Liz Claiborne Inc.mmoore.ba.ttu.edu/ValuationReports/Spring2008/LizClaiborne-Spring… · mover...

LLiizz CCllaaiibboorrnnee IInncc.. Jon Nelson

Mariama Maiga

Jessica Pearson

Walter Park

Liz Claiborne 2 | P a g e

Table of Contents

EXECUTIVE SUMMARY 4

INTRODUCTION 10

COMPANY OVERVIEW 10

INDUSTRY COMPETITORS 11

FIVE FORCES ANALYSIS 13

RIVALRY AMONG EXISTING FIRMS 14

THREAT OF NEW ENTRANTS 21

THREAT OF SUBSTITUTE PRODUCTS 26

POWER OF CUSTOMERS 28

BARGANING POWER OF SUPPLIERS 30

KEY SUCCESS FACTORS 31

FIRM COMPETITIVE ADVANTAGE ANALYSIS 33

ACCOUNTING ANAYLSIS 35

IDENTIFY KEY ACCOUNTING POLICIES 36

DEGREE OF POTENTIAL ACCOUNTING FLEXIBILITY 40

EVALUATE ACTUAL ACCOUNTING STRATEGY 43

EVALUATE THE QUALITY OF DISCLOSURE 43

IDENTIFY POTENTIAL “RED FLAGS” 51

UNDO ACCOUNTING DISTORTIONS 52

FINANCIAL ANALYSIS 54

PROFITABLITLY ANALYSIS 62

CAPITAL STRUCTURE ANALYSIS 69

FIANCIAL STATEMENT FORECAST 76

ANALYSIS OF VALUATION 78

METHOD OF COMPARABLES 78


INTRINSIC VALUATION METHOD 84

LONG RUN RESIDUAL INCOME 90

ABNORMAL EARNING GROWTH MODEL 92

APPENDIX 96

REFERENCES 147


EXECUTIVE SUMMARY

Executive SummaryLiz Claiborne NYSE (05-03-2008) Investment Recommendation:

market price 18.552 week range 15.96 - 38.90 Altman Z-ScoresRevenues 4.58B 2003 2004 2005 2006 2007Market Capitalization 1.75B Intial 5.4011214 5.6368146 5.4008248 5.1828038 4.2811597

Shares outstanding 94.62M

Price per shareIntial

Book value per share 13.42 Market Price as of May 3, 2008ROE 5.6% 18.5ROA 4.2%

Cost of capital Financial Based Estimated Valuations Estimated R-square Beta Ke Initial3 months 0.9097025 1.09 3.740% Trailing P/E NA6 months 0.9068832 1.08 3.74% Forward P/E 41.282 year 0.946782 1.10 3.74% P.E.G NA5 years 1.08 0.9698483 3.74% P/B 33.510 years 1.06 0.987518 3.75% P/EBITA 26.37

P/FCF 8.66Published data EV/EBITA 9.77Beta 0.54 D/P 6.61Ke 12.73WACC 8.73

Intrinsic Valuations Initial Discounted Dividends 1.86Free Cash Flows 66.44Residual Income 5.11LR ROE RI 14.67 16.19 14.67AEG -7.39

Industry Analysis

Liz Claiborne started her company in 1976 with a dream to provide

professional business clothing at reasonable prices. Liz Claiborne Incorporated

was started by Liz Claiborne and her three financial partners. These

entrepreneurs saw a niche of the industry that was not being capitalized. The

company clenched the opportunity to provide quality clothing to the emerging

female workforce. Liz Claiborne has successfully gained market share in the

apparel industry and is a current apparel powerhouse. Starting with only a half of

a million dollars, Liz Claiborne reported an amazing $4.994 billion dollars of sales

in 2006.

Direct competitors of Liz Claiborne include Polo Ralph Lauren, VF

Corporation, and Jones Apparel Group. These four companies compete among

themselves as well as with companies who are trying to break in the market. The

apparel industry competes on product differentiation, economies of scale,

capacity, distribution, brand image, research, development, and price control.

Brand image and research are the main areas where these companies compete.

Brand image is extremely important because people are materialistic and like to

wear clothing that is in stylish and have outstanding quality. This industry spends

generous amounts of money on promoting their clothing lines and unique style.

People buy products from Ralph Lauren because of its monetary image of the

polo team. Liz Claiborne has tried to differentiate itself by making its clothing

more comfortable and ensuring that women feel that they are dressed to the

caliber of a man in the workplace. Women’s clothing has a lot to do with how

they are perceived in the business world.

The companies that hold market share in the apparel industry consistently

compete among themselves, have a threat of new entrants, have high first

mover advantage, maintain current channels of distribution, and have high

competition based on the threat of substitute products.


The apparel industries key success factors include brand image, price

control, research, and development. The brand image of each company is

important for their survival in the industry. Without a strong reputation

consumers will quickly switch to other competitive brands that have a reputation

in good standing. Price control is important because various consumers will base

purchases exclusively on price. If the price is too expensive they have incentive

to switch brands, if the price is to low they receive that item as cheap or poorly

made. Research and development is significant because these companies must

project the fashion style of the next season. This research is important because if

the brand lines hit the wrong target, sales will greatly be affected.

Accounting Analysis

Performing an accounting analysis is very important when analyzing the

financial condition of a firm. It is usually where analysts find out if firms have

something to hide and allows them to find possible distortions in their financial

statements. Sometimes firms feel that if they give full disclosure to their

investors that they may ask questions and make decisions that will be harmful to

their firm. This is where some companies find it necessary to try and hide certain

deficiencies by disclosing only the bare minimum required by the SEC.

After performing our analysis of Liz Claiborne’s financials we found that

they effectively disclosed their information and that almost everything we needed

was readily accessible. However, once we did some further investigation we

found that they made a point to leave their operating leases off the balance

sheet and that they have failed to amortize goodwill significantly.

Computing the revenue and expense diagnostic ratios let us take a more

in depth look into the company as well as let us compare them to the apparel

industry. “Red flags” popped up when evaluating the sales/ accounts receivables

ratio as well as the sales/ cash ratio. These numbers were only distorted in 2007

and do not cause too much cause for concern but were taken note of. After


analyzing all of the ratios we do not believe that Liz Claiborne manipulated its

financial reports as far as these diagnostic ratios are concerned.

As you will see in the draft, we restated or financials to account for the

operating leases as well as the amortization of goodwill. After doing so, we

believe that it provides a much better perspective of Liz Claiborne and its actual

overall financial position.

Financial Analysis, Forecasts, and Cost of Capital Estimation

In order to fully analyze a firm you must perform a financial analysis after

the accounting analysis section is complete. The financial analysis provides a

more in depth look into a firm’s actual financial standing. Like before we will use

ratios in order to guide our evaluation, but this time we will evaluate the firm’s

profitability, liquidity, and capital structure. Another thing that will prove to be

important is the comparison of these numbers to the industry. By doing so, we

were able to benchmark Liz Claiborne’s data compared to that of the industry

and see if there performance was suspect to any discrepancies and if they were

in line with their competitors.

The overall financial analysis of Liz Claiborne and its competitors in the

apparel industry has helped us determine many factors that before were

unknown. The liquidity analysis provided us with information on seeing which

companies could effectively satisfy their debt. After comparing the financials we

were able to conclude that Liz Claiborne is in fact very liquid and are able to fulfill

their debt obligations with ease. Their ability to do this helps them stay atop the

apparel industry and a good reason why they have been able to grow

significantly through the years. The profitability analysis also proved to be

effective in analyzing firms in the apparel industry. All the ratios performed

helped analyze how quickly and effectively each firm was able to generate

profits.


The last step of the financial analysis section consists of forecasting the

firms next ten years in order to let investors and analysts see the estimated

profitability, expenses, liabilities, as well as other things. Once these forecasts

have been performed we will then be able to produce valuations for the firm and

analyze whether the firm is fairly, over, or undervalued. The forecasts for Liz

Claiborne were inconsistent due to the fact the sales for the firm have fluctuated

significantly in the past 5 years.

We also calculated the cost of debt and cost of equity estimates in order

to produce the later valuations for the project. We found Liz Claiborne’s Ke to be

12.73%, their Kd to 5.06%, and their WACCbt to be 8.73% and WACCat to be

6.83%.

Valuation

At last but not least, a conclusion was deducted from the industry

analysis, accounting analysis, financial analysis, forecasting future financial

statements, method of comparables and results of intrinsic valuation models. The

valuation was based on two models, the method of comparable and the Intrinsic

Valuation model. For the method of comparable, the results of the analysis were

based on industry averages of the Clothing and Apparel industry, which for Liz

Claiborne would include Polo Ralph Lauren, VF Corporation and Jones Apparel.

These competitors were chosen because are the adjoining representation of Liz

Claiborne competitors based on the firm size and business representation.

The share price for Liz Claiborne is then derived after computing eight ratios. The

P/E Trailing and P.E.G ratio were not compute because Liz Claiborne had

negative Net Income. However, with the computed ratios, this methodology did

not really give the investor a valuation of the share price because the Liz

Claiborne had mixed results of being half and half undervalued and overvalued.

The Forward P/E, P/B and P/EBITDA suggested that Liz Claiborne share price

was undervalued. Yet, EV/EBITDA, D/P, P/FCF on the other hand valued Liz


share price as an overvalued share price. Nevertheless, less not forget the

comparable method model is based on industry averages and excludes intrinsic

information, which is in fact a fundamental part to a firm’s valuation.

The intrinsic valuation models, which are based on theory, are essential in

estimating the firm’s market value of equity. Not all of the models are equally

useful. The degree of reliance on the perpetuity determines the sensitivity and

therefore the reliability of the model. The free cash flow model and the dividend

discount model are highly sensitive and should not be considered to be as

accurate as the residual income model, the long run residual income model, and

the abnormal earnings growth model. When computing the FCF model to be able

to observe the current share obverse on the market, the Liz had to have a

negative growth rate and relatively very high Weighted Average Cost of Capital

in the range of 25%; which will be very unreasonable for the company. The long

run RI model used data that allowed Liz book value of equity to be positive. The

long-run RI model suggested that the firm was overvalued, because the majority

of the prices generated by the model fell below the 20% range, which surrounds

the observed share price. The residual income model, the most reliable intrinsic

valuable suggested at a 100% that Liz Claiborne’s share price was overvalued.

The AEG model is the second most reliable behind the RI model. It also

suggested that Sonic is overvalued. In conclusion, the method of comparables

and the intrinsic valuations both indicate that Liz Claiborne is overvalued

company.


INTRODUCTION

Company Overview

Liz Claiborne Incorporated was established in 1976 by Mrs. Liz Claiborne

and three minority partners. They shared a common dream of revolutionizing the

fashion industry. “With less than half a million dollars and a clear focus on

design, quality and value, these four partners - Liz Claiborne, Art Ortenberg,

Leonard Boxer and Jerome Chazen - created what is now a nearly $5 billion

public company.”( www.lizclaiborneinc.com) Not only did the Liz Claiborne

Corporation revolutionize the fashion industry, it also became a fashion icon and

set a precedent for other companies to follow. One of the main reasons that Liz

Claiborne, a women’s clothing line, became successful so fast was because of the

increasing amount of women entering the work force. “Liz Claiborne and her

partners saw the opportunity to provide versatile, fashionable wardrobes that

were appropriate for work, but still conveyed a sense of individuality and

femininity. ”(www.lizclaiborneinc.com) At the time Liz Claiborne’s main

competitors were Calvin Klein and Bill Blass; two companies both producing

clothing for working women. The problem was Calvin Klein and Bill Bass’s

product lines were overpriced, and only upper class women were able to afford

their clothing lines. In our opinion, Liz Claiborne’s concept was perfect because

she saw a need in the market for affordable women’s clothing. Her idea was to

produce the same level of quality or a more superior line than Calvin Klein and

Bill Blass, but at an affordable price for working women.

With this business strategy, Liz Claiborne has become one of the most

successful companies in the industry. With assets of more than 3.49 billion and

a market capitalization of 2.11 billion, some might wonder how a small group of

investors turned half a million dollars into a multi billion dollar empire. Most of

Liz Claiborne’s success and growth has come from the successful acquisitions of

many companies. “Over the past five years, our sales have grown from


$3.448 billion in 2001 to $4.994 billion in 2006.” “This growth has been largely a

result of our acquisitions and organic growth. Our revenue growth over the five-

year period also reflects the growth of our moderate and mid-tier businesses,

which sell products at prices lower than our better-priced offerings, and our non-

apparel businesses, as well as continued growth in our retail businesses. We

have diversified our business by channels of distribution, price point and target

consumer, as well as by geography including by our extension of acquired

brands into a broad range of apparel and non-apparel categories.”(Liz Claiborne

10-K) Through these acquisitions, Liz Claiborne Incorporated has become a

multi-national corporation selling manufactured products to men and women

throughout the world.

Liz Claiborne has grown in the industry and now sells men’s and women’s

clothing. Most of the company’s sales are at the wholesale level, selling to major

retail stores such as Foleys, JCPennys, Nordstrom, and other retail stores

throughout the world. Liz Claiborne also sells products at the retail level. Many

of the companies that Liz Claiborne bought through acquisitions such as, Juicy

Couture, Kate Spade, and Mexx are all entities that have locations where retail

transactions take place.

Industry Overview

Companies in the fashion industry are categorized in the broad Consumer

Discretionary sector, but are more specifically located in the Industry of Apparel,

Accessories & Luxury Goods or Textile - Apparel Clothing. As a whole, the

Textile – Apparel Clothing sector has a market cap of $38.4 Billion only

accounting for about 1.5% of the $2,515.9 Billion in the Consumer Discretionary

sector (finance.yahoo.com). Companies in this Industry share the same goal of

trying to maintain a healthy brand image and deliver a high quality product to

customers with a seemingly endless number of designers to choose from.


Leaders in the fashion industry work to be the most demanded product

available to consumers. They strive to provide consumers with numerous options

and locations to purchase these items. Companies need to have stores open in

strategic locations for customers wishing to have the more traditional and hands-

on shopping experience, as well as being available on-line for customers

shopping over the computer and through the less often used catalogs. However,

simply being accessible to a customer does not guarantee success in the market

place. Companies work with their suppliers to find fabrics and materials that will

be used by the designers and mangers to create a finished good that can be

marketed and sold to customers.

Competitors

Jones Apparel Group, Inc. (JNY), is a well-known designer and marketer

of branded apparel, footwear, and accessories. They market their products

through specialty retail stores as well as value-based stores. Their most notable

brands include Jones New York, Nine West, Anne Klein, Easy Spirit, l.e.i., and

Barney’s New York. At the end of 2006, the company operated 411 specialty

stores, 20 total luxury stores, and 701 outlet stores. Total revenue decreased

6.5% due to a 6.8% decrease in Net Sales.

Polo Ralph Lauren Corporation (RL), competes globally in the design,

marketing, and distribution of apparel, accessories, fragrances, and home

furnishings. The company has integrated through three segments: Wholesale,

Retail, and Licensing. Their brand names include, Polo by Ralph Lauren, Lauren

by Ralph Lauren, Ralph Lauren, RRL, RLX, Chaps and Club Monaco. As of March

31, 2007, they have 147 full priced retail stores, 10,600 shops within shops

dedicated to the wholesale product, and 145 factory retail stores worldwide.

Total net revenue increased 14.7% due to increased wholesale and retail

revenue.


VF Corporation (VFC), has been providing customers with apparel and

related products since 1899. They have been distributing brands such as

Nautica, Vans, Reef, Wrangler, and The North Face through specialty stores,

department stores, national chains, and mass merchants. In addition to those

brands they have licensing rights for NFL, MLB, NHL, NASCAR, and Harley

Davidson. As of February 2007, the company’s total retail operations consist of

460 stores that sell specific brands, 78 VF outlet stores, and have brands sold in

over 200 independently-operated monobrand retail stores located primarily in

Europe and Asia and gained and increase in Net income of 5.3%.

FIVE FORCES ANALYSIS

The five forces model is prepared in order to identify the tree sources of

competition and to pin point the industries bargaining power with both suppliers

and customers. This setup of the five forces model gives the analyst a plan to

examine the competition and assess the value drivers within a particular

industry. The model also investigates the bargaining power relationships

between the consumers and the suppliers. The research required for this model

provides the basis for an analyst to evaluate the rivalry among existing firms, pin

point the challenges faced by the threat of new entrants, and prelude the threat

of substitute products entering the market. The five forces model also examines

the bargaining power of consumers and the bargaining power of the suppliers.

The information provided from the five forces evaluation lays a sold ground for

an analyst to begin to understand where the industry derives value and provides

an overview of the risks affecting industry growth.


RIVALRY AMONG EXISTING FIRMS

The first section of the five forces model is the evaluation of rivalry among

existing firms in a specific industry. In this section we will discuss how companies

in the apparel industry experience moderate price competition and high

competition for brand image. As you will see, these companies do not sell

products at or below marginal cost, but they compete heavily on band image,

quality and customer perception. This section will present eight specific

characteristics of rivalry among existing firms: industry growth, differentiation,

switching costs, economies of scale, concentration, balance of competitors,

barriers to exit and excess capacity. These entities will provide evidence to how a

firm is competing against the industry as a whole.

Industry Growth

The four competitive firms discussed throughout this analysis are VF

Corporation, Ralph Lauren, Jones Apparel Group, and Liz Claiborne Incorporated.

Although this industry is experiencing an upward growth pattern throughout the

last five year, they are not highly competitive on merchandise pricing.

Industry Sales Growth

$0

$1,000,000

$2,000,000

$3,000,000$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

2003 2004 2005 2006 2007

Year

Num

bers

in T

hous

a

Polo Ralph Lauren Corp.Jones Apparel Group Inc.VF CorporationIndustry Comparison


These incumbent firms have a strong hold on the market and are not

easily penetrable by new companies. The existing companies compete heavily on

market share in order to gain the industry advantage. VF Corporations 10K talks

about the risk of loosing one of its top consumers. “Sales to VF’s ten largest

customers were 27% of Total Revenues in fiscal 2007, with Wal-Mart Stores, Inc.

accounting for 12% of revenues. Sales are generally on a purchase order basis,

and we do not have long-term agreements with any of our customers.”

Companies in this industry depend heavily on large consumers. It makes sense

that the buyers would not sign long term agreements apparel companies

because consumers follow the hottest trends which may or may not be produced

by that individual company. For this reason, apparel companies gain a

substantial advantage when they grow through company acquisition. Acquisition

of other companies allows these powerhouses to differentiate their products and

further gain market share.

Differentiation

Companies in the apparel industry compete to have clothing that has the

most distinct look, the newest textures, the most exquisite style, and the most

jaw dropping appeal. These goals are all examples of product differentiations.

These differentiation techniques can also include factors such as advertising. For

example, as one can see on the cover of this evaluation, Liz Claiborne rarely

shows the full facial image of their models. This is a technique that draws the

attention of the client to the clothing instead of the model. The Jones Apparel

Group mentions its techniques for creating differentiation of its company from

the rest of the industry. “. We believe our design staff is recognized for its

distinctive styling of garments and its ability to update fashion classics with

contemporary trends. Our apparel designers travel throughout the world for

fabrics and colors, and stay continuously abreast of the latest fashion trends. In


addition, we actively monitor the retail sales of our products to determine and

react to changes in consumer trends” (Jones Apparel Group 10K). The apparel

industry runs on quick product line changes that are adaptable to consumer

demand and require substantial product differentiation to succeed in the

business.

Switching Cost of Companies

The apparel industry is made of companies that can switch patterns,

fabrics and designs on the drop of a dime, but they are not so versatile when it

comes to switching to a different business. These companies are structured

through many lines of operations. They have ties with the manufacturers, the

natural resources providers (cotton, flax, wool, and silk), the companies that ship

the product, and the retail distributors. Ralph Laurens 10K stated, “We contract

for the manufacture of our products and do not own or operate any production

facilities. Over 350 different manufacturers worldwide produce our apparel,

footwear and accessories products. We source both finished products and raw

materials. Raw materials include fabric, buttons and other trim. Finished products

consist of manufactured and fully assembled products ready for shipment to our

customers.” As one can see, these business lines are specifically set up for

apparel materials. For example, it would not be feasible for any company in this

industry to start manufacturing furniture. They would have the wrong

connections with resource providers, the wrong manufacturing facilities and

would need a completely different method of transportation. Companies in the

apparel industry have a great hold to their business and therefore have

extremely high levels of switching costs.


Industry Concentration

This evaluation is based on the upscale apparel industry. The four main

firms being analyzed are relatively equal sized players. Therefore, these firms

tend to cooperate in terms of item pricing. The textbook, Business Analysis &

Valuation, states, “If there are only two or three equal players they can implicitly

cooperate with each other to avoid destructive price competition.” This is exactly

what the apparel firms are trying to accomplish. There goal is to compete with

each other while blocking the market from any companies who might try to enter

their business arena. These firms each have their own specific buyers who

account for substantial percentages of their production. If a company were to

loose a significant client they face the possibility of major cutbacks or

downsizing. For example, Jones Apparel Groups 10K states, “Our ten largest

customer groups, principally department stores, accounted for approximately

55% of gross revenues in 2007. Macy's, Inc., our largest customer in 2007,

accounted for 20% of our 2007 gross revenues.” Polo Ralph Lauren’s 10K

expressed, “The following department store chains were the only wholesale

customers whose purchases represented more than 10% of our worldwide

wholesale net sales for the year ended March 31, 2007, Federated department

Stores, Inc., which represented approximately 29%; and Dillard Department

Stores, Inc., which represented approximately 14%. These stores really depend

on these department store purchases and they compete for their market share.

Economies of Scale

Economies of scale is practice of gaining a competitive advantage over

smaller companies by increasing the scale of production to cause a decrease in

the cost of production on a per unit measure. In the apparel industry, it is

common to have extensive ties to hundreds of manufacturing facilities,

distributions chains and resource providers. VF Corporation’s 10K states, “. VF is

highly skilled in managing the complexity associated with the supply chain —


600 million units and 600,000 SKUs spread over 30 brands, 40 VF-operated and

1,400 contractor manufacturing facilities, over 30 distribution centers and over

600 retail stores. Outsourcing is a productive way to save money and have a

flexible basis of production.

Another way companies achieve economies of scale is by smaller company

acquisition. This acquisition is not only for apparel product lines. Right now Polo

Ralph Lauren is in the acquisition process of gaining complete ownership of RL

Media. This is their division that operates the Polo.com e-commerce website

(Polo Ralph Lauren 10K). This is important because the more vertical the

company becomes the more profit is kept by the individual company.

Exit Barriers

If a firm is trying to leave an industry there are often barriers that enable

a firm to easily remove itself from its current production. The Business Analysis &

Valuation textbook states, “Exit barriers are high when the assets are specialized

or if there are regulations which make exit costly.” The exit barriers are high for

this industry because of the substantial input they have into retail facilities,

product brand image and their established distribution lines. The table below

illustrates the magnitude of stores that Jones Apparel Group has. This table only

includes the retail outlet stores that they operate. These stores are so high in

volume that it would be extremely hard for Jones Apparel Group to quickly

remove them from the distribution arena without filing bankruptcy.


The following table summarizes selected aspects of our outlet stores at December 31,

2007. Of these stores, 610 are located within the United States and its territories and 28

are located in Canada.

Store

type

Number of

locations

Brands

offered Type of

locations

Average store

size (sq. ft.)

Nine West 203 Primarily Nine West Manufacturer

outlet centers 2,925

Jones New York 174 Primarily Jones New

York and Jones New

York Sport

Manufacturer


Easy Spirit 118 Primarily Easy Spirit Manufacturer


Kasper 82 Primarily Kasper Manufacturer


Anne Klein 61 Primarily Anne Klein Manufacturer


Excess Capacity

Excess Capacity occurs when a firm is not selling enough of the product it

is producing. The Business Analysis & Valuation textbook states, “If capacity in

an industry is larger than customer demand, there is a strong incentive for firms

to cut prices to fill capacity.” In the clothing industry excess capacity is

fluctuating throughout seasons. Firms in this industry start their merchandise at

a premium level when it is first released. As the season wears on, the stores

must come off their prices in order to remove merchandise from the shelves and

pocket the most monetary gains possible. This excess capacity is known as

overstock or clearance merchandise. These companies will either transport the

items to an outlet stores or continuously mark them down. VF Corporations 10K


states, “Working capital increases during the first half of the year as inventory

builds to support peak shipping periods and then decreases during the second

half of the year as those inventories are sold.” This is a prime example of how

the companies monitor their stock in order to meet consumer demand at the

highs and lows of the yearly cycle.

Conclusion

The fashion industry as a whole is a very competitive industry with intense

rivalry among firms. This rivalry among existing firms section discussed how the

apparel industry is highly competitive on brand image but takes a moderate

approach to price competition. We discussed how the industry growth is on a

steady uphill climb, but how these four firms have silently agreed to block the

market toward other mass upscale apparel providers. We also discussed how

differentiation and switching costs were huge contributors to each company’s

daily concerns. The concentration of these firms is already established and the

ties they have with companies such as Wal-Mart, Dillard’s, and JCPenny’s are

imperative to their survival. We discussed how the companies create economies

of scale through multiple lines of apparel and acquisition of smaller companies.

These are all things that create rivalry among the existing firms in the upscale

apparel industry.


THREAT OF NEW ENTRANTS

The threat of new entrants into any industry causes stress. The upscale

apparel industry has created it own strategy for blocking the market of new

potential powerhouses. These smaller companies are eager to gain market share

power in order to earn abnormal or greater profits (Stated in the Business

Analysis & Valuation textbook). Although there is always the notion that new

companies could potential break in and gain substantial market share, the

upscale apparel industry has a buffer. As you will see, they have the advantage

of connections with distributors, manufacturers, and resource providers. The

ability to enter and exit the market is not easy as you will see in out evaluation.

Economies of Scale

New entrants of the fashion retail industry face various economies of scale

such as investment costs, materials cost, labor expense, advertising, goodwill,

licensing and research and development. Both new companies and new brands

have a hard time getting on their feet because of the trendy markets which

forecast styles at a minimum of one year prior to release. The total assets of the

industry also present major road blocks for new comers. The industry segment

including, Liz Claiborne, Polo Ralph Lauren and Jones Apparel Group have assets

totaling 11.37 billion. Of these total assets, each company is estimated to hold

roughly 27 percent in goodwill.

An investment in a new apparel line can cost millions of dollars; therefore,

new entrants into the apparel industry often have money before they enter the

market. If the product line is not self sufficient, one must find investors who are

willing to monetarily back their new line. These economies of scale are important

because not only do the new entrants face many challenges upon arrival in the

market, but the existing companies are always in a race to stomp out new and

old competition in order to obtain mass approval and profit share of the industry.


For example, the Wall Street Journal Article Kohl's to License Liz Claiborne Brand

stated, “The deal is part of a broader strategy by Claiborne -- which has been

trying to reinvent itself in the wake of department-store consolidation -- to

eliminate a significant number of its brands and focus on fast-growing ones

including Juicy Couture, Mexx, Kate Spade and Lucky Brand Jeans. The value of

the licensing agreement couldn't be determined.” This article and statement

shows the importance, in the trendy retail industry, to focus on areas that are

well known, trusted and significantly liked by the general consumers of the

industry.

Total Assets

2003 2004 2005 2006 2007

VF Corporation 2,208,531 2,378,568 2,365,376 2,578,010 2,645,129

Jones Apparel

Group 4,187,700 4,550,800 4,577,800 3,787,000 3,236,600

Ralph Lauren 2,297,450 2,726,669 1,413,763 1,378,500 1,685,900

Liz Claiborne 2,606,999 2,606,999 3,152,036 3,495,768 3,268,467

Values based in thousands

In conclusion, the difficult economies of scale throughout this industry

make it hard for new entrants to grow rapidly because of the overall costs of the

market, advertisement of the product, and research and development. These

stress factors allow the existing companies breathing room, which enable them

to develop new concepts and ideas which might be too much of a struggle for

new entrants.


First Mover Advantage

The textile- apparel industry is full of first mover advantages. These

advantages include distributions channels, materials sourcing, product

placement, innovative advertising, and trend setting. This industry allows for

many channels of first mover advantage where new or old companies can excel

or get lost in the shuffle. For example, Ralph Lauren’s 10K states, “Mr. Ralph

Lauren’s leadership in the design, marketing and operational areas of our

business has been a critical element of our success since the inception of our

Company. The death or disability of Mr. Lauren or other extended or permanent

loss of his services, or any negative market or industry perception with respect to

him or arising from his loss, could have a material adverse effect on our

business. Things such as death can adversely effect to perception of willingness

to buy form consumers.

The channels of distribution are important because without good retail

locations, there is no profit. If a company wastes money and resources on a

location which does not function as a good shopping space, the customers will

not buy the product.

The sources used to buy and manufacture materials are crucial because of

the availability of quality materials. This industry is about quality and fashion.

Without the proper materials, the items made will be of no value or unreliable.

The textile- apparel industry calls for innovative advertising. The key to

sales is a unique image and the consumer drawing power of the store.

Advertising is the key to keeping a fresh image along with luring customers to

the checkout lines. First mover advantages for the textile- apparel industry

include materials sourcing, channels of distribution, location and good

advertising.


Channels of Distribution

In the textile retail industry, companies have already laid claim to many

areas of channels of distribution. Many of the preexisting competitors already

have contracts with the textile makers for labor and materials. This industry has

a need for the finest materials that will produce products of both quality and

comfort. For example, Polo Ralph Lauren’s 10K states, “We contract for the

manufacture of our products and do not own or operate any production facilities.

Over 350 different manufacturers worldwide produce our apparel, footwear, and

accessories products. We source both finished products and raw materials. Raw

materials include fabric, buttons and other trim. Finished products consist of

manufactured and fully assembled products ready for shipment to our

customers.” These established companies have a high cost advantage over new

entrants because they already have established relationships with suppliers and

manufacturers. VF Corporation also has ties to their suppliers, their 10K states,

“1,400 contractor manufacturing facilities, over 30 distribution centers and over

600 retail stores. Managing this complexity is made possible by our use of

information systems technologies — with best-of-breed systems for product

development, forecasting, order management, warehouse management, etc.

attached to our core enterprise resource management platform.

Not only do these companies consume the time of the best

manufacturers, but they also occupy large amounts of floor space, both in

private and department stores. Even if a new line becomes available, they then

face a problem of where to market and sell the product.

In conclusion, the textile retail industry leaves some room for penetration

but the lines that get through are up for criticism and are immediately tested on

their staying power. The trends and forecasting of the industry make rough

roads for new entrants, but if they have unique designs and build quick relations

with manufacturers, they have a shot at entering and obtaining market share.


Legal Barriers

The ever changing legal barriers of the industry also bring hardships for

new entrants. Licensing is time consuming to acquire. Once a brand or company

has been established, they must quickly invest in legal barriers. A company

needs licenses such as patents on their products lines, trademark restrictions on

the company name, and copyrights on all of the designs inspired through

research and development.

If the company wants to sell their products worldwide, they must also

acquire international licensing. For these licenses they must collaborate with a

licensing partner such as the Orton Group, Doorsan Corporation or Dickson

Concepts. New entrants must realize that all merchandise manufactured

overseas and then brought to the United States is subject to duties. This is also

true for other countries as well. When companies sell merchandise worldwide,

they are subject to the restrictions, regulations and approval of organizations

such as the North American Free Trade Agreement and the Central American

Free Trade Agreement. These licensing and trade restrictions are essential to the

legality and sustainability of a retail company. Without these restrictions, the

legitimacy of a company will not hold because the designs, name and pure image

will be copied and exploited. These legal procedures are for the good of the

industry but they do add substantial restrictions on how quickly and if a company

can enter the market.

Higher Competition

The threat of new companies entering the industry make the following

lead to higher competition: new entrance factors of economies of scale, first

mover advantage, channels of distribution, and legal barriers. While there are

many established textile retail companies, every section of barriers leaves room

for penetration from persistent and qualified companies. The intense competition

comes not from the new entrants but from the established firms themselves.


They fight for profit share through forecasting the wants and the needs of

consumers, and how they will react to changes. Each company in the industry

wants to establish and maintain well groomed brand recognition, produce

appealing products of great quality, and respond to consumer demands. These

factors indicate a high level of product competition.

Threat of Substitute Products

For firms in the Apparel, Accessories & Luxury Goods industry, the threat

of substitute products is the most obvious obstacle with most products being

made available in the same locations as competitors. Customers have access to

the same goods, whether they are located in retail stores, shopping centers,

department stores, or on-line web-sites customers have a wide range of brands

and products to choose from. When a competitor enters the market, it is up to

the incumbent to keep market share by lowering prices, having better quality

merchandise, or promoting their lines through advertising.

Relative Price and Performance

Firms in the Apparel, Accessories, and Luxury Goods industry must stay

aware of the market trends in terms of pricing and consumers spending.

Excluding possible economic forces, such as recession or wars, a customer’s

willingness to spend their disposable income on fashion is based upon a seen

value premium for one product that satisfies a need. Companies need to

“effectively anticipate, gauge and respond to changing customer demands and

tastes” in order to fulfill the needs of their customers (Liz Claiborne 10-K).

Staying on top of current trends in fashion gives companies their competitive

advantage because products are more successful the sooner they reach the

market. While current trends are important, Polo Ralph Lauren’s 10K talks about

the importance on pricing to their consumers. They state, “We sell our


merchandise primarily to major department stores across the United States and

extend credit based on an evaluation of each customer’s financial condition,

usually without requiring collateral. However, the financial difficulties of a

customer could cause us to curtail business with that customer. We may also

assume more credit risk relating to that customer’s receivables.” This quote is

relaying the message that if Polo’s prices are not competitive with the industry,

the large department store will not carry their lines because of the financial risk

associated with selling their clothing. Applying an appropriate pricing strategy is

needed in this highly competitive industry, but for many designer labels it is also

important to keep prices high so that customers feel a bit of exclusivity for

purchasing a high-end luxury brand.

Buyers’ Willingness to Switch

Continuing with the concept of fashion labels need to create a feeling of

exclusivity, this will also provide companies with the ability to charge a price

premium for their products and still not feel much pressure from the threat of

customers switching to a substitute product. The Liz Claiborne 10K states,

“Companies are paid this premium for maintaining and enhancing favorable

brand recognition.” Companies in the fashion industry must also be creating

new and innovative products to keep up with the “what’s hot now” mentality that

exists within the industry. One example comes from the Wall Street Journal,

Power Office Attire on the Runways, “Many looks were too cluttered with

detailing to work for professional women. Simple lines convey authority. Doodads

like bows, ruffles, and feathers are too distracting to look powerful.” Designers

are now challenged to make women’s office attire similar to men’s, a new trend

for the top clothing labels to provide for consumers. Customers desire to have

the latest fashions and are willing to be loyal to brands that consistently “provide

them with exclusive and/or differentiated designs and product mixes” (Liz

Claiborne 10-K). Many customers of designer labels and high-end fashion tend


to purchase apparel that is consistent to their past and current style and taste

and are not likely to have an immediate shift in purchasing trends. As long as

companies are constant and deliver a reliable product line, the threat of a

customer switching will be less likely.

Conclusion

The threat of substitute products in the Apparel, Accessories & Luxury

Goods industry will always have a major presents because it is a highly

competitive market. Firms must deliver a consistent but always progressive and

innovative product to consumers, and still be very aware of the prices they

charge.

Bargaining Power of customers

Buyers are the people who create demand for an organization. In most of

the apparel industry, products are usually standardized for a large quantity of

buyers. The buyers from this industry will range from babies to elderly people.

Usually, the industry differentiates between its customers according to the age

group they belong too. For example the clothing industry is section between the

kids department, the teenagers, young and the elderly. In each of those

sections, the firms can chose to differentiate themselves by specializing in one of

these sectors. However most of the big firms offer all sections. In order for the

firms in that industry to be profitable they must be able to differentiate

themselves by offering the buyers want they want and need, at an affordable

price and quality.


Price Sensitivity

In the apparel industry the price sensitivity of a customer depends on

what the customer thinks is valuable and the cost of the product. In this industry

we found that they are high price sensitive because the switching costs for

customers are really low and the products are undifferentiated. The switching

cost for customers is low because there are a lot of retail stores selling the same

things and it does not cost the customers anything to go from one store to the

other. Therefore in the apparel industry, firms try to differentiate themselves

through brand image, customer service and the quality of the product. By

differentiating themselves, the firms can conquer the loyalty making customers

more willing to come back because they offered them good quality product and

services and in this way prices will not be the key determinant of buyers decision

making of purchasing a good. As Mr. Tunick quoted in the February 8th article

Retail Squeeze Felt Far Beyond Malls, in the Wall Street Journal if retailers

"have the customer in the door, but they're not necessarily thrilled or finding

new fashion, they still want to be part of the brand".

Relative Bargaining Power

Consumers’ preferences are key here as buyers have a broad choice of

what type of clothing they want to purchase. However, the industry has an

advantage because consumers need clothing and they usually don’t have a

choice because they have to wear some type of clothing anyway. Although

customers are more likely not buy huge quantities from the same store, usually

the demand for clothing is somehow elastic. Also as retailers face individual

buyers with little to no power at all, they can dictate consumers to buy products

at the retailers wish prices.


Bargaining Power of Suppliers

Apparel suppliers are abundant; they are fragmented and compete heavily

on the supply contracts of these businesses. The difference between each

supplier is minimal, so, the price and quality of the service will be a major factor

in determining suppliers. In fact, for many firms, manufacturing and sourcing

capabilities became more and more important because the firms have to do what

they can to keep up with the demand. This is very hard for the companies if they

just want to do business with domestic suppliers. Therefore most of the suppliers

in the apparel industry are mainly from Asia and the rest of them are distributed

about the rest of the world. Industry types like Liz Claiborne, manufacturing

overseas had become a norm. Firms are able to get the merchandise at a right

quantity, quality and at a very cheap price; as manufacturing abroad is a much

cheaper than it is domestically. On the other hand, overseas suppliers are not

only able to meet the buyers lower price request but also they are able to ship

quality material in a timely manner and efficiently. Therefore the suppliers are

demanded to have lower prices and consistent quality services if they want to

profit from the business

Price Sensitivity

In the apparel industry, suppliers are viewed as having low price

sensitivity for favoring the accumulation of contracts and the preservation with

clothing marketers is more important than overpricing of their services. This is

due to consumer taste and the comparative costs of manufacture in the US and

overseas (cnas.tamu.edu/publications/powerpoint/papers/Amponsaht.pdf).

Therefore, suppliers are more likely to succeed if the secure their contracts and

are efficient in their operation and more importantly are producing the product at

lower cost.


Relative Bargaining Power

In this industry, there is large number of suppliers. As a result, retailers

are not limited to just one suppliers. This is a problem in the US because labor in

the US is far more expensive then in foreign countries; so many apparel

companies outsource much of their manufacturing oversea (www.hoovers.com ).

The United States has a lot of restriction on labor and wages therefore increasing

minimum wages for workers; this led in an increase in the cost of the product.

Oversea, for example in Asian countries, apparel manufacturers have attractive

labor cost and therefore much cheaper products. As result companies outsource

their manufacturing for cost reasons and suppliers have low bargaining power.

KEY SUCCESS FACTORS

The apparel industry is a highly competitive industry. To succeed in this

industry, firms have to focus on strategies that create value. They can’t just rely

on their structure to be profitable they have to make a strategic choice in their

positioning in the industry. Some retailers with very basics products practice a

cost leadership strategy by having a tight control on cost control system, simpler

product design, economics of scale and scope. On the other hand, for those

firms seeking to offer high fashion services to consumers, the focus is on

investment in the brand image, research, development, creativity and innovation.

Brand Image

Brand image is a key element that identifies what the apparel industry

represents. The apparel industry is mainly undifferentiated; the products are

very similar, therefore investing in brand imaging a very important for a firm in

other to be profitable. Brand imaging allows the firm to market easily because

customers must recognize your product on the spot. Brand image can de made


through reinforcing brand communications such as packaging, advertising,

promotion, customer service.

Research and Development

Research and Development in the apparel industry is very important. In

this industry, products have to be identified with their buyers and understanding

customers’ needs and wants is very important so that they can guide the

products toward those wants. A significant part of research is finding out what

the consumer base is looking for. For example, a large expense of the apparel

industry is advertisement. These well crafted advertisements and logos will

create brand recognition and install an image in the mind of consumers. Polo

Ralph Lauren’s 10 states, “We create distinctive image advertising for all of our

products, conveying the particular message of each brand within the context of

our core themes. Advertisements generally portray a lifestyle rather than a

specific item and include a variety of products offered by ourselves and, in some

cases, our licensing partners.” Advertisement is crucial to the ability of a

company to thrive. Also understanding and knowing the tangible trends for each

season is very important. Each of these trends have to be researched and

forecasted within one year prior to their launch.

Price Control

Controlling the price of apparel merchandise is a vital key success factor

for the textile- apparel industry. This level of the apparel industry is no for the

millionaire class, but based on the upper middle class who is still price conscious.

The ability to compete on price enables the company to fluctuate levels of

growth throughout changing economic levels. For example, if the economy slips

into a recession, the competitors of the industry should be able to lower prices in

order to compete in the slumping markets. The industry is based on quality


which is reflected in the price, but it is important that the industry be adaptable

to change and unforeseen circumstances.

FIRM COMPETITIVE ADVANTAGE ANAYLSIS

This section is going to compare Liz Claiborne to the other companies in

the apparel industry. Liz Claiborne is an effective competitor of the industry and

this will evaluate their effective use of brand image, research and development,

and price control.

Brand Image

Liz Claiborne has many differentiated brands, but they are currently

minimizing their brands in order to better identify their brand image. The Wall

Street Journal Article, Liz Claiborne Taps Star Designer to Relight Brand, states,

“Last week, the company said it would sell its C&C California and Laundry by

Design brands to Perry Ellis International.” This is a sign that the company is

limiting its range of product line to better identify its image. The brand is trying

to release more brands lines that are connected to the Claiborne name. The Wall

Street Journal stated, “The company also launched Liz & Co., a moderate brand

sold at J.C. Penney Co. stores. That move angered Macy’s Inc., which sells the

more upscale Liz Claiborne brand.” The brand is trying to sell quality goods at all

level of industry, from luxury to general department store.

Research and development

Research and development for Liz Claiborne is very important the

company spend millions of dollars in R&D. Those researches were mainly focus

on trends also of new way to minimize cost and maximize brand image and

profit. Over the past few years, Liz Claiborne has spent substantial amounts of


money on research and development of marketing and advertising campaigns.

The Liz Claiborne 10K states, “Cooperative advertising expenses with specific

agreements with customers were $51.8 million in 2007, $40.4 million in 2006

and $31.4 million in 2005. Advertising and promotion expenses were

$146.9 million in 2007, $130.7 million in 2006 and $122.9 million in 2005.

Marketing expenses, including in-store and other Company-sponsored activities,

were $64.4 million in 2007, $55.4 million in 2006 and $53.7 million in 2005.” Liz

Claiborne was created at a time when women were entering the workforce in

mass numbers. The firm saw “the opportunity to provide versatile, fashionable

wardrobes that were appropriate for work, but still conveyed a sense of

individuality and femininity”. (LizClaiborne.com). Since the start of the company,

Liz Claiborne has put a focus on research and development for example at the

time they were entering the market, the department stores were classification

oriented that means that each department stores was just focus on the one

item; meaning that for instance in a department store they could be just selling

shirts or shorts. Therefore the buyers would buy merchandise from one brand

across product lines. To solve this problem, the firm teamed up with retailers and

through market research and test, they development a test of the concept of

“presenting all of the brand’s related sportswear pieces in one department,

streamlining the consumer’s shopping experience”

On the other hand Liz Claiborne also conducts research in the market for market

trends. The development is mostly conducted oversea though market test with

country like Thailand, China and Japan.

Price Control

Since the Liz Claiborne Company was founded, they have put an emphasis

on quality outfits for less. Their original goal was to bring professional women’s

work outfits to them for less than the existing competitors could offer. At this

point in time, the company has expanded to meet the growing needs of


consumers, but has also stood by its original goal of providing quality for less.

The company currently holds product lines ranging from general department

stores such as JCPenny to the upscale stores such as Macy’s and Neiman Marcus.

They company has the ability to diversify their product lines to hit all major areas

of the industry.

ACCOUNTING ANALYSIS

The managers who write companies financial documents and decide on

the level of disclosure often have the notion that less information is better. Many

managers believe that too much information provided to shareholders will cause

greater harm than good. They believe that if shareholders have full disclosure of

the financial statements, they will question or make rash decisions that are not in

the best interest of the company. Managers sometimes distort the financials in

order to make their margin of revenue look higher. When the financials are

artificially or falsely padded, the shareholders are relatively happier than if the

year had ended in a slump. The happiness of shareholders leads to promotions

and pay increases for the corporate managers. The Formal Accounting analysis

procedures are designed to evaluate critical aspects of the firm. These critical

values will be measured against other firms in order to assess the quality of

disclosure and any sources that create value for the company. This analysis will

identify the companies degree of flexibility within the restrictions of GAAP,

complete a full analysis of factors that contribute to the companies key success

factors, evaluate their accounting strategy, analyze the quality of disclosure,

identify potential red flags and undo any significant accounting distortions.


Identify Key Accounting Policies (KAP)

Financial statements serve as the vehicle through which investors and

owners keep track of the firm’s financial situation. The use of accounting analysis

is to evaluate the degree to which a firm’s accounting captures its underlying

business reality.” (Business Analysis & Valuation- Palepu & Healy) Therefore, we

are going to evaluate the appropriateness of Liz Claiborne’s accounting policies

and identify the company accounting flexibilities. One of the goals of analysis is

to evaluate how well the key success factors and risks are being managed by the

firm. As determined in “Firms Competitive Advantage Analysis” section, Liz

Claiborne’ s key success factors are brand image, inventory management, price

competition, and account receivables.

Brand image is one of the key success factors of Liz Claiborne. Companies

in the textile industry, like the Liz Claiborne, have to differentiate themselves in

order to stay competitive. Through the company 10K, we could see that the

company broadens itself mostly through acquisition of other companies. The

companies that they acquire have already been on the market and are marketing

high quality and upper echelon products. However, Liz Claiborne has spent 465.3

million to acquire assets from to June 1999 to December 2007. Below, the graph

shows the company’s total acquisition of assets and how it has increased over

time.


Liz Claiborne acquisition from 1999-2006

These acquisitions are a risk the company takes on and they have to

identify appropriate candidates and make sure they don’t lose money when

making the deals. On January 2005 Liz Claiborne acquired C&C California Inc. for

$29.2 million and wrote done an asset of goodwill of $25.6 million. About

87.67% of the total assets acquired were written down as goodwill. Overall, Liz

Claiborne estimated that about 20% of its acquisition from 1999 to 2006 was

goodwill. These smaller company acquisitions have been the determinants of Liz

Claiborne success thus far. However, we believe that future acquisitions might

overwhelm the company and may not guarantee as much successful growth as

the prior acquisitions have. On the other hand, the company also invests in

advertising and promotion of the products. The promotion and advertising are

fully disclosed in the Management Discussion and Analysis Section. We are not

going to highlight this section because most of Liz Claiborne’s revenue is not

earned through advertising but through the acquisitions the company is

pursuing.


Inventory management

Inventory management in the retail industry is very important for the

companies to be competitive in the industry. When a company controls its

inventory, it keeps inventory costs as low as possible and in order to do that they

must keep low inventory on hand and manage it in a costless manner. The

company should be able to keep track of the items that are moving and the dead

stock, items in surplus, critical items, items that need to be reorder and more.

When inventory control is well done, analyst should be able to determine the

book value of inventory. Being able to manage your firm’s inventory is directly

related to key success factors because it being done effectively can be a major

difference between a profitable organization and one that is struggling to keep

its head above water. Liz Claiborne inventory increased 10% from 2005 to 2006.

The company claims that the increase was mainly due to the new acquisitions,

the expansion of new retail business and the increase in the currency fluctuation

primarily the strengthen of the Euro. However Liz Claiborne has an inventory

turnover of 4.3 times in 2006 compare to an inventory turnover of 4 times in the

Apparel industry and 7.6 in the market. Liz Claiborne is a little bit over the

industry but is in the about the same range as its main competitors such as

Jones Apparel and Polo Ralph Lauren and the inventory turnover has been rising

for the past couple of years.

Price Competition

The Liz Claiborne Corporation has strived for success through being highly

competitive on price. This key success factor is crucial to the strength and

survival of the Liz Claiborne Company. The company has targeted several

avenues which will help to cut costs and differentiate their cost structure. These


changes include modifying their brand portfolio to emphasize certain brands and

implementing and maintaining a more competitive cost structure (Liz Claiborne

10K). These two areas of cutbacks will permit the company to strengthen its

market share and consumer base.

The company has recently modified their brand portfolio approach in order

to lower costs and gain market share in a highly competitive global fashion

market. To compete on price, the company had to outline its brand image in

order to cut back and focus on the most successful avenues. The Liz Claiborne

10K states, “Narrowing our portfolio to a select group that we believe we can

fully resource and develop into powerful, sustaining brands.” The company has

been losing sales because of the consumer movement from the large department

stores to the specialty stores, which focuses on product differentiation and

product labels. With the cut backs, of the Emma James, Intuitions, J.H.

Collectibles and Tapemeasure brands, the company will be able to focus on their

direct and partnered brands. The company is also refocusing some attention of

the international business. The Liz Claiborne 10K states that the company has

diversified geographically, with its international operations representing 31.5%

and 33.3% of total net sales.

The company’s new implementation of a competitive cost structure is

bound to bring millions of dollars in cut cost and help the price of overall

merchandise to decrease. The manager of the Liz Claiborne 10K stated, “We

have accelerated our structural realignment and other initiatives and are

currently anticipating annual cost savings of $150 million in 2008, an additional

$70 million in 2009 and $45 million in 2010 totaling $265 million by the end of

fiscal 2010. We anticipate that these savings will be realized through staff

reductions of approximately 800, consolidations of distribution facilities and office

space, discretionary expense cuts, process re-engineering and supply chain cost

rationalization.” The largest overhead of a company is typically its employees.

With cuts of approximately 800 employees, the company will gain a larger

revenue base because of the loss of wages incurred. The consolidation of


distribution facilities and office space reductions is beneficial because the

payment for lease space not utilized is a waste of money and should be used to

capitalize other assets. The savings and realignment of about $265 million by

year end 2010 is a phenomenal feet. If the Liz Claiborne Company can

accomplish this goal, the company can cut prices or redistribute the funds to

other beneficial areas of business.

Accounts Receivable and Liabilities

The Liz Claiborne Company stores offer the sale of gift cards which are

recognized as a current liability and are not capitalized as revenue until

redeemed. The Liz Claiborne 10K states, “Proceeds received from the sale of gift

cards are recorded as a liability and recognized as sales when redeemed by the

holder.” This is important because the company is basing sales off of outgoing

inventory and not unearned revenue. If the company were to show the purchase

of a gift card as revenue, then in future months the cost of goods sold could

potentially be greater than revenue received. The fact that Liz Claiborne does not

recognize revenue until the merchandise is bought, helps shareholders to

recognize the actual period’s revenues.

Accounting Flexibility

Having the ability to choose one’s accounting policies is becoming more

and more difficult. General Accepted Accounting Principles continue to enforce

accounting polices that force companies to severely constrain their level of

disclosure by having strict accounting standards and conventions. However,

managers still have some accounting flexibilities regarding the type of the

policies to use. For example, “all firms make choices with respect to depreciation

policies, inventory accounting policies, and policies regarding the estimation of

pension plan and other post employment benefit.” With those accounting


flexibilities, Liz Claiborne’s managers have the liberty to amortize goodwill only

when they believe it is impaired, although correct accounting requires

impairment of goodwill at least once a year. For the last couple of years, Liz

Claiborne has reported goodwill amortization according to SFAS 142, “the

discontinuation of goodwill amortization will partially offsets the income effects of

impairment write-offs and will contribute to higher reported profit in the future.”

The majority of goodwill comes from the purchase of already established firms.

The most recent increase in goodwill was from $858,565,000 to $1,007,859,000.

This came from the acquisition of the equity interest of Westcoast Contempo

Fashions Limited and Mac & Jac Holdings Limited and the purchase of Kate

Spade and other miscellaneous purchases. On the other hand, Liz Claiborne had

a fixed asset write down of $23,105,000 for the accumulated goodwill of

$858,565,000 for 2006. The table below shows the increase in goodwill of the

main industry leaders. The table below also computes the percentage of goodwill

to total assets. These ratios represent that Liz Claiborne holds a reasonable

proportion of goodwill to assets and is relatively comparable to the industry

leaders. The potential for further flexibility in this key accounting policy is

unsubstantial.


Goodwill

2002 2003 2004 2005 2006

Liz Claiborne 2,296,318,000 X 2,606,999,000 858,565,000 1,007,859,000

Ralph Lauren 273,348,000 315,559,000 341,603,000 558,858,000 699,700,000

Jones Apparel 1,541,100,000 1,649,900,000 2,125,000,000 2,097,300,000 1,299,300,000

Goodwill as a percentage of total Assets

One other flexibility that the managers have is the ability to consider some

of their extensive leases as operating leases. However those leases should be

considered an asset and capitalized on the company books. According to GAAP,

lease transactions should be recorded as capital leases if any of the following

conditions are met: first ownership of the asset is transferred to the lessee at the

end of the lease, then the lessee can purchase the asset at the end of the lease,

third the lease is 75 percent of the asset’s expected life, at last, the present

value of the lease payments are 90 percent or more of the fair value of the

asset. For the apparel industry, operating leases have been a favorite. This is

due to the underlying reason that these types of leases are more favorable

because operating leases are accounted to rent expense and that means that

they are tax deductible. When the company decides to capitalize its leases, it

decreases its earning by increasing interest expense for the period. This makes

the company less attractive to both investors and lender. If the firm takes all of

its operating leases off of the balance sheet, this would make them look good in

the eyes of the lenders because they have few obligations.

2002 2003 2004 2005 2006

Liz Claiborne 20.85 X 22.88 27.24 28.83

Ralph Lauren 15.62 15.48 14.87 20.5 22.65

Jones Apparel 40 39.4 46.7 45.81 34.31


Evaluate Accounting Strategy

After looking through the 10-K, we have assessed that Liz Claiborne Inc. is

a high disclosure company. Their Accounting strategy is one that allows for the

clearest picture of the firm’s financial situation. The document breaks down the

numbers and displays them in their individual parts and attempts to give analyst

the most detail possible. Liz Claiborne’s accounting policies are similar to the

competitors and the industry standards. This is important because it allows

shareholders to view the aspects of the company and make investment

decisions.

The most recent accounting strategy that Liz Claiborne has changed is the

way they impair and amortize goodwill. In 2002, they changed this policy due to

the fact that GAAP required revision under the SFAS 142. After this change, we

feel that Liz Claiborne has taken a more conservative approach to its accounting

style.

Qualitative Analysis of Disclosure

Investor relations are a significant part of most major company’s

involvement with consumers, as far as financial information is concerned. Each

year major companies are required to disclose all of their financial information

from that previous year in a financial summary, also known as, a 10-K. The 10-K

gives a report on a company’s business and financial standing. Many people find

these useful such as investors, competitors, and auditors. The qualitative

analysis of disclosure section will go over how satisfactory the Liz Claiborne

financial information is disclosed.

The transparency of a company is measured by the consistency of the

information that flows through a company at any given time. For a company to

be perfectly transparent, they would have to be willing to provide the same level

of information at all times. Liz Claiborne’s transparency is definitely above

average. Transparency eliminates uncertainty, which investors dislike. The 10-


K’s for the past 6 years have provided great detail, they go above and beyond to

make detailed reports on the various things that might be seen as discrepancies

in their books. Although, in many instances firms in the same industry, like Liz

Claiborne and Ralph Lauren, tend not to lend themselves to full disclosure in

order to prevent other firms from obtaining a competitive advantage or finding

out the strengths of their individual firm. At the same time, the better the

information provided by the firm in their qualitative disclosure, the less

uncertainty investors will find when reviewing the financial statements. When an

investor is able to access all of the information with ease, they gain confidence in

the company and provides them with a sense of reliability.

Quantitative Analysis

The Quantitative Analysis section will determine the effectiveness of the

different firm’s financial statement disclosure. This will be achieved through the

examination of the different core sales manipulation and core expense

manipulation in comparison to the apparel industry. Inconsistency is the main

focal point of analysis throughout the four companies examined in the

quantitative analysis section. In the event of a discrepancy, a firm should then be

evaluated more closely in order to investigate the possibility of manipulation of

the numbers within that certain firm. Manipulation occurs for a number of

different reasons including the anticipation of debt and wanting to make the

financial statements tell otherwise so that lenders and investors stay confident

and interest rates remain low.

Core Sales Manipulation Diagnostics

The following Core sales diagnostics were calculated using the past 6

years of financial summaries for the four companies evaluated in the apparel

industry. This section is essential because it exposes any flaws in the in the

accounting numbers that concern sales. Being able to look at the competitors of


Liz Claiborne, instead of Liz Claiborne solely provides a large advantage for the

person analyzing the diagnostics. Instead of automatically thinking “red flag”

when an irregularity appears, the analyst will then be able to look at the ratios

on an industry wide basis and see if there was in fact a “red flag” or if there was

in fact an industry-wide discrepancy. The graph below indicates the Net Sales/

Cash from Sales for the four major firms in the apparel industry.

Net Sales/ Cash From Sales

0

5

10

15

20

25

30

2002 2003 2004 2005 2006

Liz Claiborne(LC)Ralph Lauren(RL)VF Corporation(VFC)Jones ApparelGroup (JNY)

The main function of the Net Sales/ Cash from Sales diagnostic is to show

us the percentage of sales that was actually cash collected in the period. The

graph above shows that the apparel industry has been highly diversified over the

past 5 years. Considering that Liz Claiborne, VF Corp or Jones Apparel Group

have been expanding and acquiring various brands and companies over the past

decade, it is not that uncommon to see large differences throughout the

industry. Some companies will post a loss one year, and then have a significant

increase in revenue another year due to the manipulation of their numbers or the


success of one of their new acquisitions. Liz Claiborne stands out with a large

increase in its ratio from 2005 to 2006.

Net Sales/ Accounts Receivable

0

5

10

15

20

25

30

2002 2003 2004 2005 2006

Liz Claiborne(LC)Ralph Lauren(RL)VF Corporation(VFC)Jones ApparelGroup (JNY)

After examining the ratios and above graph, it was concluded that credit

sales are a large part of the apparel industry. The Net Sales / Accounts

Receivables ratio is what indicates how much of a firm’s net sales are supported

by either the accounts receivable or credit sales. In the apparel industry where a

majority of business is going to be done through wholesale and credit sales it is

not uncommon for these ratios to be quite high. Although Liz Claiborne has its

own stores throughout the country, it does a huge portion of all of its business

through wholesale. After reviewing the information from the graph above for the

industry, all of the major companies have remained fairly constant in the past 5

years. Liz Claiborne does show a significant increase for 2005 to 2006, which

could be a result of a number of things. It does pose as somewhat of a “red flag”

which we will identify later.


Net Sales/ Inventory

02468

1012

2002 2003 2004 2005 2006

Liz Claiborne (LC)

Ralph Lauren (RL)

VF Corporation(VFC)Jones ApparelGroup (JNY)

The Net Sales/ Inventory diagnostic ratio is used to measure how well a firm’s

inventory supports its net sales. Basically, this shows us how well a firm can use

their inventory to create revenue. A high ratio indicates that a company has low

inventory costs and/ or high sales. As shown in the graph above Liz Claiborne

leads the apparel industry in this ratio. Ideally, firms want their ratios to be high

and consistent. Liz Claiborne is able to achieve this due to their high sales

numbers. A large spike or discrepancy in the ratios would indicate that there has

been some manipulation by the firm with the discrepancy. After calculating and

evaluating all of the ratios for the apparel industry there is no reason to believe

that any of the competitors have manipulated their sales/ inventory numbers.

Conclusion to Sales Manipulation Diagnostics

After conducting a sales manipulation diagnostic test for the four major firms in

the apparel industry there was only one major discrepancy in the numbers that

would lead us to believe that Liz Claiborne may have manipulated its sales. From

2005-2006 there was a large increase in the Net Sales/ Accounts Receivables, as

well as the Net Sales/ Cash ratios. Considering that this was only one year we

cannot totally be sure if Liz Claiborne did indeed manipulate its sales. The other


firms in the apparel industry have shown no discrepancies in their numbers and

no reason for us to believe that there sales have been manipulated. Lastly, after

examining all of the sales manipulation diagnostic ratios it was found that LIZ

has consistently outperformed its competitors in the apparel industry.

The Following Table Contains The Exact Ratios that were used to compose the

above graphs

Liz Claiborne Sales Manipulation Diagnostics 2002 2003 2004 2005 2006Net Sales/ Cash From Sales 17.57 14.45 15.78 14.76 26.9

Net Sales/ Net Accounts Receivables 10.03 10.85 11.85 11.65 10.01

Net Sales/ Inventory 8.06 8.74 9.55 9.04 8.41

Ralph Lauren Sales Manipulation Diagnostics 2002 2003 2004 2005 2006Net Sals/ Cash From Sales 8.67 6.37 6.75 8.73 12.24

Net Sales/ Net Accounts Receivables 6 5.83 5.34 6.76 7.23


VF Corporation Sales Manipulation Diagnostics 2002 2003 2004 2005 2006Net Sales/ Cash From Sales 10.23 10.12 12.47 18.82 17.88



Jones Apparel Group Sales Manipulation Diagnostics 2002 2003 2004 2005 2006Net Sales/ Cash From Sales N/A N/A N/A 12.82 5.62

Net Sales/ Net Accounts Receivables N/A N/A N/A 9.76 9.75

Net Sales/ Inventory N/A N/A N/A 6.89 6.31

Core Expense Manipulation Diagnostics

The second part to the quantitative analysis section of this report will

focus on finding any irregularities within each company’s accounting policies.

This section is much like the first section, except that it focuses on one main

difference. In this section we will be looking for irregularities in the accounting of

expenses and not sales. Again, we use Liz Claiborne’s 10-K’s from the past 6

years and compare them among the top 3 competitors in the apparel industry

(Ralph Lauren, VF Corp, and Jones Apparel Group). After the ratios have been


calculated for the industry we will then look at the ratios and use our best

judgment as to whether or not the ratios have been manipulated or not. Once

these ratios have been calculated and evaluated, opinions can be made as to the

credibility of each firm in the industry’s financial statements.

Asset Turnover- Sales/Assets

00.20.40.60.8

11.21.41.61.8

2002 2003 2004 2005 2006

Liz Claiborne (LC)

Ralph Lauren (RL)

VF Corporation (VFC)

Jones Aparrell Group(JNY)

The first expense diagnostic we evaluated is the asset turnover which

explains whether or not a firm is able to sufficiently generate sales from their

assets such as inventory. It basically tells us whether or not a company’s assets

are able to support its overall sales. These numbers may become distorted when

a company fails to depreciate an asset, mostly long-term, sufficiently. Another

area of concern, which may also lead to a high turnover ratio, is that companies

fail to write off or account for goodwill. The asset turnover ratios for the apparel

industry have remained relatively constant in the past 5 years and they do not

show a high cause for concern. However, Liz Claiborne’s asset turnover numbers


have been quite high for the past 6 years. After reviewing the asset turnover

ratios above for the four leaders in the apparel industry I would say that there is

a “red flag” for Liz Claiborne, which could be in direct correlation to goodwill.

Change in CFFO/ Change in OI

-10-8-6-4-20246

2002 2003 2004 2005 2006

Liz Claiborne(LC)

Ralph Lauren(RL)

VFCorporation(VFC)Jones ApparelGroup (JNY)

The other expense diagnostic ratios that we will use are the Change in

Cash Flow from Operating Activities and the Change in Operating Income which

will show us if there has been any manipulation of the expenses on the

financials. The numbers across the apparel industry have not varied significantly

over the past 5 years. Ideally the numbers should be close to one which would

show that most of the revenue is created through its operating activities and not

that of the finance and investing. This ratio can vary if a company manipulates

the way it accrues its different expenses or changes its accounting policies in

order to distort Net Income. Liz Claiborne’s ratios have been fairly consistent

over the past 5 years and there seems no cause for concern.


Potential Red Flags

Financial statements sometimes can be manipulated by a corporation to

make its company look better on paper. Most of the time accounting

fraudulence, such as overstating or understating assets, net income or the main

accounting balances, is highly illegal and can land top executives in federal

prison. Although at times, brilliant accountants can deceptively mislead readers

through aggressive or deceptive accounting, analysts often notice signs of

deceptive accounting which triggers a RED FLAG.

For instance, Liz Claiborne shows that 28% of its total assets are goodwill.

Goodwill is not a tangible asset and has no future benefit, but it makes up more

than a quarter of Liz Claiborne’s total assets. Most of the goodwill comes from

the $448.6 million in acquisitions. Of those purchases, $102.8 million was

allocated to goodwill over the last five years. This is a substantial amount of

money being placed on the asset side of the balance sheet for goodwill making

Liz Claiborne look favorable. To our group this is a RED FLAG because goodwill

is an estimated calculation that can easily be manipulated to benefit the

company.

Another area that was questionable to our group was the amount of

money allocated to operating leases by Liz Claiborne. Liz Claiborne has $187.2

million in operating leases for all of its stores locations. These leases, in reality,

are a liability or an obligation to pay a particular party at a certain time, and

should be place on the balance sheet to accurately portray Liz Claiborne’s

financial position. Essentially, Liz Claiborne is understating its liabilities, and

understating its assets. By Liz Claiborne failing to place these liabilities on the

balance sheet, it dramatically affects the debt to equity and liquidity ratios. This


is a considerably large amount of liability hidden by ambiguous accounting which

triggers a Red FLAG.

Undo Accounting Distortion

After determining the potential RED FLAGS we restated the balance sheet

to see the affects of the possible accounting distortion. We started by

capitalizing the operating leases to see what kind of affect they would have on

balance sheet. We found that if the operating lease were capitalized and put on

the books Liz Claiborne has been understating liabilities and assets. Graph (1-1)

listed below for reference of calculations.

Another RED FLAG that caught our eyes was the fact that Liz Claiborne

showed over a billion dollars of goodwill on the balance sheet. This could

possibly show an overstatement in assets because 28% of total assets in our

eyes could have been manipulated. To see the effect of an excess in goodwill,

we decided to amortize the goodwill over a 5 year period following the year of

acquisition. Doing this we would decrease the amount of goodwill over a period

of time. We started in 2001 and went forward to 2007. We have determined

that $618,835,800 of goodwill should be not be claimed on the balance sheet

making goodwill balance at $389,019,200. With this significant amount of

money removed from that balance sheet, Liz Claiborne doesn’t seem to be as

flattering. Graph (1-2) listed below for reference of calculations.


Capitalizing Operating Leases

Table (1-1)

• We used a 5.2 interest rate to calculate all numbers

• To determine the payment we took the (beginning operating lease + Interest – Ending

Operating lease)

• We found depreciation by dividing the operating lease by 25, which was the average

length of the leases.

Operating

Leases

Interest

Expense PMT Change in

Balance Depreciation

Capital Lease

Expense

Understated

A and L

2001 97,569,000 5,073,588 9,883,412 4,809,824 3,902,760 8,976,348 88,592,652

2002 112,526,000 5,851,352 23,164,648 17,313,296 4,501,040 10,352,392 102,173,608

2003 141,542,000 7,360,184 8,888,816 1,528,632 5,661,680 13,021,864 128,520,136

2004 157,791,000 8,205,132 4,107,868 -4,097,264 6,311,640 14,516,772 143,274,228

2005 170,104,000 8,845,408 8,250,592 -594,816 6,804,160 15,649,568 154,454,432

2006 187,200,000 9,734,400 23,134,400 13,400,000 7,488,000 17,222,400 169,977,600

2007 173,800,000 9,037,600 20,137,600 11,100,000 6,952,000 15,989,600 157,810,400

TOTAL 1,040,532,000 54,107,664 97,567,336 43,459,672 41,621,280 95,728,944 944,803,056


Impairing Goodwill

Table (1-2)

After seeing the large amount of goodwill on Liz Claiborne’s

books, we decided to impair a portion of the goodwill to find what we

feel is the actual amount. The impact of the impairment expressed

above is shown on Liz Claiborne’s adjusted financial statements in the

Appendix on page 105.

Financial Analysis

An appropriate financial analysis is comprised of three categories: liquidity

analysis, profitability analysis, and capital structure analysis. Each of these

categories consist of a variety of ratios that when analyzed together determine

the financial wellbeing of a firm. Analyzing the finances of a company is

extremely important in determining if a company is worth investing. Analysis can

Goodwill

Increase in

goodwill 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2001 276,213 276,213 55242.6 55242.6 55242.6 55242.6 55242.6

2001-2002 404,654 128,441 25688.2 25688.2 25688.2 25688.2 25688.2

2002-2003 478,869 74,215 14843 14843 14843 14843 14843

2003-2004 596,436 117,567 23513.4 23513.4 23513.4 23513.4 23513.4

2004-2005 755,655 159,219 31843.8 31843.8 31843.8 31843.8 31843.8

2005-2006 858,565 102,910 20582 20582 20582 20582 20582

2006-2007 1,007,859 149,294 29858 29858 29858 29858 29858

TOTAL 1,007,859 55242.6 80930.8 95773.8 119287.2 151131 116470.4 120640.2 105797.2 82283.8 50440 29858


manipulate numbers from financial documents to make estimates and forecast of

future values and cash flows. It is also a good idea to analyzing a company with

other firms in the industry to make industry comparisons and draw conclusions.

Liquidity Analysis

The following liquidity analysis section will provide a number of ratios that

all pertain to calculating how quickly a firm in the apparel industry is able to pay

off its short term debt liability. These ratios provide information to analyst so that

they will be able to determine a firms’ efficiency. High ratios tend to indicate

good efficiency while lower ratios might suggest that there are liquidity issues

with a firms short term obligations. This section will contain seven different ratios

which will evaluate various aspects of a firm’s liquidity.


00.5

11.5

22.5

33.5

44.5

5

2003 2004 2005 2006 2007

Tim

es

Year

Current Ratio

Liz Claiborne (LIZ)

Ralph Lauren (RL)

VF Corpoation (VFC)

Jones Apparel Group (JNY)

Industry Average

The Current ratio is how a company determines whether or not its short

term assets can cover its short term liabilities. The current ratio is found by

calculating a firm’s current assets divided by its current liabilities. Analysts look

at the current ratio to determine if a company is capable of receiving a loan.

Most analyst want to see a company with a current ratio of 1 or higher

depending on the industry of the company. If a company has a current ratio of

less than 1 it will be difficult to find a lender. A current ratio of less than one

signifies a company has more debt than assets. Liz Claiborne’s current ratio for

2007 was 2, and the average for the last three years was 2.3. Liz Claiborne’s

ratio in 2007 indicates that Liz Claiborne had two dollars of assets to cover every

dollar of debt. Liz Claiborne’s current ratio average seems to be very high, but

compared to the apparel industry as a whole it is low. Polo Ralph Lauren


Corporation has a current ratio average during 2004 to 2007 of 2.69 which puts

Polo Ralph Lauren Corporation at the top of the industry.

00.20.40.60.8

11.21.41.61.8

2003 2004 2005 2006 2007

Tim

es

Year

Quick Asset Ratio

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Average

The quick asset ratio is almost the same as the current ratio except it

excludes many of the less liquid assets. The quick asset ratio is calculated by

taking the companies quick assets and dividing them by the company’s current

liabilities. Quick assets include cash, short term investments and the companies

account receivable. “The quick ratio assumes the firm’s account receivable is

liquid. This is true in industries where the credit-worthiness of the customers is

beyond dispute, or where receivables are collected in a very short

period.”(Business Analysis and Valuation) Liz Claiborne’s quick asset ratio for

2007 was .08, and Liz Claiborne’s average over the past 3 years was 1.1. This is

a very acceptable average due to the fact that the industry average was 1.13.


0123456789

2003 2004 2005 2006 2007

Tim

es

Year

Inventory Turnover

Liz Claiborne (LIZ)

Ralph Lauren (RL)


Jones Apparel Goup (JNY)

Industry Average

The inventory turnover ratio is calculated by finding a company’s cost of

goods sold and dividing it by the company’s inventory. ”A low turnover rate may

point to overstocking, obsolescence, or deficiencies in the product line or

marketing effort. However, in some instances a low rate may be appropriate,

such as where higher inventory levels occur in anticipation of rapidly rising prices

or shortages. A high turnover rate may indicate inadequate inventory levels,

which may lead to a loss in business.”( investopedia.com) The inventory

turnover ratio is important to Liz Claiborne because it helps determine how

effectively the company manages the inventory of its product lines. Over the

past three years Liz Claiborne’s inventory turnover ratio has been 4.5 which

shows Liz Claiborne might have a ”overstocking, obsolescence, or deficiencies in

the product line or marketing effort lines”( investopedia.com). The industry


average is 5.62 which places Liz Claiborne at the bottom of the apparel industry.

This shows us that compare to the industry Liz Claiborne is less efficient when it

comes to buying inventory or selling their merchandise.

0

20

40

60

80

100

120

2003 2004 2005 2006 2007

Days

Year

Days Supply of Inventory

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Average

The day supply of inventory is calculated by taking the number of days in

a year (365) and dividing by the inventory turnover ratio.” The day supply of

inventory returns is a figure that equivalent to the number of days an item is

held as inventory before it is sold. The lower the day’s inventory, the more

efficient the company is.”( investorwords.com) Liz Claiborne is moderate in this

category as compared to the apparel industry as a whole.


0

2

4

6

8

10

12

14

2003 2004 2005 2006 2007

Tim

es

Year

Accounts Receivable Turnover

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Average

The account receivable turnover ratio is a way of finding how quickly and

efficiently a company is utilizing its assets. It is calculated by dividing sales by

account receivable. “The lower the turnover rate, the longer receivables are

being held-and the less likely they are to be collected.” (answer.com) Over the

past three years Liz Claiborne has maintained a 10.3 account receivable turnover

ratio. Liz Claiborne leads the apparel industry in account receivable turnover

ratio. This means that Liz Claiborne is collecting the sales from accounts

receivable much quicker than its competitors and avoiding possible defaults on

accounts.


0

10

20

30

40

50

60

70

2003 2004 2005 2006 2007

Days

Year

Days Sales Outstanding

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Average

The day supply of receivable is calculated by taking the number of days in

the year (365) and dividing by the accounts receivable turnover. This number

helps to determine how quickly a firm collects cash from its sales for that year.

In the apparel industry the average day supply of receivables over the past 5

years is 42.44 days. This means that in the apparel industry it takes 42.44 days

to receive the cash from the sale of origin. The low of the day’s supply of

receivables ratio a company has indicates how quickly the company will receive

cash for sales. After cash is received, the company reinvests it in profitable

ventures giving the company the opportunity to gain a substantial return.


0

2

4

6

8

10

12

2003 2004 2005 2006 2007

Tim

es

Year

Working Capital Turnover

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Average

The working capital turnover is a very important ratio that helps

companies evaluates how efficiently or effectively it is using its working capital to

generate sales. Working capital turnover is found by dividing working capital

(current assets –current liabilities) into sales. Over the past three years Liz

Claiborne has managed to maintain an average of 5.5 for its working capital

ratio. The apparel industry as a whole has an average of 5.98 for the past 5

years. Over all the apparel industry is very effective when it comes to working

capital.

Conclusion

Overall the liquidity analysis of Liz Claiborne and its competitors in the

apparel industry has helped us determine how quickly the companies can satisfy

their debts. After looking at Liz Claiborne’s current ratio, quick asset ratio,


account receivable turnover ratio, days sales outstanding ratio, inventory ratio,

day’s supply of inventory ratio and the working capital turnover ratio, we have

determined that Liz Claiborne is very liquid and can fulfill its debt obligations with

ease. This section has also helped determine potential strengths and weakness

in Liz Claiborne’s financials. For instance, problems such as the declining trend

of quick asset ratio of Liz Claiborne arose. This shows analysts that the company

might have problems covering its debt responsibility in the future.

PROFITABILITY ANALYSIS

The profitability analysis section has helped us determine how quickly and

efficiently Liz Claiborne and other companies in the apparel industry can produce

profits. This section is comprised of gross profit, operating profit margin, net

profit margin, asset turnover, return on assets, and return on equity. These

numbers are based on percentages and will help to determine the profitability of

Liz Claiborne and its competitors in the apparel industry.


0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

2003 2004 2005 2006 2007

Perc

ent

Year

Gross Profit Margin

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Average

The gross profit margin is a percentage that shows the profitability of a

firm. It is calculated by dividing a company’s gross profit by its sales. “Gross

profit is influenced by two factors: 1) the price premium that a firm’s product or

service commands in the market place and 2) the efficiency of the firm’s

procurement and production process.”(Business Analysis and Valuation) Over

the past three years Liz Claiborne’s gross profit margin has been 46.7% which is

just above the appeal industry average of 45.7%. If you look at the graph above

you will see that compared to the apparel only Liz Claiborne and VF Corporation

have a steady positive trend. Ralph Lauren and The Jones Apparel Group both

have dramatic changes in 2005. Ralph Lauren started off 2005 with a negative

trend, but turned its gross profits around and made a substantial increase in the

years to follow. On the other hand The Jones Apparel Group had a positive

trend coming into 2005, but its gross profits margin took a turn for the worst in

the years after.


-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

2003 2004 2005 2006 2007

Perc

ent

Year

Operating Profit Margin

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Average

The operating profit margin is calculated by subtracting cost of sale from

revenue and then divided by revenue. “The Operating margin indicates how

effective a company is at controlling the costs and expenses associated with their

normal business operations.”(investorwords.com) In Liz Claiborne’s case, as

discussed above in the net profit margin section, it was very successful in 2004

thru 2006 with a ratio of 10.06%, but then had a dramatic decline in 2007. The

rest of the competitors in the apparel industry, excluding the VF corporations,

had negative trend in 2005, but only Liz Claiborne fell into a negative

percentage.


-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

2003 2004 2005 2006 2007

Perc

ent

Year

Net Profit Margin

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Average

The net profit margin is calculated by dividing net income by sale. “The

net profit margin is mostly used for internal comparison, because it is difficult to

accurately compare the net profit ratio for different entities. Individual

businesses' operating and financing arrangements vary so much that different

entities are bound to have different levels of expenditure, so that comparison of

one with another can have little meaning.”( investopedia.com) Liz Claiborne in

2004 to 2006 had a very adequate net profit margin with an average of 6.28%,

but in 2007 the company took a turn for the worst and posted a net profit

margin of -8.14%. This negative net profit margin was primarily due to the fact

that the sales for 2007 were dramatically lower and negatively affected net

income.


00.20.40.60.8

11.21.41.61.8

2

2003 2004 2005 2006 2007

Tim

es

Year

Asset Turnover

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Average

Asset turnover, calculated by dividing sales by total assets, is a measure

that shows a firm’s capability to generate its profits from its sales. Liz Claiborne

is an industry leader in asset turnover. One of the main reasons why they are so

successful is because of their large amount of successful acquisitions. The graph

above graph shows the positive trends of Liz Claiborne, VF Corporation, and the

Jones Apparel Group. Only Ralph Lauren had a negative trend in the asset

turnover ratio area meaning that they were unsuccessful in turning their profits

in to sales.


-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

2003 2004 2005 2006 2007

Perc

ent

Year

Return On Assets

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Comparison

The percentage generated from the return on assets formula indicates

what percentage of net profits has been generated by the assets of a firm. You

find this by taking the net income of one year and dividing the number by the

number of total assets from the previous year. A favorable ROA tends to be high,

indicating that there has been an optimal return of profit from the previous

year’s assets. A low ROA should indicate to a firm that their assets have not

been used efficiently and that there is room for improvement. The above graph

shows the ROA percentages for the apparel industry in the previous 5 years

(2002-2007). Liz Claiborne is the only company in the apparel industry that has

a negative trend telling us that its asset investments are very profitable

compared to its competitors.


-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2003 2004 2005 2006 2007

Year

Return on Equity

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Comparison

The return on equity is calculated by dividing net income by equity. “A

measure of a corporation's profitability that reveals how much profit a company

generates with the money shareholders have invested.”(investopedia.com) Liz

Claiborne invest most of their share holder’s money in the acquisitions of other

companies. This process has kept the ROE ratio high in 2004 thru 2006, but in

2007 the ROE declined rapidly. Our group feels that most of these declines are

due to the poor activity in the US economy.


Conclusion

After completing profitability analysis of Liz Claiborne and its competitors

in the apparel industry by finding the gross profit, operating profit margin, net

profit margin, asset turnover, return on assets, and return on equity we have

determined that before 2007 Liz Claiborne was very competitive in its industry.

It wasn’t until 2007 when Liz Claiborne began to show signs of a decrease in

profits its operating profit margin, net profit margin, return on equity, and its

return on equity. In all of these areas Liz Claiborne had negative trends while its

competitors were showing positive trends. We feel that overall Liz Claiborne is at

the bottom of the industry in generating profits.

CAPITAL STRUCTURE ANALYSIS

In the capital structure analysis we will see how Liz Claiborne and its

competitors finance their assets. The ratio’s used to determine the efficiency of

company capital structure are debt to equity, time interest earned, debt service

margin, Altman-Z Score, internal growth rate, and sustained growth rate. After

finding these ratios we will be able to determine which company in the apparel

industry has the most efficient capital structure.


0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

2003 2004 2005 2006 2007

Perc

ent

Year

Debt to Equity

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Comparison

The debt equity ratio is calculated by taking a companies total debts and

dividing it by the shareholders' equity. As you can see in the graph above in

2007 Liz Claiborne has the highest debt to equity ratio in the industry. A high

debt/equity ratio generally means that a company has been aggressive in

financing its growth with debt. In Liz Claiborne’s case, this could be potentially

bad because the company’s sales have decreased but its debts have risen.


-30-20-10

01020304050

2003 2004 2005 2006 2007

Year

Times Interest Earned

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Comparison

The Times Interest Earned ratio measures the ability of a firm to pay off its debt

obligations. It is calculated by dividing the EBIT of a company by total interest.

” A high ratio can indicate that a company has an undesirable lack of debt or is

paying down too much debt with earnings that could be used for other projects”

(financial-dictionary.com). In the apparel industry Ralph Lauren has the highest

time interest earned ratio, which meaning they are lacking more earnings,

compared to its competitors, which could be used for other investments.


Debt Service Margin is computed by dividing the cash flow from

operations by the current long term portion of long-term debt. It is a measure

that shows analysts how much of a firms cash flows from operations can cover

their current portion of debt. In the graph above you can see all of the

competitors, excluding Liz Claiborne, have a very steady trend with a large

increase in 2006. On the other hand Liz Claiborne has a very volatile debt

service margin increasing and decreasing dramatically over the past 5 years.

This graph indicates that Liz Claiborne does not have a problem satisfying its

long term debt obligations.


Altman Z-Scores

The Altman Z score is a financial distress. The scoring formula is

comprised of five variables that are all important in computing the bankruptcy

score. The addition of X1 (net working capital/total assets), X2 (retained

earnings/total assets), X3 (EBIT/total assets), X4 (market value of equity/book

value of equity), and X5 (sales/total assets) equals the Z score used in credit

analysis. “Generally speaking, the lower the score, the higher the odds of

bankruptcy. Companies with Z-Scores above 3 are considered to be healthy and,

therefore, unlikely to enter bankruptcy”( www.investopedia.com).

In the above graph, judging by the Z scores, you can see that all the

companies in the apparel industry are very profitable with no signs of bankruptcy

in their future. Although over the past 5 years Liz Claiborne’s Z score has had a

decreasing trend it has still managed to stay above the “grey area”. The “grey

area” is above 1.8 and below 3. If a company’s Z score falls in this area, banks

or lenders would view this company as a potential liability to default.

Grey Area Between 1.8 and 3


Internal Growth Rate

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2003 2004 2005 2006 2007

Liz Claiborne (LIZ)

Ralph Lauren (RL)

VF Corporation (VFC

Jones Apparel Group

Industry Average

The internal growth rate refers to the maximum rate at which a company can grow

using only funds generated within the company. Judging by the above graph Liz

Claiborne seems to have the worst internal growth rate in the apparel industry. This

decrease could have been caused by the decline of Liz Claiborne’s sales or assets in the

past two years. Having a low IRG means that Liz Claiborne is going to generate less

growth internally compared and will gain less potential profits compared to the apparel

industry.


-40-30-20-10

0102030

2003 2004 2005 2006 2007

Perc

ent

Year

Sustainable Growth Rate

Liz Claiborne (LIZ)

Ralph Lauren (RL)



Industry Average

The SGR or sustainable growth rate helps us determine the maximum rate

at which a company can grow without having to borrow money or increase

financial leverage. SGR is calculated by multiplying ROE by (1 – the dividend

payout rate). The graph above shows the SGR of the apparel industry. Every

company in the apparel industry has a negative SGR trend. Liz Claiborne was

leading the apparel industry until it had a dramatic decrease in net income which

in turn decreased its SGR.


Financial Statements Forecast

Forecasting financial statements is a tool that is based upon very

educated assumptions. These hypotheses are found to be very accurate and

beneficial to any people interested in valuing a company. We forecasted the net

income, balance sheet, cash flows, and the cost of capital in order to find the

future value of Liz Claiborne and to see if the company is correctly valued.

We began our financial forecasts by using Liz Claiborne’s Income

statement to find the net sales growth rate. Liz Claiborne has no significant

trend in its income statement, so we deiced to use a percent growth rate. This

allowed us to easily value the company with a steady growth rate and collect

important information for our valuations.

Ater we forecasted the regular income statement we proceeded to

estimate our restated assets. This in our eyes gave a more accurate forecast on

the company because we included new restated balances such as the

impairment of good will and capitalizing leases.

When we forecasted the balance sheet, we capitalized leases and

impaired good will. We believe that goodwill is an asset with no real intrinsic

value, so we impaired (deducted) a small percentage of goodwill in attempt to

bring the balance sheet to its real value. Liz Claiborne also had a large amount

of lease debt that wasn’t on the book. We felt that the company couldn’t be

truly value unless the value of the leases was capitalized. After restating the

good will and the capital leases we were able to forecast the company more

accurately.

When we forecasted the operating cash flows we used an average of

CFFO/Sales. The percent that we used when forecasting was 9 percent. Using


this percent gave a us a very accurate appropriate for estimation because it was

derived from two very important accounts.

Conclusion

Based on the information we gathered from our valuations, we foresee

that Liz Claiborne is going to have a decrease in sales and growth in the years to

come. Using the Income statement, balance sheet, and cash flow forecasting

has helped us accurately determine the future values for Liz Claiborne.

Cost of Capital of estimation The calculation of cost of equity (Ke) for a firm is calculated by using the

CAPM model (Ke=Rf + Beta (Rm-Rf). There are several things that go into

calculating this number including the current risk-free rate (Rf), the expected

return on the market (Rm), and the firms beta(B). We calculated our expected

market return and current risk-free rate using data from the St. Louis Federal

Reserve Site. In order to calculate our beta for the cost of equity equation we

used the regression numbers from 24 months, 36 months, 48 months, 60

months, and 72 months. The regression model that has the highest R^2 will give

us the most accurate beta in order to find our cost of equity. The 24 month

regression ended up having the highest R^2, so its beta (1.06) is the one that

we will use in our equation. The risk-free rate was calculated using the 10 year

treasury constant maturity rate and came out to be 3.74. Our market risk

premium ended up totaling to be 8.5 using S & P 500 numbers as well as

historical data. The computed cost of equity after gathering all of the variables

ending up being 12.73%.

Ke = Rf + beta(MRP)

Ke = 3.74 +1.06(8.5)


Ke = 12.73%

We calculated a current cost of debt of 5.06%. We got this be dividing

each individual liability (current and long term) by the total liabilities. We then

multiplied each number by its own cost of debt. We calculated the weighted

average cost of capital. Now that we have cost of debt and cost of equity we are

able to calculate the before (8.37%) and after (6.83) weighted average cost of

capital.

ANALYSIS OF VALUATION

The purpose of fundamental analysis is to identify stocks that are

mispriced relative to some measure of “true” value that can be derived from

derived from observable financial data. Firms valuations can be summarize in to

two main sectors the Method of Comparables and the Intrinsic Valuation.

Method of Comparables

The method of comparables looks at earnings ratios from the firm in

question as well as the industry average to formulate a firm’s share price. In a

variety of metrics, you are able to compare equivalent data across firms. This

method requires little to no insight into the companies or their industries and

does not incorporate a fundamental approach to determining, for instance, the

feasibility of reported numbers. However using this method, the compute the

seven ratios to evaluate and compute Liz Claiborne’s share price.


Forward Price to Earnings

EPS PPS P/E Industry Average

Liz Share Price

LIZ 2.61 18.15 6.95 15.82 41.28RL 3.67 61.48 16.75 Jones 3.07 14.08 4.59 VF 5.22 77.68 14.88

The forecasted price to earnings is calculated by using the price per share

(PPS) and dividing it by the forecasted earnings per share (EPS). By taking the

sum of all of the P/E ratios from VF Corporation, Jones Apparel and Polo Ralph

Lauren (Liz Claiborne direct competitors), excluding Liz Claiborne’s, and dividing

by the number of competitors, the industry average is calculated. By setting the

industry average equal to Liz P/E ratio a share price is calculated. Liz forecasted

price to earnings share price is $41.28. As we compared this computed price to

the actual market price of $18.15, the model illustrates that Liz is undervalued.

Although we are allowing for estimation error, a share price that is (+/-) 20% of

the market price is acceptable as fairly valued; the forecasted price to earnings

share price is still undervalued in these circumstances.


Trailing Price to Earning

EPS PPS P/E Industry Average

Liz Share Price

LIZ -3.74 18.15 n/a 15.82 N/A RL 3.67 61.48 16.75 Jones 3.07 14.08 4.59 VF 5.22 77.68 14.88

Just as we calculated the forecasted price to earnings, the trailing price to

earnings is calculated identically except that current prices are used instead of

forecasted prices. Therefore, the industry average of $15.82 is set equal to Liz

Claiborne’s (P/E) ratio. However, we could not compute this ratio at this point

because Liz Claiborne has a negative EPS of ($3.74).

Price to Book

BPS PPS P/B Industry Average

Liz Share Price

LIZ 13.42 18.15 1.35 2.50 $33.50 RL 23.577 61.48 2.61 Jones 23.41 14.08 0.60 VF 32.58 77.68 2.38

In order to compute the price to book value of Liz, we took again compute an

industry P/B average excluding Jones Apparel because it appears to be an outlier

from the rest and we multiplied that number but the Liz Claiborne’s Book Value

per share as of December 2007. Liz Price to Book value share price came out to

be $33.50. Again this suggests that, compare to the actual share price of $18.15,

Liz is undervalued.


Dividend to Price

DPS PPS D/P Industry Average

Liz Share Price

LIZ 0.23 18.15 0.013 0.035 $6.61 RL 0.2 61.48 0.003 Jones 0.56 14.08 0.040 VF 2.32 77.68 0.030

The dividend to price ratio was computed by dividing Liz’s dividend paid per

share by the average dividend to price ratio of the industry (Polo Ralph Lauren

was excluded as we identify it as an outlier). Liz dividend to price share value is

$6.61, leading as to the conclusion that Liz Claiborne is overvalued.

Price to Earnings Growth

EPS PPS PEG Industry Average

Liz Share Price

LIZ -3.74 18.15 N/A 1.16 N/A RL 3.67 61.48 1.08 Jones 3.07 14.08 1.12 VF 5.22 77.68 1.27

The price earnings growth model, also know as the P.E.G. ratio, calculates the

firms stock price by using the (P/E) ratio and dividing it by the expected earnings

growth rate. To derive the share price for Liz Claiborne, we took the industry

average of 1.16 is then multiplied by both Liz Claiborne’s earning growth rate of

6% and the EPS. However, we could compute this figure because Liz EPS were

negative.


Price to EBITDA

PPS EBITDA P/EBITDAIndustry Average

Liz Share Price

LIZ 18.15 3.45 5.26 7.65 26.37RL 61.48 8.07 7.62 Jones 14.08 2.85 4.95 VF 77.68 10.12 7.67

By dividing current price per share by EBITDA, which is a short form for earnings

before interest, taxes, depreciation, and amortization, for all competitors listed

on Yahoo Finance, an industry average of 7.65 was calculated. However, the

industry average was calculated without Jones Apparel (P/EBITDA), because it

was tagged as an “outlier.” Setting the industry average equal to Liz Claiborne’s

(P/EBITDA), 7.65 was multiplied by Liz EBITDA of 3.5 to get a share price of

$26.35. Once again, Liz is represented as a slightly undervalued firm.

Enterprise Value to EBITDA

The enterprise value (the value of the firms’ core underlying productive assets) is

computed by adding a firm’s book value of liabilities to a firm’s market value of

equity and subtracting the firm’s cash and financial investments, which are the

firms’ wasting assets. We computed this model backward in order to come out

with a share price for Liz Claiborne. First, we multiple the industry average EV by

Liz Claiborne Dollar value of EBITDA. Then, the next step was to subtract total

liabilities and add back in cash and investment for Liz to get the market value of

equity for Liz Claiborne. Finally, to get the share price, we divided the MVE by

the total shares outstanding. Liz share price derived from EV/EBITDA yield to

$9.77. According to this model, Liz Claiborne share price is overvalued.


Price to Free Cash Flow per Share

Liz Price considering MVE/FCF Liz Free CFC 54020MVE 864590Liz FCF per share 0.541282565P for Liz (overvalued) 8.66

This valuation model integrates the price of a company and divides it by the free

cash flows which is Cash Flow From Operation add/subtract Cash Flow From

Investment on a per share basis. First, we computed the Free Cash Flow, then

we calculated and industry average of 16.005 from the competitors without

considering Jones Apparel which is again consider as an outlier. When

formulating a share price, the industry average is multiplied to Liz’ free cash

flows per share which is 0.54, resulting in a share price of $8.66. This model

formulated an overvalued share price for Liz Claiborne.

Conclusion to Method of Comparables Valuation

After calculating various share prices for Liz Claiborne using the method of

comparables model, it is still not clear whether Liz is undervalued, overvalued, or

fairly valued.

The models produced mixed results of being undervalued and overvalued. The

Forward P/E, P/B and P/EBITDA suggested that Liz Claiborne share price was

undervalued. However, EV/EBITDA, D/P, P/FCF on the other hand valued Liz

share price as an overvalued share price. Nevertheless, less not forget the

comparable method model is based on industry averages and excludes intrinsic

information, which is in fact a fundamental part to a firm’s valuation.


The Intrinsic valuation method

This method uses models to represent forecasted financial data as a

function of WACC, cost of equity, perpetuity growth rates, and/or return on

equity. It allows the user to create sensitivity analyses which serve to create

hypothetical scenarios with cost and growth rates to see the possible effects on

share price. The user can assess the feasibility of the different possible inputs to

see the possible direction the firm can take in the future. Comprehensive

valuation analyses will incorporate both of these schools of thought into their

report, highlighting the strengths and weaknesses of each method and model

and determining the appropriateness for their own firm.


Dividend Discount Model

Sensitivity Analysis

Growth 0 0.02 0.04 0.08 9.73 2.42 2.67 3.09 6.68 10.73 2.2 2.38 2.67 4.52 11.73 2.02 2.15 2.36 3.44 Ke 12.73 1.86 1.97 2.12 2.81 13.73 1.73 1.81 1.93 2.4 14.73 1.62 1.68 1.77 2.1

Range+/-20% 23.32 15.54

This model gives as an estimate of the intrinsic vale of a stock price. The

approach expresses the value of the firm’s equity as the present value of the

forecasted future dividends. Since shareholders receive cash payment from the

company in the form of dividends, the value of their equity is the present value

of future dividends. This valuation views the firm as having an infinite life. The

inputs for this valuation model for Liz Claiborne are the forecasted dividend for a

given year of .23 per share, we estimated that this will be the dividend paid out

by Liz Claiborne overtime because for the past 5 years this number has been

pretty constant, Liz Claiborne cost of equity of 12.73% which was estimated

using the regression model, also as Liz Claiborne has a constant dividend growth

company, we include the dividend growth rate to the value to estimate the

present value of the growing perpetuity.

First, to get an equity value for Liz Claiborne, first got the forecasted dividend

per share, our computed Ke, the perpetuity growth rate. With this information,

we compute a present value factor for 10 year. Then we compute the present


value year by year dividend which is our dividend per share times the present

value factor. The next step is to compute the present value of terminal value

perpetuity which is the perpetuity forecasted dividend per share divided by the

sum of cost of equity minus the growth rate. To get the time zero present value

of perpetuity, we discount the present value of terminal value of perpetuity times

the present value of the year 2017 because the perpetuity was estimated in time

2017 dollars. The intrinsic price is estimated by summing the sum of present of

year by year dividend and the time zero PV perpetuity times the one plus Ke to

the power of 3/12 as we are estimating the price for April first. This model set

100% that Liz Claiborne’s share price was overvalued. When we run the

sensitivity analysis on the model, it estimated the share price for the current cost

of equity of 12.73% and the current growth rate of 5% to be 0.25 cents.

However, this model has a really low explanatory power. It could even be

consider being the worst model of all and should not be consider a prime driver

for investment decision because it takes an unrealistically long time to get the

investment back.


Free Cash Flow Model

Growth 0 0.02 0.03 0.05 0.06 0.09 6.73 88.55 107.73 125.04 219.67 461.42 -91.31 7.73 76.18 88.77 99.05 142.23 201.26 -179.4WACCbt 8.73 66.44 75.11 81.72 105.56 130.58 -906.3 9.73 58.54 64.74 69.22 83.86 97.07 353.78 10.73 52 56.55 59.71 69.34 77.21 155.4

The free cash flow model is another model we used to valuate Liz

Claiborne’s equity. To estimate the model share price, we took Liz Claiborne

weighted average cost of capital, the continuing perpetuity growth rate and the

book value of liabilities. The free cash flow price model is calculated by

discounting back all future cash flows minus all future liabilities. To use this

model you need the forecasted cash flows from operations (CFFO), forecasted

cash flows from investments (CFFI), a calculated WACC. The weighted average

cost of capital is used instead of the cost of equity because both equity and debt

holders have a stake in the firm’s assets. The WACC used is before tax because

the free cash flows are forecasted on an after tax basis. So, if an after tax WACC

is used, the result would be skewed because of double taxation. We also added a

growth rate to estimate the increasing perpetuity. The free cash flows are found

by taking the CFFO and adding/subtracting the CFFI. Then take all the future

years FCF and discount them back to present value terms and the sum of that

and the perpetuity of that series of cash flows gives the value of the firm. Take

that value and subtract the book value of liabilities then yields the market value

of equity. Dividing that by the number of shares outstanding gives the estimated

Range+/-20% 23.32 15.54


price per share. The intrinsic price for this model ranged a low of $-906.3 to a

high of $461.42. This model is highly sensitive to growth rate changes and WACC

changes, therefore limiting the model ability to predict the firm’s equity.

Residual Income Model


Growth 0 -0.1 -0.2 -0.3 -0.4 -0.5 9.73 10.27 9.66 8.9 7.91 6.56 4.66 10.73 8.47 7.87 7.13 6.19 4.98 3.35 11.73 6.76 6.17 5.45 4.58 3.48 2.05Ke 12.73 5.11 4.53 3.85 3.03 2.02 0.76 13.73 3.51 2.95 2.3 1.53 0.6 -0.54 14.73 1.95 1.41 0.79 0.06 -0.8 -1.84 15.73 0.42 -0.1 -0.69 -1.38 -2.18 -3.14

Range+/-20% 23.32 15.54

The residual income model is the present value of forecasted residual

income.

The residual income model, unlike the other models is the most reliable model in

estimating the value of a firm’s equity. First of all, the model is grounded on

theory, and then inputs it uses are reasonably forecastable. Third the model is

not overly sensitive to terminal growth rate and assumptions that we take about

the ROE or Ke. The sensitivity is low because the model relies less on the present

value of the terminal perpetuity and more on the present value of the annual

residual income and the initial book value of equity. Thus, the model is less

sensitive to changes in the cost of equity and the growth rate. At last the model

has a high adjusted R square explanatory power making a good model to rely


on. We used a negative growth rate on this model because it will tend to

converge to the norm. The model was used to estimate the firm’s equity using,

data from Liz Claiborne financial statement as it appear in the 10K, SEC filings for

2008.

The first step in calculating the model, we used cost of equity of 12.73%

which we found using the CAPM model. We assumed a perpetuity growth rate of

0%. We needed to have the forecasted numbers for the Book Value of Equity

and Net Income for this model. We took Book Value of Equity (t-1) and added

Earnings (t) to give us the ending balance of Book Value of Equity and

subtracted the Dividend paid from that amount. We then took the beginning

balance of Book Value of Equity (t) and multiplied it by our Ke to find normal

earnings for time (t+1). This figure represents earnings equal to the required

rate of return of investors and is value unbiased. It is also referred to as

benchmark earnings. From here, we can compare our ending balance of Book

Value of Equity to this benchmark figure. A positive difference denotes value

being added while a negative balance represents the destruction of firm value.

This figure is known as residual income. For Liz Claiborne, the company is going

to destroy value starting in year 2010 by an average of about ($1.39 per share)

according to our forecasted values. From here we calculated the year by year

difference for comparison to the AEG model. We took the present value of the

sum of each year’s residual income as well as the terminal value of the

perpetuity. From there we can calculate the implied price per share using the

market value of equity yield divided by the shares outstanding discounted to

April 1st time consistent price. At last, given various growth and Ke inputs we

conduct our sensitivity analysis.


Long Run Residual Income

Sensitivity Analysis using growth rate and cost of equity

Growth 0.01 0.02 0.04 0.05 0.06 9.73 19.58 20.11 21.7 23 25 Ke 10.73 17.61 17.84 18.52 19.03 19.76 11.73 16.01 16.05 16.16 16.24 16.35 12.73 14.67 14.73 14.34 14.17 13.95 13.73 13.55 13.37 12.89 12.57 12.17 14.73 12.59 12.35 11.72 11.31 10.8 Sensitivity Analysis using the return on equity and growth ROE 0.1 0.11 0.12 0.13 0.14 9.73 16.43 19.72 23 26.29 29.57 10.73 13.59 16.31 19.03 21.75 24.47 11.73 11.6 13.92 16.24 18.56 20.88 Ke 12.73 10.12 12.15 14.17 16.19 18.22 13.73 8.98 10.78 12.57 14.37 16.17 14.73 8.08 9.69 11.31 12.92 14.54 Sensitivity Analysis using the return on equity and growth ROE 0.1 0.11 0.12 0.13 0.14 0.01 12.01 13.34 14.67 16.01 17.34 Growth 0.02 11.67 12.87 14.58 16.04 17.5 0.04 10.75 12.55 14.34 16.13 17.92 0.05 10.12 12.15 14.17 16.19 18.22 0.06 9.3 11.63 13.95 16.28 18.6

Range+/-20% 23.32 15.54


This model has very good reliable inputs. Those inputs are reasonably

forecastable, plus the model has theory behind it to hold it. First for this model

we need the our initial book value of equity which we multiply by, one plus

average return on equity minus cost of equity divided by cost of equity minus an

estimated earnings growth rate. The estimated market value of equity is then

divided by the shares outstanding to get our initial share price which is then

discounted to get an share price as for April 1st. When we run the sensitivity

analysis across growth and cost of equity, growth and return on equity and cost

of equity and growth to get a broader view of the model suggestion. However,

the majority of the price model suggested that Liz Claiborne was overvalued.


Abnormal Earning Growth Model


Growth 0 -0.2 -0.25 -0.3 -0.35 -0.4 10.73% -8.72 39.66 27.11 21.83 18.92 17.08 11.73% -8 36.36 24.86 20.01 17.34 15.69Ke 12.73% -7.39 33.58 22.96 18.48 16.02 14.46 13.73% -6.86 31.2 21.33 17.17 14.88 13.43 14.73% -6.41 29.15 19.93 16.04 13.9 12.55

Range+/-20% 23.32 15.54

AEG YBY (43,330) (41,017) (38,820) (36,733) (34,750) (32,866) (31,076) (29,376) (27,761)Change in RI (43,330) (41,017) (38,820) (36,733) (34,750) (32,866) (31,076) (29,376) (27,761)

Most commonly known as the AEG model, it has several assumptions

beneath it. The model is the second best valuation model after the residual

income. It relates the current and future net income, it measure the adjustments

to perpetuity. First the model can be assumed to have a random walk. This

means that our best guess about future expected abnormal earning are our

current abnormal earning. The model also implies that past performance will

persist forever although we all know that things like shocks are random and

unpredictable. Another assumption is that forecasted abnormal earning for two

year ahead are simply abnormal earnings for year one.


The model has very little sensitivity to changes in the terminal growth rate and

changes in cost of equity. For Liz Claiborne we used as little as a 0.05% change

in the growth rate to compute the sensitivity for Liz Claiborne. However, the

results were not very much affected by the change like they would have been on

the Dividend Discount Model or the Free Cash Flow Model. After the sensitivity

analysis, the model estimate of about 43% that share price was fairly valued.

Conclusion to Intrinsic Value Model

Overall, the intrinsic value models have helped us forecast numbers that

ultimately leaded us to our decision of viewing Liz Claiborne’s stock as

overvalued valued. Our assumptions were based on very educated decisions

from the dividend discount, free cash flow, residual income, long run residual

income, and the abnormal earning growth models, which are all listed above.

The areas in the green represent Liz Claiborne being undervalued areas. A large

portion of undervalued data is in the free cash flow diagram. Although this is

important data, we cannot completely rely on this model because it is very

sensitive the perpetuity growth.

The red areas represent the overvalued areas of Liz Claiborne. There is a

portion of undervalued information in all of intrinsic value models; however the

majority of the overvalued information came from the residual income diagram.

This information we gathered from the residual income table was a deciding

factor in valuing our company, because the residual income model is one of the

best and most reliable model in estimating the value of a firm’s equity.

The un-highlighted areas on the tables above represent fairly valued

information. Although there is a large portion of fairly valued information in each

of the tables we still believe that Liz Claiborne is an overvalued firm.

One can argue that Liz Claiborne has been facing some downturn this year. The

company had negative net income of ($375,000) in thousands. We could also

blame the negative net income on the recent economics turmoil with sub prime


mortgages crisis and recent increase in inflation which are dragging consumer

spending expenditures down and the making government securities like TIPS

more profitable because of their risk free advantages, we could probably get

back on it feet, we still can argue that the company is facing a downside that we

think is to take long for the company before it will be able to be a positive fair

valued investment to investors. As discuss in the above, Liz Claiborne has been

increasingly growing because of the acquisition it has been purchasing. We think

that a company can not build up value in the long run by making unstoppable

acquisitions. There are times where a company has to spend on research and

developments try to innovate the product line. However innovation in the

Clothing and Apparel Industry is not a very easy thing to do. The most common

things done by a company is to invest in marketing of the product.

In conclusion, we valued the price per share of Liz Claiborne as being an over

valued firm.

Appendix Liz Claiborne Balance Sheet Assets In thousands except share data 2003 2004 2005 2006 2007 Avg 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Assets

Current Assets:

Cash and cash equivalents 211,563 293,503 385,637 $185,645 $205,401Marketable securities 36,808 50,414 7,797 9,451 328Accounts receivable trade, net 370,468 390,802 432,065 499,012 440,160 0.1466 504687 73987 84834 97271 111530 127881 146628 168124 192771 221031Inventories, net 461,154 485,182 541,139 593,445 540,807 0.045 565143 25431 26576 27772 29022 30328 31692 33118 34609 36166Deferred income taxes 45,877 45,756 51,117 60,627 103,288Other current assets 49,340 82,744 91,386 121,937 209,525Assets held for sale 65,332

Total current assets 1,175,210 1,348,401 1,509,141 1,470,117 1,564,841 48.65% 1677565 1769831 1867172 1969866 2078209 2192511 2313099 $2,440,319 $2,574,537 $2,716,136Property and Equipment, Net 378,303 410,741 474,573 581,992 580,733Goodwill, Net 478,869 596,436 755,655 1,007,859 677,852Intangibles, Net 226,577 244,168 280,986 413,962 347,119Deferred Income Taxes 0 0 0 75,445Other Assets 9,398 7,253 9,397 21,838 22,477

Total Assets 2,268,357 2,606,999 3,029,752 $3,495,768 $3,268,467 0.06 3448233 3637885 3837969 4049057 4271756 4506702 4754571 $5,016,072 $5,291,956 $5,583,014


Liabilities In th o usand s excep t sh ar e data 200 3 2 004 2005 2006 2007 Avg 2008 2009 2010 2011 2012 2013 2 014 2015 2016 2 017Liab ili t ies a nd Stockholder s Eq uity

Curr ent Liab ilit ies:

Sho rt term b or ro win gs 2 1,98 9 18,915 56,118 $22,266 $50,828Accoun ts payab le 22 5,03 2 2 27,125 259,965 281,413 223,522Accr ued expen ses 28 3,45 8 2 36,134 288,490 336,773 459,309Inco me taxes p ayab le 2 6,24 1 29,316 33,028 33,470 32,266Defe rred income taxes 497Liab ili t ies h eld for sale 3,963Total cu rre nt liabi l ities 55 6,72 0 5 11,490 637,601 673,922 770,385Lon g-Term Debt 37 7,72 5 4 40,303 476,571 570,469 836,883Other No n-Curr ent Liabilit ies 6,41 2 23,526 32,836 63,565 140,764Obligatio n u nder capital leases 7,945Defe rred Income Taxe s 3 3,70 9 43,861 49,490 54,571 1,111Commitments and Con tin gencies (Note 11)

Min ority In teres t 7,43 0 9,848 13,520 3,260 3,760Total Liabilit ies 98 1,99 6 1,0 29,028 1,217,963 1,365,787 1,752,903 0 .4 1379293 1455154 1535188 1619623 1708702 18 02681 1901 828 $2,006,429 $2,116,782 $2,233,206Stockh old er s Equ ity:

Pr efer red stock , $ .01 p ar value, au th orized

shares 50 ,00 0,000 , issu ed sh ares no ne

Common s tock , $1 par value, auth or ize 17 6,43 7 1 76,437 176,437 176,437 176,437shares 25 0,0 00 ,000 , issue d shar es 1 76,437 ,234

Cap ital in excess of p ar value 9 5,70 8 1 24,823 176,182 249,573 296,158Reta ined ear nings 2 ,28 3,69 2 2,5 39,742 2,828,968 3,354,081 2,948,085Unea rned Compensation expen se (10,185) (21,593) (36,793)Accumulate d o th er compr ehen sive los (28,317) (50,207) (63,650) (56 ,15 6) (24,582)

2 ,51 7,33 5 2,7 69,202 3,081,144 3,723,935 3,396,098Common s tock in tr easury , at cos t 81 ,6 (1,230,974) (1,191,231) (1,269,355) (1,593 ,95 4) (1,880,534)shares in 20 07 and 7 3,281 ,103 sh ares in

2 00 6.0 0

Total st ockho lders equity 1 ,28 6,36 1 1,5 77,971 1,811,789 2,129,981 1,515,564 0 .6 2068940 2182731 2302782 2429434 2563053 27 04021 2852 743 3009643 3175174 3349 808

Total Liabi lities and Sto ckho lders E 2 ,26 8,35 7 2,6 06,999 3,029,752 $3,495,768 $3,268,467 3448233 3637885 3837969 4049057 4271756 45 06702 4754 571 5016072 5291956 5583 014


Common Size Balance Sheet In t ho u s a nd s ex c e pt s ha r e d 2 0 0 3 20 0 4 2 0 05 3 0 -D e c -0 6 2 9 - D ec - 0 7 A ve r a g e 20 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 2 0 1 7

As s e ts

Cu r r en t A ss e t s:

Ca s h a n d ca s h e q u iv a l en t s 9 . 3 3 % 1 1 .2 6 % 12 . 7 3% 5. 3 1 % 6 . 2 8%

Ma r k et a b l e s e cu r i ti e s 1 . 6 2 % 1 .9 3 % 0 . 2 6% 0. 2 7 % 0 . 0 1%

Ac c o un t s re c e iv a b le t ra d e , 16 . 3 3 % 1 4 .9 9 % 14 . 2 6% 1 4. 2 7 % 13 . 4 7% 1 4 . 6 6 % 1 4 .3 3 % 1 4 . 2 0 % 1 4 .1 9 % 1 4 . 1 7 % 1 4 . 3 1 % 1 4 . 2 4 % 1 4 . 2 2 % 1 4 .2 3 % 1 4 . 2 3 % 1 4 .2 5 %In v e nt o r i es , ne t 20 . 3 3 % 1 8 .6 1 % 17 . 8 6% 1 6. 9 8 % 16 . 5 5% 1 8 . 0 6 % 1 7 .6 1 % 1 7 . 4 1 % 1 7 .3 2 % 1 7 . 3 9 % 1 7 . 5 6 % 1 7 . 4 6 % 1 7 . 4 3 % 1 7 .4 3 % 1 7 . 4 5 % 1 7 .4 7 %De f e rr e d in c o me t ax e s 2 . 0 2 % 1 .7 6 % 1 . 6 9% 1. 7 3 % 3 . 1 6%

Ot h e r c u r re n t a s s et s 2 . 1 8 % 3 .1 7 % 3 . 0 2% 3. 4 9 % 6 . 4 1%

As s e ts h e ld f or s al e 2 . 0 0%

To t a l c u r re n t a s s et s 51 . 8 1 % 5 1 .7 2 % 49 . 8 1% 4 2. 0 5 % 47 . 8 8% 48 . 6 5 % 4 8 .0 2 % 47 . 2 8% 4 6. 7 8 % 4 7 . 72 % 4 7. 6 9 % 4 7 . 50 % 47 . 4 0 % 4 7 .4 2 % 47 . 5 5% 4 7 .5 1 %

Pr o p er t y an d Eq u i pm e n t, N e t 16 . 6 8 % 1 5 .7 6 % 15 . 6 6% 1 6. 6 5 % 17 . 7 7%

Go o d wi l l , N e t 21 . 1 1 % 2 2 .8 8 % 24 . 9 4% 2 8. 8 3 % 20 . 7 4%

In t a ng i b l es , Ne t 9 . 9 9 % 9 .3 7 % 9 . 2 7% 1 1. 8 4 % 10 . 6 2%

De f e rr e d In c o me T ax e s 0 . 0 0 % 0 .0 0 % 0 . 0 0% 0. 0 0 % 2 . 3 1%Ot h e r A s s et s 0 . 4 1 % 0 .2 8 % 0 . 3 1% 0. 6 2 % 0 . 6 9%

To t a l A s s et s 1 0 0 % 10 0 % 1 0 0% 1 0 0 % 1 0 0% 1 0 0 % 10 0 % 1 0 0% 1 0 0 % 1 00 % 1 0 0 % 1 00 % 1 0 0 % 10 0 % 1 0 0% 10 0 %

Li a b il i t i es a nd S to c k ho l d e rs E qu i t y

Cu r r en t L ia b i li t i es :

Sh o r t t e r m b o rr o w in g s 2 % 5% 2 % 3%

Ac c o un t s pa y a bl e 2 2 % 2 1% 2 1 % 1 3%

Ac c r ue d e xp e n se s 2 3 % 2 4% 2 5 % 2 6%In c o me t a xe s pa y a bl e 3 % 3% 2 % 2%

De f e rr e d in c o me t ax e s

Li a b il i t i es h el d fo r sa l e

To t a l c u r re n t l i a bi l i ti e s 5 0 % 5 2% 4 9 % 4 4%

Lo n g -T e r m D e b t 4 3 % 3 9% 4 2 % 4 8%

Ot h e r N o n -C u r re n t L i a bi l i t ie s 2 % 3% 5 % 8%

Ob l i ga t i o n u n de r ca p i ta l l ea s e s 1%De f e rr e d In c o me T ax e s 4 % 4% 4 %

Co m m it m e n ts a nd C on t i ng e n c ie s (N o t e 1 1 )

Mi n o ri t y In t e re s t 1 % 1%

To t a l L i a bi l i ti e s 10 0 % 1 0 0% 1 0 0 % 1 0 0% 1 0 0 % 10 0 % 1 0 0% 1 0 0 % 1 00 % 1 0 0 % 1 00 % 1 0 0 % 10 0 % 1 0 0% 10 0 %

St o c kh o l d er s Eq u i ty :

Pr e f er r e d s t o ck , $. 0 1 p a r va l u e, a u

sh a r es 5 0 ,0 0 0 ,0 0 0 , i s su e d sh a r es n on eCo m m on s t oc k , $ 1 pa r va l u e , a u th o r i 1 1 % 1 0% 8 % 1 2%

sh a r es 2 5 0, 0 0 0, 0 0 0, i ss u e d s h a re s 17 6 , 4 37 , 2 34 0 %

Ca p i ta l i n e x ce s s o f pa r v al u e 8 % 1 0% 1 2 % 2 0%

Re t a in e d ea r n in g s 16 1 % 1 5 6% 1 5 7 % 1 9 5% 1 6 7 % 16 7 % 1 6 7% 1 6 7 % 1 67 % 1 6 7 % 1 67 % 1 6 7 % 16 7 % 1 6 7% 16 7 %

Un e a rn e d Co m p en s a ti o n e x p e ns e - 1 % - 2% 0 %

Ac c u mu l a t ed o th e r c o m pr e h e ns i v e l o s - 3 % - 4% - 3 % - 2%

Co m m on s t oc k in t re a s ur y , at c os t 8 -7 5 % - 7 0% - 7 5 % - 1 2 4%sh a r es i n 2 0 0 7 a n d 7 3 ,2 8 1 , 10 3 sh a r es i n

20 0 6 .0 0

To t a l s t o ck h o ld e r s e q ui t y 10 0 % 1 0 0% 1 0 0 % 1 0 0% 1 0 0 % 10 0 % 1 0 0% 1 0 0 % 1 00 % 1 0 0 % 1 00 % 1 0 0 % 10 0 % 1 0 0% 10 0 %

To t a l L i a bi l i ti e s a n d S t o c kh o l de r s 10 0 % 1 0 0% 1 0 0 % 1 0 0%


Liz Claiborne Income Statement In thousands except per common share data 2003 2004 2005 2006 2007 Average 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Net Sales 3,717,503 4,241,115 4,632,828 $4,643,936 $4,577,251 $4,348,388.5 $4,130,969.0 $3,924,420.6 $3,728,199.5 $3,541,789.6 $3,364,700.1 $3,196,465.1 $3,036,641.8 $2,884,809.7 $2,740,569.30.141 0.092 0.002 -0.014

Cost of goods sold 2,097,868 2,351,324 2,490,266 2,383,697 2,411,525 0.5393 $2,345,000.77 $1,264,613.01 $681,981.04 $367,779.02 $198,336.03 $106,958.74 $57,680.75 $31,106.10 $16,774.91 $9,046.38Gross Profit 1,619,635 1,889,791 2,142,562 2,260,239 2,165,726 $2,003,387.68 $2,866,356.02 $3,242,439.54 $3,360,420.52 $3,343,453.54 $3,257,741.35 $3,138,784.33 $3,005,535.73 $2,868,034.83 $2,731,522.87Selling, general administrative expenses 1,222,617 1,419,673 1,630,122 1,878,725 2,104,420 37.60% $1,634,816.45 $1,553,075.63 $1,475,421.85 $1,401,650.75 $1,331,568.22 $1,264,989.81 $1,201,740.32 $1,141,653.30 $1,084,570.63 $1,030,342.10Restrictive charges Gain (7,130) (672) 9,694

Trademark impairment 36,300

Goodwill impairment 450,819

Operating (Loss) Income 389,888 470,790 502,746 381,514 (425,813) 10% $434,838.85 $413,096.90 $392,442.06 $372,819.95 $354,178.96 $336,470.01 $319,646.51 $303,664.18 $288,480.97 $274,056.93Other (expense) income, net (2,318) (1,890) 9,602 5,357 (4,459)

Interest expense, net (25,124) (30,509) (32,151) (34,898) (42,188)

(Loss) Income before Provision for Income 362,446 438,391 480,197 351,973 (472,460)

Taxes

(Benefit) provision for income taxes 131,281 158,698 166,628 131,057 (102,440)

(Loss) Income from Continuing Operations 220,916 (370,020)

Income from discontinued operations, 33,769 4,495

net of tax

Loss on disposal of discontinued operations, (7,273)

net of tax

Net (Loss) Income 231,165 279,693 313,569 $254,685 ($372,798) 6% $260,903.31 $247,858.14 $235,465.23 $223,691.97 $212,507.37 $201,882.01 $191,787.91 $182,198.51 $173,088.58 $164,434.16


Liz Claiborne Common Size Balance Sheet In thousands except per common share data 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Net Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of goods sold 56.43% 55.44% 53.75% 51.33% 52.69% 53.93% 53.93% 53.93% 53.93% 53.93% 53.93% 53.93% 53.93% 53.93% 53.93% 53.93% 53.93%

Gross Profit 43.57% 44.56% 46.25% 48.67% 47.31%Selling, general administrative expenses 32.89% 33.47% 35.19% 40.46% 45.98% 37.60%Restrictive charges Gain -0.19% -0.02% 0.21%Trademark impairment 0.79%Goodwill impairment 9.85%

Operating (Loss) Income 10.49% 11.10% 10.85% 8.22% -9.30% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%Other (expense) income, net -0.06% -0.04% 0.21% 0.12% -0.10%Interest expense, net -0.68% -0.72% -0.69% -0.75% -0.92%

(Loss) Income before Provision for Income 9.75% 10.34% 10.37% 7.58% -10.32%Taxes(Benefit) provision for income taxes 3.53% 3.74% 3.60% 2.82% -2.24%

(Loss) Income from Continuing Operations 4.76% -8.08%Income from discontinued operations, 0.73% 0.10%net of taxLoss on disposal of discontinued operations, -0.16%net of tax

Net (Loss) Income 6.22% 6.59% 6.77% 5.48% -8.14% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%


Liz Claiborne Statement of Cash Flows In thousands 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Cash Flows from Operating Activities:Net (loss) income 231,165 279,693 313,569 $254,685 ($372,798) $260,903.31 $247,858.14 $235,465.23 $223,691.97 $212,507.37 $201,882.01 $191,787.91 $182,198.51 $173,088.58 $164,434.16Adjustments to arrive at (loss) income (33,769) 2,778from continuing operations

(Loss) income from continuing operations 220,916 (370,020)

Adjustments to reconcile (loss) incomefrom continuing operations to net cashprovided by operating activities:Depreciation and amortization 96,395 104,981 115,634 136,719 162,178Goodwill and trademark impairment 487,119Streamlining initiatives; asset write-down 2,577 14,940Loss on asset disposals 17,678 26,191Deferred income taxes (9,209) 9,796 4,424 (9,848) (143,454)Share-based compensation 22,513 19,114Tax benefit on exercise of stock options 7,852 3,492Gain on sale of securities (11,934) (3,583) (364)Accrued portion of restructuring charge 3,266 9,694Other, net 14,210 22,447 23,126 275 (558)Changes in assets and liabilities, exclusiveof acquisitions:Decrease (increase) in accounts receivable (1,126) 31,695 (32,510) (56,788) 76,117 trade, netDecrease (increase) in inventories, net 49,120 20,383 (47,274) (26,557) 48,397Decrease (increase) in other current and (10,636) (23,811) (2,440) (3,189) 9,106non-current assets(Decrease) increase in accounts payable (17,355) (13,458) 28,373 14,981 (57,626)Increase in accrued expenses 24,976 (12,916) 55,833 19,109 19,770(Decrease) increase in income taxes payable 13,066 (14) 769 12,973 (25,130)Net cash provided by operating activities 38,409 4,604of discontinued operations

Net cash provided by operating activities 393,872 418,796 457,264 394,037 273,876 290,309 319,339 351,273 386,401 425,041 467,545 514,299 565,729 622,302 684,532 752,98616432.56 29030.856 31933.9416 35127.3358 38640.0693 42504.0763 46754.4839 51429.93229 56572.92551 62230.21807 68453.23987

0.06 0.1

Cash Flows from Investing Activities:Purchases of investment instruments (90) (96) (134) (154) (40)Proceeds from sales of securities 40,934 8,054 9,616Purchases of property and equipment (80,020) (96,675) (134,320) (168,060) (173,032)Sale of property and equipment 5,711 1,410Payments for acquisitions, net of cash (206,264) (222,335) (197,221) (266,775) (48,262)acquiredPayments for in-store merchandise shops (8,851) (10,538) (12,107) (13,080) (7,927)Other, net (11,573) (7,658) (7,146) 160 1,104Net cash used in investing activities of (1,289) (2,725)discontinued operations

Net cash used in investing activities (306,798) (337,302) (309,994) (435,433) (219,856) (241,842) (266,026) (292,628) (321,891) (354,080) (389,488) (428,437) (471,281) (518,409) (570,250) (627,275)0.09942698 (0.08096) 0.404649767 (0.4950865) -21985.6 -24184.16 -26602.576 -29262.8336 -32189.117 -35408.0287 -38948.8315 -42843.71467 -47128.08614 -51840.89476 -57024.98423

0.100


Statement of Cash Flow Cont. Free Cash Flow 700670 756098 767,258 829,470 493,732 532,150 585,365 643,902 708,292 779,121 857,033 942,736 1,037,010 1,140,711 1,254,782 1,380,260

Cash Flows from Financing Activities:Short term borrowings, net 17,199 (3,074) 37,203 (30,214) 329,651Revolving credit facility - net (65,162) (12,564)Principal payments under capital lease (1,805) (3,338) (6,368)obligationsCommercial paper, net 82,075 (82,075)Proceeds from exercise of common stock 32,570 46,250 55,150 62,099 43,262optionsPurchase of common stock (116,817) (174,071) (300,488)Dividends paid (23,802) (23,643) (24,343) (23,091) (22,541)Excess tax benefits related to stock options 2,467 2,507Proceeds from issuance of 5% euro Notes, 445,099netRepayment of 6.625% euro Notes (449,505)Other, net (1,292) (1,137)

Net cash used in financing activities (39,195) 6,969 (50,612) (89,771) (37,189)

Effect of Exchange Rate Changes on Cash 36,049 (6,523) (4,524) (11,715) 2,925and Cash EquivalentsNet Change in Cash and Cash Equivalents 83,928 81,940 92,134 (142,882) 19,756Cash and Cash Equivalents at Beginning 127,635 211,563 293,503 328,527 185,645of Year

Cash and Cash Equivalents at End of Year 211,563 293,503 385,637 $185,645 $205,401


Common Size Statement of Cash Flows In thousands 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Cash Flows from Operating Activities:Net (loss) income 59% 1 1 65% -136%Adjustments to arrive at (loss) income -9% 1%from continuing operations

(Loss) income from continuing operations 56% -135%

Adjustments to reconcile (loss) incomefrom continuing operations to net cashprovided by operating activities:Depreciation and amortization 24% 25% 25% 35% 59%Goodwill and trademark impairment 2Streamlining initiatives; asset write-down 1% 5%Loss on asset disposals 4% 10%Deferred income taxes -2% 2% 1% -2% -52%Share-based compensation 0 7%Tax benefit on exercise of stock options 0 1%Gain on sale of securities -3% -1%Accrued portion of restructuring charge 1% 2%Other, net 4% 5% 5% 0%Changes in assets and liabilities, exclusiveof acquisitions:Decrease (increase) in accounts receivable 0% 8% -7% -14% 28% trade, netDecrease (increase) in inventories, net 12% 5% -10% -7% 18%Decrease (increase) in other current and -3% -6% -1% -1% 3%non-current assets(Decrease) increase in accounts payable -4% -3% 6% 4% -21%Increase in accrued expenses 6% -3% 12% 5% 7%(Decrease) increase in income taxes payable 3% 3% -9%Net cash provided by operating activities 10% 2%of discontinued operationsDividends paid (23,802) (23,643) (24,343) (23,091) (22,541) 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000Net cash provided by operating activities 393,872.00 418,796.00 457,264.00 394,037.00 273,876.00 0.09 290,308.56 319,339.42 351,273.36 386,400.69 425,040.76 467,544.84 514,299.32 565,729.26 622,302.18 684,532.40 752985.6386Net cash used in investing activities -306,798.00 -337,302.00 -309,994.00 -435,433.00 -219,856.00 (44,575) (98,002) (162,040) (238,796) (330,795) (441,066) (573,237) (731,656) (921,538) (1,149,130) (1,149,130)Net cash used in financing activities (39,195) 6,969 (50,612) (89,771) (37,189) 0.1986 -$44,574.74 -$53,427.28 -$64,037.94 -$76,755.87 -$91,999.58 -$110,270.70 -$132,170.46 -$158,419.52 -$189,881.63 -$227,592.13

CFFO/ Sales 10.60% 9.87% 9.87% 8.48% 5.98% 8.96%CFFO/ Net Income 170.39% 149.73% 145.83% 154.72% -73.46% 109.44%CFFO/ Operating Income 101.02% 88.96% 90.95% 103.28% -64.32% 63.98%


Restated Income Statement

In thousands except per common share data 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Sales 3,717,503 4,241,115 4,632,828 $4,643,936 $4,577,251 4,348,388 4,130,969 3,924,421 3,728,200 3,541,790 3,364,700 3,196,465 3,036,642 2,884,810 2,740,569net sales growth 14.09% 9.24% 0.24% -1.44% 95.00%Cost of goods sold 2,097,868 2,351,324 2,490,266 2,383,697 2,411,525

Gross Profit 1,619,635 1,889,791 2,142,562 2,260,239 2,165,726Selling, general administrative expenses 1,222,617 1,419,673 1,630,122 1,878,725 2,104,420Restrictive charges Gain (7,130) (672) 9,694Trademark impairment 36,300Goodwill impairment 119,287 151,131 116,470 120,640

Operating (Loss) Income 389,888 351,503 351,615 265,044 (95,634)Other (expense) income, net (2,318) (1,890) 9,602 5,357 (4,459)Interest expense, net (25,124) (30,509) (32,151) (34,898) (42,188)

(13,938) (13,938) (13,938) (13,938) (Loss) Income before Provision for Income 362,446 305,166 315,128 221,564 (156,219)Taxes(Benefit) provision for income taxes 131,281 158,698 166,628 131,057 (102,440)

(Loss) Income from Continuing Operations 463,864 481,756 352,621 (258,659)Income from discontinued operations, 33,769 4,495net of taxLoss on disposal of discontinued operations, (7,273)net of tax

Net (Loss) Income 231,165 463,864 481,756 $386,390 ($261,437) 6% 260903 247858 235465 223692 212507 201882 191788 182199 173089 164434

Earnings per Share:

Weighted Average Shares, Basic 101,989 99,800Weighted Average Shares, Diluted 103,483 99,800

Dividends Paid per Common Share 0.23 0.23 0.23 $0.23 $0.23


Restated Common Size Income Statement In thousands except per common share data 2003 2004 2005 2006 2007

Net Sales 100.00% 100.00% 100.00% 100.00% 100.00%Cost of goods sold 56.43% 55.44% 53.75% 51.33% 52.69%

Gross Profit 43.57% 44.56% 46.25% 48.67% 47.31%Selling, general administrative expenses 32.89% 33.47% 35.19% 40.46% 45.98%Restrictive charges Gain -0.19% -0.02% 0.21%Trademark impairment 0.79%Goodwill impairment 2.64%

Operating (Loss) Income 10.49% 8.29% 7.59% 5.71% -2.09%Other (expense) income, net -0.06% -0.04% 0.21% 0.12% -0.10%Interest expense, net -0.68% -0.72% -0.69% -0.75% -0.92%

(Loss) Income before Provision for Income 9.75% 7.20% 6.80% 4.77% -3.41%Taxes(Benefit) provision for income taxes 3.53% 3.74% 3.60% 2.82% -2.24%

(Loss) Income from Continuing Operations 7.59% -5.65%Income from discontinued operations, 0.73% 0.10%net of taxLoss on disposal of discontinued operations, -0.16%net of tax

Net (Loss) Income 6.22% 10.94% 10.40% 8.32% -5.71%


Restated Statement of Cash Flows In thousands 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Cash Flows from Operating Activities:Net (loss) income 231,165 463,864 481,756 386,390 (261,437) Adjustments to arrive at (loss) income -33769 2778from continuing operations

(Loss) income from continuing operations 352,621 (258,659)

Adjustments to reconcile (loss) incomefrom continuing operations to net cashprovided by operating activities:Depreciation and amortization 96395 104981 115634 136719 162178Goodwill and trademark impairment 133,225 165,069 130,409 134,578 Streamlining initiatives; asset write-down 2577 14940Loss on asset disposals 17678 26191Deferred income taxes -9209 9796 4424 -9848 -143454Share-based compensation 22513 19114Tax benefit on exercise of stock options 7852 3492Gain on sale of securities -11934 -3583 -364Accrued portion of restructuring charge 3266 9694Other, net 14210 22447 23126 275 -558Changes in assets and liabilities, exclusiveof acquisitions:Decrease (increase) in accounts receivable -1126 31695 -32510 -56788 76117 trade, netDecrease (increase) in inventories, net 49120 20383 -47274 -26557 48397Decrease (increase) in other current and -10636 -23811 -2440 -3189 9106non-current assets(Decrease) increase in accounts payable -17355 -13458 28373 14981 -57626Increase in accrued expenses 24976 -12916 55833 19109 19770(Decrease) increase in income taxes payable 13066 -14 769 12973 -25130Net cash provided by operating activities 38409 4604of discontinued operations

Net cash provided by operating activities 393872 552,021 622,333 524,446 (78,665) 290,309 319,339 351,273 386401 425041 467544.84 514299.32 565729.26 622302.18 684532.4 752985.640.06 16432.56 29030.856 31933.9416 35127 38640 42504.076 46754.484 51429.932 56572.926 62230.218 68453.24

0.1


Restated Common Size Statement of Cash Flows

Common Size Restated SFCCash Flows from Operating Activities:Net (loss) income 59% 84% 77% 74% 332%Adjustments to arrive at (loss) income -6% -4%from continuing operations

(Loss) income from continuing operations 67% 329%

Adjustments to reconcile (loss) incomefrom continuing operations to net cashprovided by operating activities:Depreciation and amortization 24% 19% 19% 26% -206%Goodwill and trademark impairment 24% 27% 25% -171%Streamlining initiatives; asset write-down -19%Loss on asset disposals 3% -33%Deferred income taxes -2% 2% 1% -2% 182%Share-based compensation 4% -24%Tax benefit on exercise of stock options 1% -4%Gain on sale of securities -2% -1%Accrued portion of restructuring charge 1% 2%Other, net 4% 4% 4% 1%Changes in assets and liabilities, exclusiveof acquisitions:Decrease (increase) in accounts receivable 6% -5% -11% -97% trade, netDecrease (increase) in inventories, net 12% 4% -8% -5% -62%Decrease (increase) in other current and -3% -4% -1% -12%non-current assets(Decrease) increase in accounts payable -4% -2% 5% 3% 73%Increase in accrued expenses 6% -2% 9% 4% -25%(Decrease) increase in income taxes payable 3% 2% 32%Net cash provided by operating activities 7% -6%


Restated Balance Sheet AssetsCurrent Assets:Cash and cash equivalents 211563 293503 385637 185645 205401Marketable securities 36808 50414 7797 9451 328Accounts receivable trade, net 370468 390802 432065 499012 440160Inventories, net 461154 485182 541139 593445 540807Deferred income taxes 45877 45756 51117 60627 103288Other current assets 49340 82744 91386 121937 209525Assets held for sale 65332

Total current assets 1175210 1348401 1509141 1470117 1564841Property and Equipment, Net 378303 410741 474573 581992 580733Goodwill, Net 478869 596436 755655 1007859 677852Intangibles, Net 226577 244168 280986 413962 347119Deferred Income Taxes 0 0 0 75445Other Assets 9398 7253 9397 21838 22477

Total Assets 2268357 2606999 3029752 3495768 3268467Total assets minus goodwill 2010563 2748766 2487909 2590615lease 13938.2 13938.19086 13938.19086 13938.19086 13938.19086plus impairement of goodwill 477148.8 604524 891388.6 557211.8Total Asets 2,501,650 3,367,228 3,393,236 3,161,765


Restated Balance sheet Cont.Liabilities and Stockholders EquityCurrent Liabilities:Short term borrowings 21989 18915 56118 22266 50828Accounts payable 225032 227125 259965 281413 223522Accrued expenses 283458 236134 288490 336773 459309Income taxes payable 26241 29316 33028 33470 32266Deferred income taxes 497Liabilities held for sale 3963

Total current liabilities 556720 511490 637601 673922 770385Long-Term Debt 377725 440303 476571 570469 836883Other Non-Current Liabilities 6412 23526 32836 63565 140764Obligation under capital leases 7945Deferred Income Taxes 33709 43861 49490 54571 1111Commitments and Contingencies (Note 11)Minority Interest 7430 9848 13520 3260 3760Total Liabilities 981996 1029028 1217963 1365787 1752903Adjusted Total Liabities 432592 462308 357928 1075051lease 13938.2 13938.19086 13938.19086 13938.19086 13938.19086plus impairement of goodwill 477148.8 604524 891388.6 557211.8Total liabities 923,679 1,080,770 1,263,255 1,646,201

Stockholders Equity:Preferred stock, $.01 par value, authorizedshares 50,000,000, issued shares noneCommon stock, $1 par value, authorized 176437 176437 176437 176437 176437shares 250,000,000, issued shares 176,437,234Capital in excess of par value 95708 124823 176182 249573 296158Retained earnings 2283692 2539742 2828968 3354081 2948085Unearned Compensation expense -10185 -21593 -36793Accumulated other comprehensive loss -28317 -50207 -63650 -56156 -24582

2517335 2769202 3081144 3723935 3396098Common stock in treasury, at cost 81,695,077 -1230974 -1191231 -1269355 -1593954 -1880534shares in 2007 and 73,281,103 shares in

2006Common Shares Outstanding 109.571 108.734 104.985 103.156 94.742

Total stockholders equity 1286361 1577971 1811789 2129981 1515564

Total Liabilties and Equity 2,501,650 2,892,559 3,393,236 3,161,765


Restated Common Size Balance Sheet AssetsCurrent Assets:Cash and cash equivalents 211563 12% 11% 5% 6%Marketable securities 36808 2%Accounts receivable trade, net 370468 16% 13% 15% 14%Inventories, net 461154 19% 16% 17% 17%Deferred income taxes 45877 2% 2% 2% 3%Other current assets 49340 3% 3% 4% 7%Assets held for sale 2%

Total current assets 1175210 54% 45% 43% 49%Property and Equipment, Net 378303 16% 14% 17% 18%Goodwill, Net 478869 24% 22% 30% 21%Intangibles, Net 226577 10% 8% 12% 11%Deferred Income Taxes 2%Other Assets 9398 1% 1%

Total Assets 2268357 104% 90% 103% 103%Total assets minus goodwill 80% 82% 73% 82%lease 13938.2 1%plus impairement of goodwill 19% 18% 26% 18%Total Asets 100% 100% 100% 100%


Restated Common Size Balance Sheet Cont. Liabilities and Stockholders EquityCurrent Liabilities:Short term borrowings 21989 2% 5% 2% 3%Accounts payable 225032 25% 24% 22% 14%Accrued expenses 283458 26% 27% 27% 28%Income taxes payable 26241 3% 3% 3% 2%Deferred income taxesLiabilities held for sale

Total current liabilities 556720 55% 59% 53% 47%Long-Term Debt 377725 48% 44% 45% 51%Other Non-Current Liabilities 6412 3% 3% 5% 9%Obligation under capital leases 1%Deferred Income Taxes 33709 5% 5% 4%Commitments and Contingencies (Note 11)Minority Interest 7430 1% 1%Total Liabilities 981996 111% 113% 108% 106%Adjusted Total Liabities 47% 43% 28% 65%lease 13938.2 2% 1% 1% 1%plus impairement of goodwill 52% 56% 71% 34%Total liabities 100% 100% 100% 100%

Stockholders Equity:Preferred stock, $.01 par value, authorizedshares 50,000,000, issued shares noneCommon stock, $1 par value, authorized 176437 7% 6% 5% 6%shares 250,000,000, issued shares 176,437,234Capital in excess of par value 95708 5% 6% 7% 9%Retained earnings 2283692 102% 98% 99% 93%Unearned Compensation expense -10185 -1% -1%Accumulated other comprehensive loss -28317 -2% -2% -2% -1%

2517335 111% 107% 110% 107%Common stock in treasury, at cost 81,695,077 -1230974 -48% -44% -47% -59%shares in 2007 and 73,281,103 shares in

2006Common Shares Outstanding 109.571

Total stockholders equity 1286361 63% 63% 63% 48%

Total Liabilties and Equity 100% 100% 100% 100%


Current Ratio

Company 2003 2004 2005 2006 2007 AVG

Polo Ralph Lauren Corp. 2.55 2.27 4.38 1.63 2.63 2.69

Jones Apparel Group Inc. 2.31 1.89 1.54 2.08 3.27 2.22

VF Corporation 2.79 1.73 2.05 2.54 2.33 2.29

Liz Claiborne 2.11 2.64 2.37 2.18 2.03 2.27

Industry Comparison 2.44 2.13 2.58 2.11 2.57 2.37


Quick Asset Ratio

Company 2003 2004 2005 2006 2007 AVG



VF Corporation 1.46 0.90 0.10 0.91 1.23 0.92

Liz Claiborne 1.11 1.44 1.29 1.03 0.84 1.14



Asset Turnover

2003 2004 2005 2006 2007 AVG



VF Corporation 10.12 12.47 7.47 6.95 6.71 8.74

Liz Claiborne 10.03 10.85 10.72 9.31 10.40 10.26



Days Sales Outstanding

Company 2003 2004 2005 2006 2007 AVG



VF Corporation 36.08 29.27 48.89 52.50 54.37 44.22

Liz Claiborne 36.37 33.63 34.04 39.22 35.10 35.67



Inventory Turnover

Company 2003 2004 2005 2006 2007 AVG



VF Corporation 3.50 3.74 3.50 3.67 3.58 3.60

Liz Claiborne 4.55 4.85 4.60 4.02 4.46 4.49



Days Sale of Inventory

Company 2003 2004 2005 2006 2007 AVG



VF Corporation 104.35 97.48 104.24 99.49 101.87 101.49

Liz Claiborne 80.23 75.32 79.32 90.87 81.85 81.52



Working Capital Turnover

Company 2003 2004 2005 2006 2007 AVG



VF Corporation 3.67 0.60 5.36 3.98 4.78 3.68

Liz Claiborne 6.01 5.07 5.32 5.83 5.76 5.60



Gross Profit

Company 2003 2004 2005 2006 2007 AVG

Polo Ralph Lauren Corp. 55.58% 55.04% 39.22% 53.98% 70.71% 54.91%

Jones Apparel Group Inc. 37.21% 37.13% 47.56% 36.09% 24.23% 36.44%

VF Corporation 43.75% 44.32% 41.79% 43.44% 43.48% 43.36%

Liz Claiborne 43.57% 44.56% 46.25% 48.67% 47.31% 46.07%

Industry Comparison 45.03% 45.26% 43.70% 45.54% 46.43% 45.19%


Operating Profit Margin

Company 2003 2004 2005 2006 2007 AVG



VF Corporation 12.38% 12.85% 8.63% 7.90% 11.37% 10.63%

Liz Claibonne 10.49% 11.10% 10.85% 8.22% -9.30% 6.27%



Net Profit Margin

Net Profit 2003 2004 2005 2006 2007 AVG


Jones Apparel Group Inc. 7.47% 6.57% 7.13% -3.04% 6.13% 4.85%

VF Corporation 7.64% 7.84% 7.79% 8.58% 8.19% 8.01%

Liz Claiborne 6.22% 6.59% 6.77% 5.48% -8.14% 3.38%



Asset Turnover

Asset Turno 2003 2004 2005 2006 2007 AVG



VF Corporation 1.13 1.43 1.30 1.20 1.32 1.27

Liz Claiborne 1.9 1.9 1.8 1.5 1.3 1.68



Return on Assets

Company 2003 2004 2005 2006 2007 AVG


Jones Apparel Group Inc. 8.21% -3.15% 6.03% 7.21% 8.21% 5.30%

VF Corporation 8.60% 11.18% 10.13% 10.32% 10.82% 10.21%

Liz Claiborne -1% -6.62% -6.63% -6.45% -7.11% -5.62%



Return on Equity

Company 2003 2004 2005 2006 2007 AVG


Jones Apparel Group Inc. 13.06% 11.89% 10.34% -5.40% 14.07% 8.79%

VF Corporation 10.51% 11.18% 10.13% 19.00% 18.12% 13.79%

Liz Claiborne 21.89% 21.74% 19.87% 14.06% -17.50% 12.01%



Debt to Equity

Company 2003 2004 2005 2006 2007 AVG



VF Corporation 116.04% 98.09% 83.31% 67.39% 80.23% 89.01%

Liz Claiborne 76.34% 65.21% 67.22% 64.12% 115.66% 77.71%



Times Interest Earned

Company 2003 2004 2005 2006 2007 AVG


Jones Apparel Group Inc. 9.92 10.36 6.58 -2.43 -0.14 4.86

VF Corporation 10.51 10.22 11.91 14.57 13.56 12.15

Liz Claiborne -18.7 -16.5 -11.9 12.2 -8.72



Debt Service Margin

Company 2003 2004 2005 2006 2007 AVG



Liz Claiborne 17.9 22.1 8.1 17.7 5.4 13.3

VF Corporation 4.75 1.82 3.25 3.12 6.06 3.80



Regression Analysis

3 month rate 6 month rate 2 year rate 5 year rate 10 year rate

24 months 0.83 0.84 0.88 0.94 0.97

36 months 0.71 0.7 0.79 0.91 0.98

48 months 0.80 0.81 0.91 0.99 1.01

60 months 0.98 0.99 1.04 1.04 1.03

72 months 1.09 1.08 1.10 1.08 1.06

Beta


24 months 0.8263210 0.823143699 0.892591539 0.960772108 0.987117503

36 months 0.7551810 0.756550512 0.83111856 0.931971036 0.979075738

48 months 0.7280488 0.740346932 0.840030568 0.939447005 0.98012561

60 months 0.8736942 0.882429192 0.935879082 0.96395155 0.982131145

72 months 0.9097025 0.906883161 0.946781974 0.969848328 0.987517984

Adjusted R Squared


24 months 0.1076373 0.1087562 0.1122599 0.1170723 0.0466492

36 months 0.0979390 0.0975849 0.1043786 0.1149296 0.0458248

48 months 0.1050882 0.1061102 0.1143520 0.1213950 0.0464325

60 months 0.1208409 0.1215511 0.1259210 0.1261119 0.0477715

72 months 0.1298061 0.1288536 0.1309205 0.1294545 0.0485335

Ke



24 months 2.17 2.10 3.21 3.74

36 months 2.17 2.10 3.21 3.74

48 months 2.17 2.10 3.21 3.74

60 months 2.17 2.10 3.21 3.74

72 months 2.17 2.10 3.21 3.74

Risk Free Rate


3 Month Regression U p p e r 9 5 % L o w e r 9 5 . 0 % U p p e r 9 5 . 0 %

0 . 0 0 2 3 4 1 2 9 2 0 . 0 0 1 6 4 9 6 6 2 0 . 0 0 2 3 4 1 2 9 20 . 9 3 6 8 9 8 8 3 3 0 . 7 5 3 7 1 2 7 8 0 . 9 3 6 8 9 8 8 3 3

F S i g n i f i c a n c e F1 8 2 . 9 9 4 3 2 2 7 1 . 3 7 1 1 6 E - 1 9

P - v a l u e L o w e r 9 5 % U p p e r 9 5 % o w e r 9 5 . 0 % p p e r 9 5 . 0 %1 . 3 5 7 8 1 E - 1 6 0 . 0 0 1 6 4 0 0 2 5 0 . 0 0 2 3 3 1 2 6 2 0 . 0 0 1 6 4 0 . 0 0 2 3 3 11 . 3 7 1 1 6 E - 1 9 0 . 6 0 6 8 3 3 4 9 6 0 . 8 1 7 6 1 3 9 8 7 0 . 6 0 6 8 3 3 0 . 8 1 7 6 1 4


P - v a l u e L o w e r 9 5 % U p p e r 9 5 % o w e r 9 5 . 0 % p p e r 9 5 . 0 %4 . 8 2 1 1 4 E - 1 3 0 . 0 0 1 9 2 5 6 6 7 0 . 0 0 2 9 0 2 7 7 9 0 . 0 0 1 9 2 6 0 . 0 0 2 9 0 38 . 1 4 0 4 8 E - 1 5 0 . 6 5 3 9 9 6 2 8 4 0 . 9 3 8 6 6 6 8 4 0 . 6 5 3 9 9 6 0 . 9 3 8 6 6 7


P - v a l u e L o w e r 9 5 % U p p e r 9 5 % o w e r 9 5 . 0 % p p e r 9 5 . 0 %4 . 4 8 0 6 7 E - 1 6 0 . 0 0 2 9 4 2 0 3 8 0 . 0 0 3 9 0 5 1 5 3 0 . 0 0 2 9 4 2 0 . 0 0 3 9 0 54 . 6 7 6 7 2 E - 1 7 0 . 8 5 3 7 0 7 8 4 1 . 1 0 9 6 0 6 9 0 5 0 . 8 5 3 7 0 8 1 . 1 0 9 6 0 7


P - v a l u e L o w e r 9 5 % U p p e r 9 5 % o w e r 9 5 . 0 % p p e r 9 5 . 0 %2 . 9 2 6 2 E - 1 2 0 . 0 0 3 4 5 2 5 2 4 0 . 0 0 4 6 8 2 4 3 4 0 . 0 0 3 4 5 3 0 . 0 0 4 6 8 2

3 . 4 9 7 7 8 E - 1 3 0 . 9 3 9 3 3 8 2 9 1 1 . 2 3 4 9 2 3 9 1 5 0 . 9 3 9 3 3 8 1 . 2 3 4 9 2 4


6 Month Regression F S ig n i fic a n c e F

3 31 .4 5 5 8 6 9 6 2 .9 4 63 8 E -2 8

P -v a lu e Lo w e r 9 5 % U p p e r 9 5 % L o w e r 9 5 .0 % U p p e r 9 5 .0 %3 .4 8 7 9 8 E -1 8 0 .0 0 1 7 32 0 6 3 0 .0 0 2 4 41 8 3 0 .0 01 7 3 2 0 63 0 .0 0 2 4 4 18 32 .9 4 6 3 8 E -2 8 0 .7 4 7 5 19 9 1 5 0 . 9 3 1 4 4 88 7 1 0 .7 47 5 1 9 9 15 0 . 93 1 4 4 8 87 1

F S ig n i fic a n c e F1 35 .0 1 0 7 6 3 2 2 .7 8 65 4 E -1 5

P -v a lu e Lo w e r 9 5 % U p p e r 9 5 % L o w e r 9 5 .0 % U p p e r 9 5 .0 %1 .0 4 6 4 3 E -1 3 0 .0 0 2 0 77 9 0 8 0 . 0 0 3 0 7 16 5 7 0 .0 02 0 7 7 9 08 0 . 00 3 0 7 1 65 72 .7 8 6 5 4 E -1 5 0 .6 6 8 3 19 1 7 4 0 . 9 4 8 3 9 08 4 1 0 .6 68 3 1 9 1 74 0 . 94 8 3 9 0 84 1

F S ig n i fic a n c e F26 3 .6 92 9 4 5 1 .3 7 68 2 E -1 7

P -v a lu e Lo w e r 9 5 % U p p e r 9 5 % L o w e r 9 5 .0 % U p p e r 9 5 .0 %1 .0 5 1 4 4 E -1 6 0 .0 0 3 1 10 3 4 9 0 . 0 0 4 0 7 22 9 9 0 .0 03 1 1 0 3 49 0 . 00 4 0 7 2 29 91 .3 7 6 8 2 E -1 7 0 . 8 6 6 11 3 6 5 1 . 1 1 3 9 1 14 1 8 0 .86 6 1 1 3 65 1 . 11 3 9 1 1 41 8


2 Year Regression

M S F S ig n i f i c a n c e F0 . 0 0 0 5 4 3 3 9 2 5 9 1 . 0 2 7 9 9 9 2 7 . 4 5 0 2 5 E - 3 69 . 1 9 4 0 2 E - 0 7

t S t a t P - v a l u e L o w e r 9 5 % U p p e r 9 5 % L o w e r 9 5 . 0 % U p p e r 9 5 . 0 %1 6 . 7 1 6 9 7 0 8 1 3 . 8 4 1 7 3 E - 2 6 0 . 0 0 2 1 3 8 5 5 7 0 . 0 0 2 7 1 7 9 7 1 0 . 0 0 2 1 3 8 5 5 7 0 . 0 0 2 7 1 7 9 7 12 4 . 3 1 1 0 6 7 4 2 7 . 4 5 0 2 5 E - 3 6 0 . 8 0 8 4 5 3 5 0 . 9 5 2 9 5 6 4 6 7 0 . 8 0 8 4 5 3 5 0 . 9 5 2 9 5 6 4 6 7


t S t a t P - v a l u e L o w e r 9 5 % U p p e r 9 5 % L o w e r 9 5 . 0 % U p p e r 9 5 . 0 %1 4 . 3 4 1 7 0 4 5 1 . 3 6 0 6 9 E - 1 8 0 . 0 0 2 5 3 1 1 1 8 0 . 0 0 3 3 5 7 6 1 7 0 . 0 0 2 5 3 1 1 1 8 0 . 0 0 3 3 5 7 6 1 7

1 5 . 7 4 1 8 5 9 2 1 3 . 8 1 5 4 1 E - 2 0 0 . 7 8 9 5 5 5 8 4 9 1 . 0 2 1 0 8 0 0 2 0 . 7 8 9 5 5 5 8 4 9 1 . 0 2 1 0 8 0 0 2

M S F S ig n i f i c a n c e F0 . 0 0 0 1 4 4 0 4 8 5 1 1 . 8 4 3 7 1 7 2 4 . 4 7 8 7 4 E - 2 2

2 . 8 1 4 3 E - 0 7

t S t a t P - v a l u e L o w e r 9 5 % U p p e r 9 5 % L o w e r 9 5 . 0 % U p p e r 9 5 . 0 %2 1 . 1 5 1 5 6 0 9 1 3 . 8 0 8 1 6 E - 2 1 0 . 0 0 3 3 7 9 0 0 4 0 . 0 0 4 0 9 7 3 3 2 0 . 0 0 3 3 7 9 0 0 4 0 . 0 0 4 0 9 7 3 3 22 2 . 6 2 3 9 6 3 3 4 4 . 4 7 8 7 4 E - 2 2 0 . 9 4 7 8 7 5 1 9 8 1 . 1 3 4 9 7 1 2 0 2 0 . 9 4 7 8 7 5 1 9 8 1 . 1 3 4 9 7 1 2 0 2


t S t a t P - v a l u e L o w e r 9 5 % U p p e r 9 5 % L o w e r 9 5 . 0 % U p p e r 9 5 . 0 %1 8 . 1 8 4 9 6 1 8 9 . 6 3 5 4 3 E - 1 5 0 . 0 0 3 6 5 2 9 3 4 0 . 0 0 4 5 9 3 3 6 9 0 . 0 0 3 6 5 2 9 3 4 0 . 0 0 4 5 9 3 3 6 9

2 0 . 2 5 3 0 0 9 3 2 1 . 0 2 4 3 9 E - 1 5 0 . 9 8 7 5 7 8 8 9 1 1 . 2 1 2 9 0 4 5 8 6 0 . 9 8 7 5 7 8 8 9 1 1 . 2 1 2 9 0 4 5 8 6


t S t a t P - v a l u e L o w e r 9 5 % U p p e r 9 5 % L o w e r 9 5 . 0 % U p p e r 9 5 . 0 %1 5 . 3 3 1 5 9 6 7 2 4 . 5 9 4 5 1 E - 2 2 0 . 0 0 2 0 7 2 6 3 5 0 . 0 0 2 6 9 5 1 2 1 0 . 0 0 2 0 7 2 6 3 5 0 . 0 0 2 6 9 5 1 2 11 7 . 0 6 9 1 9 7 7 8 2 . 7 6 0 1 1 E - 2 4 0 . 6 9 5 5 7 6 5 4 5 0 . 8 8 0 3 9 1 4 8 3 0 . 6 9 5 5 7 6 5 4 5 0 . 8 8 0 3 9 1 4 8 3


5 Year Regression M S F S ig n i f i c a n c e F

0 . 0 0 0 5 8 4 2 4 5 1 7 3 9 . 9 3 6 6 5 7 3 . 5 1 8 6 5 E - 5 13 . 3 5 7 8 5 E - 0 7

t S t a t P - v a l u e L o w e r 9 5 % U p p e r 9 5 % o w e r 9 5 . 0 % p p e r 9 5 . 0 %3 1 . 6 1 6 9 6 0 0 2 3 . 5 2 6 4 8 E - 4 3 0 . 0 0 2 8 5 6 0 6 0 . 0 0 3 2 4 1 0 . 0 0 2 8 5 6 0 . 0 0 3 2 4 14 1 . 7 1 2 5 4 7 9 6 3 . 5 1 8 6 5 E - 5 1 0 . 8 9 2 5 0 4 7 0 . 9 8 2 1 3 9 0 . 8 9 2 5 0 5 0 . 9 8 2 1 3 9

M S F S ig n i f i c a n c e F0 . 0 0 0 1 8 3 1 8 1 7 3 0 . 1 7 9 6 0 7 1 7 . 1 6 4 7 E - 3 02 . 5 0 8 7 1 E - 0 7

t S t a t P - v a l u e L o w e r 9 5 % U p p e r 9 5 % o w e r 9 5 . 0 % p p e r 9 5 . 0 %2 5 . 0 8 3 9 5 3 1 4 1 . 7 7 5 3 3 E - 2 8 0 . 0 0 3 1 5 2 7 1 6 0 . 0 0 3 7 0 3 0 . 0 0 3 1 5 3 0 . 0 0 3 7 0 32 7 . 0 2 1 8 3 5 7 5 7 . 1 6 4 7 E - 3 0 0 . 9 1 4 5 6 5 2 8 6 1 . 0 6 1 7 8 7 0 . 9 1 4 5 6 5 1 . 0 6 1 7 8 7


t S t a t P - v a l u e L o w e r 9 5 % U p p e r 9 5 % o w e r 9 5 . 0 % p p e r 9 5 . 0 %2 8 . 6 0 6 3 5 6 1 1 2 . 2 7 0 9 7 E - 2 5 0 . 0 0 3 5 3 1 6 0 6 0 . 0 0 4 0 7 2 0 . 0 0 3 5 3 2 0 . 0 0 4 0 7 23 0 . 6 0 9 0 7 5 9 8 2 . 4 7 3 8 2 E - 2 6 0 . 9 7 4 3 7 6 4 2 7 1 . 1 1 2 9 6 2 0 . 9 7 4 3 7 6 1 . 1 1 2 9 6 2


t S t a t P - v a l u e L o w e r 9 5 % U p p e r 9 5 % o w e r 9 5 . 0 % p p e r 9 5 . 0 %2 4 . 3 1 8 2 9 3 8 2 2 . 1 6 1 1 5 E - 1 7 0 . 0 0 3 7 3 1 5 0 5 0 . 0 0 4 4 2 7 0 . 0 0 3 7 3 2 0 . 0 0 4 4 2 7

2 7 . 2 1 7 8 2 7 1 1 . 9 5 7 4 1 E - 1 8 1 . 0 0 0 4 7 5 1 6 4 1 . 1 6 5 5 1 4 1 . 0 0 0 4 7 5 1 . 1 6 5 5 1 4


10 Year Regression

S S M S F S ig ni fic a nc e F0. 00 06 0 00 3 1 0 .0 00 6 00 03 1 5 44 1 .3 54 0 9 4 .1 2 03 E -6 87 .71 9 07 E -0 6 1 .1 0 27 2 E-0 70 .0 00 6 07 7 5

S t an da rd E rro r t S ta t P-v alue L ow e r 9 5% U pp er 95 % ow e r 9 5. 0%U p p er 95 .0 %5 .99 5 16 E -0 5 5 9. 37 3 59 13 9 1.2 8 83 E -6 1 0.0 0 34 3 99 7 5 0 .0 03 6 79 1 14 0 .0 0 34 4 0 .0 0 36 7 90. 01 30 8 25 5 5 7 3. 76 5 53 45 6 4.1 2 03 E -6 8 0.9 3 89 4 93 1 4 0 .9 91 1 33 9 79 0. 93 8 94 9 0 .9 9 11 3 4

S S M S F S ig ni fic a nc e F0. 00 01 9 09 3 3 0 .0 00 1 90 93 3 23 18 .8 5 24 4 8 5. 22 6 66 E -4 13 .78 7 62 E -0 6 8 .2 3 39 6 E-0 80. 00 01 9 47 2 1

S t an da rd E rro r t S ta t P-v alue L ow e r 9 5% U pp er 95 % ow e r 9 5. 0%U p p er 95 .0 %8 .31 8 62 E -0 5 4 5. 29 8 77 51 8 8 .21 8 95 E -4 0 0.0 0 36 0 07 8 7 0 .0 03 9 35 6 77 0. 00 3 60 1 0 .0 0 39 3 60. 02 09 3 81 3 1 4 8. 15 4 46 44 6 5 .22 6 66 E -4 1 0.9 6 61 1 82 1 6 1 .0 50 4 10 7 58 0. 96 6 11 8 1 .0 5 04 1 1

S S M S F S ig ni fic a nc e F0 .0 00 1 50 9 5 0. 00 0 15 09 5 19 24 .7 1 53 2 3 1 .6 1 52 E -3 1

2 .66 6 53 E -0 6 7 .8 4 27 3 E-0 80. 00 01 5 36 1 7

S t an da rd E rro r t S ta t P-v alue L ow e r 9 5% U pp er 95 % ow e r 9 5. 0%U p p er 95 .0 %9 .49 2 16 E -0 5 4 1. 11 0 26 27 6 1 .41 5 37 E -3 0 0.0 0 37 0 93 4 9 0 .0 04 0 95 1 57 0. 00 3 70 9 0 .0 0 40 9 50. 02 34 7 21 7 1 4 3. 87 1 57 76 3 1.6 1 52 E -3 1 0.9 8 20 5 99 8 3 1 .0 77 4 62 3 63 0 .9 8 20 6 1 .0 7 74 6 2

S S M S F S ig ni fic a nc e F0. 00 01 1 93 6 5 0 .0 00 1 19 36 5 18 20 .6 5 10 7 3 1. 18 8 39 E -2 21 .44 2 36 E -0 6 6 .5 5 61 8 E-0 80. 00 01 2 08 0 7

S t an da rd E rro r t S ta t P-v alue L ow e r 9 5% U pp er 95 % ow e r 9 5. 0%U p p er 95 .0 %0. 00 01 0 79 9 8 3 8. 12 3 21 68 9 1 .37 2 44 E -2 1 0.0 0 38 9 32 4 6 0 .0 04 3 41 1 93 0. 00 3 89 3 0 .0 0 43 4 10. 02 47 5 91 9 5 4 2. 66 9 08 80 3 1 .18 8 39 E -2 2 1.0 0 51 0 48 5 8 1 .1 07 7 99 7 14 1. 00 5 10 5 1. 10 7 8


Valuation Dividend Discount Model DDM

0 1 2 3 4 5 6 7 8 9 10 112007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Net Income ($372,798) 260903 247858 235465 223692 212507 201882 191788 182199 173089 164434Total Dividends (22,541) 23000 23000 23000 23000 23000 23000 23000 23000 23000 23000Book Value Equity 1,515,564

Book Value of Liabilities 1,752,903

dividend per share 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23pv factor 0.887075313 0.7869 0.698 0.6192 0.54929 0.4873 0.432238504 0.383428106 0.340129607 0.301720577

pv yby div 0.20 0.18 0.16 0.14 0.13 0.11 0.099 0.088 0.078 0.069pv tv perpetu 6.17Time Zero PV Perp 1.86PV dividend YBY 1.26model estimated price 3.12time consistent price 3.22Observed Share Price 18.15Initial Cost of Equity 12.73%

Growth0 0.02 0.04 0.08

9.73 2.42 0.29 0.33 0.3710.73 0.24 0.26 0.29 0.3111.73 0.23 0.24 0.27 0.28

Ke 12.73 1.86 0.23 0.25 0.2613.73 0.21 0.22 0.23 0.2414.73 0.2 0.2 0.22 0.2215.73 0.2 0.2 0.2 0.2

Range+/-20%23.3215.54


Free Cash Flow Model Free Cash Flow Model

Cash Flow from Operations 273,876 290,309 319,339 351,273 386,401 425,041 467,545 514,299 565,729 622,302 684,532 Cash Flow from Investment (219,856) (266,026) (292,628) (321,891) (354,080) (389,488) (428,437) (471,281) (518,409) (570,250) (627,275) Free Cash Flow 493,732 556,334 611,968 673,165 740,481 814,529 895,982 985,580 1,084,138 1,192,552 1,311,807 FCF Growth 0.8875 0.9091 0.9091 0.9091 0.9091 0.9091 0.9091 0.9091 0.9091 0.9091pv Factor 0.9369 0.8779 0.8225 0.7706 0.7221 0.6765 0.6339 0.5939 0.5564 0.5214PV TV Perpetuity 1,229,089.50$ Time zero PV 640,794 PV TV YBY FCF 521,254 537,224 553,684 570,647 588,131 606,150 624,721 643,862 663,588.34 683,919.40 575,000.00 pv yby 5,993,181 pv perp (13,206,170) (24,508,120) (25,330,396) MV assets (7,212,989) less bv liab 1,752,903 mve (8,965,892) divide by shares 99,800.00 time zero share price -89.84 model priceTime Constistant Price -91.31Perpetuity Growth rate 9%Kd 5.06%WACC bt 6.73%WACC at 6.83%

Observed Share Price 18.15

Sensitity AnalysisGrowth

0 0.02 0.03 0.05 0.06 0.096.73 88.55 107.73 125.04 219.67 461.42 -91.317.73 76.18 88.77 99.05 142.23 201.26 -179.4

WACCbt 8.73 66.44 75.11 81.72 105.56 130.58 -906.39.73 58.54 64.74 69.22 83.86 97.07 353.78

10.73 52 56.55 59.71 69.34 77.21 155.4

Range+/-20%23.3215.54


Residual Income Model Residuel Income Model

Net Income ($372,798) 260,903 247,858 235,465 223,692 212,507 201,882 191,788 182,199 173,089 164,434 Total Dividends 22,541 23000 23000 23000 23000 23000 23000 23000 23000 23000 23000

0.109182445Book Value of Debt 1752903Book Value of Equity 1,753,467 1,978,325 2,190,791 2,391,483 2,580,990 2,759,872 2,928,660 3,087,858 3,237,947 3,379,381Normal Income(benchmark) 192,931 223,216 251,841 278,888 304,436 328,560 351,332 372,818 393084 412191Residual Income 67,972 24,642 (16,376) (55,196) (91,928) (126,678) (159,544) (190,620) (219,996) (247,757) (274,807) Change in RI (43,330) (41,017) (38,820) (36,733) (34,750) (32,866) (31,076) (29,376) (27,761) PV factor 0.887075313 0.78690261 0.698041879 0.619215718 0.549290977 0.487262465 0.432238504 0.383428106 0.340129607 0.301720577Pv factor YBY RI 60,296 19,391 (11,431) (34,178) (50,495) (61,725) (68,961) (73,089) (74,827) (74,753) Book Value Equity 1,515,564Total PV YBY RI (369,773) Terminal Value Perpetuity (2,222,922) (7,367,484) Market Value of equity (1,077,131) (0.16) (0.55) (0.92) (1.27) (1.60) (1.91) (2.20) (2.48) (1.39) Divided by shares 99,800Initial share Price -10.79Time Consistant Price -11.12Initial Cost of Equity 12.73%Observed Share Price 18.15

Growth0 -0.1 -0.2 -0.3 -0.4 -0.5

9.73 10.27 9.66 8.9 7.91 6.56 4.6610.73 8.47 7.87 7.13 6.19 4.98 3.3511.73 6.76 6.17 5.45 4.58 3.48 2.05

ke 12.73 5.11 4.53 3.85 3.03 2.02 0.7613.73 3.51 2.95 2.3 1.53 0.6 -0.5414.73 1.95 1.41 0.79 0.06 -0.8 -1.8415.73 0.42 -0.1 -0.69 -1.38 -2.18 -3.14

Range+/-20%23.3215.54


AEG AEG Model

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 20180 1 2 3 4 5 6 7 8 9 10 11

Observed Share Price 18.15Initial Cost of Equity 0.1273Perpetuity Growth rate 0Kd 0.0506WACC bt 0.0873WACC at 0.0683Shares outsanding 99,800

(0.70) -0.05000 -0.05000 -0.05000 -0.05000 -0.05000 -0.05000 -0.05000 -0.05000 -0.05000 -1.00000Net Income (372,798) 260,903 247,858 235,465 223,692 212,507 201,882 191,788 182,199 173,089 164,434 Total Dividend 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 23,000 Drip Income 2,928 2,928 2,928 2,928 2,928 2,928 2,928 2,928 2,928 2,928 Cummulative Dividend Income for the year 263,831 250,786 238,393 226,620 215,435 204,810 194,716 185,126 176,016 167,362 benchmark (normal Income) 294,116 279,410 265,440 252,168 239,560 227,582 216,203 205,392 195,123 AEG YBY (38,437) (43,330) (41,017) (38,820) (36,733) (34,750) (32,866) (31,076) (29,376) (27,761) (29,704) Change in residuel Income from RI Model (43,330) (41,017) (38,820) (36,733) (34,750) (32,866) (31,076) (29,376) (27,761) Growth rate in AEG (0.4342) (0.4110) (0.3890) (0.3681) (0.3482) (0.3293) (0.3114) (0.2943) (0.2782) AEG YBY/ # share outstanding -0.39PV factor 0.7869 0.6980 0.6192 0.5493 0.4873 0.4322 0.3834 0.3401 0.3017PV AEG YBY (34,097) (28,632) (24,038) (20,177) (16,932) (14,206) (11,915) (9,992) (8,376) Core Earnings of perpetuity 260,903 Total PV of YBY AEG (168,365) AEG TV Perpetuity (183,614) (233,338) Total Model adjusted perpetuity Earning (91,076) Perpetuity Capitalization rate 12.73%MVE (715,442) Divided by shares 99800Initial share price (7.17) Time Consistant Price -7.39

Growth0 -0.2 -0.25 -0.3 -0.35 -0.4

10.73% -8.72 39.66 27.11 21.83 18.92 17.0811.73% -8 36.36 24.86 20.01 17.34 15.69

Ke 12.73% -7.39 33.58 22.96 18.48 16.02 14.4613.73% -6.86 31.2 21.33 17.17 14.88 13.4314.73% -6.41 29.15 19.93 16.04 13.9 12.55

Range+/-20%23.3215.54

AEG YBY (43,330) (41,017) (38,820) (36,733) (34,750) (32,866) (31,076) (29,376) (27,761) Change in RI (43,330) (41,017) (38,820) (36,733) (34,750) (32,866) (31,076) (29,376) (27,761)


Long Run Residual Income 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

0 1 2 3 4 5 6 7 8 9 10 11Initial Book Value of Equity 1,515,564Average ROE 12.00%Ke 12.73%Forward Earning growth rate 5%Estimate MVE 1,372,438 Divided by share 99,800 Initial Share Price 13.75Time consistant price 14.17

Growth ROE0.01 0.02 0.04 0.05 0.06 0.1 0.11 0.12 0.13 0.14

9.73 19.58 20.11 21.7 23 25 9.73 16.43 19.72 23 26.29 29.57Ke 10.73 17.61 17.84 18.52 19.03 19.76 10.73 13.59 16.31 19.03 21.75 24.47

11.73 16.01 16.05 16.16 16.24 16.35 11.73 11.6 13.92 16.24 18.56 20.8812.73 14.67 14.73 14.34 14.17 13.95 Ke 12.73 10.12 12.15 14.17 16.19 18.2213.73 13.55 13.37 12.89 12.57 12.17 13.73 8.98 10.78 12.57 14.37 16.1714.73 12.59 12.35 11.72 11.31 10.8 14.73 8.08 9.69 11.31 12.92 14.54

ROE0.1 0.11 0.12 0.13 0.14

0.01 12.01 13.34 14.67 16.01 17.34Growth 0.02 11.67 12.87 14.58 16.04 17.5 Range+/-20%

0.04 10.75 12.55 14.34 16.13 17.92 23.320.05 10.12 12.15 14.17 16.19 18.22 15.540.06 9.3 11.63 13.95 16.28 18.6


Altman Z Score LIZ CLAIBORNE

2003 2004 2005 2006 2007Total current assets 1,175,210 1,348,401 1,509,141 1,470,117 1,564,841Total current liabilities 556,720 511,490 637,601 673,922 770,385Total Assets 2,268,357 2,606,999 3,029,752 $3,495,768 $3,268,467

net sales 3,717,503 4,241,115 4,632,828 $4,643,936 $4,577,251Total Liabilities 981996 1,029,028 1,217,963 1,365,787 1,752,903Retained earnings 2,283,692 2,539,742 2,828,968 3,354,081 2,948,085net working capital 618,490 836,911 871,540 796,195 794,456

Operating (Loss) Income 389,888 470,790 502,746 381,514 (425,813)Other (expense) income, net (2,318) (1,890) 9,602 5,357 (4,459)EBIT 392,206 472,680 493,144 376,157 (421,354)

z scoreZ score x1 x2 x3 x4 x5

2003 5.4011 2003 0.2727 1.0068 0.1729 2.3099 1.63892004 5.6368 2004 0.3210 0.9742 0.1813 2.5335 1.62682005 5.4008 2005 0.2877 0.9337 0.1628 2.4876 1.52912006 5.1828 2006 0.2278 0.9595 0.1076 2.5595 1.32842007 4.2812 2007 0.2431 0.9020 -0.1289 1.8646 1.4004


Competitor Z Score JONES APPAREL GROUP

2003 2004 2005 2006 2007SALES $4,339,100 $4,592,600 $5,074,200 $4,742,800 $3,848,500Total Assets $4,187,700 $4,550,800 $4,577,800 $3,787,000 $3,236,600

Total Current Assets $1,455,900 $1,296,200 $1,284,300 $1,278,600 $1,294,100 z scoreTotal Current Liabilities $683,900 $62,900 $836,500 $615,400 $395,600 x1 x2 x3 x4 x5net working capital $772,000 $1,233,300 $447,800 $663,200 $898,500 2003 0.1843494 0.464981 0.138453089 2.5381538 1.036153total liablilities $1,649,900 $1,896,900 $1,911,400 $1,575,400 $1,239,800 2004 0.2710073 0.484354 0.116111453 2.3990722 1.009185Retained Earnings $1,947,200 $2,204,200 $2,426,600 $2,226,400 $2,480,800 2005 0.0978199 0.53008 0.130455677 2.3949984 1.108436EBIT 579,800.00 528400 597200 -166700 -27000 2006 0.1751254 0.587906 -0.04401901 2.4038339 1.25239

Z score 2007 0.2776061 0.766483 -0.00834209 2.6105824 1.1890562003 4.36212004 4.27972005 4.26182006 4.37522007 4.8354

Ralph Lauren2003 2004 2005 2006 2007

SALES $1,742,000 $171,000 $3,060,700 $3,501,100 $4,059,100Total Assets $2,038,800 $2,270,200 $2,726,690 $3,758,000 $3,088,700

Total Current Assets $1,162,600 $1,271,300 $1,413,763 $1,685,900 $1,378,500 z scoreTotal Current Liabilities $503,000 $501,100 $622,410 $640,300 $843,500 x1 x2 x3 x4 x5net working capital $659,600 $770,200 $791,353 $1,150,900 $535,000 2003 0.323524 0.380812 0.142660 2.456090 0.854424total liablilities $830,100 $848,200 $965,050 $1,423,100 $1,039,100 2004 0.339265 0.408510 0.119325 2.676491 0.075324Retained Earnings $776,400 $927,400 $1,090,310 $1,742,310 $1,379,200 2005 0.290225 0.399866 0.109908 4.380858 1.122497EBIT $290,855 $270,891 $299,685 $516,600 $652,600 2006 0.323524 0.380812 0.137467 2.640714 0.931639

2007 0.339265 0.408510 0.211286 3.661766 1.314177

Z score2003 4.15752004 3.61892005 6.30342006 4.41422007 5.9350


VF Corporation2003 2004 2005 2006 2007

SALES $5,083,523 $5,207,459 $5,582,075 $6,138,087 $7,140,811Total Assets $3,503,101 $5,004,278 $5,171,071 $5,465,693 $6,446,685Total Current Assets $2,074,540 $2,378,568 $2,365,376 $2,578,010 $2,645,129Total Current Liabilities $874,844 $1,372,214 $1,152,143 $1,014,848 $1,134,387

net working capital $1,199,696 $1,006,354 $1,213,233 $1,563,162 $1,510,742 z scoretotal liablilities $1,464,984 $2,464,984 $2,339,532 $2,200,521 $2,869,856 x1 x2 x3 x4 x5Retained Earnings $833,332 $1,427,283 $1,585,421 $1,806,875 $1,786,216 2003 0.578295 0.237884 0.177535 2.391221 1.451149EBIT $621,924 $777,800 $828,200 $826,144 $965,441 2004 0.201099 0.285213 0.155427 2.030146 1.040601

2005 0.234619 0.306594 0.160160 2.210301 1.079481

Z score 2006 0.285995 0.330585 0.151151 2.483818 1.1230212003 4.8361 2007 0.234344 0.277075 0.149758 2.246344 1.1076722004 3.71252005 3.99122006 4.37462007 4.0152


Sales Manipulation Diagnostics for Liz Claiborne and Competitors

Liz Claiborne Sales Manipulation Diagnostics 2002 2003 2004 2005 2006Net Sales/ Cash From Sales 17.57 14.45 15.78 14.76 26.9



Ralph Lauren Sales Manipulation Diagnostics 2002 2003 2004 2005 2006Net Sals/ Cash From Sales 8.67 6.37 6.75 8.73 12.24

Net Sales/ Net Accounts Receivables 6 5.83 5.34 6.76 7.23


VF Corporation Sales Manipulation Diagnostics 2002 2003 2004 2005 2006Net Sales/ Cash From Sales 10.23 10.12 12.47 18.82 17.88



Jones Apparel Group Sales Manipulation Diagnostics 2002 2003 2004 2005 2006Net Sales/ Cash From Sales N/A N/A N/A 12.82 5.62

Net Sales/ Net Accounts Receivables N/A N/A N/A 9.76 9.75

Net Sales/ Inventory N/A N/A N/A 6.89 6.31


Capitalizing Leases for Liz Claiborne

Operating

Leases

Interest

Expense PMT Change in

Balance Depreciation

Capital Lease

Expense

Understated

A and L

2001 97,569,000 5,073,588 9,883,412 4,809,824 3,902,760 8,976,348 88,592,652

2002 112,526,000 5,851,352 23,164,648 17,313,296 4,501,040 10,352,392 102,173,608

2003 141,542,000 7,360,184 8,888,816 1,528,632 5,661,680 13,021,864 128,520,136

2004 157,791,000 8,205,132 4,107,868 -4,097,264 6,311,640 14,516,772 143,274,228

2005 170,104,000 8,845,408 8,250,592 -594,816 6,804,160 15,649,568 154,454,432

2006 187,200,000 9,734,400 23,134,400 13,400,000 7,488,000 17,222,400 169,977,600

2007 173,800,000 9,037,600 20,137,600 11,100,000 6,952,000 15,989,600 157,810,400

TOTAL 1,040,532,000 54,107,664 97,567,336 43,459,672 41,621,280 95,728,944 944,803,056


Impairment of Liz Claiborne’s Goodwill

Goodwill

Increase in

goodwill 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2001 276,213 276,213 55242.6 55242.6 55242.6 55242.6 55242.6

2001-2002 404,654 128,441 25688.2 25688.2 25688.2 25688.2 25688.2

2002-2003 478,869 74,215 14843 14843 14843 14843 14843

2003-2004 596,436 117,567 23513.4 23513.4 23513.4 23513.4 23513.4

2004-2005 755,655 159,219 31843.8 31843.8 31843.8 31843.8 31843.8

2005-2006 858,565 102,910 20582 20582 20582 20582 20582

2006-2007 1,007,859 149,294 29858 29858 29858 29858 29858

TOTAL 1,007,859 55242.6 80930.8 95773.8 119287.2 151131 116470.4 120640.2 105797.2 82283.8 50440 29858


REFERENCES

1. http://finance.yahoo.com/q?s=LIZ

2. UNITED STATES SECURITIES AND EXCHANGE COMMISSION

3. POLO RALPH LAUREN CORPORATION

4. S&P 500

5. Wall Street Journal

6. Liz Claiborne 10K

7. Polo Ralph Lauren 10K

8. FV Corporation 10K


9. Jones Apparel Group 10K

10. Business Analysis & Valuation

11. Investapedia.com

12. Answer.com

13. nvestorwords.com

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