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Liz Claiborne's high fashion stumble

A trumpeted deal with a big-name designer was supposed to take the giant retailer beyond middle America and into high-income closets. After just 16 months, the union is falling apart.

By Suzanne Kapner, writer
Last Updated: September 19, 2008: 6:30 PM EDT

The world's most expensive streets The world's most expensive streets The world's most expensive streets
Every city has one - a retail thoroughfare that houses the most exclusive stores. Real estate slowdown or not, these luxury corridors are still thriving - for now, at least.

NEW YORK (Fortune) -- From the get-go it was one of the odder pairings in the fashion world. One is a high-end designer famous for making Carolyn Bessette's wedding dress. The other is a mainstream apparel manufacturer that sells sportswear and career clothes. Now after just 16 months, Fortune has learned, Narciso Rodriguez and Liz Claiborne are taking steps to end their partnership.

The split - in which Rodriguez would, according to people with knowledge of the situation, buy back the 50% of his name and trademarks that he sold to Liz Claiborne (LIZ, Fortune 500) in May 2007 - is a setback for Claiborne's new CEO William McComb.

With $15 million in annual sales, Narciso Rodriguez is too small to have much impact on Claiborne's $4 billion business. But McComb billed the deal - his first and only since taking over nearly two years ago - as an important step toward redirecting the company away from the middle market and making Liz Claiborne more of a true design house with a heightened fashion sense.

The challenges of building Rodriguez's small following into a sizeable business proved too great at a time when Liz Claiborne is facing its own problems. Like the rest of the economy, retailing is in a slump and traditional Seventh Avenue apparel makers have been hit harder than most.

Despite the shedding and closure of underperforming units, such as Sigrid Olsen and Ellen Tracy, the company continues to struggle. Although the Juicy Couture division seems unstoppable (will people ever stop wearing those velour track suits?), other divisions that were once strong performers, including the Lucky Brand and Mexx, have started to stumble. And still others, like Kate Spade, are a work in progress.

For the second quarter, Liz Claiborne lost 17 cents a share from continuing operations, compared with earnings of 10 cents a share the year earlier. Sales dropped 7 percent to $974 million. Since McComb was named CEO in October 2006, Liz Claiborne's shares are down 55 percent to $18.29.

Friction from the start

It's widely agreed among fashion critics that Rodriguez is uniquely talented. His latest show during New York's Fashion Week in September won rave reviews from editors for his sleek designs, including a double-faced wool corset. (Don't try squeezing into his clothes unless you are a size 2.)

It's also no secret that he can be difficult - more so than most in an industry that seems thrive on ego and narcissism. He was unhappy with his previous owner Aeffe, the large Italian clothing manufacturer, and had been looking for a buyer for years, people familiar with the situation say. He first held talks with Liz Claiborne about four years ago, but it was only in the spring of 2007, seven months after McComb officially took over, that those discussions took on more urgency.

McComb was barraged with phone calls from fashion editors and retail store buyers, who urged him to do a deal with Rodriguez, according to one person familiar with the situation. Although McComb saw potential in the designer, he was hesitant to make a move before July 11, when he planned to unveil his corporate strategy.

But Rodriguez didn't have time to wait. His label was in financial straits. A spokesman for Rodriguez directed all calls to Liz Claiborne. A Liz Claiborne spokeswoman declined to comment for this story.

Once the deal was consummated, it quickly became clear that the marriage was not one of like minds. Liz Claiborne wanted to move quickly to license new products under the Narciso name and lower prices to make his clothes more accessible to a wider array of shoppers.

Rodriguez, who wanted to stay true to the high-end image he had cultivated, resisted. Rodriguez also balked when Claiborne installed a longtime employee who had come from its DKNY Jeans division to temporarily oversee his business, complaining that she did not have enough luxury experience. Claiborne then conducted a long search for a permanent president, eventually presenting at least three candidates to Rodriguez, each of whom had European luxury goods experience. But the designer did not hire any of them, a person familiar with the situation says. The job of president remains vacant.

With the Narciso Rodriguez business on track to lose $8 million to $15 million this year - more, according to sources, than Liz Claiborne expected - unwinding the partnership became an increasingly appealing option.

It wouldn't be the first time that a designer acquisition ended in disenchantment. Prada bought the Jil Sander and Helmut Lang brands, only to turn around and sell them. And LVMH Moet Hennessy Louis Vuitton (LVMUY) has long been thought to be unhappy with its purchase of Donna Karan.

Perhaps with those unhappy endings in mind, Liz Claiborne and Rodriguez left themselves an out when they negotiated the deal. Rodriguez would have the right to buy back his name and trademarks for a nominal price, probably less than the $12 million Liz Claiborne reportedly paid him. From the start, the combination chafed more than a Narciso Rodriguez dress on a size-10 woman.

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