Annual Reports

  • 10-K (Feb 25, 2014)
  • 10-K (Feb 21, 2013)
  • 10-K (Feb 17, 2011)
  • 10-K (Aug 3, 2010)
  • 10-K (Feb 23, 2010)
  • 10-K (Mar 4, 2009)

 
Quarterly Reports

 
8-K

 
Other

Kate Spade & Co 10-K 2010
Form 10-K
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
     
þ   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
     
o   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)
 
     
Delaware
(State or other jurisdiction of incorporation or organization)
  13-2842791
(I.R.S. Employer Identification Number)
     
1441 Broadway, New York, New York
(Address of principal executive offices)
  10018
(Zip Code)
Registrant’s telephone number, including area code: 212-354-4900
Securities registered pursuant to Section 12(b) of the Act:
     
Title of class   Name of each exchange on which registered
Common Stock, par value $1 per share   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 registrant’s 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.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   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 registrant’s most recently completed second fiscal quarter, which quarter ended July 4, 2009, the aggregate market value of the registrant’s 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 registrant’s Common Stock, par value $1 per share, outstanding as of February 12, 2010: 94,821,168 shares.
Documents Incorporated by Reference:
Registrant’s Proxy Statement relating to its Annual Meeting of Stockholders to be held on May 27, 2010-Part III.
 
 

 

 


 

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 Exhibit 10(d)
 Exhibit 10(m)(vi)
 Exhibit 10(m)(vii)
 Exhibit 10(y)
 Exhibit 21
 Exhibit 23
 Exhibit 31(a)
 Exhibit 31(b)
 Exhibit 32(a)
 Exhibit 32(b)
 Exhibit 99

 

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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:
   
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;
   
general economic conditions in the United States, Europe and other parts of the world;
   
lower levels of consumer confidence, consumer spending and purchases of discretionary items, including fashion apparel and related products, such as ours;
   
continued restrictions in the credit and capital markets, which would impair our ability to access additional sources of liquidity, if needed;
   
changes in the cost of raw materials, labor, advertising and transportation;
   
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;
   
our ability to successfully implement our long-term strategic plans;
   
our ability to effect a turnaround of our MEXX Europe business;
   
our ability to respond to constantly changing consumer demands and tastes and fashion trends, across multiple product lines, shopping channels and geographies;
   
our ability to attract and retain talented, highly qualified executives, and maintain satisfactory relationships with our employees, both union and non-union;
   
our ability to adequately establish, defend and protect our trademarks and other proprietary rights;
   
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;
   
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;
   
the impact of the highly competitive nature of the markets within which we operate, both within the US and abroad;
   
our reliance on independent foreign manufactures, including the risk of their failure to comply with safety standards or our policies regarding labor practices;
   
risks associated with our agreement with Li & Fung Limited, which results in a single foreign sourcing agent for a significant portion of our products;
   
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;
   
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;
   
our exposure to domestic and foreign currency fluctuations;
   
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
   
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 SEC’s 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
Item 1.  
Business.
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 Laura’s Shoppe (Canada) Ltd. and Laura’s 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.

 

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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 – Management’s 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 – Management’s 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:
   
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 (men’s), 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 – Management’s 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 women’s and children’s 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 SPADE’s 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 women’s, men’s and children’s 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 men’s, women’s and children’s 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 men’s and women’s apparel and accessories sold principally in Kohl’s department stores.
CLAIBORNE, men’s business-casual apparel and sportswear, accessories and fragrances.
CONCEPTS BY CLAIBORNE, men’s casual separates sold exclusively in JCPenney stores.
LIZ & CO, women’s 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, women’s career and casual sportswear, in misses, plus and petite sizes, accessories and fragrances. This brand also offers a line of women’s 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 women’s sportswear, accessories, intimate apparel and footwear. Pursuant to an exclusive license agreement with Kohl’s Corporation (“Kohl’s”), which names Kohl’s as the exclusive retailer of the DANA BUCHMAN brand, we design the products under the license and Kohl’s 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 junior’s, men’s and women’s 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 junior’s, men’s and women’s 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 men’s 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.

 

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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
                 
            Approximate Average Store  
Specialty Store Format   Number of Stores     Size (Square Feet)  
LUCKY BRAND
    182       2,400  
JUICY COUTURE
    65       3,600  
KATE SPADE
    36       2,000  
JACK SPADE
    2       700  
Foreign Specialty Retail Stores
                 
            Approximate Average Store  
Specialty Store Format   Number of Stores     Size (Square Feet)  
MEXX Europe
    118       4,600  
MEXX Canada
    39       5,400  
LUCKY BRAND Canada
    12       2,400  
MONET Europe
    3       1,100  
JUICY COUTURE Europe
    1       2,800  
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
                 
            Approximate Average Store  
Outlet Store Format   Number of Stores     Size (Square Feet)  
LIZ CLAIBORNE
    92       9,400  
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.

 

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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 brand’s 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 licensee’s 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.

 

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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.
Men’s 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.

 

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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 Macy’s, 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 – Management’s 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.

 

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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 manufacturer’s 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 Protection’s 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. CBP’s 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.

 

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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.

 

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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, Kohl’s 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.

 

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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:
   
For JUICY COUTURE: Marc by Marc Jacobs, Theory, Twisted Hearts, Abercrombie & Fitch and Coach
   
For LUCKY BRAND: Diesel, Guess, True Religion, 7 for all Mankind and Free People
   
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 O’Polo, 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:
                 
    Number of          
Union   Employees     Expiration   Location
Chicago and Midwest Regional Joint Board, Workers United
    305     June 2011   West Chester, Ohio
New England Joint Board, UNITE HERE
    90     May 2012   Lincoln, Rhode Island (a)
Industrial Professional and Technical Workers International Union
    89     May 2010   Santa Fe Springs, California (b)
Western States Regional Joint Board, Workers United (c)
    85     May 2012   Vernon, California
Affiliates of Workers United
    62     May 2011   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)
    31     May 2012   New York, New York and
North Bergen, New Jersey
Affiliates of Workers United
    7     May 2010   Burnaby, British Columbia
 
     
(a)  
This facility is expected to be closed on or about April 30, 2010.
 
(b)  
This facility was closed in January of 2010.
 
(c)  
Subject to renegotiation on each of the first and second anniversaries of the effective date.
 
(d)  
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.

 

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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.

 

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Philanthropic Programs
We have a number of philanthropic programs that support the nonprofit sector in our major operating communities and beyond.
 
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.
 
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, women’s 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.
 
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.
 
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.
 
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 program’s first five years.
 
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.
Item 1A.  
Risk Factors.
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.

 

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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, 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.

 

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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 Company’s 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.

 

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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 MEXX’s 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.

 

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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 Company’s 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 customer’s 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:
 
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.
 
 
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 (men’s) 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.

 

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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 MEXX’s 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 JCPenney’s 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.

 

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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.

 

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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 Kohl’s), 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:
 
Our ability to identify appropriate business development opportunities, including new product lines and markets;
 
 
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;
 
 
Consumer acceptance of the new products or lines;
 
 
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;
 
 
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;
 
 
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
 
 
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 licensor’s brands or other product lines, which are not within our control.

 

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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:
 
Anticipating and responding to changing consumer demands in a timely manner;
 
 
Establishing and maintaining favorable brand name and recognition;
 
 
Product quality;
 
 
Maintaining and growing market share;
 
 
Developing quality and differentiated products that appeal to consumers;
 
 
Establishing and maintaining acceptable relationships with our retail customers;
 
 
Pricing products appropriately;
 
 
Providing appropriate service and support to retailers;
 
 
Optimizing our retail and supply chain capabilities;
 
 
Size and location of our retail stores and department store selling space; and
 
 
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 supplier’s 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 manufacturer’s failure to comply with safety and content regulations and standards, including with respect to children’s 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 manufacturer’s (or licensee’s) 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 MEXX’s 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.

 

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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:
 
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;
 
 
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;
 
 
The imposition of additional regulations, or the administration of existing regulations, relating to products which are imported, exported or otherwise distributed;
 
 
The imposition of additional duties, taxes and other charges on imports or exports;
 
 
Risks of increased sourcing costs, including costs for materials and labor and such increases potentially resulting from the elimination of quota on apparel products;
 
 
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;
 
 
Significant delays in the delivery of cargo due to security considerations;
 
 
The imposition of antidumping or countervailing duty proceedings resulting in the potential assessment of special antidumping or countervailing duties; and
 
 
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.

 

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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.”
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.
Item 1B.  
Unresolved Staff Comments.
None.
Item 2.  
Properties.
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:
                 
        Approximate      
        Square     Leased/
Location (a)   Primary Use   Footage     Owned
West Chester, Ohio(b)
  Apparel Distribution Center     601,000     Leased
Voorschoten, Netherlands (c)
  Offices/Apparel Distribution Center     350,000     Leased
North Bergen, New Jersey
  Offices     285,000     Owned
Vernon, California
  Offices/Apparel Distribution Center     225,000     Leased
St. Laurent, Canada
  Office/Apparel & Non-Apparel Distribution Center     160,000     Leased
New York, New York
  Offices     157,000     Leased
Lincoln, Rhode Island(d)
  Non-Apparel Distribution Center     115,000     Leased
Amsterdam, Netherlands (c)
  Offices     109,000     Leased
1440 Broadway, New York, NY
  Offices     93,000     Leased
 
     
(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.

 

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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 – Management’s 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 Company’s 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 Company’s 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 Company’s responsive pleading to be filed on June 18, 2010.
Our previously owned Augusta, Georgia facility became listed during 2004 on the State of Georgia’s 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 Georgia’s 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 Company’s 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.

 

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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 company’s 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&J’s 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 GE’s 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.

 

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PART II
Item 5.  
Market for Registrant’s 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  

 

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PERFORMANCE GRAPH
Comparison of Cumulative Five Year Return
(PERFORMANCE GRAPH)
                                                 
    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 Company’s Common Stock over a 5-year period with the return on (i) the Standard & Poor’s 500 Stock Index (“S&P 500”) (which the Company’s shares ceased to be a part of as of the close of business on December 1, 2008); (ii) the Standard & Poor’s SmallCap 600 Stock Index (“S&P SmallCap 600”) (which the Company’s 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 Company’s 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 Company’s 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 Company’s 2005 fiscal year) and assume that all dividends were reinvested.

 

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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 Company’s shareholder-approved stock incentive plans.
 
(b)  
The Company initially announced the authorization of a share buyback program in December 1989. Since its inception, the Company’s Board of Directors has authorized the purchase under the program of an aggregate of $2.275 billion of the Company’s stock. The Amended Agreement currently restricts the Company’s ability to repurchase stock.

 

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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.

 

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ITEM 7.  
MANAGEMENT’S 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 (men’s), 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.

 

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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 Forward–Looking 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 Laura’s Shoppe (Canada) Ltd. and Laura’s 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.

 

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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 Kohl’s Corporation (“Kohl’s”), whereby Kohl’s sources and sells products under the DANA BUCHMAN brand.

 

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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.

 

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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.

 

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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 %
 
                         
 
     
*  
Not meaningful.
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.

 

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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 Kohl’s 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;

 

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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.

 

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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 Company’s 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.

 

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(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 )     *  
 
                         
 
     
*  
Not meaningful.

 

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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.
 
International–Based 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 Kohl’s in January 2008) with operations closed in the second quarter of 2008;

 

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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 Company’s 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.

 

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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.

 

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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.

 

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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.

 

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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 & Jac’s 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 men’s 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 Brand’s 2007 earnings and (ii) a 2011 payment that will be based on a multiple of Lucky Brand’s 2010 earnings, net of the 2008 payment, which we estimate will be in the range of approximately $0-$5.0 million.

 

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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.

 

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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 lessor’s assets. Our lease represents less than 1.0% of the lessor’s 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 lessor’s 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.

 

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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.

 

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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 management’s 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.

 

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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 unit’s goodwill and compare it to the carrying value of the reporting unit’s 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 unit’s goodwill based upon the residual of the summed identified tangible and intangible assets.

 

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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 asset’s 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 Company’s 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 Company’s 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 Company’s stock price declined substantially, causing the Company’s 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.

 

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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 derivative’s 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.

 

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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.

 

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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.
Item 9.  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.  
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 Management’s Report on Internal Control Over Financial Reporting.
Item 9B.  
Other Information.
None.
PART III
Item 10.  
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.

 

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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.
                         
                    Number of Securities  
                    Remaining Available for  
    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)
 
                 
     
(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.
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.
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.

 

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PART IV
Item 15.  
Exhibits and Financial Statement Schedules.
                 
(a)
    1.   Financial Statements   Refer to Index to Consolidated Financial Statements on Page F-1
 
               
(a)
    2.   Schedule    
 
               
 
        SCHEDULE II — Valuation and Qualifying Accounts   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.

 

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(a) 3. Exhibits
         
Exhibit No.      
Description
 
       
2(a)
   
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 Registrant’s Current Report on Form 8-K dated May 23, 2001 and amended on July 20, 2001).
 
       
3(a)
   
Restated Certificate of Incorporation of Registrant (incorporated herein by reference to Exhibit 3(a) to Registrant’s Current Report on Form 8-K dated May 28, 2009).
 
       
3(b)
   
By-Laws of Registrant, as amended through May 21, 2009 (incorporated herein by reference to Exhibit 3(b) to Registrant’s Current Report on Form 8-K dated May 28, 2009).
 
       
4(a)
   
Specimen certificate for Registrant’s Common Stock, par value $1.00 per share (incorporated herein by reference to Exhibit 4(a) to the 1992 Annual Report).
 
       
4(b)
   
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 Registrant’s Form 8-A12B dated as of December 7, 1998).
 
       
4(b)(i)
   
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 Registrant’s Form 8-A12B/A dated as of January 30, 2002).
 
       
4(b)(ii)
   
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 Registrant’s Current Report on Form 8-K dated December 19, 2008).
 
       
10(a)
   
Reference is made to Exhibit 4(b) filed hereunder, which is incorporated herein by this reference.
 
       
10(b)
   
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 Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 1990).
 
       
10(b)(i)
   
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 Registrant’s Annual Report on Form 10-K for the year ended January 1, 2000 [the “1999 Annual Report”]).
 
       
10(b)(ii)
   
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).
 
       
10(b)(iii)
   
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).
 
       
10(b)(iv)
   
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 Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2002 [the “2002 Annual Report”]).
 
       
10(b)(v)
   
Fifth Amendment to Lease (incorporated herein by reference to Schedule 10(b)(v) to Registrant’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004 [the “2003 Annual Report”]).
 
       
10(c)+
   
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 Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006 [the “2006 Annual Report”]).
 
       
10(d)+*
   
Description of Liz Claiborne, Inc. 2009 Employee Incentive Plan.

 

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Exhibit No.      
Description
 
       
10(e)+
   
The Liz Claiborne 401(k) Savings and Profit Sharing Plan, as amended and restated (incorporated herein by reference to Exhibit 10(g) to Registrant’s 2002 Annual Report).
 
       
10(e)(i)+
   
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).
 
       
10(e)(ii)+
   
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).
 
       
10(e)(iii)+
   
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).
 
       
10(e)(iv)+
   
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).
 
       
10(e)(v)+
   
First Amendment to the 401(k) Trust Agreement (incorporated herein by reference to Exhibit 10(e)(v) to Registrant’s Annual Report on Form 10-K for the fiscal year ended January 1, 2005 (the “2004 Annual Report”).
 
       
10(e)(vi)+
   
Second Amendment to the 401(k) Trust Agreement (incorporated herein by reference to Exhibit 10(e)(vi) to the 2004 Annual Report).
 
       
10(f)+
   
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 Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 1995 [the “1995 Annual Report”]).
 
       
10(f)(i)+
   
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).
 
       
10(f)(ii)+
   
Form of Option Agreement under the Outside Directors’ 1991 Plan (incorporated herein by reference to Exhibit 10(m)(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 1996 [the “1996 Annual Report”]).
 
       
10(f)(iii)+
   
Liz Claiborne, Inc. Outside Directors’ Deferral Plan (incorporated herein by reference to Exhibit 10(f)(iii) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 [the “2005 Annual Report”]).
 
       
10(g)+
   
Liz Claiborne, Inc. 1992 Stock Incentive Plan (the “1992 Plan”) (incorporated herein by reference to Exhibit 10(p) to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 1991).
 
       
10(g)(i)+
   
Form of Restricted Career Share Agreement under the 1992 Plan (incorporated herein by reference to Exhibit 10(a) to Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 1995).
 
       
10(g)(ii)+
   
Form of Restricted Transformation Share Agreement under the 1992 Plan (incorporated herein by reference to Exhibit 10(s) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended January 3, 1998 [the “1997 Annual Report”]).
 
       
10(h)+
   
Liz Claiborne, Inc. 2000 Stock Incentive Plan (the “2000 Plan”) (incorporated herein by reference to Exhibit 4(e) to Registrant’s Form S-8 dated as of January 25, 2001).
 
       
10(h)(i)+
   
Amendment No. 1 to the 2000 Plan (incorporated herein by reference to Exhibit 10(h)(i) to the 2003 Annual Report).
 
       
10(h)(ii)+
   
Form of Option Grant Certificate under the 2000 Plan (incorporated herein by reference to Exhibit 10(z)(i) to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2000 [the “2000 Annual Report”]).
 
       
10(h)(iii)+
   
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).

 

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Exhibit No.      
Description
 
       
10(i)+
   
Liz Claiborne, Inc. 2002 Stock Incentive Plan (the “2002 Plan”) (incorporated herein by reference to Exhibit 10(y)(i) to Registrant’s Quarterly Report on Form 10-Q for the period ended June 29, 2002 [the “2nd Quarter 2002 10-Q”]).
 
       
10(i)(i)+
   
Amendment No. 1 to the 2002 Plan (incorporated herein by reference to Exhibit 10(y)(iii) to the 2nd Quarter 2002 10-Q).
 
       
10(i)(ii)+
   
Amendment No. 2 to the 2002 Plan (incorporated herein by reference to Exhibit 10(i)(ii) to the 2003 Annual Report).
 
       
10(i)(iii)+
   
Amendment No. 3 to the 2002 Plan (incorporated herein by reference to Exhibit 10(i)(iii) to the 2003 Annual Report).
 
       
10(i)(iv)+
   
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).
 
       
10(i)(v)+
   
Form of Restricted Share Agreement for Registrant’s “Growth Shares” program under the 2002 Plan (incorporated herein by reference to Exhibit 10(i)(v) to the 2003 Annual Report).
 
       
10(j)+
   
Description of Supplemental Life Insurance Plans (incorporated herein by reference to Exhibit 10(q) to the 2000 Annual Report).
 
       
10(k)+
   
Amended and Restated Liz Claiborne §162(m) Cash Bonus Plan (incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the period ended July 5, 2003).
 
       
10(l)+
   
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 Registrant’s Annual Report on Form 10-K for the fiscal year ended December 29, 2001).
 
       
10(l)(i)+
   
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 Registrant’s Current Report on Form 8-K dated December 31, 2008).
 
       
10(l)(ii)+
   
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).
 
       
10(m)
   
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 Registrant’s Current Report on Form 8-K dated October 13, 2004).
 
       
10(m)(i)
   
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 Registrant’s Current Report on Form 8-K dated March 6, 2008).
 
       
10(m)(ii)
   
Second Amendment to the Five-Year Credit Agreement, dated as of August 12, 2008, (incorporated herein by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the period ended July 5, 2008).

 

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Exhibit No.      
Description
 
       
10(m)(iii)
   
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 Registrant’s Current Report on Form 8-K dated January 14, 2009).
 
       
10(m)(iv)
   
First Amendment to the Amended and Restated Credit Agreement, dated as of March 2, 2009 (incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated March 6, 2009).
 
       
10(m)(v)
   
Second Amendment to the Amended and Restated Credit Agreement, dated as of May 12, 2009 (incorporated herein by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated May 13, 2009).
 
       
10(m)(vi)*
   
Consent and Waiver to the Amended and Restated Credit Agreement, dated as of June 12, 2009.
 
       
10(m)(vii)*
   
Third Amendment to the Amended and Restated Credit Agreement, dated as of November 2, 2009.
 
       
10(n)+
   
Liz Claiborne Inc. 2005 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1(b) to Registrant’s Current Report on Form 8-K dated May 26, 2005).
 
       
10(o)+
   
Amendment No. 1 to the Liz Claiborne Inc. 2005 Stock incentive Plan (incorporated herein by reference to Exhibit 10.1 to Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s Quarterly Report on Form 10-Q for the period ended July 4, 2009).

 

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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 Registrant’s 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 Registrant’s 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 Registrant’s Current Report on Form 8-K dated October 18, 2006).
 
       
10(x)
   
Purchase Agreement, dated June 18, 2009, for Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s 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.

 

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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
 
William L. McComb
  (principal executive officer)
 
   
/s/ Bernard W. Aronson
 
Bernard W. Aronson
  Director 
 
   
/s/ Raul J. Fernandez
  Director
 
Raul J. Fernandez
   
 
   
/s/ Kenneth B. Gilman
  Director
 
Kenneth B. Gilman
   
 
   
/s/ Nancy J. Karch
  Director
 
Nancy J. Karch
   
 
   
/s/ Kenneth P. Kopelman
  Director
 
Kenneth P. Kopelman
   
 
   
/s/ Kay Koplovitz
  Director and Chairman of the Board
 
Kay Koplovitz
   
 
   
/s/ Arthur C. Martinez
  Director
 
Arthur C. Martinez
   
 
   
/s/ Doreen A. Toben
  Director
 
Doreen A. Toben
   

 

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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

 

F-1


Table of Contents

MANAGEMENT’S 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 Company’s 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 Company’s assets that could have a material effect on the financial statements.
Management has evaluated the effectiveness of the Company’s 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 Company’s 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 Company’s 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.
MANAGEMENT’S 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 management’s 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 Company’s 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    
 
William L. McComb
 
 
Andrew Warren
   
Chief Executive Officer
  Chief Financial Officer    

 

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Table of Contents

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 Company’s 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 Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s 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 company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s 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 company’s 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 company’s 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

 

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Table of Contents

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 Company’s 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 Company’s 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 Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
New York, New York
February 23, 2010

 

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Table of Contents

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


Table of Contents

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.

 

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Table of Contents

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


Table of Contents

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


Table of Contents

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


Table of Contents

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 Company’s segment reporting structure reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of the Company’s 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 Company’s 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 Company’s 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 Company’s international, retail-based operating segment.