the Insiders


August 15, 2008 5:50 PM

Business, Retail

Should Liz Sell Mexx?

Rumors often start because their scenarios make sense.When Liz Claiborne Inc.'s stock recovered Thursday by almost the full amount it sank Wednesday after the vendor reported a sizable loss, the word on the Street was that speculation over Claiborne...

Rumors often start because their scenarios make sense.

When Liz Claiborne Inc.'s stock recovered Thursday by almost the full amount it sank Wednesday after the vendor reported a sizable loss, the word on the Street was that speculation over Claiborne selling Mexx drove the market activity.

After all, it could be argued the sum of Claiborne's parts are worth more than the current approximately $14 stock price would suggest. The company's market cap is about $1.4 billion, plus approximately $760 million in debt, bringing the enterprise value to about $2.1 billion.

Now, if Mexx does $1.3 billion in sales in 2008, and a buyer was willing to pay half of sales, Mexx could likely sell for about $700 million. Make that $800 million on a pro forma basis if the buyer figured Mexx could produce 10 percent margins within three years.

Claiborne said on its earnings call Wednesday that it wants to pay off its full $760 million in debt, which it could do by selling Mexx. It could also then fund the growth for the continuing successful Juicy Couture brand, as well as its other direct power brands Lucky Brand and Kate Spade, where it just cut back on new store growth through 2010 to conserve capital.

Since William L. McComb started as chief executive almost two years ago, his marching orders have been to focus on growth engines and eliminate distractions. Mexx has turned out to be more work than originally expected, and the European market looks like it's going to go through even more angst than the U.S. economy. Certainly between the reorganization and the economy, Claiborne has enough to deal with without what it's called a "problem child."

But back to what the company is worth. Take the $2.1 billion enterprise value and subtract the $800 million Claiborne could get from Mexx; that leaves $1.3 billion. Few could argue that Juicy and Lucky aren't worth at least that together, and Kate Spade probably now is worth more than the $80 million Claiborne paid for it at the end of 2006. That throws in all the partnered brands for free, and even though they're troubled, they must be worth something.

In short, math would argue the company's stock should be trading closer to $22 to $24. But adding the sum of the parts argument only works if the Street believes the company would be willing to unlock its value by selling the parts. So perhaps analysts were living in hope when they began speculating Liz might sell Mexx.

Claiborne, which put 16 of its brands on sale last summer, has proclaimed its loyalty to Mexx, but has said it's in talks to get more advantageous sourcing for the retailer. The most obvious name in sourcing is Li & Fung, which bought four of Claiborne's moderate brands last summer and which has declared itself on a shopping spree to grow to $20 billion in revenues (from about $12 billion today) by 2010. Sourcing talks may be merely a prelude to selling talks, which could be a prelude to the Street adding at least 50 percent to Claiborne's share price.
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