This question, asked with increasing frequency across the apparel and retail industry, refers to the Liz Claiborne Inc. (LIZ) Board of Director’s apparent tolerance of 14 consecutive quarters of per-share losses.  Annual revenues of $5 billion when CEO Bill McComb took the helm in November 2006 have plunged by half, and are still dropping.  Annual earnings of $2.13 per share in 2006 have been followed by losses in each of the subsequent four years, finishing 2010 under water at -$2.34 per share.  The stock, priced at $43 when McComb took over, is trading at around $6, resulting in an 85% drop in market capitalization, from $4.4 billion to $600 million. Adding insult to injury, the rating on the company’s bonds has recently been dropped to ten notches below investment grade.

Although the economic downturn is partly to blame, it’s not the sole culprit. LIZ’s performance has been dismal even compared to the other large apparel companies in its peer group.

All of this raises some important questions. How much of the company’s misfortune has been due to mismanagement of the business? Why would McComb, with no prior experience in apparel, fire so many experienced executives so soon after starting the job, not replacing some of them and replacing others with people having had no prior apparel experience? Why, when the company was already having financial problems, did he bring in the expensive, wrong-for-the-consumer designer Isaac Mizrahi to revamp the flagship brand? Why has there been hardly a peep out of the Liz Claiborne Board of Directors? What can the Board possibly be thinking? Indeed, is the Board MIA?  It does seem that the lights are on, but no one is home.

Despite three years of plummeting results, the Board renewed McComb’s contract in 2009 for three more years. Last August, Board Director Arthur Martinez, in a rare statement, told the Wall Street Journal: “If the company continues to show losses a year from now, absent some cataclysmic economic event, we would be obliged to question the leadership and the path that we are on.  For now, though, there is an overwhelming vote of confidence in the strategy set forth by Mr. McComb.”  One must wonder if Mr. Martinez had as clear a view of the failure of one strategy after another as the accompanying charts so clearly convey. The same article quoted McComb himself as once describing board members as having “brass balls and brass bras” for sticking with him, an apt observation given the situation.  Even more so when one considers that the same company directors responsible for hiring McComb in 2006 are still serving on the Board today.

As we approach the August 2011 “deadline” Mr. Martinez was referring to, things have not improved. McComb has recently lowered profit targets for 2012. Just-released first quarter 2011 results show another loss, this time of $.88 per share, below consensus estimates. Kohl’s has announced it will drop Claiborne’s Axcess brand, which does about $70 million in sales. Juicy Couture, once a meteoric growth engine, continues to falter, as do the Mexx and Lucky Brands, though they are reportedly in turnaround mode.

At half its pre-recession size, LIZ looks more like a holding company with four disparate, non-synergistic retail businesses, the Liz Claiborne brand now on license to JC Penney with option to buy in five years, and Mexx with no presence in the U.S.  So, as each major strategic initiative during McComb’s tenure failed to gain traction, one must wonder what the turnaround growth engine will be going forward, assuming there is to be a future in its current state.

It remains to be seen just how “brassy” the directors’ balls and bras are, and how long they can remain silent and passive – or missing.

Unfortunate Timing

In all fairness to Bill McComb, I believe it is important to note the timing and circumstances of his hiring.  McComb’s prior job was as Group Chairman at Johnson & Johnson, most recently overseeing their orthopedics business. Earlier in his fourteen years at J&J, he managed brands such as Tylenol, Motrin and Clean & Clear.  So, he was arriving at Liz Claiborne with no apparel industry experience, nor had he ever served as a CEO.  And, of course, the Great Recession was around the corner.

The recession was only one of the challenges facing McComb as he took the helm in late 2006. At the time, the company’s brand portfolio included the flagship Liz Claiborne brand, representing an estimated 30% of total sales, and over 30 other brands, including such names as Kate Spade, Juicy Couture, Lucky Brand, Mexx, Monet, Claiborne for Men, Ellen Tracy, Laundry, Enyce, JH Collectibles, and others.

At about the same time, there were some major strategic shifts in the department store sector. Stores like Macy’s, the Liz Claiborne’s brand’s largest customer, were accelerating their pursuit of private and exclusive brands and shifting their focus to a younger, more updated and “modern”  – vs. a traditional, more classic – customer.   For all wholesale brands, especially those in the Liz space, these moves were, and still are, a big deal.

These changes to the department store business model, largely to survive, were also the reason that LIZ and its peer group (VF Corporation, Phillips-Van Heusen and Polo Ralph Lauren) had been, and, in the case of the other three, still are, evolving “hybrid” business models comprised of a portfolio of wholesale and specialty retail brands, the balance of which somewhat parallels the department stores’ evolution towards a greater mix of private and exclusive brands.  Over time, it is not inconceivable that these giant former totally wholesale businesses will realize the majority of their revenues generated by their retail businesses.  The operative phrase here is “over time.”

McComb’s inexperienced misunderstanding of some of these seismic shifts taking place in the department store sector, and how the tandem evolution of the wholesale/retail model was evolving,   became apparent when he waffled on how to position the Liz Claiborne brand in his fundamental new strategy direction, and how he abruptly put his wholesale brands up for review, as put forth in mid-2007.  These misunderstandings would ultimately prove fatal to the future of the flagship brand in department stores.

The Original Grand Strategy

Midway into his first year as CEO, McComb announced the reorganization of the business around “partnered,” or wholesale, brands, including Liz Claiborne, and “direct brands” (also called “power brands”) Juicy Couture, Lucky Brand, Kate Spade and Mexx. The primary growth strategy would be in support of the direct brands, whose potential would be realized through expanded marketing, capital investment and new store openings.

The reorganized plan was aggressive considering the looming recession, which was admittedly not totally visible at the time.  The company was projecting the four direct brands to grow from $2.2 billion in revenues at the time, or 40% of LIZ’s total business of $5 billion, to $3.2 billion by 2010 – 60% of the total.

McComb also declared many cost-cutting initiatives, which included the dismissal of an entire layer of seasoned management, not to be replaced, and a new retail “partnership” model which in some ways would draw a line in the sand with their department store partners, limiting the stores’ latitude with respect to markdowns and merchandising (to which I thought “good luck”- again questioning his experience). Last but not least, there was the stunning announcement that the company was putting 16 of its wholesale (“partner brands”) under review for divestiture, discontinuation, or licensing.

Overnight, publicly, and at high volume, Mr. McComb was attempting to turn the wholesale business model on its head and create a lifestyle specialty retail conglomerate. He told WWD: “This is a company that has revolutionized the industry before and we look forward to doing it again.”

However, as clear and strategic as his revolutionary vision may have seemed, one cannot implement such magnitude overnight, particularly with only six months in the corner office and having fired the experienced professionals who were his most direct and knowledgeable link to the company’s most important customers, the strategically evolving department stores that would soon rank among his greatest challenges.

One part of the strategy that was not very clear involved the flagship brand. Interestingly, the originally announced list of power brands included Liz Claiborne, according to a March 2007 WWD article.  Shortly thereafter, however, Liz was moved to the list of partnered brands. Many in the industry presumed at the time that the move occurred to pave the way for JC Penney, who already had the exclusive rights to distribute the “Liz and Co,” to get the flagship Liz Claiborne brand as well.  However, it now seems that the switch was a result of McComb’s original lack of understanding of the nature of the wholesale business, and the realization that Liz was not capable of being a direct brand at the time, having been a long and deeply established wholesale brand.

Therefore, that being the case, what is the best thing to do with it as a wholesale brand? Do you attempt to reposition it to align with the department stores’ move towards a younger and more updated consumer, or do you find a retailer whose core consumer is a perfect match for the brand’s original position? Do you change the brand to fit the distribution, or do you identify the best distribution for your brand to best reach its core consumer?

The answer to that question is the very reason Liz & Co. sought a home at JC Penney. It would be millions of wasted dollars and years later that the flagship would finally find the same answer, following its “sister” to   the same home, whose core consumer loves the DNA of Liz Claiborne just the way it is.

The Unraveling

Strategy is one thing, but implementation is quite another.  Although it’s impossible to implement such an ambitious strategy overnight, the unraveling of a strategic initiative can happen almost overnight.

McComb’s announcement to put 16 of the wholesale brands (representing $800 in annual revenue) under review is widely recognized as one of his first major blunders.  Essentially, this was a declaration to all potential acquisition or licensing suitors that these brands were “losers.” And, for the four of them under exclusive contract with Sears (First Issue), Dillards (Intuitions), JC Penney (Tint) and Kohl’s (Stamp 10), it certainly must have caused those retailers to rethink how to move forward with them.

The announcement must have also caused the retailers of the other 12 brands under review, which included Ellen Tracy, Sigrid Olsen, Dana Buchman, and others, to proceed with caution. One pundit at the time said: “Just by opening his mouth, he probably devalued those brands by half.”  Was McComb’s lack of experience at work here as well?

Putting all those wholesale brands under review posed another major problem to the unwitting Mr. McComb, one he never could have been aware of without years in the business. A portfolio of wholesale brands gives a company more negotiating leverage over things like floor space, open-to-buy, and marketing programs, and as one brand may have a bad season, others can counterbalance the effect.   By throwing so many brands “under the bus,” Mc Comb was essentially telling the department stores “You’re not important to us.”

Essentially, he was turning his back on those whose support and partnership he would so desperately need to get the flagship brand back on track.  Inexperience indeed.  And, did anybody on the Board understand the gravity of these decisions?

Meanwhile, the Liz brand, which had generated upwards of $2 billion annually in the early 1990s, was estimated to have dropped to about $500 million by late 2007.  McComb had to deal with the brand’s positioning soon, and in the face of a disgruntled Macy’s, its biggest customer, over the Liz & Co. move exclusively to JC Penney, not to mention weakened relations with other big retailers for the reasons mentioned.

Another move among many of McComb’s inexperienced missteps at the time, and a particularly critical one in the face of the looming economic collapse, was his hiring an executive from GE to become LIZ’s CFO.

So, while most of the industry, including LIZ’s peers, are battening down the hatches, expecting the worst, they were sailing into 2008 with more complexity, not less, with people turmoil, brand turmoil, with seriously weakened financials, diminishing cash flow and rising debt, and with an unfriendly  department store sector that would impede his flagship repositioning efforts.

By the middle of the following year, 2008, all of its experienced executives would be gone.  In that same year, the LIZ Board approved and implemented a $100 million share buy-back program.  One top analyst observed that McComb and the Board must have had a bout of wishful thinking after watching the share price continue to fall even after the aggressive stock repurchase, and suggested they would have been better off using that money to pay down debt.  Later, McComb commented at another analyst conference that if he could have done one thing differently, it would be to not do the stock buyback. A pretty amazing statement, all things considered.

Need I ask again what the Board was thinking?

Enter Mizrahi

The severely wounded flagship brand had become a turnaround priority, even while the direct brands were beginning to wobble under both recessionary pressures and strategic challenges. It was like the fourth quarter of a football game, with the Liz brand on its own 40 yard line, down by three points with a minute left on the clock.  What’s the call?  You got it: Quarterback Bill McComb throws the “Hail Mary” pass to the team’s new wide receiver, Isaac Mizrahi.

In the middle of all of this turmoil, a teetering financial situation, and the looming economic catastrophe, Mr. McComb cut a reported five-year, $6 million per year deal to lure Mizrahi away from Target, in addition to hiring all 25 people in his design staff.  And, of course, high profile designers come with grandiose runway shows as part of their package, which cost another cool million a season, according to an unnamed source.

Was anybody in the organization or on the Board advising against this move?  Apparently not.  One source commented that Mr. Mizrahi was completely autonomous and that no one questioned his decisions regarding the repositioning of the brand.  Long-time Liz “staffers” were not allowed on the showroom floor when the line debuted.  Even top management, including McComb, deferred to Mizrahi’s rather anointed authority.

However, McComb certainly had to know of the enormous odds against completing that high-stakes pass, particularly with warnings from Macy’s CEO Terry Lundgren and then-head merchant Janet Grove.  Ms. Grove reportedly told Mr. Mizrahi that “the new line needed to make a big splash to reverse its plummeting sales,” which were down to about $200 million from $1 billion a decade earlier.  For his part, Lundgren, still probably unhappy about the Liz & Co. to JC Penney deal, warned him that the line better be different from Liz & Co or Macy’s might drop it.

Well, the big “splash” that Ms. Grove demanded did occur on one level.  Since Mizrahi was something of a media darling, the press and fashion critics raved and reviewed with energy.  Vogue even featured a profile of him with Michelle Obama photographed in one of his designs.

But, another kind of “splash” occurred in the real world of sales results – the sound of a heavy rock landing in water and sinking.  In contemporizing the line, Mizrahi gave “…a shot of youthfulness” to the Liz “boomer” look that he described as “a little granny, ” and the new line was summarily rejected by its longtime brand loyalists.  So, the real world of sales results, largely housed in a skeptical and miffed Macy’s, resulted in enormous markdowns, driving the partnered brands business to an operating loss of $40 million in the first quarter of 2009.

Scrambling to recover the ball, or the dropped “Hail Mary pass,” McComb reportedly offered brand exclusivity to Macy’s while also shopping the brand around to Kohl’s, JC Penney, and reportedly others.  In September of 2009, Macy’s cut the line from 300 doors to 28, signaling the brand’s demise and the end of a 30 year relationship.

Isaac Mizrahi currently designs a Liz Claiborne New York line exclusively for QVC, and presumably still continues to collect his salary.

And the Board?

Stardust Memories

Some stardust must have seeped into the LIZ environs leading up to the Mizrahi chapter.  Just months after McComb’s arrival in late 2006, following fourteen years at Johnson & Johnson, he must have had a post-Tylenol “fashionista” attack.  In early 2007, LIZ made a $12 million investment for a 50% ownership of the entity that owned the rights to the name and trademarks of designer Narcisco Rodriguez.  Rodriguez, a two-time winner of the Council of Fashion Designers of America (CFDA) Womenswear Designer of the Year, was catapulted to fame when he designed the wedding dress of John Kennedy Jr.’s bride Carolyn Bessette.  Regardless of Narcisco’s design capabilities and achievements, this was an “oil and water” mixture. Some experts wondered aloud if more than stardust got into McComb’s head.

From the start, the relationship was impossible.  As reported, one month after the acquisition, Mr. Rodriguez turned down Mr. McComb’s invitation to join him for a black tie event for the CFDA.  McComb responded with an email that he was “sad, disappointed, and deeply disturbed.”  Eighteen months later Rodriguez bought back LIZ’s stake.

Again, what was the Board thinking?  With the enormity of the re-structuring and re-positioning in the face of recession, didn’t anyone think about the incredible distraction, to say nothing of where it fit strategically, and what about the cross-purpose to the need for a laser-like focus to lead and manage the entire enterprise, its many issues and challenges, as it headed into the storm?

The JC Penney Lifeline

Finally, and “a day late and a dollar short,” McComb does the exclusive deal with JC Penney, announced in October 2009.  Although the deal was a good one, had he approached JC Penney before the Mizrahi chapter, the brand would have been worth a lot more, and would have carried greater strength from a negotiating perspective.

As it turned out, JC Penney would only do the deal with an option to acquire the brand after five years, about which JC Penney CEO, Mike Ullman was quoted: “I think if they had their choice, they would probably not have agreed to sell it.”  The deal also had LIZ ceding total control of production and marketing.

JC Penney has said that since its Fall 2010 launch in all 1100 stores, the Liz Claiborne and Claiborne brands have consistently been very strong performers.

When the current five year contract is up, you can bet your bottom dollar that JC Penney will be exercising their option to buy the brand.  Why?  Because under their roof and for their core customer, the brand is correctly positioned, and the strategy, as they are currently executing it, is correct. And who knows?  Maybe JC Penney can return the brand to its once iconic status and $2 billion annual volume.  Why not?  It is widely believed that some of their other private brands, like Arizona, do over a billion a year.

So, Mr. McComb was probably correct when he once commented that he’s considering changing the company’s name, saying: Liz Claiborne is “a misnomer strategically.”  Which would certainly be the case if JC Penney were to own the brand.

What’s Left?

As far as what’s left in its brand arsenal, I don’t see any with the capability of bringing the company back to anywhere near its $5 billion high mark. Of the $2.5 billion in sales for 2010, it’s estimated that the partnered brands, including royalties on Liz Claiborne at JC Penney, account for roughly 20%, or $500 million, while the four direct brands account for the remainder: Mexx, at about $700 million; Juicy Couture, $600 million; Lucky Brand, $500 million; and, Kate Spade, $200 million.

Is Kate the Next Liz?

While Kate Spade has experienced meteoric growth under designer Deborah Lloyd, doubling sales since she took over about three years ago, to about $185 million, it was from a relatively small base.  Yet, one analyst cited the brand as the most valuable part of LIZ’s total business, worth a potential acquisition price of $1 billion, assuming it hits predicted 2011 sales of $250 million. This is astounding, when one considers that some analysts estimate the entire LIZ business to be worth only $1.23 billion.

Regardless of Kate Spade’s success so far, however, I wouldn’t bet the ranch on its ever achieving the growth engine status of the once-revered Liz Claiborne mega-brand.

In the meantime, McComb’s got his hands full trying to turn the other three direct brands around, having thrown new management into the mix and hoping new strategies will work. However, given everything that’s happened over the past three years, it’s no wonder there are more skeptics than believers.

Mexx

It’s pretty scary that if the estimates are correct, Mexx, at $700 million, is LIZ’s biggest piece of business, which it also was at an estimated $1.2 billion in sales when McComb arrived.  This is a brand that sells not one penny’s worth of product in the U.S. It is managed and operated in Europe (and partially in Canada) where most of its revenue is generated, far from McComb and his experience base.  As the biggest piece of business, it is potentially LIZ’s biggest problem as well.  The quality of its management, operations, distribution and brand positioning was questioned early on. Management and strategy have been re-shuffled several times since McComb took over.   In May 2009, Thomas Grote, who headed Esprit’s international business for 15 years, was hired as CEO of Mexx.  Although he has relevant and fairly successful experience in branded specialty retailing, if Mexx can’t be sold, or turned around, it could potentially sink the ship.

Juicy Couture

Early on, Juicy Couture was a “hot” track suit brand in LA, catapulted by its appearance on the backsides of Madonna, Jennifer Lopez and others, then into the hands of LIZ who capitalized its growth in overdrive by expanding the brand into a cornucopia of different products and rapidly increasing store count. Managing such explosive growth is difficult and requires experienced leadership.  So, despite the challenges, McComb fired Juicy’s two founders, Pamela Skaist-Levy and Gela Nash-Taylor, the DNA of the brand’s “hotness,” and installed a new CEO in 2008. The new CEO was previously an executive at L’Oreal, the giant international beauty company.  So, once again, a new chief takes over with absolutely no experience in the apparel business.  And, this McComb “lack of experience” hiring pattern continues. One would think that while moving up the learning curve himself, he would want to have experienced direct reports.  The CEO was replaced in 2010 by a former American Eagle Outfitters executive.   At least this hire has apparel and retail experience, albeit not necessarily in the genre of the Juicy brand.  The merchandising and design staff has also been moved to New York from its LA birthplace. The L’Oreal hire has subsequently been named EVP of Business Development for LIZ – responsible for opening 46 Juicy stores around the world.

Lucky Brand

Not totally unlike Juicy, Lucky Brand had a strong positioning at its core with its classic American denim heritage.  As it headed into the storm of 2008, the brand was moved away from its traditional roots into an edgier and more value-driven positioning, but business continued to decline.  In the first half of 2009, the former head of the failing Mexx brand was appointed co-president of the Lucky Brand along with the then president.  Both were to work with the founders of the brand to turn things around.

By December of 2009, with the brand still unwinding, yet another CEO was appointed.  And while his previous job had been Group President at Williams-Sonoma, prior to that role, he did have over 10 years of experience in specialty retailing at Coach, J. Crew, Banana Republic and the Gap.

What’s Next?

The next and perhaps final chapter of this iconic company’s story is still playing out.  However, when such an enormous and rapid decline in business occurs, one that cannot pinned solely on the Great Recession, people want to know who was responsible and why.  Unfortunately for Bill McComb, as for all CEOs, particularly those of public companies, the “buck” ultimately stops right at his desk. He will ultimately own the responsibility, whatever the outcome.

Why the Liz Claiborne Board has been so passive and patient is anyone’s guess. Whether that patience continues will become evident before long. Although the stock price has risen a bit in recent months, shareholders will demand to know what is being done to stem the red ink, and the Board will need to address this in a swift and effective way, or find its days numbered. After all, the ‘buck’ that stops at their conference room table is the duty to shareholders.

Hello? Anyone home?

Post Script Clarifications and Corrections

After the original version of this issue’s feature article, “Is the Liz Claiborne Board Missing in Action?” was posted on our website, Liz Claiborne Inc. (LIZ) CEO Bill McComb responded with a message on the Liz Claiborne corporate website that took issue with some of the points made in the article. Following are excerpts of his message (in italics), with corresponding clarifications of some of the statements made and opinions offered in the article that we realize might be potentially confusing and not completely accurate in certain particulars. Both the online and print articles have been revised to include these clarifications.

“Throughout our turnaround, we have consistently hired industry veterans – skewing toward leadership experience in vertical retailing as opposed to wholesale alone. These include senior executives such as Craig Leavitt, Deborah Lloyd, LeAnn Nealz, Peter Warner, and Thomas Grote, among literally dozens more at various levels throughout the Company…”

Despite his claims of hired industry veterans, including the five executives listed, several key experienced direct reports (referred to in the article as “an entire layer of seasoned management”) were released within months of his arrival, and were not replaced. He also hired many people without industry experience. It should be noted that a key thesis of this article was that Mr. McComb, who clearly lacked industry experience, would have perhaps benefitted from an experienced staff, early on, to help him navigate his new business. In my opinion, this point was successfully made and supported in the article.

“… [The] blog refers to our Lucky Brand CEO Dave DeMattei as a former Williams Sonoma executive in an effort to discredit his experience, failing to reference his more than 10 years of experience at Coach, J. Crew, Banana Republic and the Gap.”

The article omitted the executive’s prior experience, implying that he had no apparel experience, which is not the case. Accordingly we’ve revised both the online and “hard copy” articles.

“Again, contrary to reports, the Liz Claiborne brand was always considered part of “partnered brands” under the current management and was noted as such in our first presentation in July, 2007.”

The March 2007 issue of WWD stated of McComb’s new strategy: “Although McComb will not unveil his full plan until July, he has said he will focus on Claiborne\’s five \”power brands”: Juicy Couture, Lucky Brand, Kate Spade, Mexx and Liz Claiborne.” Certainly one could be confused when his official unveiling of the new strategy in July, Liz Claiborne was no longer included as a “power brand” (re-named “direct brands”).

“The report misrepresents our strategy for the Liz Claiborne brand and provides an inaccurate timeline of events. The original JC Penney relationship for Liz & Co. was formed and announced under the previous management. In 2009, it became clear that the Macy’s-LizClaiborne brand relationship no longer made sense given the challenges faced by the department store channel. Given Liz & Co.’s success at JC Penney we made the decision to exclusively license the brand to JC Penney.”

The fact that Liz & Co. was licensed exclusively to JC Penney by Mr. McComb’s predecessor was never refuted, nor was it implied in the article to have taken place under McComb’s watch.

The Robin Report is an opinion blog dedicated to publishing the views of its editors. These views are intended to be thought- provoking and even controversial: we see the blog’s role as getting people in our industry to think critically about the business. Our mission is to provide knowledge, strategic insights and opinions on industry events, companies and trends. The article in question clearly meets these criteria.