Liz Claiborne's extreme makeover
CEO Bill McComb has remade the apparel company from frumpy to fresh by jettisoning stale brands and focusing on Juicy Couture, Kate Spade and Lucky Jeans. So why is the stock down 90% since he took the helm?
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| McComb poses beneath a photo of the late Liz Claiborne. She set the standard for fashionable clothes at reasonable prices. |
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| Kate Spade is known for its iconic rectangular bags and preppy-with-a-twist sensibility. Claiborne acquired it in 2006. |
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| Lucky Brand offers vintage-inspired jeans and graphic T-shirts infused with a rock-and-roll flair. Claiborne acquired it in 1999. |
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| Juicy Couture's velour tracksuits favored by J.Lo set of a craze and redefined California chic. Claiborne acquired it in 2003. |
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| McComb's best move may prove to be hiring Isaac Mizrahi to design the flagship line. |
(Fortune Magazine) -- In May 2007, Narciso Rodriguez, the designer of the red and black dress Michelle Obama wore on election night, agreed to sell half of his fashion house to Liz Claiborne, an apparel maker with roughly $4.2 billion in sales. Rodriguez had approached other, more upscale companies, but Claiborne was the only one to bite - which should have been warning enough for its new CEO, William McComb. Rodriguez, whose dresses sell for thousands of dollars - compared with hundreds of dollars for a Liz Claiborne outfit - represented a chance for McComb to show the fashion world that Claiborne was serious about design. But the deal was doomed almost from the start.
McComb and Rodriguez clashed over plans to boost sales by licensing the designer's name and also over whether to lower some prices to appeal to a wider range of customers, according to people familiar with the situation. (Rodriguez says he was a team player.)
Finally, on Oct. 8, Claiborne and Rodriguez agreed to terminate their partnership. The split was yet another headache for McComb, who has careened from crisis to crisis since becoming CEO of the apparel maker in November of 2006. Arriving to run Claiborn (LIZ, Fortune 500)e from Johnson & Johnson, McComb, 45, has attempted an incredibly delicate balancing act: He has been upgrading the company's image by selling off dowdy yet profitable labels like Ellen Tracy and promoting hipper, younger ones like Juicy Couture, Lucky Brand Jeans, Kate Spade, and Mexx - an upmarket version of H&M. What makes the shift especially tricky is that he has been attempting this rebranding effort during one of the worst economic slumps in history. Whether or not McComb can pull off this double play will determine if the company thrives or ends up on the discount heap.
"To some people Bill is crazy. To others he's brilliant," says Rose Marie Bravo, the former CEO of Burberry, who oversaw that brand's reinvention in the late 1990s. "We probably won't know the answer for five years. But in today's economy you have to make bold moves. You can't just wimp along and do the same thing you did last year."
McComb's efforts to change the corporate DNA while consumer spending has fallen off a cliff has caused Claiborne's stock to plunge further than most - down 87% in the preceding 12 months, compared with a 67% drop at its closest competitor, the Jones Apparel Group (JNY). Most recently Claiborne reported a third-quarter loss of $69 million, or 10 cents a share, compared with a profit of $33 million, or 33 cents a share, a year earlier. The company recently shaved 43 cents off its 2008 earnings estimate, which is now not expected to top $1.07 a share. By almost every measure - including its return on assets, return on equity, and operating margin - the company has underperformed its peers.
With the stock plummeting, Claiborne's debt is also becoming a problem. The company has already amended its credit agreements twice this year, and if profits continue to deteriorate, analysts say, it might be forced to do so again. Claiborne does not expect to breach the covenants for the remainder of 2008. But its borrowing costs will almost certainly rise as a result of the credit crisis, when it renews a $750 million bank loan coming due next year. (As of Oct. 4, Claiborne had $974 million in debt.) "Nobody wants to be at the mercy of the banks in this environment," says Susan Ding, an analyst with Standard & Poor's, which lowered its rating on Liz Claiborne's debt to junk on June 3.
Claiborne is not an isolated case, and the company may prove to be a harbinger for what lies ahead for apparel makers as a whole. Claiborne and its competitors have scrambled to reinvent themselves as the balance of power has shifted from manufacturers to retailers. Because of consolidation (capped by Macy's (M, Fortune 500) 2005 acquisition of May Co.), department stores have been able to demand more concessions from suppliers known in the trade as wholesalers. This shift forced companies such as Claiborne to wean themselves from a dependence on department stores. Claiborne's solution was to open its own retail boutiques, a more costly alternative, but one that gives it greater control over the way merchandise is displayed and when it is marked down. Nearly a third of Claiborne's revenue now comes from its own retail stores.
In response to that changing landscape, McComb launched a few internal shifts of his own. Before his first year was up, he had gutted 1,300 jobs and eliminated nearly $800 million in sales by closing or selling 13 brands - essentially dismantling the legacy of his predecessor, Paul Charron, overnight. Many of McComb's moves created buzz, such as hiring Project Runway's Tim Gunn as chief creative officer and wooing designer Isaac Mizrahi away from Target (TGT, Fortune 500) to create a new Liz Claiborne line, which hits stores in February 2009.
It was easy for McComb, who grew up in Columbia, Mo., to see the company with fresh eyes. He is the antithesis of your typical Seventh Avenue CEO. He prefers taking the subway to Town Cars. He gets $13 haircuts and is still married to his college sweetheart, Marianne, with whom he has two sons. Although he keeps an apartment in Manhattan, he commutes home most nights to Princeton, N.J. But as a fashion outsider, McComb started his tenure with few allies, and rumors of his demise circulated almost from day one. Helping to fuel those rumors (all unfounded) was McComb's appearance.
Within months of joining Claiborne, McComb was looking gaunt, and dark circles had appeared under his eyes. What only his closest friends knew was that McComb was dealing with a family crisis. His father, stepmother, and sister were each diagnosed with cancer. His stepmother was dead within a month. His father hung on for two years. And his sister, after undergoing two operations, one of which removed a lung, is now in stable condition. "Bill has intestinal fortitude," says Trudy Sullivan, the former president of Liz Claiborne, who now runs Talbots and who was the only internal candidate to compete with McComb for the CEO job.
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McComb has had his share of wins: Back in 2006, on the Wednesday before Thanksgiving, he left his office at 1441 Broadway and walked the six blocks to Macy's Herald Square for his first meeting with CEO Terry Lundgren. Macy's is Claiborne's largest customer, and Lundgren was furious at the apparel maker for creating a less expensive line for J.C. Penney (JCP, Fortune 500) that competed directly with products sold in Macy's stores.
No matter that Claiborne's prior management had created the new label, called Liz & Co., McComb took the beating. A few months later Macy's slashed orders for the spring season. That devastated Claiborne's earnings, which plunged 65%, and wiped out $785 million in market capitalization overnight. "Terry wanted to teach us a lesson," McComb says. Macy's declined to comment for this story.
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