Liz Claiborne Inc. (NYSE: LIZ) dropped a bombshell today, announcing that it will move decidedly down-market and give up the department store business that made the name an icon.Instead, Liz Claiborne and Claiborne will be sold exclusively through JCPenney in the United States, and the much-anticipated Isaac Mizrahi-designed Liz Claiborne New York line will be sold exclusively by QVC.
In a press release, the company touted the financial prospects for the deal: "As a result of these agreements, the company expects the Liz Claiborne wholesale brand franchise to swing from a meaningful adjusted operating loss in 2009 to a targeted adjusted operating profit in 2010."
The motivation for this move is pretty clear: Liz Claiborne is out of money and by partnering with a low-end but well-capitalized company like JCPenney, it will be able to earn a low-risk royalty stream. And best of all, JCPenney is going to handle everything: "JCPenney will be responsible for sourcing, production, marketing and distribution and they will together merchandise the brand."
The market has responded to the announcement with jubilation, sending the stock up nearly 25%.
But I'm not so sure: The JCPenney and QVC deals alleviate financial stress for awhile -- and put the company on a path toward viability. But in the process, they destroy quite a bit of long-term upside. Liz Claiborne can go from Macy's to JCPenney with ease -- but switching back wont' be so easy. The company has basically relegated itself to a status as a long-term third tier brand. While the company might be able to achieve an operating profit in 2010, it will actually be a massive loss once you account for the destruction of brand value that comes from these kinds of deals.
The QVC/JCPenney deal is reminiscent of the kinds of deals that are made with brands coming out of bankruptcy. It may be that Liz Claiborne made this deal to avoid bankruptcy.
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