendment to and extension of our revolving credit agreement, and
in May and November 2009, we completed additional amendments to such agreement (as amended, the
Amended Agreement). Under the Amended Agreement, we are subject to a fixed charge coverage
covenant as well as various other covenants and other requirements, such as financial requirements,
reporting requirements and various negative covenants. Pursuant to the May 2009 amendment, we are
subject to a minimum aggregate borrowing availability covenant. Our borrowing availability under
the Amended Agreement is determined primarily by the level of our eligible accounts receivable and
inventory balances. In addition, the Amended Agreement requires the application of substantially
all cash collected, including any net proceeds received with respect to certain permitted disposals
and acquisitions, to reduce outstanding borrowings under the Amended Agreement. The November 2009 amendment provides that
through the maturity date of the Amended Agreement, the fixed charge coverage covenant would apply
only if borrowing availability under the Amended Agreement falls below certain designated levels.
The November 2009 amendment also provides for, among other things, the approval of (i) a grant to
JCPenney of an option to acquire the intellectual property and related rights to certain brands in
the US and Puerto Rico (see Note 17 of Notes to Consolidated Financial Statements); (ii) the
related sale by the Company to JCPenney of such property and rights; (iii) upon the consummation of
such sale, the release of any liens on such property and rights in favor of the lenders under the
Amended Agreement; and (iv) certain defined payments, indebtedness and guarantees.
For further information concerning our debt and credit facilities, see Note 9 of Notes to
Consolidated Financial Statements and Financial Position, Liquidity and Capital Resources, below.
By the end of the first quarter of 2010, we expect to receive $166.7 million of income tax refunds
on previously paid taxes due to a Federal law change allowing our 2008 or 2009 domestic losses to
be carried back for five years, with the fifth year limited to 50.0% of taxable income. As a
condition of the Amended Agreement, we are required to repay amounts outstanding thereunder with
the amount of such refunds. Based on our forecast of borrowing availability, and subject to the
expected timing of the receipt of the anticipated tax refunds, we anticipate that cash flows from
operations and the projected borrowing availability under our Amended Agreement will be sufficient
to fund our liquidity requirements for at least the next 12 months. For a discussion of risks
related to our liquidity, including our inability to comply with the fixed charge coverage covenant that would be triggered if we fail to maintain
the minimum borrowing availability requirement under the Amended
Agreement, see Item 1A Risk
Factors and Financial Position, Liquidity and Capital Resources, below.
Sourcing
We have also sought to implement supply chain and overhead initiatives that are aimed at driving
efficiencies, as well as improving gross margins, working capital and/or operating cash flows.
As discussed below in the section entitled Commitments and Capital Expenditures, we entered into
a sourcing agency agreement with Hong Kong-based, global consumer goods exporter Li & Fung Limited
(Li & Fung), whereby Li & Fung serves as the primary sourcing agent for all brands and products
in our portfolio, other than jewelry.
For a discussion of certain risks relating to our recent initiatives, see Item 1A Risk Factors.
Discontinued Operations
In connection with actions initiated in July 2007, we disposed of certain assets and/or liabilities
of our former Emma James, Intuitions, J.H. Collectibles, Tapemeasure, C&C California, Laundry by
Design, prAna and Ellen Tracy brands and closed our SIGRID OLSEN brand, which included the closure
of its wholesale operations and the closure or conversion of its retail locations and entered into
an exclusive license agreement with Kohls Corporation (Kohls), whereby Kohls sources and sells
products under the DANA BUCHMAN brand.
37
We also sold certain assets related to our interest in the Narciso Rodriguez brand and terminated
certain agreements entered in connection with the acquisition of such brand in 2007 and disposed of
certain assets of our former Enyce brand.
The activities of our former Emma James, Intuitions, J.H. Collectibles, Tapemeasure, C&C
California, Laundry by Design, prAna, Narciso Rodriguez and Enyce brands, the retail operations of
our SIGRID OLSEN brand that were not converted to other brands and the retail operations of our
former Ellen Tracy brand have been segregated and reported as discontinued operations for all
periods presented. The SIGRID OLSEN and Ellen Tracy wholesale activities and DANA BUCHMAN
operations either do not represent operations and cash flows that can be clearly distinguished
operationally and for financial reporting purposes from the remainder of the Company or retain
continuing involvement with the Company and therefore have not been presented as discontinued
operations.
In connection with the transactions discussed above, we recognized total pretax charges of $83.5
million during the year ended January 3, 2009, including $10.6 million related to the Ellen Tracy
transaction. We allocated $2.5 million of the Ellen Tracy charge to the Ellen Tracy retail
operations, which is therefore recorded within discontinued operations. The remaining charge of
$8.1 million was allocated to the Ellen Tracy wholesale operations and has been recorded within
Selling, general & administrative expenses (SG&A).
2009 Overall Results
Our 2009 results reflected:
|
|
|
Decreased comparable store performance in our Domestic-Based and International-Based
Direct Brands segments, reflecting reduced consumer demand, decreased traffic and reduced
consumer spending; |
|
|
|
Increased retailer markdowns driven by significant promotional activity; |
|
|
|
Aggressive liquidation of excess inventories across all brands within our Partnered
Brands segment; and |
|
|
|
A $132.0 million decrease in net sales associated with brands or certain brand
activities that have been licensed, closed or exited, but not presented as discontinued
operations. |
During 2009, we also recorded the following pretax items:
|
|
|
Expenses associated with our streamlining initiatives of $166.7 million and charges
associated with the transition of our LIZ CLAIBORNE brands to license arrangements and other
accounts receivable allowances associated with exiting activities of $19.2 million; |
|
|
|
A non-cash impairment charge of $9.5 million related to our licensed
trademark intangible asset associated with our licensed DKNY® JEANS and DKNY® ACTIVE brands; |
|
|
|
A non-cash impairment charge of $4.7 million primarily associated with our LIZ CLAIBORNE
merchandising rights; and |
|
|
|
A non-cash impairment charge of $2.8 million associated with an additional purchase
price and an increase to goodwill related to our contingent earn-out payment to the former
owners of Mac & Jac. |
During 2009, we recorded a tax benefit of $109.6 million primarily attributable to a Federal law
change discussed above.
Our 2008 results reflected the following pretax items:
|
|
|
Non-cash impairment charges of $382.4 million related to the impairment of goodwill in
our Domestic-Based Direct Brands segment and $300.7 million related to our
International-Based Direct Brands segment; |
|
|
|
Expenses associated with our streamlining initiatives and strategic review of $111.8
million and $58.6 million (inclusive of a $14.3 million gain associated with the sale of a
distribution center), respectively; and |
|
|
|
A $10.0 million non-cash impairment charge associated with our Villager, Crazy Horse and
Russ trademark. |
Net Sales
Net sales in 2009 were $3.012 billion, a decrease of 24.4%, compared to 2008 net sales of $3.985
billion.
A total of 4.8% of this decline in net sales is due to the impact of (i) brands or certain brand
activities that have been licensed, closed or exited and have not been presented as part of
discontinued operations, which reduced net sales by $132.0 million (3.3%) and (ii) fluctuations in
foreign currency exchange rates in our international businesses, which reduced net sales by $58.2
million (1.5%).
The remaining decrease in net sales of 19.6% reflected (i) sales declines in wholesale and retail
operations of our International-Based Direct Brands segment; (ii) sales declines in the wholesale
operations of our Domestic-Based Direct Brands segment; and (iii) sales declines in our Partnered
Brands segment principally due to decreased volume and increased promotional activity.
38
Gross Profit and Loss from Continuing Operations
Gross profit as a percentage of net sales decreased to 46.4% in 2009 from 47.8% in 2008, reflecting
increased promotional activity across all three segments, partially offset by an increased
proportion of sales from our Domestic-Based Direct Brands segment, which runs at a higher gross
profit rate than the Company average. We recorded a loss from continuing operations of $294.1
million in 2009, as compared to a loss from continuing operations of $813.4 million in 2008. The
reduced loss from continuing operations primarily reflected a $676.1 million decrease in impairment
charges related to goodwill and other intangible assets, a reduction in SG&A and an increase in
income tax benefits recognized in 2009, partially offset by the impact of decreased gross profits.
Balance Sheet
We ended 2009 with a net debt position of $637.3 million as compared to $718.1 million at year-end
2008. Including the receipt of $99.8 million of net income tax refunds and $75.0 million related to
our transaction with Li & Fung, we generated $223.9 million in cash from continuing operations,
which enabled us to fund capital expenditures of $72.6 million, $8.8 million of acquisition related
payments and $7.2 million of investments in and advances to Kate Spade Japan Co. Ltd. (KSJ), an
equity method investee, while decreasing our net debt by $80.8 million. The effect of changes in
foreign currency exchange rates on our Eurobond increased our debt balance by $15.9 million.
International Operations
In 2009, international sales represented 33.0% of our overall sales, as compared to 35.5% in 2008.
Accordingly, our overall results can be greatly impacted by changes in foreign currency exchange
rates, which decreased net sales in 2009 by $58.2 million. The period-over-period weakening of the
euro and Canadian dollar against the US dollar has negatively impacted sales in our European and
Canadian businesses. Although we use foreign currency forward contracts and options to hedge
against our exposure to exchange rate fluctuations affecting the actual cash flows of our
international operations, unanticipated shifts in exchange rates could have an impact
on our financial results.
39
RESULTS OF OPERATIONS
As discussed above, we present our results based on three reportable segments and on a geographic
basis.
2009 vs. 2008
The following table sets forth our operating results for the year ended January 2, 2010 (52 weeks),
compared to the year ended January 3, 2009 (53 weeks):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
|
Variance |
|
Dollars in millions |
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
3,011.9 |
|
|
$ |
3,984.9 |
|
|
$ |
(973.0 |
) |
|
|
(24.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
1,397.7 |
|
|
|
1,903.3 |
|
|
|
(505.6 |
) |
|
|
(26.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
1,715.3 |
|
|
|
1,944.0 |
|
|
|
228.7 |
|
|
|
11.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and other intangible assets
|
|
|
17.0 |
|
|
|
693.1 |
|
|
|
676.1 |
|
|
|
97.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(334.6 |
) |
|
|
(733.8 |
) |
|
|
399.2 |
|
|
|
54.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(4.0 |
) |
|
|
(6.4 |
) |
|
|
2.4 |
|
|
|
37.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(65.1 |
) |
|
|
(48.3 |
) |
|
|
(16.8 |
) |
|
|
(34.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes |
|
|
(109.6 |
) |
|
|
24.9 |
|
|
|
134.5 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations |
|
|
(294.1 |
) |
|
|
(813.4 |
) |
|
|
519.3 |
|
|
|
63.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of income taxes |
|
|
(12.3 |
) |
|
|
(138.2 |
) |
|
|
125.9 |
|
|
|
91.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(306.4 |
) |
|
|
(951.6 |
) |
|
|
645.2 |
|
|
|
67.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to the noncontrolling interest |
|
|
(0.7 |
) |
|
|
0.2 |
|
|
|
0.9 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Liz Claiborne, Inc. |
|
$ |
(305.7 |
) |
|
$ |
(951.8 |
) |
|
$ |
646.1 |
|
|
|
67.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Net sales for 2009 were $3.012 billion, a decrease of 24.4%, as compared to net sales for 2008 of
$3.985 billion. This reduction reflected (i) sales declines in all of our segments; (ii) a $132.0
million decrease associated with brands or certain brand activities that have been licensed, closed
or exited and have not been presented as part of discontinued operations; and (iii) the impact of
changes in foreign currency exchange rates in our international businesses, which decreased net
sales by $58.2 million.
As detailed below, sales and operating results for 2009 in our specialty retail stores were
adversely affected by reduced mall traffic and generally lower spending levels per purchase as we
reduced unit prices to compensate for lower demand, which is reflected in reduced sales
productivity and decreased comparable store sales.
40
Net sales results for our segments are provided below:
|
|
Domestic-Based Direct
Brands net sales were $1.121 billion, a decrease of $86.7 million, or 7.2% (4.3% excluding the impact of
licensing our fragrance operations in the second quarter of 2008). The decrease in net sales reflected the following: |
|
|
|
Net sales for JUICY COUTURE were $539.9 million, a 10.7% decrease compared to 2008, or a decrease of 5.7% excluding
the impact of licensing our fragrance operations in the second quarter of 2008, which primarily reflected decreases
in our wholesale apparel and non-apparel operations, partially offset by increases in specialty retail and outlet
operations. |
|
|
|
We ended 2009 with 66 specialty stores and 33 outlet stores, reflecting the net addition over the last 12 months
of 4 specialty stores; |
|
|
|
|
Average retail square footage in 2009 was approximately 325 thousand square feet, a 35.5% increase compared to
2008; |
|
|
|
|
Sales productivity was $804 per average square foot as compared to $986 for 2008; and |
|
|
|
|
Comparable store sales in our Company-owned stores decreased by 12.0% in 2009. |
|
|
|
Net sales for LUCKY BRAND were $439.6 million, a 7.8% decrease compared to 2008, reflecting decreases in wholesale
apparel and specialty retail operations, partially offset by an increase in outlet operations. |
|
|
|
We ended 2009 with 194 specialty stores and 46 outlet stores, reflecting the net addition over the last 12 months
of 1 specialty store and 7 outlet stores; |
|
|
|
|
Average retail square footage in 2009 was approximately 584 thousand square feet, a 14.4% increase compared to
2008; |
|
|
|
|
Sales productivity was $421 per average square foot as compared to $603 for 2008; and |
|
|
|
|
Comparable store sales in our Company-owned stores decreased by 16.2% in 2009. |
|
|
|
Net sales for KATE SPADE were $141.2 million, a 12.1% increase compared to 2008, primarily driven by increases in
our outlet and wholesale operations, partially offset by decreases in our specialty retail operations. |
|
|
|
We ended 2009 with 38 specialty retail stores and 29 outlet stores, reflecting the net closure over the last 12
months of 10 specialty retail stores and a net addition of 1 outlet store; |
|
|
|
|
Average retail square footage in 2009 was approximately 146 thousand square feet, a 24.9% increase compared to
2008; |
|
|
|
|
Sales productivity was $538 per average square foot as compared to $616 for 2008; and |
|
|
|
|
Comparable store sales in our Company-owned stores decreased by 6.8% in 2009. |
|
|
International-Based
Direct Brands, comprised of our MEXX retail-based lifestyle brand, net sales were $831.9 million, a decrease of
$371.0 million or 30.8% compared to 2008. Excluding the impact of fluctuations in foreign currency exchange rates, net sales were
$879.4 million, a 26.9% decrease as compared to 2008. The decrease in net sales is primarily due to decreases in our MEXX Europe
and MEXX Canada wholesale and retail operations. |
|
|
|
We ended 2009 with 157 specialty stores, 101 outlet stores and 206 concessions, reflecting the net addition over
the last 12 months of 21 specialty stores and 1 outlet store and the net closure of 35 concessions (inclusive of
the conversion of 29 concessions to specialty retail formats); |
|
|
|
|
Average retail square footage in 2009 was approximately 1.498 million square feet, a 4.6% increase compared to 2008; |
|
|
|
|
Sales productivity was $325 per average square foot as compared to $444 for 2008; |
|
|
|
|
Comparable store sales in our MEXX Company-owned stores decreased by 10.3% in 2009; and |
|
|
|
|
Fluctuations in foreign currency exchange rates in our European and Canadian businesses decreased net sales by
$47.5 million. |
|
|
Partnered Brands net sales were $1.059 billion, a decrease of $515.3 million or 32.7% reflecting the following: |
|
|
|
A net $365.0 million, or 23.2%, decrease in sales of our ongoing wholesale operations as the
operating environment continued to adversely affect our LIZ CLAIBORNE,
DKNY® JEANS, AXCESS, CLAIBORNE and
MONET brands; |
|
|
|
|
A $97.2 million, or 6.2%, decrease due to the divestiture, licensing or exiting of the
following brands: SIGRID OLSEN (closed as of the second quarter of 2008), Cosmetics group of
brands (due to the exiting of certain brands and the license of the remaining brands to
Elizabeth Arden effective June 10, 2008), Villager (closed in the third quarter of 2008),
former Ellen Tracy brand (sold on April 10, 2008) and DANA BUCHMAN (licensed on an exclusive
basis to Kohls in January 2008) with operations closed in the second quarter of 2008; |
|
|
|
|
The impact of fluctuations in foreign currency exchange rates, primarily related to our LIZ
CLAIBORNE operations in Europe and Canada, which decreased net sales by $10.0 million, or
0.6%; and |
|
|
|
|
A $43.1 million, or 21.3% decrease in sales of our outlet operations, reflecting the following: |
|
|
|
We ended 2009 with 154 outlet stores, reflecting the net closure over the last 12 months of 11 outlet stores; |
|
|
|
|
Average retail square footage in 2009 was approximately 1.118 million square feet, a 7.8% decrease compared
to 2008; |
41
|
|
|
Sales productivity was $142 per average square foot as compared to $167 for 2008; and |
|
|
|
|
Comparable store net sales in our Company-owned stores decreased 11.4% in 2009. |
Comparable Company-owned store sales are calculated as follows:
|
|
|
New stores become comparable after 14 full fiscal months of operations (on the
1st day of the 15th full fiscal month); |
|
|
|
Except in unusual circumstances, closing stores become non-comparable one full
fiscal month prior to the scheduled closing date; |
|
|
|
A remodeled store will be changed to non-comparable when there is a 20.0% or
more increase/decrease in its selling square footage (effective at the start of the fiscal
month when construction begins). The store becomes comparable again after 14 full fiscal
months from the re-open date; |
|
|
|
A store that relocates becomes non-comparable when the new location is
materially different from the original location (in respect to selling square footage
and/or traffic patterns); and |
|
|
|
Stores that are acquired are not comparable until they have been reflected in
our results for a period of 12 months. |
Net sales per average square foot is defined as net sales divided by the average of beginning and
end of period gross square feet.
Viewed on a geographic basis, Domestic net sales decreased by $552.2 million, or 21.5%, to
$2.018 billion, principally reflecting the declines within JUICY COUTURE wholesale operations and LUCKY BRAND
retail and wholesale operations as well as in our domestic Partnered Brands segment, partially offset by an
increase in our KATE SPADE wholesale and retail operations. International net
sales decreased by $420.9 million, or 29.8%, to $993.8 million, primarily due to declines in our
MEXX Europe and MEXX Canada operations, and the $58.2 million impact of fluctuations in foreign
currency exchange rates on international sales.
Gross Profit
Gross profit in 2009 was $1.398 billion (46.4% of net sales) compared to $1.903 billion (47.8% of
net sales) in 2008. These decreases are primarily due to reduced sales and decreased gross profit
rates in our International-Based Direct Brands and Partnered Brands segments. The decreases in the
gross margin rates in these segments reflected increased promotional activity, which was partially
driven by increased retailer support in our Partnered Brands segment related to the transition of our Liz Claiborne brands to license arrangements.
In addition, fluctuations in foreign currency exchange rates in our international
businesses decreased gross profit by $31.5 million.
Gross profit also decreased due to reduced
sales in our Domestic-Based Direct Brands segment;
however, decreases in our gross profit rate were partially offset by an increased proportion of
sales from retail operations in such segment, which runs at a higher gross profit rate than the
Company average.
Expenses related to warehousing activities including receiving, storing, picking, packing and
general warehousing charges are included in SG&A; accordingly, our gross profit may not be
comparable to others who may include these expenses as a component of cost of goods sold.
Selling, General & Administrative Expenses
SG&A decreased $228.7 million or 11.8%, to $1.715 billion in 2009 compared to 2008. The SG&A
decrease reflected the following:
|
|
A $144.2 million decrease in our Partnered Brands segment and corporate SG&A, inclusive of a $17.8 million decrease resulting
from the licensing of our cosmetics brands; |
|
|
|
A $95.4 million decrease in our International-Based Direct Brands segment, including a reduction of approximately $32.6
million of payroll related expenses, $15.8 million marketing expenses, a reduction of approximately $14.3 million in shipping and
handling expenses, as well as an $11.2 million reduction in concession fees of our European operations; |
|
|
|
A $39.1 million decrease due to the impact of fluctuations in foreign currency exchange rates in our international operations; |
|
|
|
A $29.0 million increase in expenses associated with our streamlining initiatives and brand-exiting activities; and |
|
|
|
A $21.0 million increase in our Domestic-Based Direct Brands segment primarily resulting from retail expansion and increases in other operating expenses. |
SG&A as a percentage of net sales was 57.0% in 2009, compared to 48.8% in 2008, primarily
reflecting (i) an increased proportion of expenses from our Domestic-Based Direct Brands segment,
which runs at a higher SG&A rate than the Company average; (ii) deleveraging of expenses in our
International-Based Direct Brands segment; (iii) a $28.9 million increase in expenses associated
with our streamlining initiatives and brand-exiting activities; and (iv) to a lesser extent, a reduction in our
Partnered Brands segment due to the decline in sales.
42
Impairment of Goodwill and Other Intangible Assets
We recorded $2.8 million of additional purchase price and an increase to goodwill related to our
contingent earn-out payment to the former owners of Mac & Jac in the second quarter of 2009. Based
on economic circumstances and other factors, we concluded that the goodwill recorded as a result of
the settlement of the contingency was impaired and recorded an impairment charge of $2.8 million in
our Partnered Brands segment in 2009.
In 2009, we recorded non-cash impairment charges of (i) $9.5 million related to the licensed
trademark intangible asset related to our licensed DKNY® JEANS
and DKNY® ACTIVE brands due to a decline in actual and
projected performance of such brands; and (ii) $4.7
million primarily related to the impairment of LIZ CLAIBORNE merchandising rights due to decreased use
of such intangible assets.
In 2008, we recorded non-cash goodwill impairment charges of (i) $382.4 million related to goodwill
previously recorded in our Domestic-Based Direct Brands segment as a result of an impairment
evaluation we performed as of January 3, 2009 because the Companys book value exceeded its market
capitalization, plus a reasonable control premium; and (ii) $300.7 million related to goodwill
previously recorded in our International-Based Direct Brands segment, reflecting a decrease in its
fair value below its carrying value due to declines in the actual and projected performance and
cash flows of such segment.
We also recorded a non-cash impairment charge of $10.0 million related to the Villager, Crazy Horse
and Russ trademark due to our exit from these brands in the third quarter of 2008.
Operating Loss
Operating loss for 2009 was $334.6 million ((11.1)% of net sales), compared to an operating loss of
$733.8 million ((18.4)% of net sales) in 2008. The impact of fluctuations in foreign currency
exchange rates in our international operations reduced the operating loss in 2009 by $7.4 million.
Operating loss by segment is provided below:
|
|
Domestic-Based Direct Brands operating loss was $25.4 million ((2.3)%
of net sales), compared to an operating loss of $331.5 million ((27.5)%
of net sales) in 2008. The decreased operating loss reflected the
absence of the non-cash goodwill impairment charge of $382.4 million
recorded in 2008 and a decrease in advertising expenses of $8.9
million, partially offset by decreased gross profit, as discussed
above, a $31.9 million increase in restructuring charges, principally
associated with our LUCKY KIDS stores, and certain KATE SPADE stores,
and an increase in occupancy costs and other retail related expenses resulting from additional stores,
as noted above. |
|
|
|
International-Based Direct Brands operating loss was $137.6 million
((16.5)% of net sales), compared to an operating loss of $283.6 million
((23.6)% of net sales) in 2008. The decreased operating loss reflected
the absence of the non-cash goodwill impairment charge of $300.7
million recorded in 2008 and decreases in the SG&A of our European
operations, inclusive of a $32.6 million reduction in employment
related expenses, a $15.8 million reduction in marketing
expenses, a $14.3 million decrease in shipping and handling expenses and an
$11.2 million reduction in concession fees. These decreases were partially offset by reduced gross
profit, discussed above. The impact of fluctuations in foreign
currency exchange rates reduced the operating loss in 2009 by $1.5
million. |
|
|
|
Partnered Brands operating loss in 2009 was $171.6 million ((16.2)% of
net sales), compared to an operating loss of $118.7 million ((7.5)% of
net sales) in 2008. The increased operating loss is primarily due to
the decline in gross profit discussed above and increased intangible
asset impairment charges of $7.0 million, partially offset by reduced
SG&A, including marketing expenditures. |
On a geographic basis, Domestic operating loss decreased by $254.4 million to a loss of
$185.6 million, which predominantly reflected the absence of the
non-cash goodwill impairment charge of
$382.4 million recorded in 2008, in addition to decreased losses in our Domestic-Based Direct
Brands segment, partially offset by increased losses in our domestic
Partnered Brands operations. The
International operating loss was $149.0 million in 2009, compared to operating loss of
$293.8 million in 2008. This change reflected the absence of the non-cash goodwill impairment charge of
$300.7 million recorded in 2008, partially offset by increased losses in our international
Partnered Brands operations. The impact of fluctuations in foreign currency exchange rates in our
international operations decreased the operating loss by $7.4 million.
Other Expense, Net
Other expense, net amounted to $4.0 million in 2009 and $6.4 million in 2008. Other expense, net
consists primarily of (i) the impact of the partial dedesignation of the hedge of our investment in
euro functional currency subsidiaries, which resulted in the recognition of a foreign currency
translation loss of $6.5 million on our euro-denominated notes within earnings in 2009; and (ii)
foreign currency transaction gains and losses in 2009 and 2008.
Interest Expense, Net
Interest expense, net increased to $65.1 million in 2009 from $48.3 million in 2008, primarily due
to increased amortization of debt issuance costs, an increase in interest rates associated with our
amended and restated revolving credit facility and additional interest expense related to the issuance of the Convertible
Notes in June of 2009.
43
(Benefit) Provision for Income Taxes
We recorded a benefit for income taxes of $109.6 million in 2009, compared to a provision for
income taxes of $24.9 million in 2008. The income tax benefit in 2009 principally related to the
carryback of Federal losses, partially offset by increases in valuation allowances. We have not
recorded income tax benefits for other losses incurred during 2009 in accordance with accounting
principles generally accepted in the United States of America as it is not more likely than not
that we will utilize such benefits due to the combination of (i) our recent history of pretax
losses, including goodwill impairment charges recorded in 2008 and 2007; (ii) our ability to carry
forward or carry back tax losses or credits and (iii) current general economic conditions. The
income tax expense in 2008 reflected the establishment of valuation allowances for substantially
all deferred tax assets.
Loss from Continuing Operations
Loss from continuing operations in 2009 decreased to $294.1 million, or (9.8)% of net sales, from
$813.4 million in 2008, or (20.4)% of net sales. Earnings per share, Basic and Diluted (EPS) from
continuing operations attributable to Liz Claiborne, Inc. increased to $(3.13) in 2009 from $(8.69)
in 2008.
Discontinued Operations, Net of Income Taxes
Loss from discontinued operations in 2009 decreased to $12.3 million, from $138.2 million in 2008,
reflecting a loss on disposal of discontinued operations of $3.8 million and an $8.5 million loss
from discontinued operations in 2009, as compared to a loss on disposal of discontinued operations
of $91.6 million and a $46.6 million loss from discontinued operations in 2008. The loss on
disposal of discontinued operations recorded in 2008 principally reflected losses we incurred on
the disposition of our former Enyce, prAna and Narciso Rodriguez brands and the loss from
discontinued operations in 2009 and 2008 principally reflected losses we incurred in concluding the
operations of our discontinued brands. EPS from discontinued operations attributable to Liz
Claiborne, Inc. increased to $(0.13) in 2009 from $(1.48) in 2008.
Net Loss Attributable to Liz Claiborne, Inc.
Net loss attributable to Liz Claiborne, Inc. in 2009 decreased to $305.7 million from $951.8
million in 2008. EPS increased to $(3.26) in 2009, from $(10.17) in 2008.
2008 vs. 2007
The following table sets forth our operating results for the year ended January 3, 2009 (53 weeks),
compared to the year ended December 29, 2007 (52 weeks):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
|
|
|
|
January 3, |
|
|
December 29, |
|
|
Variance |
|
Dollars in millions |
|
2009 |
|
|
2007 |
|
|
$ |
|
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
3,984.9 |
|
|
$ |
4,441.7 |
|
|
$ |
(456.8 |
) |
|
|
(10.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
1,903.3 |
|
|
|
2,110.7 |
|
|
|
(207.4 |
) |
|
|
(9.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
1,944.0 |
|
|
|
2,043.1 |
|
|
|
99.1 |
|
|
|
4.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and other intangible assets |
|
|
693.1 |
|
|
|
487.1 |
|
|
|
(206.0 |
) |
|
|
(42.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(733.8 |
) |
|
|
(419.5 |
) |
|
|
(314.3 |
) |
|
|
(74.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net |
|
|
(6.4 |
) |
|
|
(3.9 |
) |
|
|
(2.5 |
) |
|
|
(64.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(48.3 |
) |
|
|
(42.2 |
) |
|
|
(6.1 |
) |
|
|
(14.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
|
24.9 |
|
|
|
(99.7 |
) |
|
|
(124.6 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations |
|
|
(813.4 |
) |
|
|
(365.9 |
) |
|
|
(447.5 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of income taxes |
|
|
(138.2 |
) |
|
|
(6.4 |
) |
|
|
(131.8 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(951.6 |
) |
|
|
(372.3 |
) |
|
|
(579.3 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the noncontrolling interest |
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.3 |
|
|
|
60.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Liz Claiborne, Inc. |
|
$ |
(951.8 |
) |
|
$ |
(372.8 |
) |
|
$ |
(579.0 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Net Sales
Net sales for 2008 were $3.985 billion, a decrease of 10.3%, as compared to net sales for 2007 of
$4.442 billion. This reduction is primarily due to a $411.7 million decrease associated with brands
or certain brand activities that have been licensed, closed or exited and have not been presented
as part of discontinued operations and decreased sales in our Partnered Brands segment, partially
offset by increased sales in our Domestic-Based Direct Brands segment and the impact of
fluctuations in foreign currency exchange rates in our international businesses, which increased
net sales by $81.2 million. Net sales data are provided below:
|
|
Domestic-Based Direct Brands net sales were $1.207 billion, increasing $201.5 million, or 20.0%, reflecting the following: |
|
|
|
Net sales for JUICY COUTURE were $604.6 million, a 22.4% increase compared to 2007, or 29.2%,
excluding the impact of licensing our fragrance operations, primarily driven by increases in
specialty retail and outlet operations, reflecting an increased number of stores in 2008. |
|
|
|
We ended 2008 with 62 specialty stores and 33 outlet stores, reflecting the net addition
over the last 12 months of 25 specialty stores and 18 outlet stores; |
|
|
|
|
Average retail square footage in 2008 was approximately 240 thousand square feet, a 103%
increase compared to 2007; |
|
|
|
|
Sales productivity was $986 per average square foot as compared to $1,158 for 2007; and |
|
|
|
|
Comparable store sales in our Company-owned stores were flat in 2008. |
|
|
|
Net sales for LUCKY BRAND were $476.8 million, a 13.1% increase compared to 2007, or an
increase of 16.9% excluding the impact of licensing our fragrance operations in the second
quarter of 2008, primarily driven by increases in our specialty retail and outlet operations,
reflecting an increased number of stores in 2008. |
|
|
|
We ended 2008 with 193 specialty stores and 39 outlet stores, reflecting the net addition
over the last 12 months of 22 specialty stores and 24 outlet stores; |
|
|
|
|
Average retail square footage in 2008 was approximately 511 thousand square feet, a 30.7%
increase compared to 2007; |
|
|
|
|
Sales productivity was $603 per average square foot as compared to $587 for 2007; and |
|
|
|
|
Comparable store sales in our Company-owned stores decreased by 5.5% for 2008. |
|
|
|
Net sales for KATE SPADE were $126.0 million, a 39.3% increase compared to 2007, primarily
driven by an increased number of retail stores, as well as increases in our outlet
operations. |
|
|
|
We ended 2008 with 48 specialty retail stores and 28 outlet stores, reflecting the net
addition over the last 12 months of 22 specialty retail stores and 15 outlet stores; |
|
|
|
|
Average retail square footage in 2008 was approximately 117 thousand square feet, a 72.1%
increase compared to 2007; |
|
|
|
|
Sales productivity was $616 per average square foot as compared to $631 for 2007; and |
|
|
|
|
Comparable store sales in our Company-owned stores decreased by 9.6% in 2008 due to a
decrease in our full priced stores, partially offset by an increase in our outlet stores. |
|
|
InternationalBased Direct Brands net sales were $1.203 billion, decreasing $49.0 million, or 3.9% compared to 2007. Excluding the impact of fluctuations in foreign
currency exchange rates, net sales were $1.131 billion, a 9.7% decrease as compared to 2007, primarily due to decreases in our MEXX Europe wholesale and
retail operations, partially offset by increased sales in our MEXX Canada retail and wholesale operations, reflecting the following: |
|
|
|
We ended 2008 with 136 specialty stores, 100 outlet stores and 241 concessions, reflecting the net addition over the last 12 months of 15 outlet stores and the
net closure of 2 specialty stores and 62 concessions; |
|
|
|
|
Average retail square footage in 2008 was approximately 1.432 million square feet, a 7.6% increase compared to 2007; |
|
|
|
|
Sales productivity increased to $444 per average square foot as compared to $433 for fiscal 2007, primarily due to the impact of exchange rate fluctuations in
our European and Canadian operations; |
|
|
|
|
Comparable store sales in our MEXX Company-owned stores decreased by 10.1% overall, primarily due to a decrease in our MEXX Europe business, as well as in our
MEXX Canada business; and |
|
|
|
|
A $71.9 million increase resulting from the impact of fluctuations in foreign currency exchange rates in our European and Canadian businesses. |
|
|
Partnered Brands net sales were $1.575 billion, a decrease of $609.2 million or 27.9%, reflecting the following: |
|
|
|
A $382.0 million, or 17.5% decrease due to the divestiture, licensing or exiting of the following brands: SIGRID OLSEN (closed in the second quarter of 2008),
cosmetics group of brands (due to the exiting of certain brands and the license of the remaining brands to Elizabeth Arden effective June 10, 2008), First Issue
(closed in early 2008), Villager (closed in the third quarter of 2008), former Ellen Tracy brand (sold on April 10, 2008) and DANA BUCHMAN (licensed on an exclusive
basis to Kohls in January 2008) with operations closed in the second quarter of 2008; |
45
|
|
|
A net $169.1 million,
or 7.7% decrease in sales of our ongoing Partnered Brands business as the operating environment continued to adversely affect our LIZ CLAIBORNE
and CLAIBORNE brands as well as our MONET brand, partially offset by increases in LIZ & CO., KENSIE (due to increased department store distribution) and the launch
of the licensed DKNY ® MENS brand; |
|
|
|
|
The impact of fluctuations in foreign currency exchange rates, which increased net sales by $9.2 million, or 0.4% primarily related to our LIZ CLAIBORNE operations
in Europe and Canada; and |
|
|
|
|
A $67.3 million, or 3.1% decrease in sales of our outlet operations, reflecting the following: |
|
|
|
We ended 2008 with 165 outlet stores, reflecting the net closure over the last 12 months of 58 outlet stores; |
|
|
|
|
Average retail square footage in 2008 was approximately 1.615 million square feet, a 24.9% decrease compared to 2007; |
|
|
|
|
Sales productivity was $166 per average square foot as compared to $167 for 2007; and |
|
|
|
|
Comparable store net sales in our Company-owned stores decreased 22.9% in 2008. |
Viewed on a geographic basis, Domestic net sales decreased by $392.2 million, or 13.2%, to
$2.570 billion, inclusive of a $411.7 million decrease associated with brands or certain brand
activities that have been licensed, closed or exited and have not been presented as part of
discontinued operations and the decrease in our Partnered Brands segment, partially offset by
increases in our Domestic-Based Direct Brands segment. International net sales decreased by
$64.6 million, or 4.4%, to $1.415 billion, primarily due to declines in our International-Based
Direct Brands operations, partially offset by the $81.2 million impact of changes in currency
exchange rates on international sales.
Gross Profit
Gross profit in 2008 was $1.903 billion, a $207.4 million decrease as compared to 2007, primarily
resulting from declines in our Partnered Brands segment due to the impact of brands that have been
sold, closed or licensed, but not treated as discontinued operations, as well as price reductions
in our Partnered Brands segment, partially offset by increased sales in our Domestic-Based Direct
Brands segment and the impact of fluctuations in foreign currency exchange rates in our
international businesses, which increased gross profit by $49.4 million in 2008. Gross profit as a
percentage of net sales increased to 47.8% in 2008 from 47.5% in 2007, reflecting an increased
proportion of sales from our Domestic-Based Direct Brands segment, which operates at a higher gross
profit rate than the Company average, partially offset by decreased gross profit rates in both our
Domestic-Based Direct Brands and Partnered Brands segments.
Selling, General & Administrative Expenses
SG&A decreased $99.1 million or 4.9%, to $1.944 billion in 2008 compared to 2007. The SG&A decrease
reflected the following:
|
|
A $299.5 million decrease in Partnered Brands and corporate SG&A; |
|
|
|
A $33.7 million decrease in the operations of our International-Based Direct Brands segment; |
|
|
|
The inclusion of an $8.1 million charge associated with the sale of our former Ellen Tracy brand; |
|
|
|
A $176.2 million increase primarily resulting from the retail expansion in our Domestic-Based Direct Brands segment; |
|
|
|
A $42.9 million increase due to the impact of fluctuations in foreign currency exchange rates in our international operations; |
|
|
|
A $21.2 million increase in expenses associated with our streamlining initiatives and brand-exiting activities; and |
|
|
|
The inclusion of a $14.3 million gain resulting from the sale of our closed former distribution center. |
SG&A as a percentage of net sales was 48.8% in 2008, compared to 46.0% in 2007, primarily
reflecting (i) an increase in the Domestic-Based Direct Brands SG&A rate primarily driven by growth
in our retail operations; (ii) an increased proportion of expenses from our Domestic-Based Direct
Brands segment, which runs at a higher SG&A rate than the Company average; (iii) an increase in
expenses associated with our streamlining initiatives and brand-exiting activities and (iv) the
charge associated with the sale of the Ellen Tracy brand.
Impairment of Goodwill and Other Intangible Assets
In 2008, we recorded non-cash goodwill impairment charges of (i) $382.4 million related to goodwill
previously recorded in our Domestic-Based Direct Brands segment as a result of an impairment
evaluation we performed as of January 3, 2009 because the Companys book value exceeded its market
capitalization, plus a reasonable control premium and (ii) $300.7 million related to
goodwill previously recorded in our International-Based Direct Brands segment, reflecting a
decrease in its fair value below its carrying value due to declines in the actual and projected
performance and cash flows of such segment.
In 2007, we recorded a non-cash impairment charge of $450.8 million related to goodwill previously
residing in our Partnered Brands segment, reflecting a decrease in its fair value below its
carrying value due to declines in the actual and projected performance and cash flows of such
segment.
46
A non-cash charge of $10.0 million was recorded in 2008 as a result of the impairment of the
Villager, Crazy Horse and Russ trademark due to our exit of these brands. In 2007, we recorded a
$36.3 million non-cash charge resulting from the impairment of the Ellen Tracy trademark due to
decreases in sales projections.
Operating Loss
Operating loss for 2008 was $733.8 million, compared to an operating loss of $419.5 million in
2007. Operating loss as a percentage of net sales was (18.4)% of sales in 2008 compared to (9.4)%
of sales in 2007. The impact of fluctuations in foreign currency exchange rates in our
international operations reduced the operating loss in 2008 by $6.4 million. Operating (loss)
income by segment is provided below:
|
|
Domestic-Based Direct Brands operating loss was $331.5 million
((27.5)% of net sales), compared to operating income of $130.8 million
(13.0% of net sales) in 2007. The decrease reflected the impact of the
non-cash impairment charge of $382.4 million discussed above and
reduced earnings in our JUICY COUTURE wholesale and LUCKY BRAND
wholesale and retail operations. |
|
|
|
International-Based Direct Brands operating loss was $283.6 million
((23.6)% of net sales), compared to operating income of $75.1 million
(6.0% of net sales) in 2007. The decrease primarily reflected the
impact of the non-cash impairment charge of $300.7 million, discussed
above, reduced earnings in our MEXX wholesale and retail operations,
as well as the impact of an increase in expenses associated with our
streamlining initiatives and brand-exiting activities in our MEXX
Europe operations, partially offset by a $4.8 million increase
resulting from fluctuations in foreign currency exchange rates. |
|
|
|
Partnered Brands operating loss in 2008 was $118.7 million ((7.5)% of
net sales), compared to an operating loss of $625.4 million ((28.6)%
of net sales) in 2007. The year-over-year change is primarily due to
the $450.8 million non-cash goodwill impairment charge recorded in
2007, discussed above and the impact of certain brand activities that
have been licensed, closed or exited and have not been presented as
part of discontinued operations, partially offset by lower sales,
increased retailer support and an increase in expenses associated with
our streamlining initiatives and brand-exiting activities. |
On a geographic basis, Domestic operating loss decreased by $28.5 million in 2008 to $440.0
million, reflecting a year-over-year decrease of $94.7 million in non-cash impairment charges,
discussed above, partially offset by reduced earnings in the operations of our Domestic-Based
Direct Brands segment. International operating loss in 2008 was $293.8 million, as compared
to operating income of $49.0 million in 2007, reflecting the non-cash impairment charge of $300.7
million discussed above, and reduced earnings in our International-Based Direct Brands segment,
partially offset by reduced losses in the international operations of our Partnered Brands segment.
The impact of fluctuations in foreign currency exchange rates in our international operations
increased operating income in 2008 by $6.4 million.
Other Expense, Net
In 2008, Other expense, net amounted to $6.4 million and was primarily comprised of $5.4 million of
foreign currency transaction losses. In 2007, Other expense, net amounted to $3.9 million and was
primarily comprised of $3.7 million of foreign currency transaction losses.
Interest Expense, Net
Interest expense, net increased to $48.3 million in 2008 from $42.2 million in 2007 principally due
to increased outstanding borrowings under our amended and restated revolving credit facility in
2008 compared to 2007, partially offset by decreased borrowing rates thereunder in 2008 compared to
2007.
Provision (Benefit) for Income Taxes
Income taxes in 2008 increased by $124.6 million to a tax expense of $24.9 million as compared to a
tax benefit of $99.7 million in 2007. The income tax expense in 2008 reflected the establishment of
valuation allowances for substantially all deferred tax assets due to the combination of (i) pretax
losses in 2008 and 2007, including goodwill impairment charges; (ii) our ability to carry forward
or carry back tax losses or credits at that time; and (iii) general economic conditions. The income
tax benefit rate for 2007 reflected the non-deductibility of a significant portion of the goodwill
impairment charges in our Partnered Brands segment.
Loss from Continuing Operations
Loss from continuing operations in 2008 increased to $813.4 million, or (20.4)% of net sales, from
$365.9 million in 2007, or (8.2)% of net sales. EPS, Basic and Diluted, from continuing operations
decreased to $(8.69) in 2008 from $(3.68) in 2007.
Discontinued Operations, Net of Income Taxes
Loss from discontinued operations in 2008 increased to $138.2 million, from $6.4 million in 2007,
reflecting a loss on disposal of discontinued operations of $91.6 million and a $46.6 million loss
from discontinued operations in 2008 as compared to a loss on disposal of discontinued operations
of $7.3 million and income of $0.9 million from discontinued operations in 2007. EPS from
discontinued operations decreased to $(1.48) in 2008 from $(0.06) in 2007, primarily due to the
impact of the deterioration of the earnings of brands sold and the loss on disposal of discontinued
operations in 2008.
47
Net Loss Attributable to Liz Claiborne, Inc.
Net loss attributable to Liz Claiborne, Inc. in 2008 increased to $951.8 million from $372.8
million in 2007. EPS decreased to $(10.17) in 2008, from $(3.74) in 2007.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements. Our primary ongoing cash requirements are to (i) fund seasonal working
capital needs (primarily accounts receivable and inventory); (ii) fund capital expenditures related
to the opening and refurbishing of our specialty and outlet stores and normal maintenance
activities; (iii) fund remaining efforts associated with our streamlining initiatives, which
include consolidation of office space and distribution centers and reductions in staff; (iv) invest
in our information systems; and (v) fund operational and contractual obligations, including the
refund to Li & Fung discussed in Commitments and Capital Expenditures, below. We
expect that our streamlining initiatives will provide long-term cost savings. We also require cash
to fund payments related to outstanding earn-out provisions of certain of our previous
acquisitions.
Sources of Cash. Our historical sources of liquidity to fund ongoing cash requirements
include cash flows from operations, cash and cash equivalents and securities on hand, as well as
borrowings through our lines of credit.
In January 2009, we completed an amendment to and extension of our revolving credit agreement, and
in May and November 2009, we completed additional amendments to
such agreement (as amended, the
Amended Agreement). Under the Amended Agreement, we are subject to a fixed charge coverage
covenant as well as various other covenants and other requirements, such as financial requirements,
reporting requirements and various negative covenants. Pursuant to the May 2009 amendment, we are
subject to a minimum aggregate borrowing availability covenant. Our borrowing availability under
the Amended Agreement is determined primarily by the level of our eligible accounts receivable and
inventory balances. In addition, the Amended Agreement requires the application of substantially all cash
collected, including any net proceeds received with respect to certain permitted disposals and acquisitions, to reduce
outstanding borrowings under the Amended Agreement. The November 2009 amendment provides that through the maturity date of the
Amended Agreement, the fixed charge coverage covenant would apply only if borrowing availability
under the Amended Agreement falls below certain designated levels. The November 2009 amendment also
provides for, among other things, the approval of (i) a grant to JCPenney of an option to acquire
the intellectual property and related rights to certain brands in the US and Puerto Rico; (ii) the
related sale by us to JCPenney of such property and rights; (iii) upon the consummation of such
sale, the release of any liens on such property and rights in favor of the lenders under the
Amended Agreement, as discussed below; and (iv) certain defined payments, indebtedness and
guarantees.
On June 24, 2009, we completed the offering of the Convertible Notes. We used the net proceeds from
the offering to repay a portion of the outstanding borrowings under our amended and restated
revolving credit facility. The Convertible Notes enhance liquidity by extending the maturity of a
portion of our debt while allowing for additional borrowing capability under our Amended Agreement,
as well as providing flexibility by allowing us to utilize shares to repay a portion of the notes.
The Convertible Notes become convertible during any fiscal quarter if the last reported sale price
of our common stock during 20 out of the last 30 trading days in the prior fiscal quarter equals or
exceeds $4.2912 (which is 120% of the conversion price). As a result of stock price performance,
the Convertible Notes became convertible during the fourth quarter of 2009 and are convertible
during the first quarter of 2010. As previously disclosed in connection with the issuance of the
Convertible Notes, we have not yet obtained stockholder approval under the rules of the NYSE for
the issuance of the full amount of common stock issuable upon conversion of the Convertible Notes.
Until such approval is obtained, if the Convertible Notes are surrendered for conversion, we must
pay the $1,000 principal amount of the conversion value of the Convertible Notes in cash and may settle the remaining conversion value in
the form of cash, stock or a combination of cash and stock.
By the end of the first quarter of 2010, we expect to receive $166.7 million of income tax refunds
on previously paid taxes due to a Federal law change allowing our 2008 or 2009 domestic losses to
be carried back for five years, with the fifth year limited to 50.0% of taxable income. As a
condition of the Amended Agreement, we are required to repay amounts outstanding thereunder with
the amount of such refunds.
As discussed above, under our Amended Agreement, we are subject to minimum borrowing availability
levels, and we are subject to the fixed charge coverage covenant in the event our borrowing
availability falls below certain designated levels. Based on our forecast of borrowing availability
under the Amended Agreement, and subject to the expected timing of the receipt of the anticipated
tax refunds, we anticipate that cash flows from operations and the projected borrowing availability
under our Amended Agreement will be sufficient to fund our liquidity requirements for at least the
next 12 months. While we might not be able to maintain the borrowing availability levels necessary
to avoid application of the fixed charge coverage covenant, we currently anticipate that, based on
the expected timing of the receipt of the anticipated tax refunds, our borrowing availability will be
sufficient to avoid springing the fixed charge coverage covenant.
48
There can be no certainty that availability under the Amended Agreement will be sufficient to fund
our liquidity needs or will remain at levels that will keep the fixed charge coverage covenant from
springing into effect. If the fixed charge coverage covenant springs into effect due to a failure
to fulfill the minimum availability requirements at any time through the end of 2010, we do not
project we will comply with this covenant. Should we be unable to comply with the requirements in
the Amended Agreement, including the fixed charge coverage covenant, we would be unable to borrow
under such agreement and any amounts outstanding would become immediately due and payable, unless
we were able to secure a waiver or an amendment under the Amended Agreement. Should we be unable to
borrow under the Amended Agreement, or if outstanding borrowings thereunder become immediately due
and payable, our liquidity would be significantly impaired, which would have a material adverse
effect on our business, financial condition and results of operations. In addition, an acceleration
of amounts outstanding under the Amended Agreement would likely cause cross-defaults under our
other outstanding indebtedness, including the Convertible Notes and the 5.0% Notes.
The sufficiency and availability of our projected sources of liquidity may be adversely affected by
a variety of factors, including, without limitation: (i) the level of our operating cash flows,
which will be impacted by retailer and consumer acceptance of our products, general economic
conditions and the level of consumer discretionary spending; (ii) the status of, and any further
adverse changes in, our credit ratings; (iii) our ability to maintain required levels of borrowing
availability and to comply with applicable financial covenants (as amended) and other covenants
included in our debt and credit facilities; (iv) the financial wherewithal of our larger department
store and specialty store customers; (v) our ability to successfully execute on the licensing
arrangements with JCPenney and QVC with respect to the LIZ CLAIBORNE family of brands; (vi) the
timing of the receipt of the anticipated tax refunds; (vii) interest rate and exchange rate
fluctuations; and (viii) whether holders of the Convertible Notes, if and when such notes are
convertible, elect to convert a substantial portion of such notes, the par value of which we must
currently settle in cash.
Although we consider the conversion of a material amount of the Convertible Notes in the near
future to be unlikely, if all or a substantial portion of the outstanding Convertible Notes were so
converted and we were required to settle all of the principal of the converted Convertible Notes in
cash, then we might not have sufficient liquidity to meet our obligations to pay the amounts
required upon conversion of the Convertible Notes and maintain the requisite levels of availability
required under the Amended Agreement.
Because of the continuing uncertainty and risks relating to future economic conditions, we may,
from time to time, explore various initiatives to improve our liquidity, including sales of various
assets, additional cost reductions and other measures. In addition, where conditions permit, we may
also, from time to time, seek to retire, exchange or purchase our outstanding debt in privately
negotiated transactions or otherwise. We may not be able to successfully complete any of such
actions, if necessary.
Cash and Debt Balances. We ended 2009 with $20.9 million in cash and marketable securities,
compared to $25.6 million at the end of 2008 and with $658.2 million of debt outstanding, compared
to $743.6 million at the end of 2008. This $80.7 million decrease in our net debt position (total
debt less cash and marketable securities) on a year-over-year basis was primarily attributable to
cash flows from continuing operations of $223.9 million, which included the receipt of $99.8
million of net income tax refunds and $75.0 million related to our transaction with Li & Fung,
partially offset by $72.6 million in capital and in-store shop expenditures, $8.8 million in
acquisition related payments and $7.2 million of investments in and advances to KSJ. The effect of
foreign currency translation on our euro-denominated 5.0% Notes increased our debt balance by $15.9
million, compared to January 3, 2009.
Accounts Receivable decreased $75.7 million, or 22.3%, at year-end 2009 compared to
year-end 2008, primarily due to (i) decreased sales in our Partnered Brands and International-Based
Direct Brands segments and (ii) the impact of brands sold or licensed. The
impact of fluctuations in foreign currency exchange rates increased accounts receivable by $3.5
million, or 1.0% at year-end 2009 compared to year-end 2008.
Inventories decreased $144.9 million, or 31.2% at year-end 2009 compared to year-end
2008, primarily due to our conservative inventory management practices and reduced sales. The impact of changes in foreign currency exchange rates
increased inventories by $7.1 million, or 1.5% at year-end 2009 compared to year-end 2008.
Borrowings under our amended and restated revolving credit facility peaked at $361.3
million during 2009, compared to a peak of $574.1 million in 2008, and were $66.5 million at
January 2, 2010, compared to $234.4 million at January 3, 2009.
Net cash provided by operating activities of our continuing operations was $223.9 million
in 2009, compared to $204.2 million in 2008. This $19.7 million increase was primarily due to an
improvement in working capital, including the receipt of $75.0 million from Li & Fung and the net receipt of $99.8 million of income tax refunds in 2009, compared to $19.2
million in 2008, partially offset by decreased earnings in 2009 compared to 2008 (excluding
impairment charges and other non-cash items). In addition, the operating activities of our
discontinued operations used $16.6 million and $45.9 million of cash in 2009 and 2008,
respectively. The cash used in 2009 principally represents losses incurred on the disposal of
discontinued operations and losses incurred with the run-off operations of such brands.
49
Net cash used in investing activities of our continuing operations was $87.9 million in
2009 compared to $253.9 million in 2008. Net cash used in investing activities in 2009 primarily
reflected the use of $72.6 million for capital and in-store shop expenditures, $8.8 million for
acquisition related payments for previous acquisitions, including LUCKY BRAND and MAC & JAC and
$7.2 million for investments in and advances to KSJ. Net cash used in investing activities in 2008
primarily reflected the use of $194.2 million for capital and in-store shop expenditures and the
use of $100.4 million for acquisition related payments for previous acquisitions, including JUICY
COUTURE and LUCKY BRAND, partially offset by the receipt of $21.3 million of proceeds related to
the Ellen Tracy transaction.
The investing activities of our discontinued operations, consisting principally of net proceeds
from dispositions, provided $2.0 million and $65.3 million of cash in 2009 and 2008, respectively.
Net cash used in financing activities was $125.8 million in 2009, compared to $141.7
million in 2008. The $15.9 million year-over-year decrease in the use of cash primarily reflected
(i) the net decrease of $34.3 million in net cash used for borrowing activities, as improved
working capital management and reduced inventory levels resulted in decreased borrowing in 2009
compared to 2008; (ii) the absence of dividend payments in 2009, which used $20.9 million of cash
in 2008; and (iii) an increase of $39.1 million in cash paid for deferred financing fees.
Commitments and Capital Expenditures
During the first quarter of 2009, we entered into an agreement with Li & Fung, whereby Li & Fung
was appointed as our sourcing agent for all of our brands and products (other than jewelry) and we
received a payment of $75.0 million at closing and an additional payment of $8.0 million in the
second quarter of 2009 to offset specific, incremental, identifiable expenses associated with the
transaction. Our agreement with Li & Fung provides for a refund of a portion of the closing payment
in certain limited circumstances, including a change of control of the Company, the sale or
discontinuation of any current brand, or certain termination events. We are also obligated to use
Li & Fung as our sourcing agent for a minimum value of inventory purchases each year through the
termination of the agreement in 2019. The licensing arrangements with JCPenney and QVC will result
in the removal of sourcing for a number of LIZ CLAIBORNE branded products sold under these licenses
from the Li & Fung sourcing arrangement. As a result, under our agreement with Li & Fung, we are
required to refund $24.3 million of the closing payment received from Li & Fung, payable on or
before April 15, 2010, with applicable late fees if paid after that date. Such amount was included
in Accrued expenses at January 2, 2010. In addition, our agreement with Li & Fung is not exclusive;
however, we are required to source a specified percentage of product purchases from Li & Fung.
We may be required to make the following additional payments in connection with our acquisitions.
If paid in cash, these payments will be funded with cash provided by operating activities or our
amended and restated revolving credit facility:
|
|
On January 26, 2006, we acquired 100% of the equity of Westcoast
Contempo Fashions Limited and Mac & Jac Holdings Limited, which
collectively design, market and sell the Mac & Jac, Kensie and
Kensiegirl apparel lines (Mac & Jac). The purchase price totaled
26.2 million Canadian dollars (or $22.7 million), which included the
retirement of debt at closing and fees, but excluded contingent
payments to be determined based upon a multiple of Mac & Jacs
earnings in fiscal years 2006, 2008, 2009 and 2010. In May of 2009, we
paid the former owners of Mac & Jac $3.8 million based on 2008 fiscal
year earnings. We currently estimate that the aggregate of the
remaining contingent payments will be in the range of approximately
$2.0-$7.0 million, which will be accounted for as additional purchase
price when paid. |
|
|
|
On June 8, 1999, we acquired 85.0% of the equity of Lucky Brand
Dungarees, Inc. (Lucky Brand), whose core business consists of the
Lucky Brand Dungarees line of women and mens denim-based sportswear.
The total purchase price consisted of aggregate cash payments of
$126.2 million and additional payments made from 2005 to 2009 totaling
$65.0 million for 12.3% of the remaining equity of Lucky Brand. We
acquired 0.4% of the equity of Lucky Brand in January of 2010 for a
payment of $5.0 million. We recorded the present value of fixed
amounts owed of $5.0 million in Accrued expenses. The remaining 2.3%
of the original shares outstanding will be settled for an aggregate
purchase price composed of the following two installments: (i) a
payment made in 2008 of $15.7 million that was based on a multiple of
Lucky Brands 2007 earnings and (ii) a 2011 payment that will be based
on a multiple of Lucky Brands 2010 earnings, net of the 2008 payment,
which we estimate will be in the range of approximately $0-$5.0
million. |
50
We will continue to closely manage spending, with a slight increase in projected 2010 capital
expenditures to approximately $85.0 million compared to $72.6 million in 2009. These expenditures
primarily relate to our plan to open 25-30 retail stores globally, the continued technological
upgrading of our management information systems and costs associated with the refurbishment of
selected specialty and outlet stores. Capital expenditures and working capital cash needs will be
financed with cash provided by operating activities and our amended and restated revolving credit
facility. In addition, pursuant to terms of the Amended Agreement, our capital expenditures may not
exceed 4.0% of total sales in 2010 and each year thereafter.
The following table summarizes as of January 2, 2010 our contractual cash obligations by future
period (see Notes 8, 9 and 21 of Notes to Consolidated Financial Statements):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
Contractual cash obligations * |
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
|
(In millions) |
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
|
Total |
|
Operating lease commitments |
|
$ |
214.0 |
|
|
$ |
376.6 |
|
|
$ |
270.7 |
|
|
$ |
383.2 |
|
|
$ |
1,244.5 |
|
Capital lease obligations |
|
|
5.4 |
|
|
|
10.7 |
|
|
|
4.9 |
|
|
|
|
|
|
|
21.0 |
|
Inventory purchase commitments |
|
|
287.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
287.2 |
|
5.0% Notes |
|
|
|
|
|
|
|
|
|
|
503.0 |
|
|
|
|
|
|
|
503.0 |
|
Interest on 5.0% Notes (a) |
|
|
25.1 |
|
|
|
50.3 |
|
|
|
25.1 |
|
|
|
|
|
|
|
100.5 |
|
6.0% Convertible Senior Notes |
|
|
90.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90.0 |
|
Interest on 6.0% Convertible Senior Notes (b) |
|
|
5.4 |
|
|
|
10.8 |
|
|
|
8.1 |
|
|
|
|
|
|
|
24.3 |
|
Guaranteed minimum licensing royalties |
|
|
14.8 |
|
|
|
31.4 |
|
|
|
|
|
|
|
|
|
|
|
46.2 |
|
Revolving credit facility and other borrowings (c) |
|
|
66.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66.5 |
|
Synthetic lease |
|
|
|
|
|
|
32.8 |
|
|
|
|
|
|
|
|
|
|
|
32.8 |
|
Synthetic lease interest |
|
|
2.2 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
Refund to Li & Fung |
|
|
24.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.3 |
|
Advances to equity investee |
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0 |
|
Additional acquisition purchase price payments |
|
|
5.0 |
|
|
|
2.4 |
|
|
|
|
|
|
|
|
|
|
|
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
743.9 |
|
|
$ |
515.9 |
|
|
$ |
811.8 |
|
|
$ |
383.2 |
|
|
$ |
2,454.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The table above does not include amounts recorded for uncertain tax positions. We
cannot estimate the amounts or timing of payments related to uncertain tax positions as we
have not yet entered into substantive settlement discussions with taxing authorities. |
|
(a) |
|
Interest on the 5.0% Notes is fixed at 5.0% per annum and assumes an exchange rate of 1.4370 US dollars per euro. |
|
(b) |
|
Interest on the 6.0% Convertible Senior Notes is fixed at 6.0% per annum. |
|
(c) |
|
Interest on these borrowings is estimated at a rate of 6.87%, or approximately $6.5 million. |
Debt consisted of the following:
|
|
|
|
|
|
|
|
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
5.0% Notes (a) |
|
$ |
501,827 |
|
|
$ |
485,582 |
|
6.0% Convertible Senior Notes(b) |
|
|
71,137 |
|
|
|
|
|
Revolving credit facility |
|
|
66,507 |
|
|
|
234,400 |
|
Capital lease obligations |
|
|
18,680 |
|
|
|
22,787 |
|
Other |
|
|
|
|
|
|
870 |
|
|
|
|
|
|
|
|
Total debt |
|
$ |
658,151 |
|
|
$ |
743,639 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The change in the balance of these euro-denominated notes reflected the impact of changes in foreign currency exchange rates. |
|
(b) |
|
Our 6.0% Convertible Senior Notes were issued during the second quarter of 2009. The
January 2, 2010 amount represented principal of $90.0 million and an unamortized debt discount of $18.9 million. |
For information regarding our debt and credit instruments, refer to Note 9 of Notes to
Consolidated Financial Statements.
As discussed in Note 9 of Notes to Consolidated Financial Statements, on January 12, 2009, we
completed an amendment to and an extension of our revolving credit agreement, and on May 12, 2009
and November 2, 2009, we completed further amendments to our revolving credit agreement.
Availability under the Amended Agreement shall be the lesser of $600.0 million or a borrowing base
that is computed monthly and comprised primarily of eligible accounts receivable and inventory. A
portion of the funds available under the Amended Agreement not in excess of $200.0 million is
available for the issuance of letters of credit, whereby standby letters of credit may not exceed
$50.0 million.
51
The Amended Agreement contains a fixed charge coverage covenant which will be in effect only when
availability under the credit facility fails to exceed $75.0 million on any date on or after the
first day of the October fiscal month and prior to the first day of the December fiscal month,
$120.0 million on any date from December 15 of a calendar year through January 30 of the following
year or $90.0 million on any other date and contains a minimum availability covenant, which
requires us to maintain availability of not less than $50.0 million on any date.
As of January 2, 2010, availability under our amended and restated revolving credit facility was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of |
|
|
|
|
|
|
Total |
|
|
Borrowing |
|
|
Outstanding |
|
|
Credit |
|
|
Available |
|
In thousands |
|
Facility(a) |
|
|
Base(a) |
|
|
Borrowings |
|
|
Issued |
|
|
Capacity |
|
Revolving credit facility (a) |
|
$ |
600,000 |
|
|
$ |
326,189 |
|
|
$ |
66,507 |
|
|
$ |
37,785 |
|
|
$ |
221,897 |
|
|
|
|
(a) |
|
Availability under the Amended Agreement is the lesser of $600.0 million or a
borrowing base comprised primarily of eligible accounts receivable and inventory. |
Off-Balance Sheet Arrangements
On November 21, 2006, we entered into an off-balance sheet financing arrangement with a financial
institution (commonly referred to as a synthetic lease) to refinance the purchase of various land
and real property improvements associated with warehouse and distribution facilities in Ohio and
Rhode Island totaling $32.8 million. This synthetic lease arrangement expires on May 31, 2011 and
replaced the previous synthetic lease arrangement, which expired on November 22, 2006. The lessor
is a wholly-owned subsidiary of a publicly traded corporation. The lessor is a sole member, whose
ownership interest is without limitation as to profits, losses and distribution of the lessors
assets. Our lease represents less than 1.0% of the lessors assets. The leases include our
guarantees for a substantial portion of the financing and options to purchase the facilities at
original cost; the maximum guarantee is approximately $27.0 million. The lessors risk included an
initial capital investment in excess of 10.0% of the total value of the lease, which is at risk
during the entire term of the lease. The equipment portion of the original synthetic lease was sold
to another financial institution and leased back to us through a seven-year capital lease totaling
$30.6 million. The lessor does not meet the definition of a variable interest entity and therefore
consolidation by the Company is not required.
On October 19, 2009, we announced further consolidation of our warehouse operations, with the
planned closure of our Rhode Island distribution facility, which is expected to occur on or about
April 30, 2010. We estimate our present obligation under the terms of the synthetic lease will be
$7.0 million for the Ohio and Rhode Island distribution facilities. That amount will be recognized
in SG&A over the remaining estimated lease terms of those facilities.
On November 2, 2009 the terms of the synthetic lease were amended to make the applicable financial
covenants under the synthetic lease consistent with the terms of the Amended Agreement. We have not
entered into any other off-balance sheet arrangements.
Hedging Activities
Our operations are exposed to risks associated with fluctuations in foreign currency exchange
rates. In order to reduce exposures related to changes in foreign currency exchange rates, we use
foreign currency collars and forward contracts for the purpose of hedging the specific exposure to
variability in forecasted cash flows associated primarily with inventory purchases mainly by our
European and Canadian entities. As of January 2, 2010, we had Canadian currency collars maturing
through July 2010 to sell 17.0 million Canadian dollars for $15.7 million. We also had forward
contracts maturing through December 2010 to sell 22.5 million Canadian dollars for $20.4 million
and to sell 54.8 million euro for $77.0 million.
52
The following table summarizes the fair value and presentation in the Consolidated Financial
Statements for derivatives designated as hedging instruments and derivatives not designated as
hedging instruments as of January 2, 2010 and January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Contracts Designated as Hedging Instruments |
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
In thousands |
|
Balance Sheet |
|
Notional |
|
|
|
|
|
|
Balance Sheet |
|
Notional |
|
|
|
|
Period |
|
Location |
|
Amount |
|
|
Fair Value |
|
|
Location |
|
Amount |
|
|
Fair Value |
|
January 2, 2010 |
|
Other current assets |
|
$ |
26,408 |
|
|
$ |
586 |
|
|
Accrued expenses |
|
$ |
74,634 |
|
|
$ |
3,091 |
|
January 3, 2009 |
|
Other current assets |
|
|
34,702 |
|
|
|
2,313 |
|
|
Accrued expenses |
|
|
134,109 |
|
|
|
8,789 |
|
|
|
|
Foreign Currency Contracts Not Designated as Hedging Instruments |
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
In thousands |
|
Balance Sheet |
|
Notional |
|
|
|
|
|
|
Balance Sheet |
|
Notional |
|
|
|
|
Period |
|
Location |
|
Amount |
|
|
Fair Value |
|
|
Location |
|
Amount |
|
|
Fair Value |
|
January 2, 2010 |
|
Other current assets |
|
$ |
|
|
|
$ |
|
|
|
Accrued expenses |
|
$ |
12,015 |
|
|
$ |
690 |
|
January 3, 2009 |
|
Other current assets |
|
|
12,758 |
|
|
|
111 |
|
|
Accrued expenses |
|
|
3,701 |
|
|
|
46 |
|
The following table summarizes the effect of foreign currency exchange contracts on the
Consolidated Financial Statements for the years ended January 2, 2010, January 3, 2009 and December
29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Reclassified |
|
|
|
|
|
|
|
|
Amount of Gain or |
|
|
from Accumulated |
|
Amount of Gain or |
|
|
Amount of Gain or |
|
|
|
(Loss) Recognized in |
|
|
OCI into |
|
(Loss) Reclassified |
|
|
(Loss) Recognized in |
|
|
|
Accumulated OCI |
|
|
Operations |
|
from Accumulated |
|
|
Operations on |
|
|
|
on Derivative |
|
|
(Effective and |
|
OCI into Operations |
|
|
Derivative |
|
In thousands |
|
(Effective Portion) |
|
|
Ineffective Portion) |
|
(Effective Portion) |
|
|
(Ineffective Portion) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year
ended
January 2,
2010 |
|
$ |
(7,113 |
) |
|
Cost of goods sold |
|
$ |
(4,181 |
) |
|
$ |
(1,428 |
) |
Fiscal year ended
January 3, 2009 |
|
|
(7,588 |
) |
|
Cost of goods sold |
|
|
(11,646 |
) |
|
|
1,706 |
|
Fiscal year ended
December 29, 2007 |
|
|
(11,694 |
) |
|
Cost of goods sold |
|
|
(4,409 |
) |
|
|
(1,658 |
) |
Approximately $7.7 million of unrealized losses in Accumulated other comprehensive loss relating to
cash flow hedges will be reclassified into earnings in the next 12 months as the inventory is sold.
We hedge our net investment position in euro functional subsidiaries by designating a portion of
the 350.0 million euro-denominated bonds as the hedging instrument in a net investment hedge. To
the extent the hedge is effective, related foreign currency translation gains and losses are
recorded within Other comprehensive loss. Translation gains and losses related to the ineffective
portion of the hedge are recognized in current operations.
The related translation (losses) gains recorded within Other comprehensive loss were $(9.4)
million, $26.9 million and $(53.0) million for the years ended January 2, 2010, January 3, 2009 and
December 29, 2007, respectively. During the first quarter of 2009, we dedesignated 143.0 million of
the euro-denominated bonds as a hedge of our net investment in euro-denominated functional currency
subsidiaries due to a decrease in the carrying value of the hedged item below 350.0 million euro.
The associated foreign currency translation loss of $6.5 million is reflected within Other
(expense) income, net on the accompanying Consolidated Statement of Operations during the year
ended January 2, 2010.
53
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the Consolidated Financial Statements. These estimates and assumptions also affect
the reported amounts of revenues and expenses.
Critical accounting policies are those that are most important to the portrayal of our financial
condition and results of operations and require managements most difficult, subjective and complex
judgments as a result of the need to make estimates about the effect of matters that are inherently
uncertain. Our most critical accounting policies, discussed below, pertain to revenue recognition,
income taxes, accounts receivable trade, inventories, goodwill and intangible assets, accrued
expenses, derivative instruments and share-based compensation. In applying such policies,
management must use some amounts that are based upon its informed judgments and best estimates. Due
to the uncertainty inherent in these estimates, actual results could differ from estimates used in
applying the critical accounting policies. Changes in such estimates, based on more accurate future
information, may affect amounts reported in future periods.
Estimates by their nature are based on judgments and available information. The estimates that we
make are based upon historical factors, current circumstances and the experience and judgment of
our management. We evaluate our assumptions and estimates on an ongoing basis and may employ
outside experts to assist in our evaluations. Therefore, actual results could materially differ
from those estimates under different assumptions and conditions.
For accounts receivable, we estimate the net collectibility, considering both historical and
anticipated trends as well as an evaluation of economic conditions and the financial positions of
our customers. For inventory, we review the aging and salability of our inventory and estimate the
amount of inventory that we will not be able to sell in the normal course of business. This
distressed inventory is written down to the expected recovery value to be realized through
off-price channels. If we incorrectly anticipate these trends or unexpected events occur, our
results of operations could be materially affected. We utilize various valuation methods to
determine the fair value of acquired tangible and intangible assets. For inventory, the method uses
the expected selling prices of finished goods and intangible assets acquired are valued using a
discounted cash flow model. Should any of the assumptions used in these projections differ
significantly from actual results, material impairment losses could result where the estimated fair
values of these assets become less than their carrying amounts. For accrued expenses related to
items such as employee insurance, workers compensation and similar items, accruals are assessed
based on outstanding obligations, claims experience and statistical trends; should these trends
change significantly, actual results would likely be impacted. Derivative instruments in the form
of forward contracts and options are used to hedge the exposure to variability in probable future
cash flows associated with inventory purchases and sales collections primarily associated with our
European and Canadian entities. If fluctuations in the relative value of the currencies involved in
the hedging activities were to move dramatically, such movement could have a significant impact on
our results. Changes in such estimates, based on more accurate information, may affect amounts
reported in future periods. We are not aware of any reasonably likely events or circumstances,
which would result in different amounts being reported that would materially affect our financial
condition or results of operations.
Revenue Recognition
Revenue is recognized from our wholesale, retail and licensing operations. Revenue within our
wholesale operations is recognized at the time title passes and risk of loss is transferred to
customers. Wholesale revenue is recorded net of returns, discounts and allowances. Returns and
allowances require pre-approval from management. Discounts are based on trade terms. Estimates for
end-of-season allowances are based on historical trends, seasonal results, an evaluation of current
economic conditions and retailer performance. We review and refine these estimates on a monthly
basis based on current experience, trends and retailer performance. Our historical estimates of
these costs have not differed materially from actual results. Retail store revenues are recognized
net of estimated returns at the time of sale to consumers. Sales tax collected from customers is
excluded from revenue. Proceeds received from the sale of gift cards are recorded as a liability
and recognized as sales when redeemed by the holder. Licensing revenues are recorded based upon
contractually guaranteed minimum levels and adjusted as actual sales data is received from
licensees.
54
Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, as measured by enacted tax rates that are expected to
be in effect in the periods when the deferred tax assets and liabilities are expected to be
realized or settled. We also assess the likelihood of the realization of deferred tax assets and
adjust the carrying amount of these deferred tax assets by a valuation allowance to the extent we
believe it more likely than not that all or a portion of the deferred tax assets will not be
realized. We consider many factors when assessing the likelihood of future realization of deferred
tax assets, including recent earnings results within taxing jurisdictions, expectations of future taxable income, the carryforward periods
available and other relevant factors. Changes in the required valuation allowance are recorded in
income in the period such determination is made. Significant judgment is required in determining
the worldwide provision for income taxes. Changes in estimates may create volatility in our
effective tax rate in future periods for various reasons including changes in tax laws or rates,
changes in forecasted amounts and mix of pretax income (loss), settlements with various tax
authorities, either favorable or unfavorable, the expiration of the statute of limitations on some
tax positions and obtaining new information about particular tax positions that may cause
management to change its estimates. In the ordinary course of a global business, the ultimate tax
outcome is uncertain for many transactions. It is our policy to recognize the impact of an
uncertain income tax position on our income tax return at the largest amount that is more likely
than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax
position will not be recognized if it has less than a 50.0% likelihood of being sustained. The tax
provisions are analyzed periodically (at least quarterly) and adjustments are made as events occur
that warrant adjustments to those provisions. We record interest expense and penalties payable to
relevant tax authorities as income tax expense.
Accounts Receivable Trade, Net
In the normal course of business, we extend credit to customers that satisfy pre-defined credit
criteria. Accounts receivable trade, net, as shown on the Consolidated Balance Sheets, is net of
allowances and anticipated discounts. An allowance for doubtful accounts is determined through
analysis of the aging of accounts receivable at the date of the financial statements, assessments
of collectibility based on an evaluation of historical and anticipated trends, the financial
condition of our customers and an evaluation of the impact of economic conditions. An allowance for
discounts is based on those discounts relating to open invoices where trade discounts have been
extended to customers. Costs associated with potential returns of products as well as allowable
customer markdowns and operational charge backs, net of expected recoveries, are included as a
reduction to sales and are part of the provision for allowances included in Accounts receivable
trade, net. These provisions result from seasonal negotiations with our customers as well as
historical deduction trends, net of expected recoveries, and the evaluation of current market
conditions. Should circumstances change or economic or distribution channel conditions deteriorate
significantly, we may need to increase our provisions. Our historical estimates of these costs have
not differed materially from actual results.
Inventories, Net
Inventories
for seasonal, replenishment and on-going merchandise are recorded at
the lower of actual average cost or market
value. We continually evaluate the composition of our inventories by assessing slow-turning,
ongoing product as well as prior seasons fashion product. Market value of distressed inventory is
valued based on historical sales trends for this category of inventory of our individual product
lines, the impact of market trends and economic conditions and the value of current orders in-house
relating to the future sales of this type of inventory. Estimates may differ from actual results
due to quantity, quality and mix of products in inventory, consumer and retailer preferences and
market conditions. We review our inventory position on a monthly basis and adjust our estimates
based on revised projections and current market conditions. If economic conditions worsen, we
incorrectly anticipate trends or unexpected events occur, our estimates could be proven overly
optimistic and required adjustments could materially adversely affect future results of operations.
Our historical estimates of these costs and our provisions have not differed materially from actual
results.
Goodwill and Intangibles, Net
Goodwill and intangible assets with indefinite lives are not amortized, but rather tested for
impairment at least annually. Our annual impairment test is performed as of the first day of the
third fiscal quarter.
A two-step impairment test is performed on goodwill. In the first step, we compare the fair value
of each reporting unit to its carrying value. We determine the fair value of our reporting units
using the market approach, as is typically used for companies providing products where the value of
such a company is more dependent on the ability to generate earnings than the value of the assets
used in the production process. Under this approach, we estimate fair value based on market
multiples of revenues and earnings for comparable companies. We also use discounted future cash
flow analyses to corroborate these fair value estimates. If the fair value of the reporting unit
exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not
impaired and we are not required to perform further testing. If the carrying value of the net
assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must
perform the second step in order to determine the implied fair value of the reporting units
goodwill and compare it to the carrying value of the reporting units goodwill. The activities in
the second step include valuing the tangible and intangible assets of the impaired reporting unit
based on their fair value and determining the fair value of the impaired reporting units goodwill
based upon the residual of the summed identified tangible and intangible assets.
55
The fair
values of purchased intangible assets with indefinite lives, primarily trademarks and tradenames,
are estimated and compared to their carrying values. We estimate the fair value of these intangible
assets based on an income approach using the relief-from-royalty method. This methodology assumes
that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the
related benefits of these types of assets. This approach is dependent on a number of factors,
including estimates of future growth and trends, royalty rates in the category of intellectual
property, discount rates and other variables. We base our fair value estimates on assumptions we
believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future
results may differ from those estimates. We recognize an impairment loss when the estimated fair
value of the intangible asset is less than the carrying value.
The
recoverability of the carrying values of all intangible assets with finite lives is
re-evaluated when events or changes in circumstances indicate an assets value may be impaired. Impairment
testing is based on a review of forecasted operating cash flows and the profitability of the
related brand. If such analysis indicates that the carrying value of these assets is not
recoverable, the carrying value of such assets is reduced to fair value through a charge to our
Consolidated Statement of Operations.
Intangible assets with finite lives are amortized over their respective lives to their estimated
residual values. Trademarks
with finite lives are amortized over their estimated useful lives. Intangible merchandising rights are amortized over a
period of 3 to 4 years. Customer relationships are amortized assuming gradual attrition over periods ranging from 12 to 14 years.
In performing our goodwill impairment evaluation, we consider declines in the Companys market
value, which began in the second half of 2007, and reconcile the sum of the estimated fair values
of our five reporting units to the Companys market value (based on our stock price), plus a
reasonable control premium, which is estimated as that amount that would be received to sell the
Company as a whole in an orderly transaction between market participants.
During
2009, we recorded a pretax goodwill impairment charge of $2.8 million associated with contingent
consideration for our acquisition of Mac & Jac in 2006.
During the annual goodwill impairment test performed in fiscal 2008, no impairment was recognized,
however, as a result of declines in the actual and projected performance and cash flows of our
International-Based Direct Brands segment, we determined that an additional goodwill impairment
test was required to be performed as of January 3, 2009. This assessment compared the carrying
value of each of our reporting units with its estimated fair value using discounted cash flow
models and market approaches. As a result, we determined that the goodwill of our
International-Based Direct Brands segment, which is a reporting unit, was impaired and recorded a
non-cash impairment charge of $300.7 million during the fourth quarter of 2008.
We consider many factors in evaluating whether the carrying value of goodwill may not be
recoverable, including declines in stock price and market capitalization in relation to the book
value of the Company. In the last two months of 2008 and into 2009, the capital markets experienced
substantial volatility and the Companys stock price declined substantially, causing the Companys
book value to exceed its market capitalization, plus a reasonable
control premium. Accordingly, we concluded that our remaining
goodwill was impaired and recorded a non-cash pretax
impairment charge of $382.4 million during the fourth quarter of
2008 related to goodwill previously recorded in our Domestic-Based
Direct Brands segment.
During 2007, as a result of the then probable sale of brands under strategic review in our
Partnered Brands segment and the decline in actual and projected performance and cash flows of such
segment, we determined that the goodwill of our Partnered Brands segment, which is a reporting
unit, was impaired and recorded a non-cash pretax impairment charge of $450.8 million during the
fourth quarter of 2007.
As a result of the impairment analysis performed in connection with our purchased trademarks with
indefinite lives, no impairment charges were recorded during 2009.
As a result of the 2008 impairment analysis performed in connection with our purchased trademarks
with indefinite lives, we determined that the carrying value of our intangible asset related to our
Villager, Crazy Horse and Russ trademark exceeded its estimated fair value. Accordingly, we
recorded a non-cash pretax charge of $10.0 million to reduce the value of the Villager, Crazy
Horse and Russ trademark to their estimated fair value. This impairment resulted from a decline in
future anticipated cash flows due to our exit of these brands.
56
Also, as a result of the impairment analysis performed in connection with our purchased trademarks
with indefinite lives during 2007, we determined that the carrying value of such intangible asset
related to our former Ellen Tracy brandname exceeded its estimated fair value. Accordingly, during
2007, we recorded a non-cash pretax charge of $36.3 million to reduce the value of the Ellen Tracy
trademark to its estimated fair value.
As a
result of the decline in actual and projected performance and cash
flows of the licensed DKNY® JEANS and DKNY® ACTIVE brands
during 2009, we determined the carrying value of the related licensed
trademark intangible asset exceeded its estimated
fair value and recorded a non-cash impairment charge of $9.5 million. In addition, as a result of entering into the JCPenney and QVC license agreements discussed
above, we performed an impairment analysis of our LIZ CLAIBORNE merchandising rights. The decreased
use of such intangible assets resulted in the recognition of a non-cash impairment charge of $4.5
million to reduce the carrying value of the merchandising rights to their estimated fair value.
Accrued Expenses
Accrued expenses for employee insurance, workers compensation, contracted advertising and other
outstanding obligations are assessed based on claims experience and statistical trends, open
contractual obligations and estimates based on projections and current requirements. If these
trends change significantly, then actual results would likely be impacted.
Derivative Instruments
Derivative instruments, including certain derivative instruments embedded in other contracts, are
recorded in the Consolidated Balance Sheets as either an asset or liability and measured at their
fair value. The changes in a derivatives fair value are recognized either currently in earnings or
Accumulated other comprehensive loss, depending on whether the derivative qualifies for hedge
accounting treatment. We test each derivative for effectiveness at inception of each hedge
and at the end of each reporting period.
We use foreign currency forward contracts and options for the purpose of hedging the specific
exposure to variability in forecasted cash flows associated primarily with inventory purchases
mainly by our European and Canadian entities. These instruments are designated as cash flow hedges.
To the extent the hedges are highly effective, the effective portion of the changes in fair value
is included in Accumulated other comprehensive loss, net of income taxes, with the corresponding
asset or liability recorded in the Consolidated Balance Sheet. The ineffective portion of the cash
flow hedge is recognized primarily as a component of Cost of goods sold in current period earnings
or, in the case of the swaps, if any, within SG&A. Amounts recorded in Accumulated other
comprehensive loss are reflected in current period earnings when the hedged transaction affects
earnings. If fluctuations in the relative value of the currencies involved in the hedging
activities were to move dramatically, such movement could have a significant impact on our results
of operations.
At the beginning of each hedge period, we justify an expectation that the hedge will be highly
effective. This effectiveness assessment also involves an estimation of the probability of the
occurrence of transactions for cash flow hedges. The use of different assumptions and changing
market conditions may impact the results of the effectiveness assessment and ultimately the timing
of when changes in derivative fair values and underlying hedged items are recorded in earnings.
We hedge our net investment position in euro functional subsidiaries by borrowing directly in
foreign currency and designating a portion of foreign currency debt as a hedge of net investments.
The foreign currency transaction gain or loss recognized for the effective portion of a foreign
currency denominated debt instrument that is designated as the hedging instrument in a net
investment hedge is recorded as a translation adjustment. We have at times used derivative
instruments to hedge the changes in the fair value of the debt due to interest rates, with the
change in fair value recognized currently in Interest expense, net, together with the change in fair
value of the hedged item attributable to interest rates.
Occasionally, we purchase short-term foreign currency contracts and options outside of the cash
flow hedging program to neutralize quarter-end balance sheet and other expected exposures. These
derivative instruments do not qualify as cash flow hedges and are recorded at fair value with all
gains or losses, which have not been significant, recognized as a component of SG&A in current
period earnings.
57
Share-Based Compensation
We
recognize compensation expense based on the fair
value of employee share-based awards, including stock options and restricted stock, net of estimated forfeitures. Determining the
fair value of options at the grant date requires judgment, including estimating the expected term
that stock options will be outstanding prior to exercise, the associated volatility and the
expected dividends. Judgment is required in estimating the amount of share-based awards expected to
be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates,
share-based compensation expense could be materially impacted.
Inflation
The rate of inflation over the past few years has not had a significant impact on our sales or
profitability.
ACCOUNTING PRONOUNCEMENTS
For a discussion of recently adopted accounting pronouncements and recent accounting
pronouncements, see Notes 1 and 20 of Notes to Consolidated Financial Statements.
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We finance our capital needs through available cash and marketable securities, operating cash
flows, letters of credit, our synthetic lease and our amended and restated revolving credit
facility. Our floating rate revolving credit facility exposes us to market risk for changes in
interest rates. Loans thereunder bear interest at rates that vary with changes in prevailing market
rates.
We do not speculate on the future direction of interest rates. As of January 2, 2010 and January 3,
2009, our exposure to changing market rates was as follows:
|
|
|
|
|
|
|
|
|
Dollars in millions |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
Variable rate debt |
|
$ |
66.5 |
|
|
$ |
234.4 |
|
Average interest rate |
|
|
6.87 |
% |
|
|
3.90 |
% |
A ten percent change in the average rate would have resulted in a $1.4 million change in interest
expense during 2009.
As of January 2, 2010, we have not employed interest rate hedging to mitigate such risks with
respect to our floating rate facility. We believe that our Eurobond offering and the Convertible
Notes, which are fixed rate obligations, partially mitigate the risks with respect to our variable
rate financing.
MEXX transacts business in multiple currencies, resulting in exposure to exchange rate
fluctuations. We mitigate the risks associated with changes in foreign currency exchange rates
through the use of foreign exchange forward contracts and collars to hedge transactions denominated
in foreign currencies for periods of generally less than one year. Gains and losses on contracts
which hedge specific foreign currency denominated commitments are recognized in the period in which
the underlying hedged item affects earnings.
At January 2, 2010 and January 3, 2009, we had forward contracts aggregating to $97.4 million and
$185.3 million, respectively. We had outstanding foreign currency collars with net notional amounts
aggregating to $15.7 million at January 2, 2010. Unrealized (losses) gains for outstanding foreign
currency options and foreign exchange forward contracts were $(2.5) million at January 2, 2010 and
$(6.5) million at January 3, 2009. A sensitivity analysis to changes in the foreign currencies when
measured against the US dollar indicated that if the US dollar uniformly weakened by 10.0% against
all of the hedged currency exposures, the fair value of these instruments would decrease by $10.0
million at January 2, 2010. Conversely, if the US dollar uniformly strengthened by 10.0% against
all of the hedged currency exposures, the fair value of these instruments would increase by $9.7
million at January 2, 2010. Any resulting changes in the fair value of the hedged instruments would
be partially offset by changes in the underlying balance sheet positions. The sensitivity analysis
assumes a parallel shift in foreign currency exchange rates. The assumption that exchange rates
change in a parallel fashion may overstate the impact of changing exchange rates on assets and
liabilities denominated in foreign currency. We do not hedge all transactions denominated in
foreign currency.
We hedge our net investment position in euro functional subsidiaries by designating a portion of
the 350.0 million euro-denominated bonds as the hedging instrument in a net investment hedge. As
discussed above (see Hedging Activities), we dedesignated 143.0 million of the euro-denominated
bonds as a hedge of our net investment in euro-denominated functional currency subsidiaries. A
sensitivity analysis to changes in the US dollar when measured against the euro indicated if the US
dollar weakened by 10.0% against the euro, a translation loss of $20.6 million associated with the ineffective portion of the hedge
would be recorded in Other expense, net. Conversely, if the US dollar strengthened by 10.0% against
the euro, a translation gain of $20.6 million associated with the ineffective portion of the hedge
would be recorded in Other (expense) income, net.
58
We are exposed to credit related losses if the counterparties to our derivative instruments fail to
perform their obligations. We systemically measure and asses such risk as it relates to the credit
ratings of these counterparties, all of which currently have satisfactory credit ratings and
therefore we do not expect to realize losses associated with counterparty default.
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data. |
See the Index to Consolidated Financial Statements and Schedule appearing at the end of this
Annual Report on Form 10-K for information required under this Item 8.
|
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Item 9. |
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
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Item 9A. |
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Controls and Procedures. |
Our management, under the supervision and with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated our disclosure controls and procedures at the end of each of
our fiscal quarters. Our Chief Executive Officer and Chief Financial Officer concluded that, as of
January 2, 2010, our disclosure controls and procedures were effective to ensure that all
information required to be disclosed is recorded, processed, summarized and reported within the
time periods specified, and that information required to be filed in the reports that we file or
submit under the Securities Exchange Act of 1934 (the Exchange Act) is accumulated and
communicated to our management, including our principal executive and principal financial officers,
to allow timely decisions regarding required disclosure. There were no changes in our internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended January 2, 2010 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
See Index to Consolidated Financial Statements and Schedule appearing at the end of this Annual
Report on Form 10-K for Managements Report on Internal Control Over Financial Reporting.
|
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|
Item 9B. |
|
Other Information. |
None.
PART III
|
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Item 10. |
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Directors and Executive Officers and Corporate Governance. |
With respect to our Executive Officers, see Executive Officers of the Registrant in Part I of
this Annual Report on Form 10-K.
Information regarding Section 16 (a) compliance, the Audit Committee (including membership and
Audit Committee Financial Experts but excluding the Audit Committee Report), our code of ethics
and background of our Directors appearing under the captions Section 16 (a) Beneficial Ownership
Reporting Compliance, Corporate Governance, Additional Information-Company Code of Ethics and
Business Practices and Election of Directors in our Proxy Statement for the 2010 Annual Meeting
of Shareholders (the 2010 Proxy Statement) is hereby incorporated by reference.
|
|
|
Item 11. |
|
Executive Compensation. |
Information called for by this Item 11 is incorporated by reference to the information set forth
under the headings Compensation Discussion and Analysis and Executive Compensation (other than
the Board Compensation Committee Report) in the 2010 Proxy Statement.
59
|
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Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
EQUITY COMPENSATION
The following table summarizes information about the stockholder approved Liz Claiborne, Inc.
Outside Directors 1991 Stock Ownership Plan (the Outside Directors Plan); Liz Claiborne, Inc.
1992 Stock Incentive Plan; Liz Claiborne, Inc. 2000 Stock Incentive Plan (the 2000 Plan); Liz
Claiborne, Inc. 2002 Stock Incentive Plan (the 2002 Plan); and Liz Claiborne, Inc. 2005 Stock
Incentive Plan (the 2005 Plan), which together comprise all of our existing equity compensation
plans, as of January 2, 2010. In January 2006, we adopted the Liz Claiborne, Inc. Outside
Directors Deferral Plan, which amended and restated the Outside Directors Plan by eliminating
equity grants under the Outside Directors Plan, including the annual grant of shares of Common
Stock. The last grant under the Outside Directors Plan was on January 10, 2006.
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Number of Securities |
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|
|
|
|
|
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|
|
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Remaining Available for |
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|
Number of Securities to be |
|
|
Weighted Average Exercise |
|
|
Future Issuance Under |
|
|
|
Issued Upon Exercise of |
|
|
Price of Outstanding |
|
|
Equity Compensation Plans |
|
|
|
Outstanding Options, |
|
|
Options, Warrants and |
|
|
(Excluding Securities |
|
Plan Category |
|
Warrants and Rights |
|
|
Rights |
|
|
Reflected in Column) |
|
Equity Compensation
Plans Approved by
Stockholders |
|
|
5,565,672 |
(1) |
|
$ |
19.27 |
(2) |
|
|
5,167,019 |
(3) |
Equity Compensation
Plans Not Approved
by Stockholders |
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
|
5,565,672 |
(1) |
|
$ |
19.27 |
(2) |
|
|
5,167,019 |
(3) |
|
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|
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(1) |
|
Includes 449,084 shares of Common Stock issuable under the 2000, 2002 and 2005
Plans pursuant to participants elections thereunder to defer certain director compensation.
In addition includes 169,250 performance shares granted to a group of key executives. The
ultimate number of shares earned will be determined by the extent of achievement of the
performance criteria set forth in the performance share arrangements and range from 0-200% of target. |
|
(2) |
|
Performance Shares and shares of Common Stock issuable under the 2000, 2002 and
2005 Plans pursuant to participants election thereunder to defer certain director
compensation were not included in calculating the Weighted Average Exercise Price. |
|
(3) |
|
In addition to options, warrants and rights, the 2000 Plan, the 2002 Plan and the
2005 Plan authorize the issuance of restricted stock, unrestricted stock and performance
stock. Each of the 2000 and the 2002 Plans contains a sub-limit on the aggregate number of
shares of restricted Common Stock, which may be issued; the sub-limit under the 2000 Plan is
set at 1,000,000 shares and the sub-limit under the 2002 Plan is set at 1,800,000 shares. The
2005 Plan contains an aggregate 2,000,000 shares sub-limit on the number of shares of
restricted stock, restricted stock units, unrestricted stock and performance shares that may be awarded. |
Security ownership information of certain beneficial owners and management as called for by
this Item 12 is incorporated by reference to the information set forth under the heading Security
Ownership of Certain Beneficial Owners and Management in the 2010 Proxy Statement.
|
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Item 13. |
|
Certain Relationships and Related Transactions, and Director Independence. |
Information called for by this Item 13 is incorporated by reference to the information set forth
under the headings Certain Relationships and Related Transactions in the 2010 Proxy Statement.
|
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Item 14. |
|
Principal Accounting Fees and Services. |
Information called for by this Item 14 is incorporated by reference to the information set forth
under the heading Ratification of the Appointment of the Independent Registered Public Accounting
Firm in the 2010 Proxy Statement.
60
PART IV
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Item 15. |
|
Exhibits and Financial Statement Schedules. |
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(a)
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1. |
|
Financial Statements
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|
Refer to Index to Consolidated
Financial Statements on Page F-1 |
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(a)
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2. |
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Schedule |
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SCHEDULE II Valuation and Qualifying Accounts
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F-45 |
NOTE: Schedules other than those referred to above and parent company financial statements have
been omitted as inapplicable or not required under the instructions contained in Regulation S-X or
the information is included elsewhere in the financial statements or the notes thereto.
61
(a) 3. Exhibits
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Exhibit No. |
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|
Description |
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2(a)
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|
Share Purchase Agreement, dated as of May 15, 2001,
among Registrant, Liz Claiborne 2 B.V., LCI
Acquisition US, and the other parties signatory
thereto (incorporated herein by reference to Exhibit
2.1 to Registrants Current Report on Form 8-K dated
May 23, 2001 and amended on July 20, 2001). |
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3(a)
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Restated Certificate of Incorporation of Registrant (incorporated herein by
reference to Exhibit 3(a) to Registrants Current Report on Form 8-K dated May 28, 2009). |
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3(b)
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By-Laws of Registrant, as amended through May 21, 2009 (incorporated herein
by reference to Exhibit 3(b) to Registrants Current Report on Form 8-K dated May 28, 2009). |
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4(a)
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|
Specimen certificate for Registrants Common Stock, par value $1.00 per share (incorporated herein by
reference to Exhibit 4(a) to the 1992 Annual Report). |
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4(b)
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|
Rights Agreement, dated as of December 4, 1998, between Registrant and First Chicago Trust Company of New
York (incorporated herein by reference to Exhibit 1 to Registrants Form 8-A12B dated as of December 7,
1998). |
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4(b)(i)
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Amendment to the Rights Agreement, dated November 11, 2001, between Registrant and The Bank of New York,
appointing The Bank of New York as Rights Agent (incorporated herein by reference to Exhibit 1 to
Registrants Form 8-A12B/A dated as of January 30, 2002). |
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4(b)(ii)
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Amendment to the Rights Agreement, dated as of December 19, 2008, between Registrant and The Bank of New
York Mellon, as Rights Agent (incorporated herein by reference to Exhibit 4.1 to Registrants Current Report on
Form 8-K dated December 19, 2008). |
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10(a)
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Reference is made to Exhibit 4(b) filed hereunder, which is incorporated herein by this reference. |
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10(b)
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Lease, dated as of January 1, 1990 (the 1441 Lease), for premises located at 1441 Broadway, New York,
New York between Registrant and Lechar Realty Corp. (incorporated herein by reference to Exhibit 10(n) to
Registrants Annual Report on Form 10-K for the fiscal year ended December 29, 1990). |
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10(b)(i)
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|
First Amendment: Lease Extension and Modification Agreement, dated as of January 1, 1998, to the 1441
Lease (incorporated herein by reference to Exhibit 10(k) (i) to the Registrants Annual Report on Form
10-K for the year ended January 1, 2000 [the 1999 Annual Report]). |
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10(b)(ii)
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|
Second Amendment to Lease, dated as of September 19, 1998, to the 1441 Lease (incorporated herein by
reference to Exhibit 10(k) (ii) to the 1999 Annual Report). |
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10(b)(iii)
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|
Third Amendment to Lease, dated as of September 24, 1999, to the 1441 Lease (incorporated herein by
reference to Exhibit 10(k) (iii) to the 1999 Annual Report). |
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10(b)(iv)
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Fourth Amendment to Lease, effective as of July 1, 2000, to the 1441 Lease (incorporated herein by
reference to Exhibit 10(j)(iv) to the Registrants Annual Report on Form 10-K for the fiscal year ended
December 28, 2002 [the 2002 Annual Report]). |
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10(b)(v)
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Fifth Amendment to Lease (incorporated herein by reference to Schedule 10(b)(v) to Registrants Annual
Report on Form 10-K for the fiscal year ended January 3, 2004 [the 2003 Annual Report]). |
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10(c)+
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National Collective Bargaining Agreement, made and entered into as of June 1, 2006, by and between Liz
Claiborne, Inc. and UNITE HERE for the period June 1, 2006 through May 31, 2009 (incorporated herein by
reference to Exhibit 10(c) to the Registrants Annual Report on Form 10-K for the fiscal year ended
December 30, 2006 [the 2006 Annual Report]). |
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10(d)+*
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Description of Liz Claiborne, Inc. 2009 Employee Incentive Plan. |
62
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Exhibit No. |
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Description |
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10(e)+
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The Liz Claiborne 401(k) Savings and Profit Sharing Plan, as amended and restated (incorporated herein by
reference to Exhibit 10(g) to Registrants 2002 Annual Report). |
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10(e)(i)+
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First Amendment to the
Liz Claiborne 401(k) Savings and Profit Sharing Plan (incorporated herein by reference to Exhibit 10(e)(i)
to the 2003 Annual Report). |
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10(e)(ii)+
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Second Amendment to the Liz Claiborne 401(k) Savings and Profit Sharing Plan (incorporated herein by
reference to Exhibit 10(e)(ii) to the 2003 Annual Report). |
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10(e)(iii)+
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Third Amendment to the Liz Claiborne 401(k) Savings and Profit Sharing Plan (incorporated herein by
reference to Exhibit 10(e)(iii) to the 2003 Annual Report). |
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10(e)(iv)+
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Trust Agreement
(the 401(k) Trust Agreement) dated as of October 1,
2003 between Registrant and Fidelity Management Trust
Company (incorporated herein by reference to Exhibit 10(e)(iv) to the 2003 Annual Report). |
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10(e)(v)+
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First Amendment to the 401(k) Trust Agreement (incorporated herein by reference to Exhibit 10(e)(v) to
Registrants Annual Report on Form 10-K for the fiscal year ended January 1, 2005 (the 2004 Annual
Report). |
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10(e)(vi)+
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Second Amendment to the 401(k) Trust Agreement (incorporated herein by reference to Exhibit 10(e)(vi) to
the 2004 Annual Report). |
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10(f)+
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Liz Claiborne, Inc. Amended and Restated Outside Directors 1991 Stock Ownership Plan (the Outside
Directors 1991 Plan) (incorporated herein by reference to Exhibit 10(m) to Registrants Annual Report on
Form 10-K for the fiscal year ended December 30, 1995 [the 1995 Annual Report]). |
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10(f)(i)+
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Amendment to the Outside Directors 1991 Plan, effective as of December 18, 2003 (incorporated herein by
reference to Exhibit 10(f)(i) to the 2003 Annual Report). |
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10(f)(ii)+
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Form of Option Agreement under the Outside Directors 1991 Plan (incorporated herein by reference to
Exhibit 10(m)(i) to the Registrants Annual Report on Form 10-K for the fiscal year ended December 28,
1996 [the 1996 Annual Report]). |
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10(f)(iii)+
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Liz Claiborne, Inc. Outside Directors Deferral Plan (incorporated herein by reference to Exhibit
10(f)(iii) to Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2005 [the
2005 Annual Report]). |
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10(g)+
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Liz Claiborne, Inc. 1992 Stock Incentive Plan (the 1992 Plan) (incorporated herein by reference to
Exhibit 10(p) to Registrants Annual Report on Form 10-K for the fiscal year ended December 28, 1991). |
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10(g)(i)+
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Form of Restricted Career Share Agreement under
the 1992 Plan (incorporated herein by reference to Exhibit 10(a) to Registrants Quarterly Report on Form
10-Q for the period ended September 30, 1995). |
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10(g)(ii)+
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Form of Restricted Transformation Share Agreement under the 1992 Plan (incorporated herein by reference to
Exhibit 10(s) to the Registrants Annual Report on Form 10-K for the fiscal year ended January 3, 1998
[the 1997 Annual Report]). |
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10(h)+
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Liz Claiborne, Inc. 2000 Stock Incentive Plan (the 2000 Plan) (incorporated herein by reference to
Exhibit 4(e) to Registrants Form S-8 dated as of January 25, 2001). |
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10(h)(i)+
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Amendment No. 1 to the 2000 Plan (incorporated herein by reference to Exhibit 10(h)(i) to the 2003 Annual
Report). |
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10(h)(ii)+
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Form of Option Grant
Certificate under the 2000 Plan (incorporated herein by reference to Exhibit 10(z)(i) to the Registrants
Annual Report on Form 10-K for the fiscal year ended December 30, 2000 [the 2000 Annual Report]). |
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10(h)(iii)+
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Form of 2006 Special Performance-Based Restricted Stock Confirmation under the 2000 Plan (incorporated
herein by reference to Exhibit 10(h)(v) to the 2005 Annual Report). |
63
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Exhibit No. |
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Description |
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10(i)+
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Liz Claiborne, Inc. 2002 Stock Incentive Plan (the 2002 Plan) (incorporated herein by reference to
Exhibit 10(y)(i) to Registrants Quarterly Report on Form 10-Q for the period ended June 29, 2002 [the
2nd Quarter 2002 10-Q]). |
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10(i)(i)+
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Amendment No. 1 to the 2002 Plan (incorporated herein by reference to Exhibit 10(y)(iii) to the 2nd
Quarter 2002 10-Q). |
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10(i)(ii)+
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Amendment No. 2 to the 2002 Plan (incorporated herein by reference to Exhibit 10(i)(ii) to the 2003 Annual
Report). |
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10(i)(iii)+
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Amendment No. 3 to the 2002 Plan (incorporated herein by reference to Exhibit 10(i)(iii) to the 2003
Annual Report). |
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10(i)(iv)+
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Form of Option Grant
Certificate under the 2002 Plan (incorporated herein by reference to Exhibit 10(y)(ii) to the 2nd Quarter
2002 10-Q). |
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10(i)(v)+
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Form of Restricted Share Agreement for Registrants Growth Shares program under the 2002 Plan
(incorporated herein by reference to Exhibit 10(i)(v) to the 2003 Annual Report). |
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10(j)+
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Description of Supplemental Life Insurance Plans (incorporated herein by reference to Exhibit 10(q) to the
2000 Annual Report). |
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10(k)+
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Amended and Restated Liz Claiborne §162(m) Cash Bonus Plan (incorporated herein by reference to Exhibit
10.1 to Registrants Quarterly Report on Form 10-Q for the period ended July 5, 2003). |
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10(l)+
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Liz Claiborne, Inc. Supplemental Executive Retirement Plan effective as of January 1, 2002, constituting
an amendment, restatement and consolidation of the Liz Claiborne, Inc. Supplemental Executive Retirement
Plan and the Liz Claiborne, Inc. Bonus Deferral Plan (incorporated herein by reference to Exhibit 10(t)(i)
to Registrants
Annual Report on Form 10-K for the fiscal year ended December 29, 2001). |
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10(l)(i)+
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Liz Claiborne, Inc. Supplemental Executive Retirement Plan effective as of January 1, 2005, including
amendments through December 31, 2008 (incorporated herein by reference to Exhibit 10.1 to Registrants
Current Report on Form 8-K dated December 31, 2008). |
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10(l)(ii)+
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Trust Agreement, dated as of January 1, 2002, between Registrant and Wilmington Trust Company
(incorporated herein by reference to Exhibit 10(t)(i) to the 2002 Annual Report). |
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10(m)
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Five-Year Credit Agreement, dated as of October 13, 2004, among Registrant, the
Lenders party thereto, Bank of America, N.A., Citibank, N.A., SunTrust Bank and Wachovia Bank, National
Association, as Syndication Agents, and JPMorgan Chase Bank, as Administrative Agent (incorporated herein
by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K dated October 13, 2004). |
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10(m)(i)
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First Amendment and Waiver to the Five-Year Credit Agreement, dated as of February 20, 2008 (incorporated
herein by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K dated March 6, 2008). |
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10(m)(ii)
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Second Amendment to the Five-Year Credit Agreement, dated as of August 12, 2008, (incorporated herein by
reference to Exhibit 10.1 to Registrants Quarterly Report on Form 10-Q for the period ended July 5,
2008).
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64
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Exhibit No. |
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Description |
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10(m)(iii)
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Amended and Restated Credit Agreement, dated as of January 12, 2009, among Registrant, Mexx Europe B.V.,
and Liz Claiborne Canada Inc., as Borrowers, the several subsidiary guarantors party thereto, the several
lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and US Collateral Agent,
JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent and Canadian Collateral Agent,
J.P. Morgan Europe Limited, as European Administrative Agent and European Collateral Agent, Bank of
America, N.A. and Suntrust Bank, as Syndication Agents, Wachovia Bank, National Association as
Documentation Agent, J.P. Morgan Securities Inc. and Banc of America Securities LLC, as Joint Lead
Arrangers, and J.P. Morgan Securities Inc., Banc of America Securities LLC, and Wachovia Capital Markets,
LLC, as Joint Bookrunners (incorporated herein by reference to Exhibit 10.1 to Registrants Current Report
on Form 8-K dated January 14, 2009). |
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10(m)(iv)
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First Amendment to the Amended and Restated Credit Agreement, dated as of March 2, 2009 (incorporated
herein by reference to Exhibit 10.1 to Registrants Current Report on Form 8-K dated March 6, 2009). |
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10(m)(v)
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Second Amendment
to the Amended and Restated Credit Agreement, dated as of May 12, 2009 (incorporated herein by reference
to Exhibit 10.1 to Registrants Current Report on Form 8-K dated May 13, 2009). |
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10(m)(vi)*
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Consent and Waiver to the Amended and Restated Credit Agreement, dated as of June 12, 2009. |
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10(m)(vii)*
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Third Amendment to the Amended and Restated Credit Agreement, dated as of November 2, 2009. |
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10(n)+
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Liz Claiborne Inc. 2005 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1(b) to
Registrants Current Report on Form 8-K dated May 26, 2005). |
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|
|
10(o)+
|
|
|
|
Amendment No. 1 to the Liz Claiborne Inc. 2005 Stock incentive Plan (incorporated herein by reference to
Exhibit 10.1 to Registrants Current Report on Form 8-K dated July 12, 2005). |
|
|
|
|
|
10(p)+
|
|
|
|
Form of Restricted Stock Grant Certificate (incorporated herein by reference to Exhibit 10(a) to
Registrants Quarterly Report on Form 10-Q for the period ended April 2, 2005). |
|
|
|
|
|
10(q)+
|
|
|
|
Form of Option Grant Confirmation (incorporated herein by reference to Exhibit 99.2 to Registrants
Current Report on Form 8-K dated December 4, 2008). |
|
|
|
|
|
10(r)+
|
|
|
|
Liz Claiborne, Inc. Section 162(m) Long Term Performance Plan (incorporated herein by reference to Exhibit
10.1(a) to Registrants Current Report on Form 8-K dated May 26, 2005). |
|
|
|
|
|
10(s)+
|
|
|
|
Form of Section 162(m) Long Term Performance Plan (incorporated herein by reference to Exhibit 10 to
Registrants Quarterly Report on Form 10-Q for the period ended October 1, 2005). |
|
|
|
|
|
10(t)+
|
|
|
|
Form of Executive Severance Agreement (incorporated herein by reference to Exhibit 99.1 to Registrants
Current Report on Form 8-K dated December 4, 2008). |
|
|
|
|
|
10(u)+
|
|
|
|
Employment Agreement, by and between Registrant and William L. McComb, dated October 13, 2006
(incorporated herein by reference to Exhibit 99.2 to Registrants Current Report on Form 8-K dated October
18, 2006). |
|
|
|
|
|
10(u)(i)+
|
|
|
|
Amended and Restated Employment Agreement, by and between Registrant and
William L. McComb, dated December 24, 2008 (incorporated herein by reference to Exhibit 10.1
to Registrants Current Report on Form 8-K dated December 24, 2008). |
|
|
|
|
|
10(u)(ii)
|
|
|
|
Severance Benefit Agreement, by and between Registrant and William L. McComb,
dated July 14, 2009 (incorporated herein by reference to Exhibit 10.4 to Registrants
Quarterly Report on Form 10-Q for the period ended July 4, 2009). |
|
|
|
|
|
10(v)+
|
|
|
|
Executive Terminations Benefits Agreement, by and between Registrant and William L. McComb, dated as of
October 13, 2006 (incorporated herein by reference to Exhibit 10.3 to Registrants Quarterly Report on Form
10-Q for the period ended July 4, 2009). |
65
|
|
|
|
|
Exhibit No. |
|
|
|
Description |
|
|
|
|
|
10(v)(i)+
|
|
|
|
Amended and Restated Executive Termination Benefits Agreement, by and between Registrant and William L.
McComb, dated as of December 24, 2008 (incorporated herein by reference to Exhibit 10.2 to Registrants
Current Report on Form 8-K dated December 24, 2008). |
|
|
|
|
|
10(v)(ii)
|
|
|
|
Executive Termination Benefits Agreement, by and between Registrant and William L. McComb, dated as of July
14, 2009 (incorporated herein by reference to Exhibit 10.3 to
Registrants Quarterly Report on Form 10-Q for
the period ended July 4, 2009). |
|
|
|
|
|
10(w)+
|
|
|
|
Retirement and Consulting Agreement, by and between Registrant and Paul R. Charron, dated as of October 13,
2006 (incorporated herein by reference to Exhibit 99.4 to Registrants Current Report on Form 8-K dated
October 18, 2006). |
|
|
|
|
|
10(x)
|
|
|
|
Purchase Agreement, dated June 18, 2009, for Registrants 6.0% Convertible Senior Notes due June 2014, by
and among Registrant and J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
as Representatives of Several Initial Purchasers (incorporated herein by reference to Exhibit 10.5 to
Registrants Quarterly Report on Form 10-Q for the period ended July 4, 2009). |
|
|
|
|
|
10(x)(i)
|
|
|
|
Indenture, dated June 24, 2009, by and between Registrant and The Bank of New York Mellon, as Trustee
(incorporated herein by reference to Exhibit 4.1 to Registrants Quarterly Report on Form 10-Q for the
period ended July 4, 2009). |
|
|
|
|
|
10(y)*∆
|
|
|
|
License Agreement, dated as of October 7, 2009, between Registrant, J.C. Penney Corporation, Inc. and J.C. Penney Company, Inc. |
|
|
|
|
|
21*
|
|
|
|
List of Registrants Subsidiaries. |
|
|
|
|
|
23*
|
|
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
|
|
31(a)*
|
|
|
|
Rule 13a-14(a)
Certification of Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
31(b)*
|
|
|
|
Rule 13a-14(a) Certification of Chief Financial Officer of the Company in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32(a)*#
|
|
|
|
Certification of Chief Executive Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
32(b)*#
|
|
|
|
Certification of Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley
Act of 2002. |
|
|
|
|
|
99*
|
|
|
|
Undertakings. |
|
|
|
+ |
|
Compensation plan or arrangement required to be noted as provided in Item 14(a)(3). |
|
* |
|
Filed herewith. |
|
∆ |
|
Certain portions of this exhibit have been omitted in connection with an application for confidential treatment therefor. |
|
# |
|
A signed original of this written statement required by Section 906 has been provided by the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request. |
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized, on February 23, 2010.
|
|
|
|
|
|
|
|
|
|
|
LIZ CLAIBORNE, INC. |
|
|
|
LIZ CLAIBORNE, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Andrew Warren
|
|
|
|
By: |
|
/s/ Elaine H. Goodell |
|
|
|
|
Andrew Warren,
|
|
|
|
|
|
Elaine H. Goodell,
|
|
|
|
|
Chief Financial Officer
(principal financial officer)
|
|
|
|
|
|
Vice President Corporate Controller
and Chief Accounting Officer
(principal accounting officer) |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form
10-K has been signed below by the following persons on behalf of the registrant and in the
capacities indicated, on February 23, 2010.
|
|
|
Signature |
|
Title |
|
|
|
/s/ William L. McComb
|
|
Chief Executive Officer and Director |
|
|
(principal executive officer) |
|
|
|
/s/ Bernard W. Aronson
Bernard W. Aronson
|
|
Director |
|
|
|
/s/ Raul J. Fernandez
|
|
Director |
|
|
|
|
|
|
/s/ Kenneth B. Gilman
|
|
Director |
|
|
|
|
|
|
/s/ Nancy J. Karch
|
|
Director |
|
|
|
|
|
|
/s/ Kenneth P. Kopelman
|
|
Director |
|
|
|
|
|
|
/s/ Kay Koplovitz
|
|
Director and Chairman of the Board |
|
|
|
|
|
|
/s/ Arthur C. Martinez
|
|
Director |
|
|
|
|
|
|
/s/ Doreen A. Toben
|
|
Director |
|
|
|
67
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
|
|
|
|
|
Page |
|
|
Number |
|
|
|
|
|
F-2 to F-4 |
|
|
|
FINANCIAL STATEMENTS |
|
|
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 to F-8 |
|
|
|
|
|
F-9 |
|
|
|
|
|
F-10 to F-44 |
|
|
|
|
|
F-45 |
F-1
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a 15(f) under the Securities and Exchange Act of 1934. Internal
control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of
America. The Companys system of internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with accounting principles generally accepted in the United
States of America, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the Companys assets that could have a material effect on the financial statements.
Management has evaluated the effectiveness of the Companys internal control over financial
reporting as of January 2, 2010 based upon criteria for effective internal control over financial
reporting described in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, management
determined that the Companys internal control over financial reporting was effective as of
January 2, 2010 based on the criteria in Internal Control Integrated Framework issued by COSO.
The Companys internal control over financial reporting as of January 2, 2010 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their
attestation report which appears herein.
MANAGEMENTS RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Liz Claiborne, Inc. is responsible for the preparation, objectivity and integrity
of the consolidated financial statements and other information contained in this Annual Report. The
consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and include some amounts that are based on
managements informed judgments and best estimates.
Deloitte & Touche LLP, an independent registered public accounting firm, has audited these
consolidated financial statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and has expressed herein their unqualified opinion on those
financial statements.
The Audit Committee of the Board of Directors, which oversees all of the Companys financial
reporting process on behalf of the Board of Directors, consists solely of independent directors,
meets with the independent registered public accounting firm, internal auditors and management
periodically to review their respective activities and the discharge of their respective
responsibilities. Both the independent registered public accounting firm and the internal auditors
have unrestricted access to the Audit Committee, with or without management, to discuss the scope
and results of their audits and any recommendations regarding the system of internal controls.
February 23, 2010
|
|
|
|
|
/s/ William L. McComb
|
|
/s/ Andrew Warren |
|
|
|
|
Andrew Warren
|
|
|
Chief Executive Officer
|
|
Chief Financial Officer |
|
|
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Liz Claiborne, Inc.
We have audited the internal control over financial reporting of Liz Claiborne, Inc. and
subsidiaries (the Company) as of January 2, 2010, based on criteria established in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of January 2, 2010, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as of
and for the year ended January 2, 2010 of the Company and our report dated February 23, 2010
expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 23, 2010
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Liz Claiborne, Inc.
We have audited the accompanying consolidated balance sheets of Liz Claiborne, Inc. and
subsidiaries (the Company) as of January 2, 2010 and January 3, 2009, and the related
consolidated statements of operations, retained earnings, comprehensive loss and changes in capital
accounts, and cash flows for each of the three years in the period ended January 2, 2010. Our
audits also included the financial statement schedule listed in the Index at Item 15. These
financial statements and financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the consolidated financial position of Liz Claiborne, Inc. and subsidiaries as of January 2, 2010
and January 3, 2009, and the results of their operations and their cash flows for each of the three
years in the period ended January 2, 2010, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of January 2,
2010, based on the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23,
2010 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 23, 2010
F-4
Liz Claiborne, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
In thousands, except share data |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
20,372 |
|
|
$ |
25,431 |
|
Accounts receivable trade, net |
|
|
263,508 |
|
|
|
339,158 |
|
Inventories, net |
|
|
319,713 |
|
|
|
464,619 |
|
Deferred income taxes |
|
|
769 |
|
|
|
6,816 |
|
Other current assets |
|
|
267,499 |
|
|
|
223,379 |
|
Assets held for sale |
|
|
15,070 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
886,931 |
|
|
|
1,059,403 |
|
Property and Equipment, Net |
|
|
444,688 |
|
|
|
572,428 |
|
Intangibles, Net |
|
|
231,229 |
|
|
|
251,267 |
|
Deferred Income Taxes |
|
|
7,565 |
|
|
|
2,200 |
|
Other Assets |
|
|
35,490 |
|
|
|
20,154 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,605,903 |
|
|
$ |
1,905,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
70,868 |
|
|
$ |
110,219 |
|
Convertible Senior Notes |
|
|
71,137 |
|
|
|
|
|
Accounts payable |
|
|
144,942 |
|
|
|
211,529 |
|
Accrued expenses |
|
|
343,288 |
|
|
|
301,591 |
|
Income taxes payable |
|
|
5,167 |
|
|
|
3,890 |
|
Deferred income taxes |
|
|
7,150 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
642,552 |
|
|
|
627,229 |
|
Long-Term Debt |
|
|
516,146 |
|
|
|
633,420 |
|
Other Non-Current Liabilities |
|
|
201,027 |
|
|
|
98,786 |
|
Deferred Income Taxes |
|
|
26,299 |
|
|
|
38,358 |
|
Commitments and Contingencies (Note 8) |
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, authorized shares 50,000,000, issued shares none |
|
|
|
|
|
|
|
|
Common stock, $1 par value, authorized shares 250,000,000, issued shares 176,437,234 |
|
|
176,437 |
|
|
|
176,437 |
|
Capital in excess of par value |
|
|
319,326 |
|
|
|
292,144 |
|
Retained earnings |
|
|
1,669,316 |
|
|
|
1,975,082 |
|
Accumulated other comprehensive loss |
|
|
(69,371 |
) |
|
|
(66,716 |
) |
|
|
|
|
|
|
|
|
|
|
2,095,708 |
|
|
|
2,376,947 |
|
|
|
|
|
|
|
|
|
|
Common stock in treasury, at cost 81,488,984 and 81,316,925 shares |
|
|
(1,879,160 |
) |
|
|
(1,873,300 |
) |
|
|
|
|
|
|
|
Total Liz Claiborne, Inc. stockholders equity |
|
|
216,548 |
|
|
|
503,647 |
|
Noncontrolling interest |
|
|
3,331 |
|
|
|
4,012 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
219,879 |
|
|
|
507,659 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
1,605,903 |
|
|
$ |
1,905,452 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
F-5
Liz Claiborne, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands, except per common share data |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
December 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
$ |
3,011,859 |
|
|
$ |
3,984,946 |
|
|
$ |
4,441,715 |
|
Cost of goods sold |
|
|
1,614,109 |
|
|
|
2,081,646 |
|
|
|
2,330,990 |
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
1,397,750 |
|
|
|
1,903,300 |
|
|
|
2,110,725 |
|
Selling, general & administrative expenses |
|
|
1,715,327 |
|
|
|
1,943,963 |
|
|
|
2,043,106 |
|
Goodwill impairment |
|
|
2,785 |
|
|
|
683,071 |
|
|
|
450,819 |
|
Impairment of other intangible assets |
|
|
14,222 |
|
|
|
10,046 |
|
|
|
36,300 |
|
|
|
|
|
|
|
|
|
|
|
Operating Loss |
|
|
(334,584 |
) |
|
|
(733,780 |
) |
|
|
(419,500 |
) |
Other expense, net |
|
|
(4,007 |
) |
|
|
(6,372 |
) |
|
|
(3,943 |
) |
Interest expense, net |
|
|
(65,084 |
) |
|
|
(48,288 |
) |
|
|
(42,188 |
) |
|
|
|
|
|
|
|
|
|
|
Loss Before (Benefit) Provision for Income Taxes |
|
|
(403,675 |
) |
|
|
(788,440 |
) |
|
|
(465,631 |
) |
(Benefit) provision for income taxes |
|
|
(109,615 |
) |
|
|
24,875 |
|
|
|
(99,744 |
) |
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations |
|
|
(294,060 |
) |
|
|
(813,315 |
) |
|
|
(365,887 |
) |
Discontinued operations, net of income taxes |
|
|
(12,350 |
) |
|
|
(138,244 |
) |
|
|
(6,395 |
) |
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
(306,410 |
) |
|
|
(951,559 |
) |
|
|
(372,282 |
) |
Net (loss) income attributable to the noncontrolling
interest |
|
|
(681 |
) |
|
|
252 |
|
|
|
516 |
|
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Liz Claiborne, Inc. |
|
$ |
(305,729 |
) |
|
$ |
(951,811 |
) |
|
$ |
(372,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations Attributable to
Liz
Claiborne, Inc. |
|
$ |
(3.13 |
) |
|
$ |
(8.69 |
) |
|
$ |
(3.68 |
) |
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Liz Claiborne, Inc. |
|
$ |
(3.26 |
) |
|
$ |
(10.17 |
) |
|
$ |
(3.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Continuing Operations Attributable to Liz
Claiborne, Inc. |
|
$ |
(3.13 |
) |
|
$ |
(8.69 |
) |
|
$ |
(3.68 |
) |
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Liz Claiborne, Inc. |
|
$ |
(3.26 |
) |
|
$ |
(10.17 |
) |
|
$ |
(3.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares, Basic |
|
|
93,880 |
|
|
|
93,606 |
|
|
|
99,800 |
|
Weighted Average Shares, Diluted |
|
|
93,880 |
|
|
|
93,606 |
|
|
|
99,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Paid per Common Share |
|
$ |
|
|
|
$ |
0.23 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
F-6
Liz Claiborne, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE LOSS AND CHANGES IN CAPITAL ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Capital in |
|
|
|
|
|
|
Other |
|
|
Treasury Shares |
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Excess of |
|
|
Retained |
|
|
Comprehensive |
|
|
Number of |
|
|
|
|
|
|
Noncontrolling |
|
|
|
|
In thousands, except share data |
|
Shares |
|
|
Amount |
|
|
Par Value |
|
|
Earnings |
|
|
Loss |
|
|
Shares |
|
|
Amount |
|
|
Interest |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2006 |
|
|
176,437,234 |
|
|
$ |
176,437 |
|
|
$ |
249,573 |
|
|
$ |
3,354,081 |
|
|
$ |
(56,156 |
) |
|
|
73,281,103 |
|
|
$ |
(1,593,954 |
) |
|
$ |
3,244 |
|
|
$ |
2,133,225 |
|
Adoption of accounting guidance related to
uncertainty in income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED BALANCE, DECEMBER 31, 2006 |
|
|
176,437,234 |
|
|
|
176,437 |
|
|
|
249,573 |
|
|
|
3,343,587 |
|
|
|
(56,156 |
) |
|
|
73,281,103 |
|
|
|
(1,593,954 |
) |
|
|
3,244 |
|
|
|
2,122,731 |
|
Net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(372,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
516 |
|
|
|
(372,282 |
) |
Other comprehensive loss, net of income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment, net of income
taxes of $19,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,999 |
|
Losses on cash flow hedging derivatives, net of
income taxes of $1,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,459 |
) |
Unrealized gains on available-for-sale securities,
net of income taxes of $(32) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(340,708 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
29,064 |
|
|
|
|
|
|
|
|
|
|
|
(1,560,987 |
) |
|
|
14,198 |
|
|
|
|
|
|
|
43,262 |
|
Excess tax benefits related to stock options |
|
|
|
|
|
|
|
|
|
|
5,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,999 |
|
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,704 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,704 |
) |
Purchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,913,000 |
|
|
|
(300,488 |
) |
|
|
|
|
|
|
(300,488 |
) |
Issuance of common stock under restricted stock and
employment agreements, net |
|
|
|
|
|
|
|
|
|
|
(7,890 |
) |
|
|
|
|
|
|
|
|
|
|
61,961 |
|
|
|
(290 |
) |
|
|
|
|
|
|
(8,180 |
) |
Amortization share-based compensation |
|
|
|
|
|
|
|
|
|
|
19,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 29, 2007 |
|
|
176,437,234 |
|
|
|
176,437 |
|
|
|
296,158 |
|
|
|
2,948,085 |
|
|
|
(24,582 |
) |
|
|
81,695,077 |
|
|
|
(1,880,534 |
) |
|
|
3,760 |
|
|
|
1,519,324 |
|
Net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(951,811 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
(951,559 |
) |
Other comprehensive loss, net of income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment, net of income taxes
of $(1,295) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,750 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44,750 |
) |
Gain on cash flow hedging derivatives, net of
income taxes of $(1,003) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,055 |
|
Unrealized loss on available-for-sale
securities, net
of income taxes of $(46) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(439 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(993,693 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
(4,100 |
) |
|
|
35 |
|
|
|
|
|
|
|
70 |
|
Excess tax benefits related to stock options |
|
|
|
|
|
|
|
|
|
|
(4,760 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,760 |
) |
Cash dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,938 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,938 |
) |
Share-based award activity |
|
|
|
|
|
|
|
|
|
|
(7,666 |
) |
|
|
(254 |
) |
|
|
|
|
|
|
(374,052 |
) |
|
|
7,199 |
|
|
|
|
|
|
|
(721 |
) |
Amortization share-based compensation |
|
|
|
|
|
|
|
|
|
|
8,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, JANUARY 3, 2009 |
|
|
176,437,234 |
|
|
$ |
176,437 |
|
|
$ |
292,144 |
|
|
$ |
1,975,082 |
|
|
$ |
(66,716 |
) |
|
|
81,316,925 |
|
|
$ |
(1,873,300 |
) |
|
$ |
4,012 |
|
|
$ |
507,659 |
|
F-7
Liz Claiborne, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS, COMPREHENSIVE LOSS AND CHANGES IN CAPITAL
ACCOUNTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Capital in |
|
|
|
|
|
|
Other |
|
|
Treasury Shares |
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Excess of |
|
|
Retained |
|
|
Comprehensive |
|
|
Number of |
|
|
|
|
|
|
Noncontrolling |
|
|
|
|
In thousands, except share data |
|
Shares |
|
|
Amount |
|
|
Par Value |
|
|
Earnings |
|
|
Loss |
|
|
Shares |
|
|
Amount |
|
|
Interest |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, JANUARY 3, 2009 |
|
|
176,437,234 |
|
|
$ |
176,437 |
|
|
$ |
292,144 |
|
|
$ |
1,975,082 |
|
|
$ |
(66,716 |
) |
|
|
81,316,925 |
|
|
$ |
(1,873,300 |
) |
|
$ |
4,012 |
|
|
$ |
507,659 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(305,729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(681 |
) |
|
|
(306,410 |
) |
Other comprehensive loss, net of income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,467 |
|
Translation adjustment on Eurobond and other
instruments, net of income taxes of $10,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,593 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,593 |
) |
Loss on cash flow hedging derivatives, net of
income taxes of $(515) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,417 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,417 |
) |
Unrealized gain on available-for-sale securities, net
of income taxes of $0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(309,065 |
) |
Issuance of Convertible Senior Notes, net |
|
|
|
|
|
|
|
|
|
|
11,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,992 |
|
Restricted shares issued, net of cancellations and
shares withheld for taxes |
|
|
|
|
|
|
|
|
|
|
6,478 |
|
|
|
|
|
|
|
|
|
|
|
171,979 |
|
|
|
(5,916 |
) |
|
|
|
|
|
|
562 |
|
Amortization share-based compensation |
|
|
|
|
|
|
|
|
|
|
8,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,744 |
|
Dividend equivalent units vested |
|
|
|
|
|
|
|
|
|
|
(32 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
80 |
|
|
|
56 |
|
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, JANUARY 2, 2010 |
|
|
176,437,234 |
|
|
$ |
176,437 |
|
|
$ |
319,326 |
|
|
$ |
1,669,316 |
|
|
$ |
(69,371 |
) |
|
|
81,488,984 |
|
|
$ |
(1,879,160 |
) |
|
$ |
3,331 |
|
|
$ |
219,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
F-8
Liz Claiborne, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
December 29, 2007 |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(306,410 |
) |
|
$ |
(951,559 |
) |
|
$ |
(372,282 |
) |
Adjustments to arrive at loss from continuing operations |
|
|
12,350 |
|
|
|
138,244 |
|
|
|
6,395 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(294,060 |
) |
|
|
(813,315 |
) |
|
|
(365,887 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile loss from continuing operations to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
163,564 |
|
|
|
158,086 |
|
|
|
156,570 |
|
Impairment of goodwill and other intangible assets |
|
|
17,007 |
|
|
|
693,117 |
|
|
|
487,119 |
|
Loss on asset disposals and impairments, including streamlining initiatives |
|
|
52,775 |
|
|
|
21,639 |
|
|
|
31,278 |
|
Deferred income taxes |
|
|
(10,124 |
) |
|
|
174,596 |
|
|
|
(143,454 |
) |
Share-based compensation |
|
|
8,744 |
|
|
|
8,309 |
|
|
|
19,114 |
|
Tax benefit on exercise of stock options |
|
|
|
|
|
|
7 |
|
|
|
3,492 |
|
Other, net |
|
|
(104 |
) |
|
|
291 |
|
|
|
(922 |
) |
Changes in assets and liabilities, exclusive of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in accounts receivable trade, net |
|
|
82,190 |
|
|
|
87,583 |
|
|
|
76,117 |
|
Decrease in inventories, net |
|
|
146,049 |
|
|
|
49,566 |
|
|
|
48,397 |
|
Decrease in other current and non-current assets |
|
|
33,251 |
|
|
|
16,124 |
|
|
|
9,106 |
|
Decrease in accounts payable |
|
|
(64,013 |
) |
|
|
(2,771 |
) |
|
|
(57,626 |
) |
Increase (decrease) in accrued expenses and other non-current liabilities |
|
|
86,565 |
|
|
|
(61,186 |
) |
|
|
19,254 |
|
Increase (decrease) in income taxes payable |
|
|
2,016 |
|
|
|
(127,807 |
) |
|
|
(25,130 |
) |
Net cash (used in) provided by operating activities of discontinued operations |
|
|
(16,570 |
) |
|
|
(45,878 |
) |
|
|
16,448 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
207,290 |
|
|
|
158,361 |
|
|
|
273,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of securities |
|
|
|
|
|
|
|
|
|
|
9,616 |
|
Proceeds from sales of property and equipment |
|
|
|
|
|
|
19,831 |
|
|
|
1,410 |
|
Purchases of property and equipment |
|
|
(65,332 |
) |
|
|
(184,260 |
) |
|
|
(172,499 |
) |
Proceeds from disposition |
|
|
|
|
|
|
21,252 |
|
|
|
|
|
Payments for purchases of businesses |
|
|
(8,755 |
) |
|
|
(100,403 |
) |
|
|
(34,314 |
) |
Payments for in-store merchandise shops |
|
|
(7,306 |
) |
|
|
(9,983 |
) |
|
|
(7,357 |
) |
Investments in and advances to equity investee |
|
|
(7,237 |
) |
|
|
|
|
|
|
|
|
Other, net |
|
|
773 |
|
|
|
(348 |
) |
|
|
1,064 |
|
Net cash provided by (used in) investing activities of discontinued operations |
|
|
2,022 |
|
|
|
65,269 |
|
|
|
(17,776 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(85,835 |
) |
|
|
(188,642 |
) |
|
|
(219,856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings, net |
|
|
(169,231 |
) |
|
|
(113,543 |
) |
|
|
329,651 |
|
Proceeds from issuance of Convertible Senior Notes |
|
|
90,000 |
|
|
|
|
|
|
|
|
|
Principal payments under capital lease obligations |
|
|
(4,361 |
) |
|
|
(4,178 |
) |
|
|
(6,368 |
) |
Commercial paper, net |
|
|
|
|
|
|
|
|
|
|
(82,075 |
) |
Proceeds from exercise of stock options |
|
|
|
|
|
|
70 |
|
|
|
43,262 |
|
Purchase of common stock |
|
|
|
|
|
|
|
|
|
|
(300,488 |
) |
Dividends paid |
|
|
|
|
|
|
(20,938 |
) |
|
|
(22,541 |
) |
Excess tax benefits related to stock options |
|
|
|
|
|
|
|
|
|
|
2,507 |
|
Payment of deferred financing fees |
|
|
(42,209 |
) |
|
|
(3,119 |
) |
|
|
(1,137 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(125,801 |
) |
|
|
(141,708 |
) |
|
|
(37,189 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
|
(713 |
) |
|
|
(7,981 |
) |
|
|
2,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(5,059 |
) |
|
|
(179,970 |
) |
|
|
19,756 |
|
Cash and Cash Equivalents at Beginning of Year |
|
|
25,431 |
|
|
|
205,401 |
|
|
|
185,645 |
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year |
|
$ |
20,372 |
|
|
$ |
25,431 |
|
|
$ |
205,401 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these
statements.
F-9
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Liz Claiborne, Inc. and its wholly-owned and majority-owned subsidiaries (the Company) are
engaged primarily in the design and marketing of a broad range of apparel and accessories. The
Companys segment reporting structure reflects a brand-focused approach, designed to optimize the
operational coordination and resource allocation of the Companys businesses across multiple
functional areas including specialty retail, retail outlets, wholesale apparel, wholesale
non-apparel, e-commerce and licensing. The three reportable segments described below represent the
Companys brand-based activities for which separate financial information is available and which is
utilized on a regular basis by its chief operating decision maker (CODM) to evaluate performance
and allocate resources. In identifying its reportable segments, the Company considers economic
characteristics, as well as products, customers, sales growth potential and long-term
profitability. The Company aggregates its five operating segments to form reportable segments,
where applicable. As such, the Company reports its operations in three reportable segments as
follows:
|
|
|
Domestic-Based Direct Brands segment consists of the specialty
retail, outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry,
and handbags), e-commerce and licensing operations of the Companys three domestic,
retail-based operating segments: JUICY COUTURE, KATE SPADE and LUCKY BRAND. |
|
|
|
International-Based Direct Brands segment consists of the specialty
retail, outlet, concession, wholesale apparel, wholesale non-apparel (including
accessories, jewelry and handbags), e-commerce and licensing operations of MEXX, the
Companys international, retail-based operating segment. |
|
|
|
Partnered Brands segment consists of one operating segment including
the wholesale apparel, wholesale non-apparel, specialty retail, outlet, e-commerce and
licensing operations of the Companys wholesale-based brands including: AXCESS,
CLAIBORNE (mens), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, KENSIE, LIZ & CO., LIZ CLAIBORNE,
MAC & JAC, MARVELLA, MONET, TRIFARI, and the Companys licensed DKNY® JEANS, DKNY® ACTIVE
and DKNY® MENS brands. |
In connection with actions initiated in July 2007, the Company (i) disposed of certain assets of
its former Emma James, Intuitions, J.H. Collectibles and Tapemeasure brands on October 4, 2007;
(ii) disposed of certain assets and liabilities of its former C&C California and Laundry by Design
brands on February 4, 2008; (iii) disposed of substantially all of the assets and liabilities of
its former prAna brand on April 4, 2008; (iv) disposed of substantially all of the assets and
liabilities of its former Ellen Tracy brand on April 10, 2008; (v) closed its SIGRID OLSEN brand,
which included the closure of its wholesale operations and the closure or conversion of its retail
locations in the second quarter of 2008 and (vi) entered into an exclusive license agreement with
Kohls Corporation (Kohls), whereby Kohls sources and sells products under the DANA BUCHMAN
brand.
On October 7, 2008, the Company completed the sale of certain assets related to its interest in the
Narciso Rodriguez brand and terminated certain agreements entered in connection with the
acquisition of such brand in 2007 and on October 20, 2008, the Company completed the sale of
certain assets of its former Enyce brand.
During the first quarter of 2009, the Company completed the closure of its Mt. Pocono, Pennsylvania
distribution center. Certain assets associated with such distribution center have been segregated
and reported as held for sale as of January 2, 2010.
The activities of the Companys former Emma James, Intuitions, J.H. Collectibles, Tapemeasure, C&C
California, Laundry by Design, prAna, Narciso Rodriguez and Enyce brands, the retail operations of
the Companys SIGRID OLSEN brand that were not converted to other brands and the retail operations
of the Companys former Ellen Tracy brand have been segregated and reported as discontinued
operations for all periods presented. The SIGRID OLSEN and Ellen Tracy wholesale activities and
DANA BUCHMAN operations either do not represent operations and cash flows that can be clearly
distinguished operationally and for financial reporting purposes from the remainder of the Company
or retain continuing involvement with the Company and therefore have not been presented as
discontinued operations.
In connection with the transactions discussed above, the Company recognized total pretax charges of
$83.5 million during the year ended January 3, 2009, including $10.6 million related to the Ellen
Tracy transaction. The Company allocated $2.5 million of the Ellen Tracy charge to the Ellen Tracy
retail operations, which is therefore recorded within discontinued operations. The remaining charge
of $8.1 million was allocated to the Ellen Tracy wholesale operations and has been recorded within
Selling, general & administrative expenses (SG&A).
F-10
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized financial data for the aforementioned brands that are classified as discontinued
operations are provided in Note 2 Discontinued Operations.
PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements include the accounts of the Company. All inter-company
balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the Consolidated Financial Statements. These estimates and assumptions also affect
the reported amounts of revenues and expenses. Estimates by their nature are based on judgments and
available information. Therefore, actual results could materially differ from those estimates under
different assumptions and conditions.
Critical accounting policies are those that are most important to the portrayal of the Companys
financial condition and results of operations and require managements most difficult, subjective
and complex judgments as a result of the need to make estimates about the effect of matters that
are inherently uncertain. The Companys most critical accounting policies, discussed below, pertain
to revenue recognition, income taxes, accounts receivable trade, inventories, goodwill and
intangible assets, accrued expenses, derivative instruments and share-based compensation. In
applying such policies, management must use some amounts that are based upon its informed judgments
and best estimates. Due to the uncertainty inherent in these estimates, actual results could differ
from estimates used in applying the critical accounting policies. Changes in such estimates, based
on more accurate future information, may affect amounts reported in future periods.
Revenue Recognition
The Company recognizes revenue from its wholesale, retail and licensing operations. Revenue within
the Companys wholesale operations is recognized at the time title passes and risk of loss is
transferred to customers. Wholesale revenue is recorded net of returns, discounts and allowances.
Returns and allowances require pre-approval from management. Discounts are based on trade terms.
Estimates for end-of-season allowances are based on historical trends, seasonal results, an
evaluation of current economic conditions and retailer performance. The Company reviews and refines
these estimates on a monthly basis based on current experience, trends and retailer performance.
The Companys historical estimates of these costs have not differed materially from actual results.
Retail store revenues are recognized net of estimated returns at the time of sale to consumers.
Sales tax collected from customers is excluded from revenue. Proceeds received from the sale of
gift cards are recorded as a liability and recognized as sales when redeemed by the holder.
Licensing revenues, which amounted to $57.6 million, $61.0 million and $54.3 million during 2009,
2008 and 2007, respectively, are recorded based upon contractually guaranteed minimum levels and
adjusted as actual sales data is received from licensees.
Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, as measured by enacted tax rates that are expected to
be in effect in the periods when the deferred tax assets and liabilities are expected to be
realized or settled. The Company also assesses the likelihood of the realization of deferred tax
assets and adjusts the carrying amount of these deferred tax assets by a valuation allowance to the
extent the Company believes it more likely than not that all or a portion of the deferred tax
assets will not be realized. Many factors are considered when assessing the likelihood of future
realization of deferred tax assets, including recent earnings results within taxing jurisdictions,
expectations of future taxable income, the carryforward periods available and other relevant
factors. Changes in the required valuation allowance are recorded in income in the period such
determination is made. Significant judgment is required in determining the worldwide provision for
income taxes. Changes in estimates may create volatility in the Companys effective tax rate in
future periods for various reasons including changes in tax laws or rates, changes in forecasted
amounts and mix of pretax income (loss), settlements with various tax authorities, either favorable
or unfavorable, the expiration of the statute of limitations on some tax positions and obtaining
new information about particular tax positions that may cause management to change its estimates.
In the ordinary course of a global business, the ultimate tax outcome is uncertain for many
transactions. It is the Companys policy to recognize the impact of an uncertain income tax
position on its income tax return at the largest amount that is more likely than not to be
sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50.0% likelihood of being sustained. The tax provisions are
analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant
adjustments to those provisions. The Company records interest expense and penalties payable to
relevant tax authorities as income tax expense.
F-11
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounts Receivable Trade, Net
In the normal course of business, the Company extends credit to customers that satisfy pre-defined
credit criteria. Accounts receivable trade, net, as shown on the Consolidated Balance Sheets, is
net of allowances and anticipated discounts. An allowance for doubtful accounts is determined
through analysis of the aging of accounts receivable at the date of the financial statements,
assessments of collectibility based on an evaluation of historical and anticipated trends, the
financial condition of the Companys customers and an evaluation of the impact of economic
conditions. An allowance for discounts is based on those discounts relating to open invoices where
trade discounts have been extended to customers. Costs associated with potential returns of
products as well as allowable customer markdowns and operational charge backs, net of expected
recoveries, are included as a reduction to sales and are part of the provision for allowances
included in Accounts receivable trade, net. These provisions result from seasonal negotiations
with the Companys customers as well as historical deduction trends, net of expected recoveries,
and the evaluation of current market conditions. The Companys historical estimates of these costs
have not differed materially from actual results.
Inventories, Net
Inventories for seasonal, replenishment and on-going merchandise are recorded at the lower of actual average cost or market value. The Company continually evaluates the composition of its inventories by
assessing slow-turning, ongoing product as well as prior seasons fashion product. Market value of
distressed inventory is valued based on historical sales trends for this category of inventory of
the Companys individual product lines, the impact of market trends and economic conditions and the
value of current orders in-house relating to the future sales of this type of inventory. Estimates
may differ from actual results due to quantity, quality and mix of products in inventory, consumer
and retailer preferences and market conditions. The Companys historical estimates of these costs
and its provisions have not differed materially from actual results.
In the first quarter of 2009, the Company entered into a ten-year, sourcing agency agreement with
Li & Fung Limited (Li & Fung) (see Note 8 Commitments and Contingencies). Pursuant to the
agreement, the Company received a payment of $75.0 million at closing, which was recorded within
Accrued expenses and Other non-current liabilities on the accompanying Consolidated Balance Sheet.
Under the terms of the sourcing agency agreement, the Company is subject to minimum purchase
requirements based on the value of inventory purchased each year under the agreement. The licensing
agreements with J.C. Penney Company, Inc. (JCPenney) and QVC, Inc. (QVC) (see Note 17
Additional Financial Information) will result in the removal of sourcing for a number of LIZ
CLAIBORNE branded products sold under these licenses from the Li & Fung sourcing agreement. As a result, a refund of $24.3 million will be paid to Li & Fung in March 2010. The
Company will reclassify up to $5.0 million per contract year of the $50.7 million net payment as a
reduction of inventory cost as inventory is purchased using the sourcing agent, up to the minimum
requirement for the initial term of the agreement and subsequently reflected as a reduction of Cost
of goods sold as the inventory is sold.
Goodwill and Intangibles, Net
Goodwill and intangible assets with indefinite lives are not amortized, but rather tested for
impairment at least annually. The Companys annual impairment test is performed as of the first day
of the third fiscal quarter.
A two-step impairment test is performed on goodwill. In the first step, the Company compares the
fair value of each reporting unit to its carrying value. The Company determines the fair value of
its reporting units using the market approach, as is typically used for companies providing
products where the value of such a company is more dependent on the ability to generate earnings
than the value of the assets used in the production process. Under this approach, the Company
estimates fair value based on market multiples of revenues and earnings for comparable companies.
The Company also uses discounted future cash flow analyses to corroborate these fair value
estimates. If the fair value of the reporting unit exceeds the carrying value of the net assets
assigned to that reporting unit, goodwill is not impaired and the Company is not required to
perform further testing. If the carrying value of the net assets assigned to the reporting unit
exceeds the fair value of the reporting unit, then the Company must perform the second step in
order to determine the implied fair value of the reporting units goodwill and compare it to the
carrying value of the reporting units goodwill. The activities in the second step include valuing
the tangible and intangible assets of the impaired reporting unit based on their fair value and
determining the fair value of the impaired reporting units goodwill based upon the residual of the
summed identified tangible and intangible assets.
The fair values of purchased intangible assets with indefinite lives, primarily trademarks and
tradenames, are estimated and compared to their carrying values. The Company estimates the fair
value of these intangible assets based on an income approach using the relief-from-royalty method.
This methodology assumes that, in lieu of ownership, a third party would be willing to pay a
royalty in order to exploit the related benefits of these types of assets. This approach is
dependent on a number of factors, including estimates of future growth and trends, royalty rates in
the category of intellectual property, discount rates and other variables. The Company bases its
fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and
inherently uncertain. Actual future results
may differ from those estimates. The Company recognizes an impairment loss when the estimated fair
value of the intangible asset is less than the carrying value.
F-12
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The recoverability of the carrying values of all intangible assets with finite lives is
re-evaluated when events or changes in circumstances indicate an assets value may be impaired. Impairment
testing is based on a review of forecasted operating cash flows and the profitability of the
related brand. If such analysis indicates that the carrying value of these assets is not
recoverable, the carrying value of such assets is reduced to fair value through a charge to the
Consolidated Statement of Operations.
Intangible assets with finite lives are amortized over their respective lives to their estimated
residual values. Trademarks with finite lives are amortized over their estimated useful lives. Intangible
merchandising rights are amortized over a period of 3 to 4 years. Customer relationships are
amortized assuming gradual attrition over periods ranging from 12 to 14 years.
In performing its goodwill impairment evaluation, the Company considers declines in its market
value, which began in the second half of 2007, and reconciles the sum of the estimated fair values
of its five reporting units to the Companys market value (based on its stock price), plus a
reasonable control premium, which is estimated as that amount that would be received to sell the
Company as a whole in an orderly transaction between market participants.
During 2009, the Company recorded a pretax goodwill impairment charge of $2.8 million associated
with contingent consideration for its acquisition of Mac & Jac in 2006 (see Note 5 Goodwill and
Intangibles, Net).
During the annual goodwill impairment test performed in fiscal 2008, no impairment was recognized,
however, as a result of declines in the actual and projected performance and cash flows of the
Companys International-Based Direct Brands segment, the Company determined that an additional
goodwill impairment test was required to be performed as of January 3, 2009. This assessment
compared the carrying value of each of the Companys reporting units with its estimated fair value
using discounted cash flow models and market approaches. As a result, the Company determined that
the goodwill of its International-Based Direct Brands segment, which is a reporting unit, was
impaired and recorded a non-cash pretax impairment charge of $300.7 million during the fourth
quarter of 2008.
The Company considers many factors in evaluating whether the carrying value of goodwill may not be
recoverable, including declines in stock price and market capitalization in relation to the book
value of the Company. In the last two months of 2008 and into 2009, the capital markets experienced
substantial volatility and the Companys stock price declined substantially, causing the Companys
book value to exceed its market capitalization, plus a reasonable control premium. Accordingly, the
Company concluded that its remaining goodwill was impaired and recorded a non-cash pretax
impairment charge of $382.4 million during the fourth quarter of 2008, related to goodwill
previously recorded in its Domestic-Based Direct Brands segment.
Also, as a result of the then probable sale of brands under strategic review in the Companys
Partnered Brands segment and the decline in actual and projected performance and cash flows of such
segment, the Company determined that a goodwill impairment test was required to be performed as of
December 29, 2007. As a result, the Company determined that the goodwill of its Partnered Brands
segment, which is a reporting unit, was impaired and recorded a non-cash pretax impairment charge
of $450.8 million during the fourth quarter of 2007.
As a result of the impairment analysis performed in connection with the Companys purchased
trademarks with indefinite lives, no impairment charges were recorded during 2009.
As a result of the 2008 impairment analysis performed in connection with the Companys purchased
trademarks with indefinite lives, the Company determined that the carrying value of its intangible
asset related to its Villager, Crazy Horse and Russ trademark exceeded its estimated fair value.
Accordingly, the Company recorded a non-cash pretax charge of $10.0 million to reduce the value of
the Villager, Crazy Horse and Russ trademark to its estimated fair value. This impairment resulted
from a decline in future anticipated cash flows due to the Companys exit of these brands.
Also, as a result of the impairment analysis performed in connection with the Companys purchased
trademarks with indefinite lives during 2007, the Company determined that the carrying value of
such intangible asset related to its former Ellen Tracy brandname exceeded its estimated fair
value. Accordingly, during 2007, the Company recorded a non-cash pretax charge of $36.3 million to
reduce the value of the Ellen Tracy trademark to its estimated fair value.
F-13
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Also, as a result of the decline in actual and projected performance of the licensed DKNY® JEANS and DKNY® ACTIVE brands during 2009,
the Company determined the carrying value of the related licensed trademark intangible asset exceeded its estimated
fair value and recorded a non-cash impairment charge of $9.5 million. In addition, as a result of
the Company entering into license agreements with JCPenney and QVC (see Note 17 Additional
Financial Information), the Company performed an impairment analysis of its LIZ CLAIBORNE
merchandising rights. The decreased use of such intangible assets resulted in the recognition of a
non-cash impairment charge of $4.5 million to reduce the carrying value of the merchandising rights
to their estimated fair value.
Accrued Expenses
Accrued expenses for employee insurance, workers compensation, contracted advertising and other
outstanding obligations are assessed based on claims experience and statistical trends, open
contractual obligations and estimates based on projections and current requirements. If these
trends change significantly, then actual results would likely be impacted.
Derivative Instruments
The Companys derivative instruments, including certain derivative instruments embedded in other
contracts, are recorded in the Consolidated Balance Sheets as either an asset or liability and
measured at their fair value. The changes in a derivatives fair value are recognized either
currently in earnings or Accumulated other comprehensive loss, depending on whether the derivative
qualifies for hedge accounting treatment. The Company tests each derivative for effectiveness at
inception of each hedge and at the end of each reporting period.
The Company uses foreign currency forward contracts and options for the purpose of hedging the
specific exposure to variability in forecasted cash flows associated primarily with inventory
purchases mainly by the Companys European and Canadian entities. These instruments are designated
as cash flow hedges. To the extent the hedges are highly effective, the effective portion of the
changes in fair value are included in Accumulated other comprehensive loss, net of income taxes,
with the corresponding asset or liability recorded in the Consolidated Balance Sheet. The
ineffective portion of the cash flow hedge is recognized primarily as a component of Cost of goods
sold in current period earnings or, in the case of swaps, if any, within SG&A. Amounts recorded in
Accumulated other comprehensive loss are reflected in current period earnings when the hedged
transaction affects earnings. If fluctuations in the relative value of the currencies involved in
the hedging activities were to move dramatically, such movement could have a significant impact on
the Companys results of operations.
The Company hedges its net investment position in euro functional subsidiaries by borrowing
directly in foreign currency and designating a portion of foreign currency debt as a hedge of net
investments. The foreign currency transaction gain or loss recognized for the effective portion of
a foreign currency denominated debt instrument that is designated as the hedging instrument in a
net investment hedge is recorded as a translation adjustment. The Company has at times used
derivative instruments to hedge the changes in the fair value of the debt due to interest rates,
with the change in fair value recognized currently in Interest expense, net, together with the
change in fair value of the hedged item attributable to interest rates.
Occasionally, the Company purchases short-term foreign currency contracts and options outside of
the cash flow hedging program to neutralize quarter-end balance sheet and other expected exposures.
These derivative instruments do not qualify as cash flow hedges and are recorded at fair value with
all gains or losses, which have not been significant, recognized as a component of SG&A in current
period earnings.
Share-Based Compensation
The Company recognizes compensation expense based on the fair value of employee share-based awards,
including stock options and restricted stock, net of estimated forfeitures. Determining the fair
value of options at the grant date requires judgment, including estimating the expected term that
stock options will be outstanding prior to exercise, the associated volatility and the expected
dividends. Judgment is required in estimating the amount of share-based awards expected to be
forfeited prior to vesting. If actual forfeitures differ significantly from these estimates,
share-based compensation expense could be materially impacted.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Fair Value Measurements
The Company applies the relevant accounting guidance on fair value measurements to (i) all
financial instruments that are being measured and reported on a fair value basis; (ii)
non-financial assets and liabilities measured and reported at fair value on a non-recurring basis;
and (iii) disclosures of fair value of certain financial assets and liabilities.
F-14
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following fair value hierarchy is used in selecting inputs for those instruments measured at
fair value that distinguishes between assumptions based on market data (observable) and the
Companys assumptions (unobservable inputs). The hierarchy consists of three levels.
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Level 1 |
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Quoted market prices in active markets for identical assets or liabilities; |
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Level 2 |
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Inputs other than Level 1 inputs that are either directly or indirectly observable; and |
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Level 3 |
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Unobservable inputs developed using estimates and assumptions developed by the
Company, which reflect those that a market participant would use. |
Fair value measurement for the Companys assets assumes the highest and best use (the use that
generates the highest returns individually or as a group) for the asset by market participants,
considering the use of the asset that is physically possible, legally permissible, and financially
feasible at the measurement date. This applies even if the intended use of the asset by the Company
is different.
Fair value measurement for the Companys liabilities assumes that the liability is transferred to a
market participant at the measurement date and that the nonperformance risk relating to the
liability is the same before and after the transaction. Nonperformance risk refers to the risk that
the obligation will not be fulfilled and includes the Companys own credit risk.
The Company has chosen not to elect the fair value measurement option for any instruments not
required to be measured at fair value on a recurring basis.
The fair value of the Companys cash flow hedges is primarily based on observable forward foreign
exchange rates.
Cash and Cash Equivalents
All highly liquid investments with an original maturity of three months or less at the date of
purchase are classified as cash equivalents.
Property and Equipment, Net
Property and equipment is stated at cost less accumulated depreciation and amortization. Buildings
and building improvements are depreciated using the straight-line method over their estimated
useful lives of 20 to 39 years. Machinery and equipment and furniture and fixtures are depreciated
using the straight-line method over their estimated useful lives of three to seven years. Leasehold
improvements are depreciated over the shorter of the remaining lease term or the estimated useful
lives of the assets. Improvements are capitalized and depreciated in accordance with the Companys
policies; costs for maintenance and repairs are expensed as incurred. Leased property meeting
certain capital lease criteria is capitalized and the present value of the related lease payments
is recorded as a liability. Amortization of capitalized leased assets is recorded on the
straight-line method over the shorter of the estimated useful life of the asset or the initial
lease term. The Company recognizes a liability for the fair value of an asset retirement obligation
(ARO) if the fair value can be reasonably estimated. The Companys AROs are primarily associated
with the removal and disposal of leasehold improvements at the end of a lease term when the Company
is contractually obligated to restore a facility to a condition specified in the lease agreement.
Amortization of AROs is recorded on a straight-line basis over the life of the lease term.
The Company capitalizes the costs of software developed or obtained for internal use.
Capitalization of software developed or obtained for internal use commences during the development
phase of the project. The Company amortizes software developed or obtained for internal use on a
straight-line basis over five years, when such software is substantially ready for use.
The Company evaluates the recoverability of property and equipment if circumstances indicate an
impairment may have occurred. This analysis is performed by comparing the respective carrying
values of the assets to the current and expected future cash flows to be generated from such
assets, on an undiscounted basis. If such analysis indicates that the carrying value of these
assets is not recoverable, the carrying value of the impaired assets is reduced to fair value
through a charge to the Companys Consolidated Statement of Operations.
The
Company recorded pretax charges of $36.1 million in 2009 (see Note 10 Fair Value
Measurements), $13.0 million in 2008 and $4.6 million in 2007 to reduce the carrying values of
certain property and equipment to their estimated fair values. The 2008 charges primarily related
to an impairment analysis performed on property and equipment associated with the Companys closed
Mt. Pocono distribution center. During the fourth quarter of 2008, the Company determined that the
carrying value of such assets exceeded their estimated fair value and recorded a charge of $10.4
million within SG&A on the accompanying Consolidated Statement of Operations. The impairment
resulted from a decline in then-present and expected utilization of such assets. The remaining 2008
charge of $2.6 million resulted from the decision to close the retail operations of the Companys
MEXX brand in the United Kingdom (MEXX UK). An impairment analysis was performed on the property
and equipment of MEXX UK, and the Company determined that the carrying value of such assets
exceeded their fair value.
F-15
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 2007 charges related to a decline in future anticipated cash flows of the Companys former
SIGRID OLSEN brand retail stores due to various factors, including the Companys decision to close
such brand. Accordingly, the Company recorded a pretax charge of $4.6 million within SG&A on the
accompanying Consolidated Statement of Operations in order to reduce the carrying value of such
assets to their estimated fair value.
Operating Leases
The Company leases office space, retail stores and distribution facilities. Many of these operating
leases provide for tenant improvement allowances, rent increases and/or contingent rent provisions.
Rental expense is recognized on a straight-line basis commencing with the possession date of the
property, which is typically the earlier of the lease commencement date or the date when the
Company takes possession of the property. Certain store leases include contingent rents that are
based on a percentage of retail sales over stated thresholds. Tenant allowances are amortized on a
straight-line basis over the life of the lease as a reduction of rent expense and are included in
SG&A.
Foreign Currency Translation
Assets and liabilities of non-US subsidiaries are translated at period-end exchange rates. Revenues
and expenses are translated at average rates of exchange in effect during the year. Resulting
translation adjustments are included in Accumulated other comprehensive loss. Revenues and expenses
for each month are translated using that months average exchange rate and then are combined for
the period totals. Gains and losses on translation of intercompany loans with foreign subsidiaries
of a long-term investment nature are also included in this component of Stockholders equity.
Foreign Currency Transactions
Outstanding balances in foreign currencies are translated at the end of period exchange rates. The
resulting exchange differences are recorded in the Consolidated Statement of Operations or
Accumulated other comprehensive loss, as appropriate.
Cost of Goods Sold
Cost of goods sold for wholesale operations includes the expenses incurred to acquire and produce
inventory for sale, including product costs, freight-in, import costs, third-party inspection
activities, sourcing agent commissions and provisions for shrinkage. For retail operations,
in-bound freight from the Companys warehouse to its own retail stores is also included.
Warehousing activities including receiving, storing, picking, packing and general warehousing
charges are included in SG&A and, as such, the Companys gross profit may not be comparable to
others who may include these expenses as a component of Cost of goods sold.
Advertising, Promotion and Marketing
All costs associated with advertising, promoting and marketing of Company products are expensed
during the periods when the activities take place. Costs associated with cooperative advertising
programs involving agreements with customers, whereby customers are required to provide documentary
evidence of specific performance and when the amount of consideration paid by the Company for these
services is at or below fair value, are charged to SG&A. Costs associated with customer cooperative
advertising allowances without specific performance guidelines are recorded as a reduction of sales
revenue. Cooperative advertising expenses with specific agreements with customers were $19.9
million in 2009, $43.4 million in 2008 and $51.5 million in 2007. Advertising and promotion
expenses were $65.3 million in 2009, $94.9 million in 2008 and $144.3 million in 2007. Marketing
expenses, including in-store and other Company-sponsored activities,
were $27.3 million in 2009,
$40.4 million in 2008 and $61.6 million in 2007.
Shipping and Handling Costs
Shipping and handling costs, which are mostly comprised of warehousing activities, are included as
a component of SG&A in the Consolidated Statements of Operations. In fiscal years 2009, 2008 and
2007, shipping and handling costs were $117.5 million, $149.3 million and $259.2 million,
respectively.
Equity Method Investment
The Company uses the equity method of accounting for its investments in and its proportionate share
in earnings of an affiliate that it does not control, but over which it exerts significant
influence (see Note 21 Related Party Transactions). The Company considers whether the fair value
of its equity method investment has declined below carrying value whenever adverse events or
changes in circumstances indicate the recorded value may not be recoverable.
F-16
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash Dividends and Common Stock Repurchases
On December 16, 2008, the Board of Directors announced the suspension of the Companys quarterly
cash dividend indefinitely. The Company paid the dividend scheduled for December 15, 2008 in the
amount of $0.05625 per share to stockholders of record at the close of business on November 21,
2008.
The Companys amended and restated revolving credit agreement currently restricts its ability to
pay dividends and repurchase stock (see Note 9 Debt and Lines of Credit).
Fiscal Year
The Companys fiscal year ends on the Saturday closest to December 31. The 2009 and 2007 fiscal
years, which ended on January 2, 2010 and December 29, 2007, respectively, reflected a 52-week
period. The 2008 fiscal year ended January 3, 2009 reflected a 53-week period.
Subsequent Events
The Companys policy is to evaluate all events or transactions that occur from the balance
sheet date through the date of the issuance of its financial statements. The Company has evaluated
events or transactions that occurred after January 2, 2010 through February 23, 2010, the date the
Company issued these financial statements (see Note 24 Subsequent Events).
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective January 4, 2009, the Company adopted new accounting guidance on fair value measurements
with respect to non-financial assets and liabilities measured on a non-recurring basis. The
application of the fair value framework to these fair value measurements did not have a material
impact on the Companys financial position, results of operations or cash flows.
The Company adopted new accounting guidance regarding noncontrolling interests in consolidated
financial statements on January 4, 2009, the first day of fiscal year 2009. The new accounting
guidance requires (i) classification of noncontrolling interests, commonly referred to as minority
interests, within stockholders equity; (ii) net income to include the net income attributable to
the noncontrolling interest; and (iii) enhanced disclosure of activity related to noncontrolling
interests. The Company reclassified the noncontrolling interest to a separate component within
Stockholders equity on the Consolidated Balance Sheets and separately presented the Net (loss)
income attributable to the noncontrolling interest on the Consolidated Statements of Operations.
The noncontrolling interest at January 2, 2010 and January 3, 2009 is the remaining equity of the
former owners of Lucky Brand Dungarees, Inc. (see Note 8 Commitments and Contingencies).
On January 4, 2009, the Company adopted new accounting guidance on derivative instruments and
hedging activities, which enhances the disclosure requirements for derivative instruments and
hedging activities. The Company adjusted its disclosure to provide information about: (i) how and
why the Company uses derivative instruments; (ii) how derivative instruments and related hedged
items are accounted for; and (iii) how derivative instruments and related hedged items affect the
Companys financial position, financial performance and cash flows. The adoption of the new
accounting guidance did not affect the Companys consolidated financial statements, but did require
additional disclosures, which are provided in Note 11 Derivative Instruments.
In the second quarter of 2009, the Company adopted new accounting guidance on fair value
measurements, which provides additional guidance in determining whether a market is active or
inactive and whether a transaction is distressed. The guidance is applicable to all financial and
nonfinancial assets and liabilities and requires enhanced disclosures. The adoption of such
guidance did not have an impact on the Companys consolidated financial statements.
In the second quarter of 2009, the Company adopted new accounting guidance on fair value
measurements, which requires disclosures about fair value of financial instruments in interim as
well as in annual financial statements. The adoption of the amended guidance did not affect the
Companys consolidated financial statements, but did require additional disclosures, which are
provided in Note 10 Fair Value Measurements.
In the second quarter of 2009, the Company adopted new accounting guidance on subsequent events.
The new accounting guidance establishes standards for accounting and disclosure of events that
occur after the balance sheet date but before financial statements are issued. The adoption of such
guidance did not impact the Companys consolidated financial statements.
In the third quarter of 2009, the Company adopted new accounting guidance on fair value
measurements. The new accounting guidance provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a reporting entity
is required to measure fair value using specified valuation techniques. In addition, when
estimating the fair
value of a liability, a reporting entity is not required to include a separate input or adjustment
to other inputs relating to the existence of a restriction that prevents the transfer of the
liability. A quoted price in an active market for the identical liability at the measurement date
and the quoted price for the identical liability when traded as an asset in an active market when
no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.
The adoption of such guidance did not impact the Companys consolidated financial statements.
F-17
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OTHER MATTERS
Liquidity Enhancement and Cost Reduction
The Company has been greatly impacted by the recent economic downturn, including a drastic decline
in consumer spending that began in the second half of 2008. As consumer spending remained at
depressed levels during 2009 and may not return to pre-2008 levels for an extended period of time,
the Company remains focused on carefully managing those factors within its control, most
importantly spending, with a slight increase in projected 2010 capital expenditures to
approximately $85.0 million (from $72.6 million in 2009). The Company will continue its
streamlining efforts to drive cost out of its operations through supply chain and overhead
initiatives that are aimed at driving efficiencies, as well as improving gross margins, working
capital and operating cash flows.
The Companys cost reduction efforts have also included tighter controls surrounding discretionary
spending, a freeze in merit compensation increases in 2009, the cessation of its quarterly dividend
and the continuation of streamlining initiatives.
On June 24, 2009, the Company completed the offering of $90.0 million of 6.0% Convertible Senior
Notes due June 15, 2014 (the Convertible Notes). The Convertible Notes are unsecured, senior
obligations of the Company, pay interest semi-annually at a rate of 6.0% per annum, and will be
convertible, under certain circumstances, into cash, shares of the Companys common stock, or a
combination of cash and shares, at the option of the Company. The Company used the net proceeds
from the offering to repay a portion of the outstanding borrowings under its amended and restated
revolving credit facility (see Note 9 Debt and Lines of Credit).
The Convertible Notes become convertible during any fiscal quarter if the last reported sale price
of the Companys common stock during 20 out of the last 30 trading days in the prior fiscal quarter
equals or exceeds $4.2912 (which is 120% of the conversion price). As a result of stock price
performance, the Convertible Notes became convertible during the fourth quarter of 2009 and are
convertible during the first quarter of 2010. As previously disclosed in connection with the
issuance of the Convertible Notes, the Company has not yet obtained stockholder approval under the
rules of the NYSE for the issuance of the full amount of common stock issuable upon conversion of
the Convertible Notes. Until such approval is obtained, if the Convertible Notes are surrendered
for conversion, the Company must pay the $1,000 principal amount of the
Convertible Notes in cash and may settle the remaining conversion value in the form of cash, stock
or a combination of cash and stock.
In January 2009, the Company completed an amendment to and extension of its revolving credit
facility, and in May and November 2009, the Company completed additional amendments to such
facility (as amended, the Amended Agreement), as discussed in Note 9 Debt and Lines of Credit.
Under the Amended Agreement, the Company is subject to a fixed charge coverage covenant as well as
various other covenants and other requirements, such as financial requirements, reporting
requirements and various negative covenants. Pursuant to the May 2009 amendment, the Company is
subject to a minimum aggregate borrowing availability covenant. The Companys borrowing
availability under the Amended Agreement is determined primarily by the level of its eligible
accounts receivable and inventory balances. In addition, the Amended
Agreement requires the application of substantially all cash
collected, including any net proceeds received with respect to
certain permitted disposals and acquisitions, to reduce outstanding
borrowings under the Amended Agreement. The November 2009 amendment provides that through the
maturity date of the Amended Agreement, the fixed charge coverage covenant would apply only if
borrowing availability under the Amended Agreement falls below certain designated levels. The
November 2009 amendment also provides for, among other things, the approval of (i) a grant to
JCPenney of an option to acquire the intellectual property and related rights to certain brands in
the US and Puerto Rico (see Note 17 Additional Financial Information); (ii) the related sale by
the Company to JCPenney of such property and rights; (iii) upon the consummation of such sale, the
release of any liens on such property and rights in favor of the lenders under the Amended
Agreement; and (iv) certain defined payments, indebtedness and guarantees.
By the end of the first quarter of 2010, the Company expects to receive $166.7 million of income
tax refunds on previously paid taxes due to a Federal law change allowing 2008 or 2009 domestic
losses to be carried back for five years, with the fifth year limited to 50.0% of taxable income.
As a condition of the Amended Agreement, the Company is required to repay amounts outstanding
thereunder with the amount of such refunds. Based on its forecast of borrowing availability under the Amended Agreement, and subject to the
expected timing of the receipt of the anticipated tax refunds, the Company currently anticipates
that cash flows from operations and the projected borrowing availability under its Amended
Agreement will be sufficient to fund its liquidity requirements for at least the next 12 months.
While the Company might not be able to maintain the borrowing availability levels necessary to
avoid application of the fixed charge coverage covenant, the Company currently anticipates that its
borrowing availability will be sufficient to avoid springing the fixed charge coverage
F-18
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
covenant for at least the next 12 months. There can be no certainty that availability under the
Amended Agreement will be sufficient to fund its liquidity needs or will remain at levels that will
keep the fixed charge coverage covenant from springing into effect. If the fixed charge coverage
covenant springs into effect due to a failure to fulfill the minimum availability requirements at
any time through the end of 2010, the Company does not project it will comply with this covenant.
Should the Company be unable to comply with the requirements in the Amended Agreement, including
the fixed charge coverage covenant, the Company would be unable to borrow under such agreement and
any amounts outstanding would become immediately due and payable unless the Company were able to
secure a waiver or an amendment under the Amended Agreement. The sufficiency and availability of
the Companys projected sources of liquidity may be adversely affected by a variety of factors,
including, without limitation: (i) the level of the Companys operating cash flows, which will be
impacted by retailer and consumer acceptance of the Companys products, general economic conditions
and the level of consumer discretionary spending; (ii) the status of, and any further adverse
changes in, the Companys credit ratings; (iii) the Companys ability to maintain required levels
of borrowing availability and to comply with applicable financial covenants (as amended) and other
covenants included in its debt and credit facilities; (iv) the financial wherewithal of the
Companys larger department store and specialty store customers; (v) the Companys ability to
successfully execute on the licensing arrangements with JCPenney and QVC with respect to the LIZ
CLAIBORNE family of brands; (vi) the timing of the receipt of the anticipated tax refunds; (vii)
interest rate and exchange rate fluctuations; and (viii) whether holders of the Convertible Notes,
if and when such notes are convertible, elect to convert a substantial portion of such notes, the
par value of which the Company must currently settle in cash. An acceleration of amounts
outstanding under the Amended Agreement would likely cause cross-defaults under the Companys other
outstanding indebtedness, including the Convertible Notes and the Companys 5.0% 350.0 million euro
Notes due 2013.
NOTE 2: DISCONTINUED OPERATIONS
On October 4, 2007, the Company completed the sale of its former Emma James, Intuitions, J.H.
Collectibles and Tapemeasure brands in a single transaction. Consideration for the sale was
represented by a note that matured in February 2008 for which the Company received approximately
$15.0 million in the first quarter of 2008.
On February 4, 2008, the Company completed the disposal of certain assets and liabilities of its
former C&C California and Laundry by Design brands for net proceeds of $33.1 million and on
April 4, 2008, the Company completed the disposal of substantially all of the assets and
liabilities of its former prAna brand for net proceeds of $15.7 million (net of payments to the
former owners of prAna of $18.5 million and other transaction related costs). On April 10, 2008,
the Company completed the sale of the assets and liabilities of its former Ellen Tracy brand for
net proceeds of $25.8 million, of which $21.3 million was recorded in continuing operations in the
accompanying Consolidated Statement of Cash Flows.
On October 7, 2008, the Company completed the sale of certain assets related to its interest in the
Narciso Rodriguez brand and terminated certain agreements entered in connection with the
acquisition of such brand in 2007, in exchange for a net fee of $5.3 million.
On October 20, 2008, the Company completed the sale of certain assets and liabilities of its former
Enyce brand in exchange for $5.5 million.
The Company recorded pretax charges of $3.8 million in 2009, $75.4 million ($91.6 million, after
tax) in 2008 and $11.8 million ($7.3 million, after tax) in 2007, respectively, to reflect the
estimated difference between the carrying value of the net assets sold and their estimated fair
value, less costs to dispose, including transaction costs. The charges recorded in 2009 do not
result in any incremental tax benefit to the Company, and as such, no tax benefit was recorded
during 2009. The net loss on disposal of discontinued operations in 2008 included $16.2 million for
unfavorable discrete tax items consisting of the effect of previously recorded tax credits, which
will no longer be obtained (see Note 7 Income Taxes). These amounts were included in Discontinued
operations, net of income taxes on the accompanying Consolidated Statements of Operations.
Assets held for sale on the accompanying Consolidated Balance Sheets consisted of Property and
equipment associated with the Companys closed Mt. Pocono, Pennsylvania distribution center.
F-19
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Summarized statement of operations data for discontinued operations are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
|
January 2, |
|
|
January 3, |
|
|
December 29, |
|
|
|
2010 |
|
|
2009 |
|
|
2007 |
|
In thousands |
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
592 |
|
|
$ |
76,874 |
|
|
$ |
382,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for income taxes |
|
$ |
(8,521 |
) |
|
$ |
(46,638 |
) |
|
$ |
1,164 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations, net of
income taxes |
|
$ |
(8,521 |
) |
|
$ |
(46,638 |
) |
|
$ |
878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued operations, net of
income taxes |
|
$ |
(3,829 |
) |
|
$ |
(91,606 |
) |
|
$ |
(7,273 |
) |
|
|
|
|
|
|
|
|
|
|
NOTE 3: INVENTORIES, NET
Inventories, net consisted of the following:
|
|
|
|
|
|
|
|
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
Raw materials |
|
$ |
5,896 |
|
|
$ |
25,778 |
|
Work in process |
|
|
773 |
|
|
|
2,975 |
|
Finished goods |
|
|
313,044 |
|
|
|
435,866 |
|
|
|
|
|
|
|
|
Total |
|
$ |
319,713 |
|
|
$ |
464,619 |
|
|
|
|
|
|
|
|
NOTE 4: PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following:
|
|
|
|
|
|
|
|
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
Land and buildings |
|
$ |
69,235 |
|
|
$ |
108,175 |
|
Machinery and equipment |
|
|
312,444 |
|
|
|
373,094 |
|
Furniture and fixtures |
|
|
274,235 |
|
|
|
277,563 |
|
Leasehold improvements |
|
|
529,281 |
|
|
|
545,516 |
|
|
|
|
|
|
|
|
|
|
|
1,185,195 |
|
|
|
1,304,348 |
|
Less: Accumulated depreciation and amortization |
|
|
740,507 |
|
|
|
731,920 |
|
|
|
|
|
|
|
|
Total property and equipment, net |
|
$ |
444,688 |
|
|
$ |
572,428 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property and equipment for the years ended January 2,
2010, January 3, 2009 and December 29, 2007, was $128.3 million, $140.0 million and $138.1 million,
respectively, which included depreciation for property and equipment under capital leases of
$5.9 million, $6.6 million and $7.2 million, respectively. Machinery and equipment under capital
leases was $36.1 million and $45.0 million as of January 2, 2010 and January 3, 2009, respectively.
In November 2008, the Company sold a closed distribution center and realized a gain of
$14.3 million, which was recorded within SG&A in the Consolidated Statement of Operations.
F-20
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5: GOODWILL AND INTANGIBLES, NET
The following tables disclose the carrying value of all the intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
In thousands |
|
Period |
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount: |
|
|
|
|
|
|
|
|
|
|
|
|
Licensed trademarks (a) |
|
|
|
|
|
$ |
|
|
|
$ |
32,154 |
|
Owned trademarks |
|
5 years |
|
|
1,000 |
|
|
|
1,000 |
|
Customer relationships |
|
13 years |
|
|
12,220 |
|
|
|
11,955 |
|
Merchandising rights (b) |
|
4 years |
|
|
35,025 |
|
|
|
49,888 |
|
Other |
|
4 years |
|
|
2,322 |
|
|
|
2,618 |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
6 years |
|
|
50,567 |
|
|
|
97,615 |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
Licensed trademarks |
|
|
|
|
|
|
|
|
|
|
(19,795 |
) |
Owned trademarks |
|
|
|
|
|
|
(517 |
) |
|
|
(316 |
) |
Customer relationships |
|
|
|
|
|
|
(3,426 |
) |
|
|
(2,375 |
) |
Merchandising rights |
|
|
|
|
|
|
(23,488 |
) |
|
|
(30,019 |
) |
Other |
|
|
|
|
|
|
(1,487 |
) |
|
|
(1,183 |
) |
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
(28,918 |
) |
|
|
(53,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net: |
|
|
|
|
|
|
|
|
|
|
|
|
Licensed trademarks |
|
|
|
|
|
|
|
|
|
|
12,359 |
|
Owned trademarks |
|
|
|
|
|
|
483 |
|
|
|
684 |
|
Customer relationships |
|
|
|
|
|
|
8,794 |
|
|
|
9,580 |
|
Merchandising rights |
|
|
|
|
|
|
11,537 |
|
|
|
19,869 |
|
Other |
|
|
|
|
|
|
835 |
|
|
|
1,435 |
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized intangible assets, net |
|
|
|
|
|
|
21,649 |
|
|
|
43,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Owned trademarks |
|
|
|
|
|
|
209,580 |
|
|
|
207,340 |
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
231,229 |
|
|
$ |
251,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The decrease in the balance reflected a non-cash impairment charge
of $9.5 million recorded within the Companys Partnered Brands segment
related to the Companys licensed trademark intangible asset
associated with its licensed
DKNY ® JEANS and DKNY ® ACTIVE brands. |
|
(b) |
|
The decrease in the balance included a non-cash impairment charge of $4.7
million recorded within the Companys Partnered Brands segment
primarily related to LIZ CLAIBORNE merchandising rights. |
Amortization expense of intangible assets was $15.6 million, $15.2 million and $16.1 million
for the years ended January 2, 2010, January 3, 2009 and December 29, 2007, respectively.
The estimated amortization expense of intangible assets for the next five years is as follows:
|
|
|
|
|
|
|
Amortization |
|
|
|
Expense |
|
Fiscal Year |
|
(In millions) |
|
2010 |
|
$ |
6.8 |
|
2011 |
|
|
4.7 |
|
2012 |
|
|
2.8 |
|
2013 |
|
|
1.3 |
|
2014 |
|
|
1.0 |
|
F-21
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The changes in carrying amount of goodwill for the year ended January 2, 2010 were as follows:
|
|
|
|
|
In thousands |
|
Partnered Brands |
|
Balance as of January 3, 2009 |
|
$ |
|
|
Additional purchase price Mac & Jac |
|
|
2,785 |
|
Impairment charge |
|
|
(2,785 |
) |
|
|
|
|
Balance as of January 2, 2010 |
|
$ |
|
|
|
|
|
|
During 2009, the Company recorded $2.8 million of additional purchase price and an increase to
goodwill related to its contingent payment to the former owners of Mac & Jac. As discussed in Note
1 Basis of Presentation and Significant Accounting Policies, the Company performed a step two
goodwill impairment assessment, concluded that the goodwill recorded as a result of the settlement
of the contingency was impaired and recorded an impairment charge of $2.8 million in its Partnered
Brands segment.
NOTE 6: ACCRUED EXPENSES
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
Streamlining initiatives |
|
$ |
64,482 |
|
|
$ |
27,541 |
|
Lease obligations |
|
|
46,708 |
|
|
|
40,412 |
|
Payroll, bonuses and other employment related obligations |
|
|
34,223 |
|
|
|
25,557 |
|
Taxes, other than taxes on income |
|
|
26,293 |
|
|
|
24,036 |
|
Refund to Li & Fung |
|
|
24,300 |
|
|
|
|
|
Employee benefits |
|
|
20,546 |
|
|
|
39,527 |
|
Interest |
|
|
13,483 |
|
|
|
12,395 |
|
Advertising |
|
|
11,205 |
|
|
|
10,578 |
|
Acquisition related obligations |
|
|
4,989 |
|
|
|
4,865 |
|
Fair value of derivatives |
|
|
3,781 |
|
|
|
8,835 |
|
Other |
|
|
93,278 |
|
|
|
107,845 |
|
|
|
|
|
|
|
|
|
|
$ |
343,288 |
|
|
$ |
301,591 |
|
|
|
|
|
|
|
|
NOTE 7: INCOME TAXES
(Loss) income before (benefit) provision for income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
December 29, 2007 |
|
United States |
|
$ |
(498,179 |
) |
|
$ |
(475,337 |
) |
|
$ |
(391,259 |
) |
International |
|
|
94,504 |
|
|
|
(313,103 |
) |
|
|
(74,372 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(403,675 |
) |
|
$ |
(788,440 |
) |
|
$ |
(465,631 |
) |
|
|
|
|
|
|
|
|
|
|
F-22
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The (benefit) provision for income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
December 29, 2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
(106,978 |
) |
|
$ |
(157,761 |
) |
|
$ |
26,709 |
|
Foreign |
|
|
2,473 |
|
|
|
5,963 |
|
|
|
8,313 |
|
State and local |
|
|
5,014 |
|
|
|
2,077 |
|
|
|
14,594 |
|
|
|
|
|
|
|
|
|
|
|
Total Current |
|
|
(99,491 |
) |
|
|
(149,721 |
) |
|
|
49,616 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(6,442 |
) |
|
|
119,743 |
|
|
|
(118,815 |
) |
Foreign |
|
|
(1,413 |
) |
|
|
19,083 |
|
|
|
9 |
|
State and local |
|
|
(2,269 |
) |
|
|
35,770 |
|
|
|
(30,554 |
) |
|
|
|
|
|
|
|
|
|
|
Total Deferred |
|
|
(10,124 |
) |
|
|
174,596 |
|
|
|
(149,360 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(109,615 |
) |
|
$ |
24,875 |
|
|
$ |
(99,744 |
) |
|
|
|
|
|
|
|
|
|
|
Liz Claiborne, Inc. and its US subsidiaries file a consolidated federal income tax return. Deferred
income tax benefits and deferred income tax liabilities represent the tax effects of revenues,
costs and expenses, which are recognized for tax purposes in different periods from those used for
financial statement purposes.
As discussed in Note 2 Discontinued Operations, in 2008 the Company recorded a $16.2 million
charge within loss on disposal of discontinued operations, net of income taxes, related to
unfavorable discrete tax items consisting of previously recorded tax credits that will no longer be
obtained.
The effective income tax rate differed from the statutory federal income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
|
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
December 29, 2007 |
|
Federal tax benefit at statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State and local income taxes, net of
federal benefit |
|
|
(0.4 |
) |
|
|
(4.8 |
) |
|
|
2.2 |
|
Goodwill and asset impairments |
|
|
9.3 |
|
|
|
(17.3 |
) |
|
|
(13.0 |
) |
Increase in valuation allowance |
|
|
(7.3 |
) |
|
|
(19.4 |
) |
|
|
(1.8 |
) |
Tax on unrecognized tax benefits |
|
|
(2.3 |
) |
|
|
3.5 |
|
|
|
(2.1 |
) |
Rate differential on foreign income |
|
|
(6.8 |
) |
|
|
0.9 |
|
|
|
(1.8 |
) |
Other, net |
|
|
(0.3 |
) |
|
|
(1.1 |
) |
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.2 |
% |
|
|
(3.2 |
)% |
|
|
21.4 |
% |
|
|
|
|
|
|
|
|
|
|
F-23
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of net deferred taxes arising from temporary differences as of January 2, 2010 and
January 3, 2009 were as follows:
|
|
|
|
|
|
|
|
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Inventory valuation |
|
$ |
1,758 |
|
|
$ |
2,044 |
|
Streamlining initiatives |
|
|
17,593 |
|
|
|
10,269 |
|
Deferred compensation |
|
|
2,060 |
|
|
|
8,391 |
|
Nondeductible accruals |
|
|
62,253 |
|
|
|
18,857 |
|
Unrealized investment losses |
|
|
6,824 |
|
|
|
3,786 |
|
Share-based compensation |
|
|
18,585 |
|
|
|
15,397 |
|
Net operating loss carryforward |
|
|
167,608 |
|
|
|
105,138 |
|
Tax credit carryforward |
|
|
10,439 |
|
|
|
10,439 |
|
Goodwill |
|
|
76,301 |
|
|
|
84,897 |
|
Other, net |
|
|
22,475 |
|
|
|
27,885 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
385,896 |
|
|
|
287,103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Trademarks and other intangibles |
|
|
(35,264 |
) |
|
|
(35,922 |
) |
Property and equipment |
|
|
(24,017 |
) |
|
|
(27,421 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(59,281 |
) |
|
|
(63,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Valuation allowance |
|
|
(351,730 |
) |
|
|
(253,102 |
) |
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
(25,115 |
) |
|
$ |
(29,342 |
) |
|
|
|
|
|
|
|
As of January 2, 2010, the Company and its domestic subsidiaries had net operating loss and foreign
tax credit carryforwards of $128.8 million and $10.4 million, respectively, for federal income tax
purposes that will reduce future federal taxable income. The net operating loss and foreign tax
credit carryforwards for federal income tax purposes will expire in 2029 and 2018, respectively.
As of January 2, 2010, the Company and certain of its domestic subsidiaries recorded a
$70.9 million deferred tax asset related to net operating loss carryforwards for state income tax
purposes that will reduce future state taxable income. The net operating loss carryforwards for
state income tax purposes begin to expire in 2012.
As of January 2, 2010, certain of the Companys foreign subsidiaries recorded a $75.4 million
deferred tax asset related to net operating loss carryforwards for foreign income tax purposes that
will reduce future foreign taxable income. The net operating loss carryforwards for foreign income
tax purposes begin to expire in 2013.
As of January 2, 2010, the Company and its subsidiaries recorded valuation allowances in the amount
of $351.7 million due to the combination of (i) its recent history of pretax losses, including
goodwill impairment charges recorded in 2008 and 2007; (ii) the Companys ability to carry forward
or carry back tax losses or credits and (iii) current general economic conditions. This represents
a total increase in the valuation allowance of $98.6 million compared to the balance at January 3,
2009.
Income taxes receivable of $179.2 million and $116.4 million were included in Other current assets
as of January 2, 2010 and January 3, 2009, respectively.
The Company has not provided for deferred taxes on the outside basis difference in its investments
in foreign subsidiaries that are essentially permanent in duration. As of January 2, 2010, there
were no unremitted earnings. It is not practicable to determine the amount of income taxes that
would be payable in the event such outside basis differences reverse or unremitted earnings are
repatriated.
F-24
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company adopted new accounting guidance related to uncertain income tax positions on
December 31, 2006 (the first day of the 2007 fiscal year) and recorded a cumulative effect charge
to retained earnings of $10.5 million. Changes in the amounts of unrecognized tax benefits are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
December 29, 2007 |
|
Balance as of beginning of period |
|
$ |
20,149 |
|
|
$ |
75,206 |
|
|
$ |
38,099 |
|
Increases from prior period positions |
|
|
10,865 |
|
|
|
5,369 |
|
|
|
35,741 |
|
Decreases from prior period positions |
|
|
(111 |
) |
|
|
(811 |
) |
|
|
(4,849 |
) |
Increases from current period positions |
|
|
53,209 |
|
|
|
1,920 |
|
|
|
11,256 |
|
Decreases from current period positions |
|
|
|
|
|
|
|
|
|
|
(763 |
) |
Decreases relating to settlements with taxing authorities |
|
|
(538 |
) |
|
|
(43,972 |
) |
|
|
(4,064 |
) |
Reduction as a result of a lapse of the applicable
statute of limitations |
|
|
|
|
|
|
(17,563 |
) |
|
|
(214 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of end of period (a) |
|
$ |
83,574 |
|
|
$ |
20,149 |
|
|
$ |
75,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As of January 2, 2010 and January 3, 2009, the amounts are included within
Income taxes payable and Other non-current liabilities on the accompanying Consolidated
Balance Sheet. |
The Company recognizes interest and penalties related to unrecognized tax benefits as a
component of the provision for income taxes. For the year ended January 2, 2010, the Company did
not materially change its accrual for interest and penalties. For the
year ended January 3, 2009, the Company decreased its accrual for
interest and penalties by $19.3 million and $3.2 million,
respectively and during the year ended December 29, 2007, the Company
increased its accrual for interest and penalties by $16.0 million and
$1.5 million, respectively. At January 2, 2010 and January 3,
2009, the accrual for interest and penalties was $3.1 million and $1.0 million, respectively.
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax
rate is $83.6 million. The Company expects to reduce the liability for unrecognized tax benefits by
an amount between $1.6 million and $2.9 million within the next 12 months due to either settlement
or the expiration of the statute of limitations.
The Company files tax returns in the US Federal jurisdiction and various state and foreign
jurisdictions. A number of years may elapse before an uncertain tax position, for which the Company
has unrecognized tax benefits, is audited and finally resolved. While it is difficult to predict
the final outcome or the timing of resolution of any particular uncertain tax position, the Company
believes that the unrecognized tax benefits reflect the most likely outcome. These unrecognized tax
benefits, as well as the related interest, are adjusted in light of changing facts and
circumstances. Favorable resolution would be recognized as a reduction to the effective tax rate in
the period of resolution.
The number of years with open tax audits varies depending upon the tax jurisdiction. The major tax
jurisdictions include the US and the Netherlands. The Company is no longer subject to US Federal
examination by the Internal Revenue Service (IRS) for the years before 2006 and, with a few
exceptions, this applies to tax examinations by state authorities for the years before 2005. As a
result of the US Federal tax law change extending the carryback period from two to five years and
the Companys carryback of its 2009 tax loss to 2004 and 2005, the IRS has the ability to re-open
its past examinations of 2004 and 2005. The Company has been reviewed by the IRS for 2004 and 2005.
The Company is no longer subject to income tax examination by the Dutch tax authorities for years
before 2005.
NOTE 8: COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, showroom, warehouse/distribution, retail space and computers and other
equipment under various noncancelable operating lease agreements, which expire through 2025. Rental
expense for 2009, 2008 and 2007 was $214.3 million, $224.6 million and $214.6 million,
respectively, excluding certain costs such as real estate taxes and common area maintenance.
The Company leases retail stores under leases with terms that are typically five or ten years. The
Company amortizes rental abatements, construction allowances and other rental concessions
classified as deferred rent, on a straight-line basis over the initial term of the lease. The
initial lease term can include one renewal under limited circumstances if the renewal is reasonably
assured, based on consideration of all of the following factors (i) a written renewal at the
Companys option or an automatic renewal; (ii) there is no minimum sales requirement that could
impair the Companys ability to renew; (iii) failure to renew would subject the Company to a
substantial penalty and (iv) there is an established history of renewals in the format or location.
F-25
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At January 2, 2010, minimum aggregate rental commitments under non-cancelable operating and capital
leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
Fiscal Year |
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
Thereafter |
|
|
Total |
|
|
Interest |
|
|
Principal |
|
In millions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Leases |
|
$ |
5.4 |
|
|
$ |
5.3 |
|
|
$ |
5.4 |
|
|
$ |
4.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
21.0 |
|
|
$ |
1.3 |
|
|
$ |
14.3 |
|
Operating Leases |
|
|
214.0 |
|
|
|
196.4 |
|
|
|
180.2 |
|
|
|
145.6 |
|
|
|
125.1 |
|
|
|
383.2 |
|
|
|
1,244.5 |
|
|
|
|
|
|
|
|
|
Certain rental commitments have renewal options extending through the fiscal year 2037. Some of
these renewals are subject to adjustments in future periods. Many of the leases call for additional
charges, some of which are based upon various escalations, and, in the case of retail leases, the
gross sales of the individual stores above base levels. Future rental commitments for leases have
not been reduced by minimum non-cancelable sublease rentals aggregating $30.2 million.
Sourcing
During the first quarter of 2009, the Company entered into an agreement with Li & Fung, whereby Li
& Fung was appointed as the Companys sourcing agent for all of the Companys brands and products
(other than jewelry). The Company received a payment of $75.0 million at closing and an additional
payment of $8.0 million in the second quarter of 2009 to offset specific, incremental, identifiable
expenses associated with the transaction. The agreement with Li & Fung provides for a refund of a
portion of the closing payment in certain limited circumstances, including a change of control of
the Company, the sale or discontinuation of any current brand, or certain termination events. The
Company is also obligated to use Li & Fung as its sourcing agent for a minimum value of inventory
purchases each year through the termination of the agreement in 2019. The licensing arrangements
with JCPenney and QVC will result in the removal of sourcing for a number of LIZ CLAIBORNE branded
products sold under these licenses from the Li & Fung sourcing arrangement. As a result, under the
Companys agreement with Li & Fung, the Company is required to refund $24.3 million of the closing
payment received from Li & Fung, payable on or before April 15, 2010, with applicable late fees if
paid after that date. Such amount was included in Accrued expenses at January 2, 2010. In addition,
the Companys agreement with Li & Fung is not exclusive; however, the Company is required to source
a specified percentage of product purchases from Li & Fung.
Acquisitions
On January 26, 2006, the Company acquired 100% of the equity of Westcoast Contempo Fashions Limited
and Mac & Jac Holdings Limited, which collectively design, market and sell the Mac & Jac, Kensie
and Kensiegirl apparel lines (Mac & Jac). The purchase price totaled 26.2 million Canadian
dollars (or $22.7 million), which included the retirement of debt at closing and fees, but excluded
contingent payments to be determined based upon a multiple of Mac & Jacs earnings in fiscal years
2006, 2008, 2009 and 2010. In May 2009, the Company paid the former owners of Mac & Jac $3.8
million based on 2008 fiscal year endings. The Company currently estimates that the aggregate of
the contingent payments will be in the range of approximately $2.0-$7.0 million, which will be
accounted for as additional purchase price when paid.
On June 8, 1999, the Company acquired 85.0% of the equity of Lucky Brand Dungarees, Inc. (Lucky
Brand), whose core business consists of the Lucky Brand Dungarees line of women and mens
denim-based sportswear. The total purchase price consisted of aggregate cash payments of $126.2
million and additional payments made from 2005 to 2009 totaling $65.0 million for 12.3% of the
remaining equity of Lucky Brand. The Company acquired 0.4% of the equity of Lucky Brand in January
of 2010 for a payment of $5.0 million. The Company recorded the present value of fixed amounts owed
of $5.0 million in Accrued expenses. The remaining 2.3% of the original shares outstanding will be
settled for an aggregate purchase price composed of the following two installments (i) a payment
made in 2008 of $15.7 million that was based on a multiple of Lucky Brands 2007 earnings, which
the Company has accounted for as additional purchase price and (ii) a 2011 payment that will be
based on a multiple of Lucky Brands 2010 earnings, net of the 2008 payment, which the Company
estimates will be in the range of approximately $0-$5.0 million.
Licensing
The Company has an exclusive license agreement with an affiliate of Donna Karan International, Inc.
to design, produce, market and sell mens and womens sportswear, jeanswear and activewear products
in the Western Hemisphere under the DKNY ® Jeans and DKNY ® Active marks and logos. Under the
agreement, the Company is obligated to pay a royalty equal to a percentage of net sales of the
DKNY ® Jeans and DKNY ® Active products. The initial term of the license agreement runs through
December 31, 2012; the Company has an option to renew for an additional 15-year period if certain
sales thresholds are met.
In addition, the Company has an exclusive license agreement with an affiliate of Donna Karan
International, Inc. to design, produce, market and sell mens sportswear in the United States,
Puerto Rico, Canada and United States military post exchanges under the DKNY ® Mens
mark and logo. Under the agreement, the Company is obligated to pay a royalty equal to a percentage
of net sales of
the DKNY ® Mens products. The initial term of the license agreement runs through
December 31, 2012; the Company has an option to renew for an additional 5-year period if certain
sales thresholds are met.
F-26
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The above licenses are subject to minimum guarantees totaling $46.2 million and running through
2012; there is no maximum limit on the license fees paid by the Company.
Other
Macys, Inc. accounted for approximately 9.3%, 10.3% and 13.9% of net sales in 2009, 2008 and 2007,
respectively. The Company does not believe that any concentration of credit risk represents a
material risk of loss with respect to its financial position as of January 2, 2010.
On November 21, 2006, the Company entered into an off-balance sheet financing arrangement with a
financial institution (commonly referred to as a synthetic lease) to refinance the purchase of
various land and real property improvements associated with warehouse and distribution facilities
in Ohio and Rhode Island totaling $32.8 million. This synthetic lease arrangement expires on May
31, 2011 and replaced the previous synthetic lease arrangement, which expired on November 22, 2006.
The lessor is a wholly-owned subsidiary of a publicly traded corporation. The lessor is a sole
member, whose ownership interest is without limitation as to profits, losses and distribution of
the lessors assets. The Companys lease represents less than 1.0% of the lessors assets. The
lease includes guarantees by the Company for a substantial portion of the financing and options to
purchase the facilities at original cost; the maximum guarantee is approximately $27.0 million. The
lessors risk included an initial capital investment in excess of 10.0% of the total value of the
lease, which is at risk during the entire term of the lease. The equipment portion of the original
synthetic lease was sold to another financial institution and leased back to the Company through a
seven-year capital lease totaling $30.6 million. The lessor does not meet the definition of a
variable interest entity and therefore consolidation by the Company is not required. In October of
2010, the Company is required to communicate its intent to (i) purchase the underlying assets; (ii)
refinance the synthetic lease; or (iii) remarket the leased property.
On October 19, 2009, the Company announced further consolidation of its warehouse operations, with
the planned closure of its Rhode Island distribution facility, which is expected to occur on or
about April 30, 2010. The Company estimates its present obligation under the terms of the synthetic
lease will be $7.0 million for the Ohio and Rhode Island distribution facilities. That amount will
be recognized in SG&A over the remaining estimated lease terms of these facilities.
On November 2, 2009, the terms of the synthetic lease were amended to make the applicable financial
covenants under the synthetic lease consistent with the terms of the Amended Agreement. The Company
has not entered into any other off-balance sheet arrangements.
At January 2, 2010, the Company had entered into short-term commitments for the purchase of raw
materials and for the production of finished goods totaling $287.2 million.
The Company is a party to several pending legal proceedings and claims. Although the outcome of any
such actions cannot be determined with certainty, management is of the opinion that the final
outcome of any of these actions should not have a material adverse effect on the Companys
financial position, results of operations, liquidity or cash flows (see Note 22 Legal
Proceedings).
F-27
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9: DEBT AND LINES OF CREDIT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
January 2, |
|
|
January 3, |
|
In thousands |
|
2010 |
|
|
2009 |
|
5.0% Notes, due July 2013 (a) |
|
$ |
501,827 |
|
|
$ |
485,582 |
|
6.0% Convertible Senior Notes, due June 2014 (b) |
|
|
71,137 |
|
|
|
|
|
Revolving credit facility |
|
|
66,507 |
|
|
|
234,400 |
|
Capital lease obligations |
|
|
18,680 |
|
|
|
22,787 |
|
Other |
|
|
|
|
|
|
870 |
|
|
|
|
|
|
|
|
Total debt |
|
|
658,151 |
|
|
|
743,639 |
|
Less: Short-term borrowings (c) |
|
|
70,868 |
|
|
|
110,219 |
|
Convertible Senior Notes (d) |
|
|
71,137 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
516,146 |
|
|
$ |
633,420 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The change in the balance of these euro-denominated notes reflected the impact
of changes in foreign currency exchange rates. |
|
(b) |
|
The Companys 6.0% Convertible Senior Notes were issued during the second quarter of
2009. The January 2, 2010 amount represented principal of $90.0 million and an unamortized
debt discount of $18.9 million. |
|
(c) |
|
At January 2, 2010, the balance consisted primarily of outstanding borrowings under
the Companys amended and restated revolving credit facility and obligations under capital
leases. Outstanding revolver borrowings were reflected as a current liability due to the
requirement to repay such obligations with substantially all cash collected by the Company, in
accordance with the Amended Agreement. Such requirement does not affect future borrowing
ability or the final maturity date under the Amended Agreement. |
|
(d) |
|
The Convertible Notes were reflected as a current liability since they were
convertible during the fourth quarter of 2009. |
5.0% Notes
On July 6, 2006, the Company completed the issuance of 350.0 million euro (or $446.9 million based
on the exchange rate in effect on such date) 5.0% Notes (the Notes) due July 8, 2013. The net
proceeds of the offering were used to refinance the Companys then outstanding 350.0 million euro
6.625% Notes due August 7, 2006, which were originally issued on August 7, 2001. The Notes bear
interest from and including July 6, 2006, payable annually in arrears on July 8 of each year
beginning on July 8, 2007. The Notes are listed on the Luxembourg Stock Exchange and have a current
credit rating of B- from Standard & Poors (S&P) and Caa2 from Moodys Investor Services, Inc.
(Moodys). A portion of the Notes is designated as a hedge of the Companys net investment in a
foreign subsidiary (see Note 11 Derivative Instruments).
6.0% Convertible Senior Notes
On June 24, 2009, the Company issued $90.0 million Convertible Notes. The Convertible Notes bear
interest at a rate of 6.0% per year and mature on June 15, 2014. The Company used the net proceeds
from this offering to repay $86.6 million of outstanding borrowings under its amended and restated
revolving credit facility.
The Convertible Notes are convertible at an initial conversion rate of 279.6421 shares of the
Companys common stock per $1,000 principal amount of Convertible Notes (representing an initial
conversion price of $3.576 per share of common stock), subject to adjustment in certain
circumstances. Upon conversion, a holder will receive cash up to the aggregate principal amount of
the Convertible Notes converted and cash, shares of common stock or a combination thereof (at the
Companys election) in respect of the conversion value above the Convertible Notes principal
amount, if any. The conversion rate is subject to a conversion rate cap of 211.2064 shares per
$1,000 principal amount. Holders may convert the Convertible Notes at their option prior to the
close of business on the business day immediately preceding March 15, 2014 only under the following
circumstances: (i) during any fiscal quarter commencing after October 3, 2009, if the last reported
sale price of the common stock for at least 20 trading days (whether or not consecutive) during a
period of 30 consecutive trading days ending on the last trading day of the preceding fiscal
quarter is greater than or equal to 120% of the applicable conversion price on each applicable
trading day; (ii) during the five business day period after any 10 consecutive trading day period
in which the trading price per $1,000 principal amount of Convertible Notes for each day of such
measurement period was less than 98% of the product of the last reported sale price of the
Companys common stock and the applicable conversion rate on each such day; or (iii) upon the
occurrence of specified corporate events. In addition, on or after March 15, 2014 until the close
of business on the third scheduled trading day immediately preceding the maturity date, holders may
convert their Convertible Notes at any time, regardless of the foregoing circumstances. As of
January 2, 2010, none of the Convertible Notes were converted.
F-28
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company separately accounts for the liability and equity components of the Convertible Notes in
a manner that reflects the Companys nonconvertible debt borrowing rate when interest is recognized
in subsequent periods. The Company allocated $20.6 million of the $90.0 million principal amount of
the Convertible Notes to the equity component and to debt discount. The debt discount will be
amortized into interest expense through June 2014 using the effective interest method. The
Companys effective interest rate on the Convertible Notes is 12.25%. The non-cash interest expense
that will be recorded will increase as the Convertible Notes approach maturity and accrete to face
value. Interest expense associated with the semi-annual interest payment and non-cash amortization
of the debt discount was $4.6 million for the year ended January 2, 2010.
Amended and Restated Revolving Credit Facility
On January 12, 2009, the Company completed an amendment to and an extension of its revolving credit
agreement, and on May 12, 2009 and November 2, 2009, the Company completed further amendments to
its revolving credit agreement. Availability under the Amended Agreement shall be the lesser of
$600.0 million or a borrowing base that is computed monthly and comprised primarily of eligible
accounts receivable and inventory. A portion of the funds available under the Amended Agreement not
in excess of $200.0 million is available for the issuance of letters of credit, whereby standby
letters of credit may not exceed $50.0 million. As a condition to the Amended Agreement, during
2009, the Company was required to and did repay amounts outstanding
under its Amended Agreement
with the receipt of tax refunds, which aggregated $99.8 million. Such repayments did not
reduce future borrowing capacity or alter the maturity date of the facility. The amended and
restated revolving credit facility is secured by a first priority lien on substantially all of the
Companys assets and includes a $300.0 million multi-currency revolving credit line and a
$300.0 million US Dollar credit line. The Amended Agreement allows two borrowing options: one
borrowing option with interest rates based on euro currency rates and a second borrowing option
with interest rates based on the alternate base rate, as defined in the Amended Agreement, with a
spread based on the aggregate availability under the Amended Agreement.
The Amended Agreement restricts the Companys ability to, among other things, incur indebtedness,
grant liens, repurchase stock, issue cash dividends, make capital expenditures beyond agreed upon
levels, make investments and acquisitions and sell assets, in each case subject to certain
designated exceptions. In addition, the Amended Agreement (i) contains a fixed charge coverage
covenant which will be in effect only when availability under the amended and restated revolving
credit facility fails to exceed $75.0 million on any date on or after the first day of the October
fiscal month and prior to the first day of the December fiscal month, $120.0 million on any date
from December 15 of a calendar year through January 30 of the following year or $90.0 million on
any other date; (ii) contains a minimum availability covenant, which requires the Company to
maintain availability of not less than $50.0 million (or, on any date on or after October 4, 2009
and prior to December 6, 2009, $45.0 million); (iii) contains a minimum LIBOR interest rate of 1.5%
and adjusts certain interest rate spreads based upon availability; (iv) requires the application of
substantially all cash collected, including any net proceeds received with respect to certain
permitted disposals and acquisitions, to reduce outstanding borrowings under the Amended Agreement;
(v) provides for the inclusion of an intangible asset value of $30.0 million in the borrowings base
until the consummation of the sale of certain assets to JCPenney pursuant to the exercise by
JCPenney of its purchase option under the JCPenney license agreement; (vi) permits the incurrence
of liens and sale of assets in connection with the grant and exercise of the JCPenney purchase
option under the JCPenney license agreement; and (vii) permits the acquisition of certain joint
venture interests and the indebtedness and guarantees by certain parties arising in connection with
such acquisition, subject to certain capped amounts and meeting certain borrowing availability
tests. The requirement to use substantially all cash collections to repay outstanding borrowings
under the Amended Agreement does not affect future borrowing ability or the final maturity date of
the Amended Agreement.
The funds available under the Amended Agreement may be used to refinance certain existing debt,
provide for working capital and for general corporate purposes, and back both trade and standby
letters of credit in addition to the Companys synthetic lease. The Amended Agreement contains
customary events of default clauses and cross-default provisions with respect to the Companys
other outstanding indebtedness, including the Notes and the Convertible Notes. The Amended
Agreement will expire on May 31, 2011, at which time all outstanding amounts thereunder will be due
and payable.
The Company currently believes that the financial institutions under the Amended Agreement are able
to fulfill their commitments, although such ability to fulfill commitments will depend on the
financial condition of the Companys lenders at the time of borrowing.
As of January 2, 2010, the Company held a B3 corporate family debt rating and a Caa2 senior
unsecured debt rating from Moodys and a B corporate family debt rating and a B- senior unsecured
debt rating from S&P.
F-29
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of January 2, 2010, availability under the Companys amended and restated revolving credit
facility was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of |
|
|
|
|
|
|
Total |
|
|
Borrowing |
|
|
Outstanding |
|
|
Credit |
|
|
Available |
|
In thousands |
|
Facility(a) |
|
|
Base(a) |
|
|
Borrowings |
|
|
Issued |
|
|
Capacity |
|
Revolving credit facility (a) |
|
$ |
600,000 |
|
|
$ |
326,189 |
|
|
$ |
66,507 |
|
|
$ |
37,785 |
|
|
$ |
221,897 |
|
|
|
|
(a) |
|
Availability under the Amended Agreement is the lesser of $600.0 million or a
borrowing base comprised primarily of eligible accounts receivable
and inventory. |
Capital Lease
On November 21, 2006, the Company entered into a seven year capital lease with a financial
institution totaling $30.6 million. The purpose of the lease was to finance the equipment
associated with its distribution facilities in Ohio and Rhode Island, which had been previously
financed through the Companys 2001 synthetic lease, which matured in 2006 (see Note 8
Commitments and Contingencies).
NOTE 10: FAIR VALUE MEASUREMENTS
As discussed in Note 1 Basis of Presentation and Significant Accounting Policies, the Company
utilizes a three level hierarchy that defines the assumptions used to measure certain assets and
liabilities at fair value.
The following table presents the financial assets and liabilities the Company measures at fair
value on a recurring basis, based on such fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
Level 2 |
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
Financial Assets: |
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
586 |
|
|
$ |
2,424 |
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
Derivatives |
|
$ |
(3,781 |
) |
|
$ |
(8,835 |
) |
The following table presents the non-financial assets the Company measured at fair value on a
non-recurring basis, based on the fair value hierarchy as of January 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Carrying |
|
|
Fair Value Measured and Recorded at |
|
|
Total Losses |
|
|
|
Value as of |
|
|
Reporting Date Using: |
|
|
Year Ended |
|
In thousands |
|
January 2, 2010 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
January 2, 2010 |
|
Property and equipment |
|
$ |
3,690 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,690 |
|
|
$ |
36,124 |
|
Intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,222 |
|
Assets held for sale |
|
|
15,070 |
|
|
|
|
|
|
|
|
|
|
|
15,070 |
|
|
|
2,472 |
|
As a result of the decision to exit certain operational retail formats, an impairment analysis was
performed on the associated property and equipment. The Company determined that the carrying value
of a portion of such assets exceeded their fair value. The impairments resulted from a decline in
respective future anticipated cash flows of certain retail locations of: (i) KATE SPADE; (ii) LUCKY
BRAND; (iii) Partnered Brands; (v) MEXX Europe and Canada; and (vi) JUICY COUTURE, as well as
certain corporate and MEXX software and the Companys Santa Fe Springs, California and Lincoln,
Rhode Island distribution centers.
During 2009, the Company determined that the carrying value of the assets held for sale related to
its closed Mt. Pocono distribution center exceeded the estimated fair value and recorded aggregate
impairment charges of $2.5 million.
F-30
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair values and carrying values of the Companys debt instruments are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
January 2, 2010 |
|
In thousands |
|
Fair Value |
|
|
Carrying Value |
|
5.0% Notes, due July 2013 (a) |
|
$ |
392,615 |
|
|
$ |
501,827 |
|
6.0% Convertible Senior Notes, due June 2014 (a) |
|
|
160,738 |
|
|
|
71,137 |
|
Revolving credit facility (b) |
|
|
66,507 |
|
|
|
66,507 |
|
|
|
|
(a) |
|
Carrying values include unamortized debt discount. |
|
(b) |
|
Borrowings under the revolving credit facility bear interest based on
market rates; accordingly, its fair value approximates its carrying value. |
The fair values of the Companys debt instruments were estimated using market observable
inputs, including quoted prices in active markets, market indices and interest rate measurements.
Within the hierarchy of fair value measurements, these are Level 2 fair values. The fair values of
cash and cash equivalents, receivables and accounts payable approximate their carrying values due
to the short-term nature of these instruments.
NOTE 11: DERIVATIVE INSTRUMENTS
The Companys operations are exposed to risks associated with fluctuations in foreign currency
exchange rates. In order to reduce exposures related to changes in foreign currency exchange rates,
the Company uses foreign currency collars and forward contracts for the purpose of hedging the
specific exposure to variability in forecasted cash flows associated primarily with inventory
purchases mainly by the Companys European and Canadian entities. As of January 2, 2010, the
Company had Canadian currency collars maturing through July 2010 to sell 17.0 million Canadian
dollars for $15.7 million. The Company also had forward contracts maturing through December 2010 to
sell 22.5 million Canadian dollars for $20.4 million and to sell 54.8 million euro for $77.0
million.
The following table summarizes the fair value and presentation in the Consolidated Financial
Statements for derivatives designated as hedging instruments and derivatives not designated as
hedging instruments as of January 2, 2010 and January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Contracts Designated as Hedging Instruments |
|
In thousands |
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
|
|
|
|
Balance Sheet |
|
Notional |
|
|
|
|
|
|
Balance Sheet |
|
Notional |
|
|
|
|
Period |
|
|
|
|
|
Location |
|
Amount |
|
|
Fair Value |
|
|
Location |
|
Amount |
|
|
Fair Value |
|
January 2, 2010 |
|
|
|
|
|
Other current assets |
|
$ |
26,408 |
|
|
$ |
586 |
|
|
Accrued expenses |
|
$ |
74,634 |
|
|
$ |
3,091 |
|
January 3, 2009 |
|
|
|
|
|
Other current assets |
|
|
34,702 |
|
|
|
2,313 |
|
|
Accrued expenses |
|
|
134,109 |
|
|
|
8,789 |
|
|
|
|
|
|
|
|
Foreign Currency Contracts Not Designated as Hedging Instruments |
|
In thousands |
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
|
|
|
|
Balance Sheet |
|
Notional |
|
|
|
|
|
|
Balance Sheet |
|
Notional |
|
|
|
|
Period |
|
|
|
|
|
Location |
|
Amount |
|
|
Fair Value |
|
|
Location |
|
Amount |
|
|
Fair Value |
|
January 2, 2010 |
|
|
|
|
|
Other current assets |
|
$ |
|
|
|
$ |
|
|
|
Accrued expenses |
|
$ |
12,015 |
|
|
$ |
690 |
|
January 3, 2009 |
|
|
|
|
|
Other current assets |
|
|
12,758 |
|
|
|
111 |
|
|
Accrued expenses |
|
|
3,701 |
|
|
|
46 |
|
F-31
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the effect of foreign currency exchange contracts on the
Consolidated Financial Statements for the years ended January 2, 2010, January 3, 2009 and December
29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or |
|
|
|
|
|
|
|
|
|
Amount of Gain or |
|
|
(Loss) Reclassified |
|
|
Amount of Gain or |
|
|
Amount of Gain or |
|
|
|
(Loss) Recognized in |
|
|
from Accumulated |
|
|
(Loss) Reclassified |
|
|
(Loss) Recognized in |
|
|
|
Accumulated OCI |
|
|
OCI into Operations |
|
|
from Accumulated |
|
|
Operations on |
|
|
|
on Derivative |
|
|
(Effective and |
|
|
OCI into Operations |
|
|
Derivative |
|
In thousands |
|
(Effective Portion) |
|
|
Ineffective Portion) |
|
|
(Effective Portion) |
|
|
(Ineffective Portion) |
|
Fiscal year ended
January 2, 2010 |
|
$ |
(7,113 |
) |
|
Cost of goods sold |
|
$ |
(4,181 |
) |
|
$ |
(1,428 |
) |
Fiscal year ended
January 3, 2009 |
|
|
(7,588 |
) |
|
Cost of goods sold |
|
|
(11,646 |
) |
|
|
1,706 |
|
Fiscal year ended
December 29, 2007 |
|
|
(11,694 |
) |
|
Cost of goods sold |
|
|
(4,409 |
) |
|
|
(1,658 |
) |
Approximately $7.7 million of unrealized losses in Accumulated other comprehensive loss relating to
cash flow hedges will be reclassified into earnings in the next 12 months as the inventory is sold.
The Company hedges its net investment position in euro functional subsidiaries by designating a
portion of the 350.0 million euro-denominated bonds as the hedging instrument in a net investment
hedge. To the extent the hedge is effective, related foreign currency translation gains and losses
are recorded within Other comprehensive loss. Translation gains and losses related to the
ineffective portion of the hedge are recognized in current operations.
The related translation (losses) gains recorded within Other comprehensive loss were $(9.4)
million, $26.9 million and $(53.0) million for the years ended January 2, 2010, January 3, 2009 and
December 29, 2007, respectively. During the first quarter of 2009, the Company dedesignated 143.0
million of the euro-denominated bonds as a hedge of its net investment in euro-denominated
functional currency subsidiaries due to a decrease in the carrying value of the hedged item below
350.0 million euro. The associated foreign currency translation loss of $6.5 million is reflected
within Other (expense) income, net on the accompanying Consolidated Statement of Operations during
the year ended January 2, 2010.
NOTE 12: STREAMLINING INITIATIVES
2009 Actions
In the first quarter of 2009, the Company entered into a long-term, sourcing agency agreement with
Li & Fung. As a result, the Companys international buying offices were integrated into Li & Fung
or reduced to support functions. The Companys streamlining initiatives related to this action
include lease terminations, property and equipment disposals and employee terminations and
relocation and were completed during 2009. Expenses associated with this action are partially
offset by a payment of $8.0 million received from Li & Fung during the second quarter of 2009.
During the first quarter of 2009, the Company completed the closure of its Mt. Pocono, Pennsylvania
distribution center, including staff eliminations and initiated actions to sell the facility.
Also, during the first quarter of 2009, the Company committed to a plan to close or repurpose its
Lucky Brand Kids stores, although the Company will continue to offer associated merchandise through
other channels. The action included lease terminations and staff reductions and was completed in
the fourth quarter of 2009.
In August 2009, the Company initiated additional streamlining initiatives that will continue to
impact all of its reportable segments and include continued rationalization of distribution centers
and office space, store closures principally within its International-Based Direct Brands segment,
staff reductions, including consolidation of certain support and production functions and
outsourcing certain corporate functions. These actions are expected to be completed in by the end
of the second quarter of 2010.
In connection with the license agreements with JCPenney and QVC (see Note 17 Additional Financial
Information), the Company expects to further consolidate office space and reduce staff in certain
support functions. As a result, the Company may incur further
charges related to the reduction of leased space, impairments of property and equipment and other
assets, severance and other restructuring costs. These actions are expected to be completed by the
end of the second quarter of 2010.
F-32
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company continued to consolidate its warehouse operations, with the closure of its leased Santa
Fe Springs, California distribution facility in January of 2010 and the planned closure of its
Rhode Island distribution facility, which is expected to occur on or about April 30, 2010.
2008 Actions
In the second quarter of 2008, the Company entered into an exclusive long-term global licensing
agreement for the manufacture, distribution and marketing of the Liz Claiborne fragrance brands. As
a result, the Company closed a distribution center dedicated to its fragrance brands and incurred
related expenses for staff reductions, office space consolidation including asset write-offs and
lease terminations. In the third quarter of 2008, the Company initiated a restructuring action
related to its MEXX Europe operations, which included a change in the senior management and design
teams, as well as cost reduction actions.
2007 Actions
During 2007, the Company began various streamlining initiatives, which resulted in: (i) realignment
of its organization to a brand-centric structure; (ii) discontinuation or licensing of fourteen of
the Companys brands; and (iii) implementation of a more competitive cost structure, including cost
savings through staff reductions, closing and consolidation of distribution facilities and office
space, discretionary expense cuts, process re-engineering and supply chain cost rationalization.
For the years ended January 2, 2010, January 3, 2009 and December 29, 2007, the Company recorded
pretax charges totaling $166.7 million, $111.8 million and $110.0 million, respectively, related to
these initiatives.
The Company expects to pay approximately $57.0 million of accrued streamlining costs during 2010. A
summary rollforward and components of the Companys streamlining initiatives were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
|
|
|
|
Payroll and |
|
|
Termination |
|
|
Asset |
|
|
|
|
|
|
|
In thousands |
|
Related Costs |
|
|
Costs |
|
|
Write-Downs |
|
|
Other Costs |
|
|
Total |
|
Balance at December 31, 2006 |
|
$ |
14,422 |
|
|
$ |
5,461 |
|
|
$ |
|
|
|
$ |
26 |
|
|
$ |
19,909 |
|
2007 provision |
|
|
49,764 |
|
|
|
20,719 |
|
|
|
33,366 |
|
|
|
6,103 |
|
|
|
109,952 |
|
2007 asset write-downs |
|
|
|
|
|
|
|
|
|
|
(33,366 |
) |
|
|
|
|
|
|
(33,366 |
) |
Translation difference |
|
|
604 |
|
|
|
171 |
|
|
|
|
|
|
|
15 |
|
|
|
790 |
|
2007 spending |
|
|
(46,223 |
) |
|
|
(14,528 |
) |
|
|
|
|
|
|
(5,918 |
) |
|
|
(66,669 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007 |
|
|
18,567 |
|
|
|
11,823 |
|
|
|
|
|
|
|
226 |
|
|
|
30,616 |
|
2008 provision |
|
|
45,570 |
|
|
|
33,479 |
|
|
|
21,466 |
|
|
|
11,296 |
|
|
|
111,811 |
|
2008 asset write-downs |
|
|
|
|
|
|
|
|
|
|
(21,466 |
) |
|
|
|
|
|
|
(21,466 |
) |
Translation difference |
|
|
634 |
|
|
|
(1,001 |
) |
|
|
|
|
|
|
(225 |
) |
|
|
(592 |
) |
2008 spending |
|
|
(53,319 |
) |
|
|
(28,942 |
) |
|
|
|
|
|
|
(10,681 |
) |
|
|
(92,942 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2009 |
|
|
11,452 |
|
|
|
15,359 |
|
|
|
|
|
|
|
616 |
|
|
|
27,427 |
|
2009 provision, net(a)(b) |
|
|
75,718 |
|
|
|
33,558 |
|
|
|
44,062 |
|
|
|
13,343 |
|
|
|
166,681 |
|
2009 asset write-downs (b) |
|
|
|
|
|
|
|
|
|
|
(44,062 |
) |
|
|
|
|
|
|
(44,062 |
) |
Translation difference |
|
|
(518 |
) |
|
|
52 |
|
|
|
|
|
|
|
(1 |
) |
|
|
(467 |
) |
2009 spending |
|
|
(53,956 |
) |
|
|
(25,207 |
) |
|
|
|
|
|
|
(6,754 |
) |
|
|
(85,917 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 2, 2010 |
|
$ |
32,696 |
|
|
$ |
23,762 |
|
|
$ |
|
|
|
$ |
7,204 |
|
|
$ |
63,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Net of the receipt of $8.0 million from Li & Fung. |
|
(b) |
|
Assets write-downs included a non-cash impairment charge of $4.5 million
related to LIZ CLAIBORNE merchandising rights (see Note 1 Basis
of Presentation and Significant Accounting Policies). |
F-33
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Expenses associated with the Companys streamlining actions were primarily recorded in SG&A in
the Consolidated Statements of Operations and impacted reportable segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
December 29, 2007 |
|
|
|
|
|
Domestic-Based Direct Brands |
|
$ |
50,167 |
|
|
$ |
42 |
|
|
$ |
1,897 |
|
International-Based Direct Brands |
|
|
43,249 |
|
|
|
32,540 |
|
|
|
35,296 |
|
Partnered Brands |
|
|
73,265 |
|
|
|
79,229 |
|
|
|
72,759 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
166,681 |
|
|
$ |
111,811 |
|
|
$ |
109,952 |
|
|
|
|
|
|
|
|
|
|
|
NOTE 13: SHARE-BASED COMPENSATION
The Company issues stock options, restricted shares, restricted share units and shares with
performance features to employees under share-based compensation plans, which are described herein.
The Company recognized share-based compensation expense of $8.7 million, $8.3 million and
$19.1 million, excluding amounts related to discontinued operations, for the fiscal years ended
January 2, 2010, January 3, 2009 and December 29, 2007, respectively. Share-based compensation
expense related to discontinued operations was not significant for the periods presented.
Compensation expense for stock options and restricted stock awards is measured at fair value on the
date of grant based on the number of shares granted. The fair value of stock options is estimated
based on the binominal lattice pricing model; the fair value of restricted shares is based on the
quoted market price on the date of the grant. Stock option expense is recognized using the
straight-line attribution basis over the entire vesting period of the award. Restricted share,
restricted share unit and performance share expense is recognized on a straight-line basis over the
requisite service period for each separately vesting portion of the award as if the award was, in
substance, multiple awards. Expense is recognized net of estimated forfeitures.
Stock Plans
In March 1992, March 2000, March 2002 and March 2005, the Company adopted the 1992 Plan, the
2000 Plan, the 2002 Plan and the 2005 Plan respectively, under which options (both
nonqualified options and incentive stock options) to acquire shares of common stock may be granted
to officers, other key employees, consultants and outside directors, in each case as selected by
the Companys Compensation Committee (the Committee). Payment by option holders upon exercise of
an option may be made in cash or, with the consent of the Committee, by delivering previously
acquired shares of Company common stock or any other method approved by the Committee. If
previously acquired shares are tendered as payment, the shares are subject to a six-month holding
period, as well as specific authorization by the Committee. To date, this type of exercise has not
been approved or transacted. The Committee has the authority under all of the plans to allow for a
cashless exercise option, commonly referred to as a broker-assisted exercise. Under this method
of exercise, participating employees must make a valid exercise of their stock options through a
designated broker. Based on the exercise and information provided by the Company, the broker sells
the shares on the open market. The employees receive cash upon settlement, some of which is used to
pay the purchase price. Neither the stock-for-stock nor broker-assisted cashless exercise option
are generally available to executive officers or directors of the Company. Although there are none
currently outstanding, stock appreciation rights may be granted in connection with all or any part
of any option granted under the plans and may also be granted without a grant of a stock option.
Vesting schedules will be accelerated upon a change of control of the Company. Options and stock
appreciation rights generally may not be transferred during the lifetime of a holder.
Awards under the 2000, 2002 and 2005 Plans may also be made in the form of dividend equivalent
rights, restricted stock, unrestricted stock performance shares and restricted stock units.
Exercise prices for awards under the 2000, 2002 and 2005 Plans are determined by the Committee; to
date, all stock options have been granted at an exercise price not less than the closing market
value of the underlying shares on the date of grant.
The 2000 Plan provides for the issuance of up to 10,000,000 shares of common stock with respect to
options, stock appreciation rights and other awards. No awards may be granted under the 2000 Plan
after March 9, 2010. The Company ceased issuing grants under the 1992 Plan in 2000; awards made
there under prior to its termination remain in effect in accordance with their terms. The 2002 Plan
provides for the issuance of up to 9,000,000 shares of common stock with respect to options, stock
appreciation rights and other awards. The 2002 plan expires in 2012. The 2005 Plan provides for the
issuance of up to 5,000,000 shares of common stock with respect to options, stock appreciation
rights and other awards. The 2005 plan expires in 2015, but no performance-based awards may
be granted after the fifth anniversary of the 2005 Plans adoption. As of January 2, 2010,
5,167,019 shares were available for future grant under the 2000, 2002 and 2005 Plans.
F-34
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company delivers treasury shares upon the exercise of stock options. The difference between the
cost of the treasury shares and the exercise price of the options has been reflected on a first-in,
first-out basis.
Stock Options
Stock options are issued at the current market price and have a three-year vesting period and a
contractual term of 7-10 years. As of January 2, 2010, the Company has not changed the terms of any
outstanding awards.
The Company utilizes the Binomial lattice pricing model to estimate the fair value of options
granted. The Company believes this model provides the best estimate of fair value due to its
ability to incorporate inputs that change over time, such as volatility and interest rates and to
allow for actual exercise behavior of option holders.
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
Valuation Assumptions: |
|
January 2, 2010 |
|
January 3, 2009 |
|
December 29, 2007 |
Weighted-average fair value of options granted |
|
$2.07 |
|
$3.50 |
|
$10.06 |
Expected volatility |
|
48.7% to 74.8% |
|
28.1% to 60.7% |
|
23.1% to 39.5% |
Weighted-average volatility |
|
66.1% |
|
36.4% |
|
25.6% |
Expected term (in years) |
|
5.2 |
|
5.0 |
|
4.5 |
Dividend yield |
|
0.00% |
|
0.77% |
|
0.63% |
Risk-free rate |
|
0.5% to 5.0% |
|
0.8% to 5.1% |
|
4.4% to 5.2% |
Expected annual forfeiture |
|
11.7% |
|
12.7% |
|
10.0% |
Expected volatilities are based on a term structure of implied volatility, which assumes changes in
volatility over the life of an option. The Company utilizes historical optionee behavioral data to
estimate the option exercise and termination rates that are used in the valuation model. The
expected term represents an estimate of the period of time options are expected to remain
outstanding. The expected term provided in the above table represents an option weighted-average
expected term based on the estimated behavior of distinct groups of employees who received options
in 2009, 2008 and 2007. The range of risk-free rates is based on a forward curve of interest rates
at the time of option grant.
A summary of award activity under the Companys stock option plans as of January 2, 2010 and
changes therein during the fiscal year then ended are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted Average |
|
|
Remaining |
|
|
Intrinsic Value |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
(In thousands) |
|
Outstanding at January 3, 2009 |
|
|
5,359,319 |
|
|
$ |
27.15 |
|
|
|
4.5 |
|
|
$ |
819 |
|
Granted |
|
|
2,135,500 |
|
|
|
3.54 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled/expired |
|
|
(2,576,189 |
) |
|
|
22.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 2, 2010 |
|
|
4,918,630 |
|
|
$ |
19.27 |
|
|
|
4.9 |
|
|
$ |
4,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
January 2, 2010 |
|
|
4,412,522 |
|
|
$ |
20.79 |
|
|
|
5.9 |
|
|
$ |
3,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 2, 2010 |
|
|
2,137,905 |
|
|
$ |
32.12 |
|
|
|
3.5 |
|
|
$ |
4 |
|
The total intrinsic value of options exercised was insignificant for the fiscal year ended January
3, 2009. The total intrinsic value of options exercised for the fiscal year ended December 29, 2007
was $22.6 million.
As of January 2, 2010, there were approximately 2.8 million nonvested stock options with a weighted
average exercise price of $9.40 and there was $4.2 million of total unrecognized compensation cost
related to nonvested stock options granted under the Companys stock option plans. That expense is
expected to be recognized over a weighted average period of 1.7 years. The total fair value of
shares vested for the years ended January 2, 2010, January 3, 2009 and December 29, 2007 was
$4.3 million, $3.9 million and $19.0 million, respectively.
F-35
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Stock
The Company grants restricted shares and restricted share units to certain domestic and
international employees. These shares are subject to transfer restrictions and risk of forfeiture
until earned by continued employment. As of January 2, 2010, the Company has not changed the terms
of any outstanding awards. These shares generally vest 50% on the second anniversary date from the
date of grant and 50% on the third anniversary date from the date of grant, with the exception of
83,500 outstanding awards granted to key executives in January 2004 that are scheduled to vest in
January 2010.
The Company grants performance shares to certain of its employees, including the Companys
executive officers. Performance shares are earned based on the achievement of certain profit return
on capital targets aligned with the Companys strategy. In 2006, the Committee granted 166,500
performance shares to a group of key executives. As of January 2, 2010, 150,350 of such shares have
vested and none remain outstanding. In 2007, the Committee granted performance shares which were
evaluated based on 2009 performance with the number of shares to be earned ranging from 0 to 150%
of the target amount, or 190,000 shares. Based on 2009 performance, these shares were deemed
unearned and cancelled. In 2008, the Committee granted performance shares which are evaluated based
on the 2008 and 2010 performance period. The number of shares to be earned upon vesting in 2011 can
range from 0 to 200% of the target amount, or 609,000 shares. The shares which were contingently
issuable based on 2008 performance were deemed not earned and cancelled. As of January 2, 2010, the
Company does not expect a significant number of the remaining performance shares granted in 2008 to
vest, which is reflected within the Companys estimated forfeitures.
Each of the Companys non-employee Directors receives an annual grant of shares of common stock
with a value of $100,000 as part of an annual retainer for serving on the Board of Directors, with
the exception of the Chairman of the Board who receives an annual grant of shares of common stock
with a value of $175,000. Retainer shares are non-transferable until the first anniversary of the
grant, with 25% becoming transferable on each of the first and second anniversary of the grant and
50% becoming transferable on the third anniversary, subject to certain exceptions.
A summary of award activity under the Companys restricted stock plans as of January 2, 2010 and
changes therein during the fiscal year then ended are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value |
|
Nonvested stock at January 3, 2009 (a)(b) |
|
|
2,163,108 |
|
|
$ |
21.38 |
|
Granted |
|
|
117,500 |
|
|
|
3.26 |
|
Vested |
|
|
(339,650 |
) |
|
|
30.10 |
|
Cancelled (a)(b) |
|
|
(808,102 |
) |
|
|
21.81 |
|
|
|
|
|
|
|
|
Nonvested stock at January 2, 2010 (b) |
|
|
1,132,856 |
|
|
$ |
16.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest as of January 2, 2010 |
|
|
769,701 |
|
|
$ |
17.46 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In the third quarter of 2007, performance shares were granted to a group of key
executives. These shares were subject to certain service and performance conditions to be
measured as of the fiscal 2009 year-end. Based on 2009 performance, the shares were deemed
unearned and cancelled. |
|
(b) |
|
In the second and third quarters of 2008, performance shares were granted to a
group of key executives. These shares are subject to certain service and performance
conditions, a portion of which were measured as of fiscal 2008 year-end and the remainder will
be measured at fiscal 2010 year-end. The shares which were contingently issuable based on 2008
performance were deemed not earned and cancelled. The ultimate amount of shares measured at
fiscal 2010 year-end earned will be determined by the extent of achievement of the performance
criteria set forth in the performance share agreements and will range from 0 200% of target. |
The weighted average grant date fair value of restricted shares granted in the years ended
January 2, 2010, January 3, 2009 and December 29, 2007 was $3.26, $13.30 and $40.36, respectively.
As of January 2, 2010, there was $2.9 million of total unrecognized compensation cost related to
nonvested stock awards granted under the restricted stock plans. The expense is expected to be
recognized over a weighted average period of 1.7 years. The total fair value of shares vested
during the years ended January 2, 2010, January 3, 2009 and December 29, 2007 was $10.2 million,
$12.5 million and $20.2 million, respectively.
F-36
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14: PROFIT-SHARING RETIREMENT, SAVINGS AND DEFERRED COMPENSATION PLANS
The Company maintains qualified defined contribution plans for its eligible employees. These plans
allow deferred arrangements under section 401(k) of the Internal Revenue Code and may provide for
employer-matching contributions. One such plan contains provisions for a discretionary profit
sharing component, although such a contribution was not made for 2009, 2008 or 2007.
The Companys aggregate 401(k)/Profit Sharing Plan contribution expense, which is included in SG&A
in the accompanying Consolidated Statements of Operations, was not significant in 2009 and amounted
to $5.0 million and $4.4 million in 2008 and 2007, respectively. The Company announced the
suspension of the 401(k) match in May 2009.
The Company has a non-qualified supplemental retirement plan for certain employees whose benefits
under the 401(k)/Profit Sharing Plan are expected to be constrained by the operation of certain
Internal Revenue Code limitations. The supplemental plan provides a benefit equal to the difference
between the contribution that would be made for an employee under the tax-qualified plan absent
such limitations and the actual contribution under that plan. The supplemental plan also allows
certain employees to defer up to 50% of their base salary and up to 100% of their annual bonus. The
Company established an irrevocable rabbi trust to which the Company makes periodic contributions
to provide a source of funds to assist in meeting its obligations under the supplemental plan. The
principal of the trust and earnings thereon, are to be used exclusively for the participants under
the plan, subject to the claims of the Companys general creditors.
NOTE 15: STOCKHOLDER RIGHTS PLAN
In December 1998, the Company adopted a Stockholder Rights Plan to replace the then expiring plan
originally adopted in December 1988. Under the plan, one preferred stock purchase right was
attached to each share of common stock outstanding. If any person or group (referred to as an
Acquiring Person) became the beneficial owner of 15.0% or more of the Companys common stock
(20.0% or more in the case of certain acquisitions by institutional investors), each right, other
than rights held by the Acquiring Person, would become exercisable for common stock having a market
value of twice the exercise price of the right. If after anyone became an Acquiring Person or if
the Company or 50.0% or more of its assets were acquired in a merger, sale or other business
combination, each right (other than voided rights) would become exercisable for common stock of the
acquirer having a market value of twice the exercise price of the right. On December 21, 2009, the
Stockholder Rights Plan expired.
F-37
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 16: EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted (loss) earnings per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended |
|
In thousands, except per share data |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
|
December 29, 2007 |
|
Loss from continuing operations |
|
$ |
(294,060 |
) |
|
$ |
(813,315 |
) |
|
$ |
(365,887 |
) |
Net (loss) income attributable to the noncontrolling
interest |
|
|
(681 |
) |
|
|
252 |
|
|
|
516 |
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Liz
Claiborne, Inc. |
|
|
(293,379 |
) |
|
|
(813,567 |
) |
|
|
(366,403 |
) |
Loss from discontinued operations, net of income taxes |
|
|
(12,350 |
) |
|
|
(138,244 |
) |
|
|
(6,395 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Liz Claiborne, Inc. |
|
$ |
(305,729 |
) |
|
$ |
(951,811 |
) |
|
$ |
(372,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding (a) |
|
|
93,880 |
|
|
|
93,606 |
|
|
|
99,800 |
|
Stock options and nonvested shares (a)(b)(c) |
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding (a) |
|
|
93,880 |
|
|
|
93,606 |
|
|
|
99,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to Liz
Claiborne, Inc. |
|
$ |
(3.13 |
) |
|
$ |
(8.69 |
) |
|
$ |
(3.68 |
) |
Loss from discontinued operations |
|
|
(0.13 |
) |
|
|
(1.48 |
) |
|
|
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Liz Claiborne, Inc. |
|
$ |
(3.26 |
) |
|
$ |
(10.17 |
) |
|
$ |
(3.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Because the Company incurred a loss from continuing operations for all years
presented, outstanding stock options and nonvested shares are antidilutive. Accordingly, for
the years ended January 2, 2010, January 3, 2009 and December 29, 2007, approximately 4.9
million, 5.4 million and 4.6 million outstanding stock options, respectively, and
approximately 1.0 million, 1.5 million and 1.3 million outstanding nonvested shares,
respectively, were excluded from the computation of diluted loss per share. |
|
(b) |
|
Excludes approximately 0.2 million, 0.7 million and 0.2 million nonvested shares
for the years ended January 2, 2010, January 3, 2009 and December 29, 2007, respectively, for
which the performance criteria have not yet been achieved. |
|
(c) |
|
Because the Company incurred a loss from continuing operations for the year ended
January 2, 2010, approximately 2.1 million potentially dilutive shares issuable upon
conversion of the Convertible Notes were considered antidilutive for such periods, and were
excluded from the computation of diluted loss per share. |
NOTE 17: ADDITIONAL FINANCIAL INFORMATION
Licensing-Related Transactions
In October 2009, the Company entered into a multi-year license agreement with JCPenney, which
granted JCPenney an exclusive right and license (subject to pre-existing licenses and certain
limited exceptions) to use the LIZ CLAIBORNE, LIZ & CO., CLAIBORNE and CONCEPTS BY CLAIBORNE
trademarks with respect to covered product categories and included the worldwide manufacturing of
the licensed products and the sale, marketing, merchandising, advertising and promotion of the
licensed products in the US and Puerto Rico. Under the agreement, JCPenney will only use designs provided or approved by the Company. The agreement has a term that
may remain in effect up to July 31, 2020. Sales by JCPenney under the agreement are
anticipated to commence in August 2010. At the end of year five, JCPenney will have the option to
acquire the trademarks and other Liz Claiborne brands for use in the US and Puerto Rico. JCPenney
will also have the option to take ownership of the trademarks in the same territory at the end of
year 10. The license agreement provides for the payment to the Company of royalties based on net
sales of licensed products by JCPenney and a portion of the related gross profit when the gross
profit percentage exceeds a specified rate, subject to a minimum annual payment.
The Company also entered into a multi-year license agreement with QVC, granting rights (subject to
pre-existing licenses) to certain of the Companys trademarks and other intellectual property
rights. QVC has the rights to use the LIZ CLAIBORNE NEW YORK brand with Isaac Mizrahi as creative
director on any apparel, accessories, or home categories in its US and international markets. QVC
will merchandise and source the product and the Company will provide brand management oversight.
The agreement provides for the payment to the Company of a royalty based on net sales.
F-38
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On June 10, 2008, the Company entered into an exclusive long-term global licensing agreement with
Elizabeth Arden, Inc. (Elizabeth Arden) for the manufacture, distribution and marketing of the
Liz Claiborne fragrance brands. The Companys fragrance brands include JUICY COUTURE, CURVE BY LIZ
CLAIBORNE, LUCKY BRAND and the LIZ, REALITIES, BORA BORA and MAMBO fragrances. The Company also
assigned all of its rights and obligations under its USHER fragrance license to Elizabeth Arden as
of the effective date.
Other Expense, Net
Other expense, net primarily consisted of (i) the impact of the partial dedesignation of the hedge
of the Companys investment in euro functional currency subsidiaries, which resulted in the
recognition of a foreign currency translation loss of $6.5 million on the Companys
euro-denominated notes within earnings in 2009; and (ii) foreign currency transaction gains
(losses) of $2.0 million, $(5.4) million and $(3.7) million for the years ended January 2, 2010,
January 3, 2009 and December 29, 2007, respectively.
Consolidated Statements of Cash Flows Supplementary Disclosures
During the years ended January 2, 2010 and January 3, 2009, the Company received net income tax
refunds of $99.8 million and $19.2 million, respectively and made income tax payments of $63.7
million for the year ended December 29, 2007. During the years ended January 2, 2010, January 3,
2009 and December 29, 2007, the Company made interest payments of $42.7 million, $56.8 million and
$49.6 million, respectively. As of January 2, 2010, January 3, 2009 and December 29, 2007, the
Company accrued capital expenditures totaling $3.3 million, $11.2 million and $14.0 million,
respectively.
During the year ended January 2, 2010, the Company received a payment of $75.0 million from Li &
Fung related to a sourcing agreement, which is included within Increase (decrease) in accrued
expenses and other non-current liabilities on the accompanying Consolidated Statement of Cash
Flows.
During 2009, the Company made business acquisition payments of $8.8 million, which included (i)
$5.0 million related to the Lucky Brand acquisition; and (ii) $3.8 million related to earn-out
provisions of the Mac & Jac acquisition. During 2008, the Company made business acquisition
payments of $100.4 million, which included (i) $95.4 million related to earn-out provisions of the
Juicy Couture acquisition; and (ii) $5.0 million related to the Lucky Brand acquisition. During
2007, the Company made business acquisition payments of
$34.3 million, which consisted primarily of
(i) $19.9 million related to earn-out provisions of the Juicy Couture acquisition;
(ii) $10.0 million related to the Lucky Brand acquisition; and (iii) $3.4 million related to the
acquisition of Kate Spade.
NOTE 18: SEGMENT REPORTING
The Companys segment reporting structure reflects a brand-focused approach, designed to optimize
the operational coordination and resource allocation of the Companys businesses across multiple
functional areas including specialty retail, retail outlets, wholesale apparel, wholesale
non-apparel, e-commerce and licensing. The three reportable segments described below represent the
Companys brand-based activities for which separate financial information is available and which is
utilized on a regular basis by its CODM to evaluate performance and allocate resources. In
identifying its reportable segments, the Company considers economic characteristics, as well as
products, customers, sales growth potential and long-term profitability. The Company aggregates its
five operating segments to form reportable segments, where applicable. As such, the Company reports
its operations in three reportable segments as follows:
|
|
|
Domestic-Based Direct Brands segment consists of the specialty
retail, outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry,
and handbags), e-commerce and licensing operations of the Companys three domestic,
retail-based operating segments: JUICY COUTURE, KATE SPADE and LUCKY BRAND. |
|
|
|
International-Based Direct Brands segment consists of the specialty retail,
outlet, concession, wholesale apparel, wholesale non-apparel (including accessories,
jewelry and handbags), e-commerce and licensing operations of MEXX, the Companys
international, retail-based operating segment. |
|
|
|
Partnered Brands segment consists of one operating segment including the
wholesale apparel, wholesale non-apparel, specialty retail, outlet, e-commerce and
licensing operations of the Companys wholesale-based brands including: AXCESS,
CLAIBORNE (mens), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, KENSIE, LIZ & CO., LIZ CLAIBORNE,
MAC & JAC, MARVELLA, MONET, TRIFARI, and the Companys licensed DKNY ® JEANS,
DKNY ® ACTIVE and DKNY ® MENS brands. |
F-39
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Companys Chief Executive Officer has been identified as the CODM. The CODM evaluates
performance and allocates resources based primarily on the operating income of each reportable
segment. The accounting policies of the Companys reportable segments are the same as those
described in Note 1 Basis of Presentation and Significant Accounting Policies. There are no
inter-segment sales or transfers. The Company also presents its results on a geographic basis based
on selling location, between Domestic (wholesale customers, Company-owned specialty retail and
outlet stores located in the United States and
e-commerce sites) and International (wholesale
customers and Company-owned specialty retail, outlet and concession stores located outside of the
United States). The Company, as licensor, also licenses to third parties the right to produce and
market products bearing certain Company-owned trademarks; the resulting royalty income is included
within the results of the associated segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
Operating |
|
|
|
|
|
|
|
|
|
|
Expenditures |
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
(Loss) |
|
|
|
|
|
|
Segment |
|
|
for Long- |
|
Dollars in thousands |
|
Net Sales |
|
|
% to Total |
|
|
Expense |
|
|
Income |
|
|
% of Sales |
|
|
Assets(i) |
|
|
Lived Assets |
|
Fiscal Year Ended
January 2, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-Based Direct
Brands (a) |
|
$ |
1,120,664 |
|
|
|
37.2 |
% |
|
$ |
48,075 |
|
|
$ |
(25,425 |
) |
|
|
(2.3 |
)% |
|
$ |
640,240 |
|
|
$ |
37,362 |
|
International-Based
Direct Brands (b) |
|
|
831,889 |
|
|
|
27.6 |
% |
|
|
36,234 |
|
|
|
(137,625 |
) |
|
|
(16.5 |
)% |
|
|
403,828 |
|
|
|
13,071 |
|
Partnered Brands (c) |
|
|
1,059,306 |
|
|
|
35.2 |
% |
|
|
79,255 |
|
|
|
(171,534 |
) |
|
|
(16.2 |
)% |
|
|
533,661 |
|
|
|
30,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
3,011,859 |
|
|
|
100.0 |
% |
|
$ |
163,564 |
|
|
$ |
(334,584 |
) |
|
|
(11.1 |
)% |
|
|
|
|
|
$ |
81,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-Based Direct
Brands(d) |
|
$ |
1,207,400 |
|
|
|
30.3 |
% |
|
$ |
40,147 |
|
|
$ |
(331,456 |
) |
|
|
(27.5 |
)% |
|
$ |
614,797 |
|
|
$ |
205,820 |
|
International-Based
Direct Brands (e) |
|
|
1,202,900 |
|
|
|
30.2 |
% |
|
|
45,839 |
|
|
|
(283,600 |
) |
|
|
(23.6 |
)% |
|
|
628,044 |
|
|
|
34,215 |
|
Partnered Brands (f) |
|
|
1,574,646 |
|
|
|
39.5 |
% |
|
|
72,100 |
|
|
|
(118,724 |
) |
|
|
(7.5 |
)% |
|
|
624,719 |
|
|
|
54,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
3,984,946 |
|
|
|
100.0 |
% |
|
$ |
158,086 |
|
|
$ |
(733,780 |
) |
|
|
(18.4 |
)% |
|
|
|
|
|
$ |
294,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
December 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic-Based Direct
Brands |
|
$ |
1,005,927 |
|
|
|
22.6 |
% |
|
$ |
28,760 |
|
|
$ |
130,834 |
|
|
|
13.0 |
% |
|
|
|
|
|
$ |
106,370 |
|
International-Based
Direct Brands (g) |
|
|
1,251,946 |
|
|
|
28.2 |
% |
|
|
50,353 |
|
|
|
75,094 |
|
|
|
6.0 |
% |
|
|
|
|
|
|
54,821 |
|
Partnered Brands (h) |
|
|
2,183,842 |
|
|
|
49.2 |
% |
|
|
77,457 |
|
|
|
(625,428 |
) |
|
|
(28.6 |
)% |
|
|
|
|
|
|
52,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
4,441,715 |
|
|
|
100.0 |
% |
|
$ |
156,570 |
|
|
$ |
(419,500 |
) |
|
|
(9.4 |
)% |
|
|
|
|
|
$ |
214,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Domestic-Based Direct Brands segment operating loss included charges
totaling $50.2 million related to streamlining initiatives. |
|
(b) |
|
The International-Based Direct Brands segment operating loss included charges
totaling $43.2 million related to streamlining initiatives. |
|
(c) |
|
The Partnered Brands segment operating loss included non-cash impairment charges
of $2.8 million related to goodwill and $14.2 million related to other intangible assets
(see Note 1 Basis of Presentation and Significant Accounting Policies) and charges
totaling $68.8 million related to streamlining initiatives (excluding a non-cash impairment
charge of $4.5 million related to LIZ CLAIBORNE merchandising rights). |
|
(d) |
|
The Domestic-Based Direct Brands segment operating loss included a non-cash
impairment charge of $382.4 million related to the impairment of goodwill (see Note 1
Basis of Presentation and Significant Accounting Policies). |
|
(e) |
|
The International-Based Direct Brands segment operating loss included a non-cash
impairment charge of $300.7 million related to the impairment of goodwill (see Note 1
Basis of Presentation and Significant Accounting Policies) and charges totaling $32.5
million related to streamlining initiatives. |
|
(f) |
|
The Partnered Brands segment operating loss included a non-cash impairment
charge of $10.0 million to reduce the value of the Villager, Crazy Horse and Russ
trademark to its estimated fair value (see Note 1 Basis of Presentation and Significant
Accounting Policies) and charges
totaling $79.2 million related to streamlining initiatives. The Partnered Brands segment
operating loss also included a $14.3 million gain associated with the sale of a
distribution center. |
|
(g) |
|
The International-Based Direct Brands segment operating income included charges
totaling $35.3 million related to streamlining initiatives. |
|
(h) |
|
The Partnered Brands segment operating loss included non-cash impairment charges
of $450.8 million related to the impairment of goodwill and $36.3 million related to the
Companys former Ellen Tracy trademark (see Note 1 Basis of Presentation and Significant
Accounting Policies) and charges totaling $72.8 million related to streamlining
initiatives. |
|
(i) |
|
Amounts exclude unallocated Corporate assets of $13.1 million and $37.9 million
at January 2, 2010 and January 3, 2009, respectively, and assets held for sale of $15.1
million at January 2, 2010. |
F-40
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
GEOGRAPHIC DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
Operating |
|
|
|
|
|
|
|
|
|
|
Expenditures |
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
(Loss) |
|
|
|
|
|
|
Segment |
|
|
for Long- |
|
Dollars in thousands |
|
Net Sales |
|
|
% to Total |
|
|
Expense |
|
|
Income |
|
|
% of Sales |
|
|
Assets(g) |
|
|
Lived Assets |
|
Fiscal Year Ended
January 2, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (a) |
|
$ |
2,018,055 |
|
|
|
67.0 |
% |
|
$ |
112,248 |
|
|
$ |
(185,625 |
) |
|
|
(9.2 |
)% |
|
$ |
877,429 |
|
|
$ |
24,947 |
|
International (b) |
|
|
993,804 |
|
|
|
33.0 |
% |
|
|
51,316 |
|
|
|
(148,959 |
) |
|
|
(15.0 |
)% |
|
|
700,300 |
|
|
|
56,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
3,011,859 |
|
|
|
100.0 |
% |
|
$ |
163,564 |
|
|
$ |
(334,584 |
) |
|
|
(11.1 |
)% |
|
|
|
|
|
$ |
81,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
January 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (c) |
|
$ |
2,570,253 |
|
|
|
64.5 |
% |
|
$ |
102,652 |
|
|
$ |
(440,002 |
) |
|
|
(17.1 |
)% |
|
$ |
1,047,363 |
|
|
$ |
256,791 |
|
International (d) |
|
|
1,414,693 |
|
|
|
35.5 |
% |
|
|
55,434 |
|
|
|
(293,778 |
) |
|
|
(20.8 |
)% |
|
|
820,197 |
|
|
|
37,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
3,984,946 |
|
|
|
100.0 |
% |
|
$ |
158,086 |
|
|
$ |
(733,780 |
) |
|
|
(18.4 |
)% |
|
|
|
|
|
$ |
294,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
December 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (e) |
|
$ |
2,962,443 |
|
|
|
66.7 |
% |
|
$ |
99,242 |
|
|
$ |
(468,531 |
) |
|
|
(15.8 |
)% |
|
|
|
|
|
$ |
145,989 |
|
International (f) |
|
|
1,479,272 |
|
|
|
33.3 |
% |
|
|
57,328 |
|
|
|
49,031 |
|
|
|
3.3 |
% |
|
|
|
|
|
|
68,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
4,441,715 |
|
|
|
100.0 |
% |
|
$ |
156,570 |
|
|
$ |
(419,500 |
) |
|
|
(9.4 |
)% |
|
|
|
|
|
$ |
214,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Domestic operating loss included: (i) charges totaling $114.7 million
related to streamlining initiatives (excluding a non-cash impairment charge of $4.5 million
related to LIZ CLAIBORNE merchandising rights) and (ii) non-cash impairment charges of $2.8
million related to goodwill and $14.2 million related to other intangible assets (see Note
1 Basis of Presentation and Significant Accounting Policies). |
|
(b) |
|
The International operating loss included charges totaling $47.5 million related
to streamlining initiatives. |
|
(c) |
|
The Domestic operating loss included (i) non-cash impairment charges of $382.4
million related to the impairment of goodwill and $10.0 million to reduce the value of the
Villager, Crazy Horse and Russ trademark to its estimated fair value (see Note 1 Basis of
Presentation and Significant Accounting Policies) and (ii) charges totaling $77.8 million
related to streamlining initiatives. The Domestic operating loss also included a $14.3
million gain associated with the sale of a distribution center. |
|
(d) |
|
The International operating loss included a non-cash impairment charge of $300.7
million related to the impairment of goodwill (see Note 1 Basis of Presentation and
Significant Accounting Policies) and charges totaling $34.0 million related to streamlining
initiatives. |
|
(e) |
|
The Domestic operating loss included non-cash pretax impairment charges of
$450.8 million related to the impairment of goodwill and $36.3 million related to the
Companys former Ellen Tracy trademark (see Note 1 Basis of Presentation and Significant
Accounting Policies) and charges totaling $69.4 million related to streamlining
initiatives. |
|
(f) |
|
The International operating income included charges totaling $40.6 million
related to streamlining initiatives. |
|
(g) |
|
Amounts exclude unallocated Corporate assets of $13.1 million and $37.9 million
at January 2, 2010 and January 3, 2009, respectively, and assets held for sale of $15.1
million at January 2, 2010. |
F-41
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 19: ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss is comprised of the effects of foreign currency translation,
losses on cash flow hedging derivatives and changes in unrealized gains and losses on securities,
as detailed below:
|
|
|
|
|
|
|
|
|
In thousands |
|
January 2, 2010 |
|
|
January 3, 2009 |
|
Cumulative translation adjustment, net of income taxes of $7,129 and $18,115, respectively |
|
$ |
(64,148 |
) |
|
$ |
(63,022 |
) |
Losses on cash flow hedging derivatives, net of income taxes of $1,833 and $1,318,
respectively |
|
|
(5,564 |
) |
|
|
(3,147 |
) |
Unrealized gains (losses) on securities, net of income taxes of $0 and $0, respectively |
|
|
341 |
|
|
|
(547 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of income taxes |
|
$ |
(69,371 |
) |
|
$ |
(66,716 |
) |
|
|
|
|
|
|
|
As discussed in Note 11 Derivative Instruments, the Company hedges its net investment position in
euro functional subsidiaries by designating a portion of the 350.0 million euro-denominated bonds
as the hedging instrument in a net investment hedge. The foreign currency translation gains and
losses that are recognized on the euro-denominated bonds and certain other instruments are
accounted for as a component of Accumulated other comprehensive loss. As of January 2, 2010 and
January 3, 2009, the Company recorded a tax benefit of $7.1 million and $18.1 million,
respectively, related to such foreign currency transaction gains and losses in the Cumulative
translation adjustment account in Accumulated other comprehensive loss.
NOTE 20: RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, new accounting guidance on consolidation was issued, which revises how a company
determines when an entity that is insufficiently capitalized or not controlled through voting
should be consolidated. A company must determine whether it should provide consolidated reporting
of an entity based upon the entitys purpose and design and the parent companys ability to direct
the entitys actions. In addition, the new accounting guidance addresses the obligation to absorb
losses of the entity that could potentially be significant to the variable interest entity or the
right to receive benefits from the entity that could potentially be significant to the variable
interest entity. The new accounting guidance became effective beginning on January 3, 2010, the
first day of the Companys 2010 fiscal year. The new accounting guidance did not have an impact on
the Companys consolidated financial statements.
NOTE 21: RELATED PARTY TRANSACTIONS
On November 20, 2009, the Company and Sanei International Co., LTD established a joint venture
under the name of Kate Spade Japan Co., Ltd. (KSJ). The joint venture is a Japanese corporation
and its purpose is to market and distribute small leather goods and other fashion products and
accessories in Japan under the Kate Spade brand. The Company accounts for its 49.0% interest in KSJ
under the equity method of accounting. As of January 2, 2010, the Company recorded $7.4 million
related to its investment in the equity investee, which is included in Other non-current assets in
the accompanying Consolidated Balance Sheet. In the first quarter of 2010, the Company expects to
advance $4.0 million to KSJ. The impact of the Companys equity in earnings of KSJ was
insignificant in 2009.
During 2009, 2008 and 2007, the Company paid the law firm Kramer, Levin, Naftalis & Frankel LLP, of
which Kenneth P. Kopelman (a Director of the Company) is a partner, fees of $1.2 million,
$1.3 million and $0.8 million, respectively, in connection with legal services provided to the
Company. The 2009 amount represents less than one percent of such firms 2009 fee revenue. The
foregoing transactions between the Company and this entity were effected on an arms-length basis,
with services provided at fair market value.
During 2007, the Company leased a certain office facility from Amex Property B.V. (Amex), a
company whose principal owner is Rattan Chadha, former President and Chief Executive Officer of
MEXX. The space housed certain offices of the Mexx Group B.V. in Voorschoten, Netherlands. The
rental paid to Amex during fiscal year 2007 was $0.7 million, excluding a $1.6 million charge to
terminate the lease in 2007.
The Company believes that each of the transactions described above was effected on terms no less
favorable to the Company than those that would have been realized in transactions with unaffiliated
entities or individuals.
F-42
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 22: LEGAL PROCEEDINGS
A complaint captioned The Levy Group, Inc. v. L.C. Licensing, Inc. and Liz Claiborne, Inc. was
filed in the New York Supreme Court in New York County on January 21, 2010. The complaint alleges
claims for breach of contract, breach of the implied covenant of good faith and fair dealing,
promissory estoppel and tortious interference against L.C. Licensing, Inc. and the Company in
connection with a trademark licensing agreement between L.C. Licensing, Inc. and its licensee, The
Levy Group, Inc. The Levy Group, Inc.s alleged claims
purportedly arise from the Companys decision to sign a
long-term licensing agreement with JCPenney. The complaint seeks an award of $100.0 million in compensatory damages plus
punitive damages. The Company believes the allegations in the complaint are without merit and
intends to defend this lawsuit vigorously.
The Companys previously owned Augusta, Georgia facility became listed during 2004 on the
State of Georgias Hazardous Site Inventory of environmentally impacted sites due to the detection
of certain chemicals at the site. In November 2005, the Georgia Department of Natural Resources
requested that the Company submit a compliance status report and compliance status certification
regarding the site. The Company submitted the requested materials in the second quarter of 2006. In
October 2006, the Company received a letter from the Department of Natural Resources requesting
that the Company provide additional information and perform additional tests to complete the
compliance status report, which was previously submitted. Additional testing was completed and the
Company submitted the results in the second quarter of 2007. The Georgia Department of Natural
Resources reviewed the Companys submission and requested certain modifications to the response and
some minimal additional testing. The Company submitted the modified response and additional testing
results. The Georgia Department of Natural Resources reviewed the Companys modified response and
additional testing results and in the first quarter of 2009, notified the Company that it required
additional information to complete the Companys compliance status report submission. In June 2009,
the Company submitted a revised compliance status report to address the Georgia Department of
Natural Resources requests and based on the testing results, the Company requested that the site
be removed from the Hazardous Sites Inventory. On December 22, 2009, the Georgia Department of
Natural Resources advised the Company that it had completed the compliance status report and that
the site had been designated as needing no further action and that it was removed from the State of
Georgias Hazardous Site Inventory.
The Company is a party to several other pending legal proceedings and claims. Although the outcome
of any such actions cannot be determined with certainty, management is of the opinion that the
final outcome of any of these actions should not have a material adverse effect on the Companys
financial position, results of operations, liquidity or cash flows.
NOTE 23: UNAUDITED QUARTERLY RESULTS
Unaudited quarterly financial information for 2009 and 2008 is set forth in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands, except per |
|
March |
|
|
June |
|
|
September |
|
|
December |
|
share data |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net sales |
|
$ |
779,665 |
|
|
$ |
1,095,374 |
|
|
$ |
683,770 |
|
|
$ |
963,430 |
|
|
$ |
769,619 |
|
|
$ |
1,014,969 |
|
|
$ |
778,805 |
|
|
$ |
911,173 |
|
Gross profit |
|
|
348,823 |
|
|
|
527,051 |
|
|
|
326,389 |
|
|
|
460,010 |
|
|
|
348,843 |
|
|
|
500,354 |
|
|
|
373,695 |
|
|
|
415,885 |
|
Loss from continuing operations
(a) |
|
|
(87,333 |
)(c) |
|
|
(7,659 |
)(d) |
|
|
(76,745 |
)(e) |
|
|
(13,825 |
)(f) |
|
|
(87,794 |
)(g) |
|
|
(9,398 |
)(h) |
|
|
(42,188 |
)(i) |
|
|
(782,433 |
)(j) |
(Loss) income from discontinued
operations, net of income taxes |
|
|
(4,415 |
) |
|
|
(23,265 |
) |
|
|
(5,375 |
) |
|
|
(9,322 |
) |
|
|
(2,918 |
) |
|
|
(59,306 |
) |
|
|
358 |
|
|
|
(46,351 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (a) |
|
|
(91,748 |
) |
|
|
(30,924 |
) |
|
|
(82,120 |
) |
|
|
(23,147 |
) |
|
|
(90,712 |
) |
|
|
(68,704 |
) |
|
|
(41,830 |
) |
|
|
(828,784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
attributable to Liz Claiborne, Inc. (a) |
|
$ |
(91,379 |
) |
|
$ |
(31,021 |
) |
|
$ |
(82,106 |
) |
|
$ |
(23,163 |
) |
|
$ |
(90,541 |
) |
|
$ |
(68,725 |
) |
|
$ |
(41,703 |
) |
|
$ |
(828,902 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per
share: (a) (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations attributable to
Liz Claiborne, Inc. |
|
$ |
(0.93 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.82 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.93 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.45 |
) |
|
$ |
(8.36 |
) |
(Loss) income from
discontinued operations |
|
|
(0.04 |
) |
|
|
(0.25 |
) |
|
|
(0.05 |
) |
|
|
(0.10 |
) |
|
|
(0.03 |
) |
|
|
(0.63 |
) |
|
|
|
|
|
|
(0.49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Liz
Claiborne, Inc. |
|
$ |
(0.97 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.87 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.96 |
) |
|
$ |
(0.73 |
) |
|
$ |
(0.45 |
) |
|
$ |
(8.85 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per common
share |
|
$ |
|
|
|
$ |
0.06 |
|
|
$ |
|
|
|
$ |
0.06 |
|
|
$ |
|
|
|
$ |
0.06 |
|
|
$ |
|
|
|
$ |
0.06 |
|
F-43
Liz Claiborne, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
(a) |
|
As discussed in Note 1 Basis of Presentation and Significant Accounting Policies,
the Company adopted new accounting guidance regarding noncontrolling interests in Consolidated
Financial Statements on January 4, 2009. Accordingly, the noncontrolling interest previously
presented as a component of Other expense, net has been reclassified to conform to the current
year presentation. |
|
(b) |
|
Because the Company incurred a loss from continuing operations in all periods
presented, outstanding stock options, nonvested shares and potentially dilutive shares
issuable upon conversion of the Convertible Notes are antidilutive for such periods.
Accordingly, basic and diluted weighted average shares outstanding are equal for such periods. |
|
(c) |
|
Included pretax expenses related to streamlining initiatives of $33.3 million and a
non-cash impairment charge of $1.9 million related to goodwill. |
|
(d) |
|
Included pretax expenses related to streamlining initiatives of $37.5 million. |
|
(e) |
|
Included pretax expenses related to streamlining initiatives of $15.4 million and a
non-cash impairment charge of $0.9 million related to goodwill. |
|
(f) |
|
Included pretax expenses related to streamlining initiatives of $21.5 million. |
|
(g) |
|
Included pretax expenses related to streamlining initiatives of $26.5 million. |
|
(h) |
|
Included pretax expenses related to streamlining initiatives of $23.6 million and a
non-cash impairment charge of $10.0 million related to the Companys Villager, Crazy Horse and
Russ trademark. |
|
(i) |
|
Included (i) pretax expenses related to streamlining initiatives of $87.0 million
(excluding a non-cash impairment charge of $4.5 million related to LIZ CLAIBORNE merchandising
rights); (ii) non-cash pretax impairment charges of $14.2 million related to other intangible
assets; and (iii) a tax benefit of $103.8 million primarily attributable to a Federal law
change allowing for the Companys 2008 or 2009 domestic losses to be carried back for five
years. |
|
(j) |
|
Included (i) non-cash goodwill impairment charges aggregating $683.1 million; (ii)
charges of $29.2 million related to streamlining initiatives; and (iii) a $14.3 million gain
associated with the sale of a distribution center. |
NOTE 24: SUBSEQUENT EVENTS
On January 8, 2010, the Company entered into an agreement with Lauras Shoppe (Canada) Ltd. and
Lauras Shoppe (P.V.) Inc. (collectively, Laura Canada) pursuant to which up to 38 Liz Canada
store leases will be assigned and title to certain property and equipment will be transferred to
Laura Canada, in each case, subject to the satisfaction of certain conditions. The Company expects
to recognize a pretax charge of approximately $12.0 million related to this transaction in the
first quarter of 2010.
F-44
Liz Claiborne, Inc. and Subsidiaries
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning |
|
|
to Costs and |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
In thousands |
|
of Period |
|
|
Expenses |
|
|
Other Accounts |
|
|
Deductions |
|
|
End of Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED JANUARY 2, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable allowance
for doubtful accounts |
|
$ |
16,925 |
|
|
$ |
20,299 |
|
|
$ |
|
|
|
$ |
11,649 |
(a) |
|
$ |
25,575 |
|
Allowance for returns |
|
|
32,951 |
|
|
|
154,452 |
|
|
|
|
|
|
|
163,630 |
|
|
|
23,773 |
|
Allowance for discounts |
|
|
4,699 |
|
|
|
30,450 |
|
|
|
|
|
|
|
32,481 |
|
|
|
2,668 |
|
Deferred tax valuation allowance |
|
|
253,102 |
|
|
|
98,628 |
|
|
|
|
|
|
|
|
|
|
|
351,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED JANUARY 3, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable allowance
for doubtful accounts |
|
$ |
6,074 |
|
|
$ |
14,340 |
|
|
$ |
|
|
|
$ |
3,489 |
(a) |
|
$ |
16,925 |
|
Allowance for returns |
|
|
50,288 |
|
|
|
205,187 |
|
|
|
|
|
|
|
222,524 |
|
|
|
32,951 |
|
Allowance for discounts |
|
|
7,018 |
|
|
|
49,534 |
|
|
|
|
|
|
|
51,853 |
|
|
|
4,699 |
|
Deferred tax valuation allowance |
|
|
8,322 |
|
|
|
244,780 |
|
|
|
|
|
|
|
|
|
|
|
253,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR ENDED DECEMBER 29, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable allowance
for doubtful accounts |
|
$ |
4,470 |
|
|
$ |
3,323 |
|
|
$ |
|
|
|
$ |
1,719 |
(a) |
|
$ |
6,074 |
|
Allowance for returns |
|
|
42,495 |
|
|
|
237,839 |
|
|
|
|
|
|
|
230,046 |
|
|
|
50,288 |
|
Allowance for discounts |
|
|
9,787 |
|
|
|
73,673 |
|
|
|
|
|
|
|
76,442 |
|
|
|
7,018 |
|
Deferred tax valuation allowance |
|
|
|
|
|
|
8,322 |
|
|
|
|
|
|
|
|
|
|
|
8,322 |
|
|
|
|
(a) |
|
Uncollectible accounts written off, less
recoveries. |
F-45