UPDATE 5-Liz Claiborne in J.C. Penney deal, shares jump

Thu Oct 8, 2009 6:54pm EDT

* Liz Claiborne and Claiborne brands exclusive to JCPenney

* QVC to sell Liz Claiborne New York brand by Mizrahi

* Sees Liz Claiborne wholesale brand profit in 2010

* Liz shares jump 31 pct; Penney shares up 0.7 pct (Adds comments from CEO, analyst; Adds byline and dateline)

By Brad Dorfman and Martinne Geller

CHICAGO/NEW YORK, Oct 8 (Reuters) - Liz Claiborne Inc LIZ.N will move its namesake brand to JC Penney Co Inc Department Stores and take a line by celebrity designer Isaac Mizrahi off department store shelves in a strategy shift that pushed shares up nearly 33 percent to their highest level in 11 months.

The exclusive deal to sell all Claiborne brands at Penney (JCP.N) will end a decades-long tie between the Claiborne franchise and the Macy's Inc (M.N) store chain, but guarantees revenue and frees up cash for the struggling apparel and accessories maker.

Citigroup analyst Kate McShane called the move "a giant leap in the right direction for the flailing (wholesale) segment," since it will reduce the company's exposure to the volatile department store sector.

"They are out of that channel that was just eating them up and spitting them out," said S&P equity analyst Marie Driscoll, referring to higher-end department stores like Macy's that have slashed inventory in the wake of the recession.

The Liz Claiborne brand has sold poorly in recent years and continued to decline, said Macy's spokesman Jim Sluzewski, adding that Macy's could not justify expanding it.

"Customers have been confused between various brands carrying the Liz name, and the management of Liz Claiborne needed to take corrective action," Sluzewski said in an email.

Liz Claiborne Chief Executive William McComb told Reuters that the exclusive Liz&Co and Concepts by Claiborne brands it already sells at Penney have been doing so well that it made sense to "go all the way with them".

"At the end of the day, market forces draw you to the most salient solutions for your business," McComb said.

The company's Liz Claiborne New York brand will now be sold only on cable shopping network QVC. The company had hoped Mizrahi's much-hyped revamp of the line earlier this year would breathe new life into sales, but it failed to take off.

"It says the brand failed at retail because of the product offering," Jeff Edelman, director of Retail Consumer Advisory Services at RSM McGladrey Inc said of the Mizrahi line. "The product didn't work."

McComb said timing was the problem.

"It was launched in the teeth of the great recession. The force of the economy prevented retailers from betting big on it." As a result, he said, consumers had a hard time finding the new merchandise, even when they were looking for it.

"The whole point of QVC -- it's like an ironic snap to the other direction," he said.

McComb said the Liz Claiborne New York brand could reach $100 million in sales on QVC but noted the rest of the brands have the potential to hit $1 billion in sales at Penney.

PAYMENTS AT PENNEY'S

The Claiborne and Liz Claiborne brands will be sold only at J.C. Penney for up to 10 years, beginning with the fall 2010 lines. Liz Claiborne said it expects a profit from its namesake wholesale brands in 2010.

Company brands Liz&Co and Concepts by Claiborne have been sold since 2007 at Penney, which has fared better than some rivals by emphasizing lower prices and more exclusive merchandise.

In September, Liz Claiborne hired turnaround firm Alvarez & Marsal to help it improve operations and cash flow. The company said on Thursday that Alvarez had finished its review and made recommendations, but it declined to give further details.

The Penney deal includes guaranteed minimum payments to Liz Claiborne. That will make revenue and earnings more predictable for Liz, which has suffered in the recession as retailers place fewer orders for its clothes or sell them at steep discounts.

The company's working capital requirements will be lower, since Penney will be responsible for sourcing and production, said Chief Financial Officer Andrew Warren.

"This will help Liz further streamline," Driscoll said. "What is their investment now? Their investment is the intelligence. It's the designers."

The deal also alleviates conflicts between the Liz Claiborne business at Penney and at other department stores in the mall, McComb said. Other wholesale brands, such as DKNY jeans, will still be sold at Macy's and Dillard's Inc (DDS.N) stores.

Aside from its wholesale business, Liz Claiborne owns the Juicy Couture, Lucky Brand, Kate Spade and Mexx retail chains.

The Liz Claiborne brand accounted for 17 percent of total 2008 sales, while other "Liz Family" brands made up 9 percent.

Under the QVC deal, Liz Claiborne will receive royalty payments on net sales of the Mizrahi-designed line, which will be more high-end. Mizrahi has a show scheduled to begin on the cable network this fall.

Liz Claiborne shares closed up 31 percent at $6.81 on the New York Stock Exchange, while Penney shares ended up 25 cents, or 0.7 percent, at $35.16. (Additional reporting by Aarthi Sivaraman in Seattle; Editing by Michele Gershberg, Gerald E. McCormick and Bernard Orr)

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