##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 1-10689
 LIZ CLAIBORNE, INC.
   Delaware
    
    13-2842791(State or other 
jurisdiction of 
incorporation or 
organization)
    
    (I.R.S. Employer
Identification No.)1441 Broadway, New York, New York
    
    10018(Address of principal executive offices)
    
    (Zip Code)
 (212) 354-4900
 
  þ o
  þ o o
 o þ




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##### 



LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
MARCH 31, 2007
 PAGENUMBERPART I   FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2007
(Unaudited), December 30, 2006 and April 1, 2006 (Unaudited)
    
    
    3Condensed Consolidated Statements of Income for the Three Month
Periods Ended March 31, 2007 (Unaudited) and April 1, 2006
(Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three
Month Periods Ended March 31, 2007 (Unaudited) and April 1, 2006
(Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6-25Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    26Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 4.
    
    Controls and Procedures
    
    
    47PART II   OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    48Item 1A.
    
    Risk Factors
    
    
    48Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    48Item 5.
    
    Other Information
    
    
    48Item 6.
    
    Exhibits
    
    
    49SIGNATURES
    
    
    50EX-31.A: CERTIFICATIONEX-31.B: CERTIFICATIONEX-32.A: CERTIFICATIONEX-32.B: CERTIFICATION






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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  (Unaudited)
    
    
    
    
    
    
    (Unaudited)March 31,
    
    
    December 30,
    
    
    April 1,2007
    
    
    2006
    
    
    2006AssetsCurrent Assets:Cash and cash equivalents
    
    $
    96,504
    
    
    $
    185,645
    
    
    $
    90,371Marketable securities
    
    
    9,485
    
    
    
    9,451
    
    
    
    8,464Accounts receivable  trade, net
    
    
    601,294
    
    
    
    499,012
    
    
    
    639,292Inventories, net
    
    
    644,180
    
    
    
    593,445
    
    
    
    563,799Deferred income taxes
    
    
    73,290
    
    
    
    60,627
    
    
    
    53,207Other current assets
    
    
    151,383
    
    
    
    121,937
    
    
    
    122,490Total current assets
    
    
    1,576,136
    
    
    
    1,470,117
    
    
    
    1,477,623Property and Equipment, Net
    
    
    567,105
    
    
    
    581,992
    
    
    
    493,105Goodwill, Net
    
    
    1,010,122
    
    
    
    1,007,859
    
    
    
    949,949Intangibles, Net
    
    
    410,013
    
    
    
    413,962
    
    
    
    338,351Other Assets
    
    
    21,570
    
    
    
    21,838
    
    
    
    11,447Total Assets
    
    $
    3,584,946
    
    
    $
    3,495,768
    
    
    $
    3,270,475Liabilities and Stockholders EquityCurrent Liabilities:Short term borrowings
    
    $
    26,824
    
    
    $
    22,266
    
    
    $
    29,308Accounts payable
    
    
    238,533
    
    
    
    281,413
    
    
    
    276,461Accrued expenses
    
    
    284,578
    
    
    
    336,773
    
    
    
    369,201Income taxes payable
    
    
    
    
    
    
    33,470
    
    
    
    21,858Total current liabilities
    
    
    549,935
    
    
    
    673,922
    
    
    
    696,828Long-Term Debt
    
    
    689,092
    
    
    
    541,877
    
    
    
    459,110Obligations Under Capital Leases
    
    
    26,858
    
    
    
    28,592
    
    
    
    3,837Other Non-Current Liabilities
    
    
    102,227
    
    
    
    63,565
    
    
    
    60,992Deferred Income Taxes
    
    
    65,445
    
    
    
    54,571
    
    
    
    55,531Commitments and Contingencies (Note 9)Minority Interest
    
    
    3,375
    
    
    
    3,260
    
    
    
    2,866Stockholders Equity:Preferred stock, $.01 par value, authorized shares 
50,000,000, issued shares  none
    
    
    
    
    
    
    
    
    
    
    Common stock, $1 par value, authorized shares 
250,000,000, issued shares  176,437,234
    
    
    176,437
    
    
    
    176,437
    
    
    
    176,437Capital in excess of par value
    
    
    261,770
    
    
    
    249,573
    
    
    
    197,749Retained earnings
    
    
    3,353,919
    
    
    
    3,354,081
    
    
    
    3,163,553Accumulated other comprehensive income (loss)
    
    
    (57,147
    )
    
    
    (56,156
    )
    
    
    (37,154
    )3,734,979
    
    
    
    3,723,935
    
    
    
    3,500,585Common stock in treasury, at cost, 72,382,307,
73,281,103 and 72,077,259 shares
    
    
    (1,586,965
    )
    
    
    (1,593,954
    )
    
    
    (1,509,274
    )Total stockholders equity
    
    
    2,148,014
    
    
    
    2,129,981
    
    
    
    1,991,311Total Liabilities and Stockholders Equity
    
    $
    3,584,946
    
    
    $
    3,495,768
    
    
    $
    3,270,475
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
   Three Months Ended(13 Weeks)
    
    
    (13 Weeks)March 31, 2007
    
    
    April 1, 2006Net Sales
    
    $
    1,152,979
    
    
    $
    1,171,201Cost of goods sold
    
    
    625,206
    
    
    
    627,188Gross Profit
    
    
    527,773
    
    
    
    544,013Selling, general & administrative expenses
    
    
    488,890
    
    
    
    466,882Operating Income
    
    
    38,883
    
    
    
    77,131Other income (expense), net
    
    
    (729
    )
    
    
    3,313Interest expense, net
    
    
    (8,532
    )
    
    
    (7,105
    )Income Before Provision for Income Taxes
    
    
    29,622
    
    
    
    73,339Provision for income taxes
    
    
    13,424
    
    
    
    26,402Net Income
    
    $
    16,198
    
    
    $
    46,937Net Income per Weighted Average Share, Basic
    
    $
    0.16
    
    
    $
    0.45Net Income per Weighted Average Share, Diluted
    
    $
    0.16
    
    
    $
    0.45Weighted Average Shares, Basic
    
    
    101,796
    
    
    
    103,422Weighted Average Shares, Diluted
    
    
    103,127
    
    
    
    104,870Dividends Paid per Common Share
    
    $
    0.06
    
    
    $
    0.06
  4




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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Three Months Ended(13 Weeks)
    
    
    (13 Weeks)March 31,
    
    
    April 1,2007
    
    
    2006Cash Flows from Operating Activities:Net income
    
    $
    16,198
    
    
    $
    46,937Adjustments to reconcile net income to net cash used in operating
activities:Depreciation and amortization
    
    
    38,528
    
    
    
    32,345Streamlining initiatives; asset write-down
    
    
    
    
    
    
    4,729Loss on asset disposals
    
    
    4,753
    
    
    
    Deferred income taxes
    
    
    16,576
    
    
    
    (2,911
    )Share-based compensation
    
    
    7,609
    
    
    
    3,471Tax benefit on exercise of stock options
    
    
    2,074
    
    
    
    2,652Gain on sale of securities
    
    
    
    
    
    
    (3,583
    )Gain on sale of property and equipment
    
    
    (279
    )
    
    
    Other, net
    
    
    (50
    )
    
    
    (8
    )Change in assets and liabilities, exclusive of acquisitions:Increase in accounts receivable  trade, net
    
    
    (100,555
    )
    
    
    (212,721
    )Increase in inventories, net
    
    
    (48,698
    )
    
    
    (17,041
    )Increase in other current and non-current assets
    
    
    (22,622
    )
    
    
    (9,513
    )(Decrease) increase in accounts payable
    
    
    (30,860
    )
    
    
    28,283Decrease in accrued expenses
    
    
    (56,448
    )
    
    
    (4,812
    )(Decrease) increase in income taxes payable
    
    
    (22,407
    )
    
    
    1,743Net cash used in operating activities
    
    
    (196,181
    )
    
    
    (130,429
    )Cash Flows from Investing Activities:Purchases of investment instruments
    
    
    (40
    )
    
    
    (35
    )Proceeds from sales of securities
    
    
    
    
    
    
    8,054Purchases of property and equipment
    
    
    (34,347
    )
    
    
    (30,531
    )Proceeds from sales of property and equipment
    
    
    1,410
    
    
    
    Payments for acquisitions, net of cash acquired
    
    
    (13,431
    )
    
    
    (35,659
    )Payments for in-store merchandise shops
    
    
    (1,008
    )
    
    
    (5,520
    )Other, net
    
    
    (612
    )
    
    
    448Net cash used in investing activities
    
    
    (48,028
    )
    
    
    (63,243
    )Cash Flows from Financing Activities:Short term borrowings (repayments), net
    
    
    4,531
    
    
    
    (19,421
    )Principal payments under capital lease obligations
    
    
    (1,756
    )
    
    
    (927
    )Commercial paper, net
    
    
    142,355
    
    
    
    34,841Proceeds from exercise of common stock options
    
    
    15,976
    
    
    
    20,276Purchase of common stock
    
    
    
    
    
    
    (75,285
    )Dividends paid
    
    
    (5,726
    )
    
    
    (5,871
    )Excess tax benefits related to stock options
    
    
    1,091
    
    
    
    734Other, net
    
    
    (330
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    156,141
    
    
    
    (45,653
    )Effect of Exchange Rate Changes on Cash and Cash Equivalents
    
    
    (1,073
    )
    
    
    1,169Net Change in Cash and Cash Equivalents
    
    
    (89,141
    )
    
    
    (238,156
    )Cash and Cash Equivalents at Beginning of Period
    
    
    185,645
    
    
    
    328,527Cash and Cash Equivalents at End of Period
    
    $
    96,504
    
    
    $
    90,371
  5




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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     SIGNIFICANT ACCOUNTING POLICIES
 NATURE OF OPERATIONS
  PRINCIPLES OF CONSOLIDATION
  USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
 Use of Estimates
   Revenue Recognition


6



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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Income Taxes
  Accounts Receivable  Trade, Net
  Inventories, Net
  Goodwill and Other Intangibles, Net


7



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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     Accrued Expenses
  Derivative Instruments


8



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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Share-Based Compensation
  OTHER SIGNIFICANT ACCOUNTING POLICIES
 Fair Value of Financial Instruments
  Cash and Cash Equivalents
  Marketable Securities


9



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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Property and Equipment, Net
  Foreign Currency Translation
  Cost of Goods Sold
  Advertising, Promotion and Marketing
  Shipping and Handling Costs
  Fiscal Year


10



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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Cash Dividend and Common Stock Repurchase
   ® ®


11



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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


12



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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Capital in
    
    
    
    
    
    
    Common stockexcess of par
    
    
    Retained
    
    
    in treasury, atIn thousands
    
    value
    
    
    earnings
    
    
    costBalance as of December 30, 2006
    
    $
    249,573
    
    
    $
    3,354,081
    
    
    $
    (1,593,954
    )Net income
    
    
    
    
    
    
    16,198
    
    
    
    Cumulative impact of change in accounting
for income tax uncertainty
    
    
    
    
    
    
    (10,494
    )
    
    
    Restricted shares issued, net of
cancellations and shares withheld for taxes
    
    
    (8,991
    )
    
    
    
    
    
    
    1,427Purchase of common stock
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    10,414
    
    
    
    
    
    
    
    5,562Share-based compensation
    
    
    7,609
    
    
    
    
    
    
    
    Tax benefit on stock options exercised
    
    
    2,074
    
    
    
    
    
    
    
    Excess tax benefits related to stock options
    
    
    1,091
    
    
    
    
    
    
    
    Dividends declared
    
    
    
    
    
    
    (5,866
    )
    
    
    Balance as of March 31, 2007
    
    $
    261,770
    
    
    $
    3,353,919
    
    
    $
    (1,586,965
    )
 Capital in
    
    
    
    
    
    
    Common stockexcess of par
    
    
    Retained
    
    
    in treasury, atIn thousands
    
    value
    
    
    earnings
    
    
    costBalance as of December 31, 2005
    
    $
    187,689
    
    
    $
    3,122,487
    
    
    $
    (1,450,169
    )Net income
    
    
    
    
    
    
    46,937
    
    
    
    Restricted shares issued, net of cancellations
    
    
    (8,469
    )
    
    
    
    
    
    
    7,576Purchase of common stock
    
    
    
    
    
    
    
    
    
    
    (75,285
    )Stock options exercised
    
    
    11,672
    
    
    
    
    
    
    
    8,604Share-based compensation
    
    
    3,471
    
    
    
    
    
    
    
    Tax benefit on stock options exercised
    
    
    2,652
    
    
    
    
    
    
    
    Excess tax benefits related to stock options
    
    
    734
    
    
    
    
    
    
    
    Dividends declared
    
    
    
    
    
    
    (5,871
    )
    
    
    Balance as of April 1, 2006
    
    $
    197,749
    
    
    $
    3,163,553
    
    
    $
    (1,509,274
    )


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months Ended(13 Weeks)
    
    
    (13 Weeks)In thousands
    
    March 31, 2007
    
    
    April 1, 2006Net income:As reported
    
    $
    16,198
    
    
    $
    46,937Other
comprehensive income (loss):Change in cumulative translation gain
    
    
    4,252
    
    
    
    9,761Change in cumulative translation loss of Eurobonds
    
    
    (4,810
    )
    
    
    (11,066
    )Changes in unrealized losses on securities, net
of income tax (provision) benefit of $(5) and
$633
    
    
    (7
    )
    
    
    (1,125
    )Changes in fair value of cash flow hedges, net of
income tax (provision) benefit of $(69) and $555
    
    
    (426
    )
    
    
    (986
    )Total comprehensive income, net of tax
    
    $
    15,207
    
    
    $
    43,521
  March 31,
    
    
    December 30,
    
    
    April 1,In thousands
    
    2007
    
    
    2006
    
    
    2006Cumulative translation adjustment
    
    $
    (55,829
    )
    
    $
    (55,271
    )
    
    $
    (35,854
    )Unrealized losses on securities, net of taxes of
$94, $99 and $388, respectively
    
    
    (149
    )
    
    
    (142
    )
    
    
    (691
    )Unrealized losses on cash flow hedging
derivatives, net of taxes of $426, $495 and $268,
respectively
    
    
    (1,169
    )
    
    
    (743
    )
    
    
    (609
    )Accumulated other comprehensive (loss), net of tax
    
    $
    (57,147
    )
    
    $
    (56,156
    )
    
    $
    (37,154
    )


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Unrealized
    
    
    EstimatedIn thousands
    
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueMarch 31, 2007:
    
    Equity investments
    
    $
    9,252
    
    
    $
    
    
    
    $
    (169
    )
    
    $
    9,083Other investments
    
    
    464
    
    
    
    
    
    
    
    (62
    )
    
    
    402Total
    
    $
    9,716
    
    
    $
    
    
    
    $
    (231
    )
    
    $
    9,485December 30, 2006:
    
    Equity investments
    
    $
    9,212
    
    
    $
    
    
    
    $
    (186
    )
    
    $
    9,026Other investments
    
    
    458
    
    
    
    
    
    
    
    (33
    )
    
    
    425Total
    
    $
    9,670
    
    
    $
    
    
    
    $
    (219
    )
    
    $
    9,451April 1, 2006:
    
    Equity investments
    
    $
    9,094
    
    
    $
    
    
    
    $
    (967
    )
    
    $
    8,127Other investments
    
    
    439
    
    
    
    
    
    
    
    (102
    )
    
    
    337Total
    
    $
    9,533
    
    
    $
    
    
    
    $
    (1,069
    )
    
    $
    8,464
    March 31,
    
    
    December 30,
    
    
    April 1,In thousands
    
    2007
    
    
    2006
    
    
    2006Raw materials
    
    $
    31,728
    
    
    $
    34,521
    
    
    $
    32,363Work in process
    
    
    14,534
    
    
    
    13,566
    
    
    
    19,680Finished goods
    
    
    597,918
    
    
    
    545,358
    
    
    
    511,756Total
    
    $
    644,180
    
    
    $
    593,445
    
    
    $
    563,799
   March 31,
    
    
    December 30,
    
    
    April 1,In thousands
    
    2007
    
    
    2006
    
    
    2006Land and buildings
    
    $
    135,291
    
    
    $
    141,451
    
    
    $
    141,093Machinery and equipment
    
    
    412,039
    
    
    
    407,511
    
    
    
    367,686Furniture and fixtures
    
    
    278,259
    
    
    
    276,685
    
    
    
    219,453Leasehold improvements
    
    
    464,648
    
    
    
    460,784
    
    
    
    409,3011,290,237
    
    
    
    1,286,431
    
    
    
    1,137,533Less: Accumulated depreciation and
amortization
    
    
    723,132
    
    
    
    704,439
    
    
    
    644,428Total property and equipment, net
    
    $
    567,105
    
    
    $
    581,992
    
    
    $
    493,105


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    WeightedAverageAmortization

    
    March 31,
    
    
    December 30,
    
    
    April 1,In thousands
    
    Period

    
    2007
    
    
    2006
    
    
    2006Amortized intangible assets:Gross Carrying Amount:Licensed trademarks
    
    15 years
    
    $
    32,449
    
    
    $
    32,449
    
    
    $
    32,449Owned trademarks
    
    20 years
    
    
    7,600
    
    
    
    7,600
    
    
    
    7,600Customer relationships
    
    12 years
    
    
    49,367
    
    
    
    49,351
    
    
    
    49,330Merchandising rights
    
    4 years
    
    
    52,265
    
    
    
    57,695
    
    
    
    51,256Subtotal
    
    10 years
    
    
    141,681
    
    
    
    147,095
    
    
    
    140,635Accumulated Amortization:Licensed trademarks
    
    
    
    
    
    
    (14,982
    )
    
    
    (14,330
    )
    
    
    (12,293
    )Owned trademarks
    
    
    
    
    
    
    (847
    )
    
    
    (752
    )
    
    
    (467
    )Customer relationships
    
    
    
    
    
    
    (7,824
    )
    
    
    (6,800
    )
    
    
    (3,985
    )Merchandising rights
    
    
    
    
    
    
    (26,452
    )
    
    
    (29,563
    )
    
    
    (21,562
    )Subtotal
    
    
    
    
    
    
    (50,105
    )
    
    
    (51,445
    )
    
    
    (38,307
    )Net:Licensed trademarks
    
    
    
    
    
    
    17,467
    
    
    
    18,119
    
    
    
    20,156Owned trademarks
    
    
    
    
    
    
    6,753
    
    
    
    6,848
    
    
    
    7,133Customer relationships
    
    
    
    
    
    
    41,543
    
    
    
    42,551
    
    
    
    45,345Merchandising rights
    
    
    
    
    
    
    25,813
    
    
    
    28,132
    
    
    
    29,694Total amortized intangible assets, net
    
    
    
    
    
    
    91,576
    
    
    
    95,650
    
    
    
    102,328Unamortized intangible assets:Owned trademarks
    
    
    
    
    
    
    318,437
    
    
    
    318,312
    
    
    
    236,023Total intangible assets
    
    
    
    
    
    $
    410,013
    
    
    $
    413,962
    
    
    $
    338,351
   (In millions)Fiscal Year
    
    Amortization Expense|2007
    
    $
    18.92008
    
    
    16.52009
    
    
    13.72010
    
    
    9.42011
    
    
    7.6


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Wholesale
    
    
    WholesaleIn thousands
    
    Apparel
    
    
    Non-Apparel
    
    
    TotalBalance, December 30, 2006
    
    $
    998,264
    
    
    $
    9,595
    
    
    $
    1,007,859Reclass of Kate Spade goodwill
    
    
    (44,692
    )
    
    
    44,692
    
    
    
    Kate Spade working capital
    
    
    
    
    
    
    1,879
    
    
    
    1,879Other
    
    
    (150
    )
    
    
    14
    
    
    
    (136
    )Translation difference
    
    
    520
    
    
    
    
    
    
    
    520Balance, March 31, 2007
    
    $
    953,942
    
    
    $
    56,180
    
    
    $
    1,010,122


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
        Three Months EndedIn thousands
    
    March 31, 2007Wholesale Apparel
    
    $
    1,942Wholesale Non-Apparel
    
    
    Retail
    
    
    4,969Total
    
    $
    6,911


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  LeasePayroll and
    
    
    Termination
    
    
    Fixed AssetIn thousands
    
    Related Costs
    
    
    Costs
    
    
    Write-Downs
    
    
    Other Costs
    
    
    Total2006 provision
    
    $
    45,887
    
    
    $
    10,592
    
    
    $
    23,126
    
    
    $
    7,096
    
    
    $
    86,7012006 fixed asset write-downs
    
    
    
    
    
    
    
    
    
    
    (23,105
    )
    
    
    
    
    
    
    (23,105
    )Translation difference
    
    
    458
    
    
    
    35
    
    
    
    (21
    )
    
    
    (51
    )
    
    
    4212006 spending
    
    
    (30,402
    )
    
    
    (5,102
    )
    
    
    
    
    
    
    (6,934
    )
    
    
    (42,438
    )Balance at December 30, 2006
    
    $
    15,943
    
    
    $
    5,525
    
    
    $
    
    
    
    $
    111
    
    
    $
    21,5792007 provision
    
    
    2,031
    
    
    
    1,506
    
    
    
    3,194
    
    
    
    180
    
    
    
    6,9112007 fixed asset write-downs
    
    
    
    
    
    
    
    
    
    
    (3,194
    )
    
    
    
    
    
    
    (3,194
    )Translation difference
    
    
    89
    
    
    
    14
    
    
    
    
    
    
    
    (1
    )
    
    
    1022007 spending
    
    
    (8,196
    )
    
    
    (4,524
    )
    
    
    
    
    
    
    (109
    )
    
    
    (12,829
    )Balance at March 31, 2007
    
    $
    9,867
    
    
    $
    2,521
    
    
    $
    
    
    
    $
    181
    
    
    $
    12,569
   Three Months EndedMarch 31, 2007
    
    
    April 1, 2006Weighted
    
    
    Net Income
    
    
    
    
    
    
    Weighted
    
    
    Net IncomeIn thousands, except per
    
    
    
    
    
    Average
    
    
    per Common
    
    
    
    
    
    
    Average
    
    
    per Commonshare data
    
    Net Income
    
    
    Shares
    
    
    Share
    
    
    Net Income
    
    
    Shares
    
    
    ShareBasic
    
    $
    16,198
    
    
    
    101,796
    
    
    $
    0.16
    
    
    $
    46,937
    
    
    
    103,422
    
    
    $
    0.45Effect of dilutive
securities:Stock options and
restricted stock grants
    
    
    
    
    
    
    1,331
    
    
    
    
    
    
    
    
    
    
    
    1,448
    
    
    
    Diluted
    
    $
    16,198
    
    
    
    103,127
    
    
    $
    0.16
    
    
    $
    46,937
    
    
    
    104,870
    
    
    $
    0.45


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     For the Three Months Ended March 31, 2007Wholesale
    
    
    Wholesale
    
    
    
    
    
    
    Corporate/In thousands
    
    Apparel
    
    
    Non-Apparel
    
    
    Retail
    
    
    Eliminations
    
    
    TotalNET SALES:Total net sales
    
    $
    765,726
    
    
    $
    141,449
    
    
    $
    305,374
    
    
    $
    (59,570
    )
    
    $
    1,152,979Intercompany sales
    
    
    (64,334
    )
    
    
    (8,350
    )
    
    
    
    
    
    
    72,684
    
    
    
    Sales from external customers
    
    $
    701,392
    
    
    $
    133,099
    
    
    $
    305,374
    
    
    $
    13,114
    
    
    $
    1,152,979% to total
    
    
    60.8
    %
    
    
    11.6
    %
    
    
    26.5
    %
    
    
    1.1
    %
    
    
    100.0
    %OPERATING INCOME:Total operating income
    
    $
    50,897
    
    
    $
    (609
    )
    
    $
    (21,000
    )
    
    $
    9,595
    
    
    $
    38,883Intercompany segment operating
(income) loss
    
    
    (130
    )
    
    
    (1,263
    )
    
    
    
    
    
    
    1,393
    
    
    
    Segment operating income
from external customers
    
    $
    50,767
    
    
    $
    (1,872
    )
    
    $
    (21,000
    )
    
    $
    10,988
    
    
    $
    38,883% of sales
    
    
    7.2
    %
    
    
    (1.4
    )%
    
    
    (6.9
    )%
    
    
    83.8
    %
    
    
    3.4
    %


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the Three Months Ended April 1, 2006Wholesale
    
    
    Wholesale
    
    
    
    
    
    
    Corporate/In thousands
    
    Apparel
    
    
    Non-Apparel
    
    
    Retail
    
    
    Eliminations
    
    
    TotalNET SALES:Total net sales
    
    $
    793,946
    
    
    $
    145,497
    
    
    $
    264,235
    
    
    $
    (32,477
    )
    
    $
    1,171,201Intercompany sales
    
    
    (36,425
    )
    
    
    (7,264
    )
    
    
    
    
    
    
    43,689
    
    
    
    Sales from external customers
    
    $
    757,521
    
    
    $
    138,233
    
    
    $
    264,235
    
    
    $
    11,212
    
    
    $
    1,171,201% to total
    
    
    64.7
    %
    
    
    11.8
    %
    
    
    22.6
    %
    
    
    0.9
    %
    
    
    100.0
    %OPERATING INCOME:Total operating income
    
    $
    72,411
    
    
    $
    15,541
    
    
    $
    (25,254
    )
    
    $
    14,433
    
    
    $
    77,131Intercompany segment operating
(income) loss
    
    
    6,295
    
    
    
    7
    
    
    
    
    
    
    
    (6,302
    )
    
    
    Segment operating income
from external customers
    
    $
    78,706
    
    
    $
    15,548
    
    
    $
    (25,254
    )
    
    $
    8,131
    
    
    $
    77,131% of sales
    
    
    10.4
    %
    
    
    11.2
    %
    
    
    (9.6
    )%
    
    
    72.5
    %
    
    
    6.6
    %
  Three Months EndedMarch 31,
    
    
    April 1,2007
    
    
    2006NET SALES:Domestic
    
    $
    808,513
    
    
    $
    849,767International
    
    
    344,466
    
    
    
    321,434Total net sales
    
    $
    1,152,979
    
    
    $
    1,171,201OPERATING INCOME:Domestic
    
    $
    26,162
    
    
    $
    72,529International
    
    
    12,721
    
    
    
    4,602Total operating income
    
    $
    38,883
    
    
    $
    77,131


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Three Months EndedBinomial Lattice Valuation Assumptions:
    
    March 31, 2007
    
    April 1, 2006Weighted-average fair value of options granted
    
    $
    11.51
    
    
    $
    9.55Expected volatility
    
    23.1% to 39.5%
    
    23.1% to 39.5%Weighted-average volatility
    
    
    24.0
    %
    
    
    24.4
    %Expected term (in years)
    
    
    4.7
    
    
    
    4.4Dividend yield
    
    
    0.52
    %
    
    
    0.61
    %Risk-free rate
    
    4.4% to 4.8%
    
    4.4% to 4.8%Expected annual forfeiture
    
    
    12.0
    %
    
    
    6.8
    %
 Stock Options
 Weighted
    
    
    Weighted Average
    
    
    AggregateAverage Exercise
    
    
    Remaining
    
    
    Intrinsic ValueShares
    
    
    Price
    
    
    Contractual Term
    
    
    ($000)Outstanding at December 30, 2006
    
    
    5,889,216
    
    
    $
    32.58
    
    
    
    5.8
    
    
    $
    64,519Granted
    
    
    74,000
    
    
    
    43.59Exercised
    
    
    (591,041
    )
    
    
    27.97Cancelled
    
    
    (66,915
    )
    
    
    38.35Outstanding at March 31, 2007
    
    
    5,305,260
    
    
    $
    33.17
    
    
    
    5.7
    
    
    $
    55,020Vested or expected to vest at March 31, 2007
    
    
    5,156,069
    
    
    $
    32.97
    
    
    
    4.8
    
    
    $
    55,925Exercisable at March 31, 2007
    
    
    4,504,967
    
    
    $
    31.85
    
    
    
    5.6
    
    
    $
    52,297


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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Restricted Stock
  Weighted AverageShares
    
    
    Exercise PriceNonvested at December 30, 2006
    
    
    1,718,493
    
    
    $
    37.63Granted
    
    
    457,340
    
    
    
    43.61Vested
    
    
    (324,570
    )
    
    
    38.01Cancelled
    
    
    (61,150
    )
    
    
    37.65Nonvested at March 31, 2007
    
    
    1,790,113
    
    
    $
    39.09Expected to vest
    
    
    1,448,058
    
    
    $
    34.56


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##### Table of Contents



ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
 Business/Segments
  
    
    Wholesale Apparel consists of womens, mens and childrens apparel
designed and marketed worldwide under various trademarks we own or
license from third-party owners. This segment includes our better
apparel (LIZ CLAIBORNE, CLAIBORNE (mens), INTUITIONS, MAC & JAC, MEXX
and SIGRID OLSEN), bridge-priced (DANA BUCHMAN and ELLEN TRACY), our
mid-tier brands (AXCESS, LIZ & CO and CONCEPTS BY CLAIBORNE, FIRST
ISSUE, STAMP 10, TINT and VILLAGER), moderate brands (EMMA JAMES, J.H.
COLLECTIBLES and TAPEMEASURE), denim/street wear (ENYCE and LUCKY
BRAND DUNGAREES), contemporary sportswear (JUICY COUTURE, C & C
CALIFORNIA, KENSIE, KENSIEGIRL and LAUNDRY BY SHELLI SEGAL) and our
active wear (prAna) businesses, as well as our licensed DKNY® JEANS
and DKNY® ACTIVE businesses.
    
    Wholesale Non-Apparel consists of handbags, small leather goods,
fashion accessories, jewelry and cosmetics designed and marketed
worldwide under certain of the above listed and other owned or
licensed trademarks, including our MONET, TRIFARI, MARVELLA, LAUNDRY
BY DESIGN, KATE SPADE and JACK SPADE labels and our licensed KENNETH
COLE label.
    
    Retail consists of our worldwide retail operations that sell most of
these apparel and non-apparel products to the public through our 339
outlet stores, 383 specialty retail stores and 631 international
concession stores (where the retail selling space is either owned and
operated by the department store in which the retail selling space is
located, or leased and operated by a third party, while, in each case,
we own the inventory) and our e-commerce sites. This segment
includes specialty retail and outlet stores operating under the
following formats: MEXX, LUCKY BRAND DUNGAREES, LIZ CLAIBORNE,
ELISABETH, DKNY® JEANS, DANA BUCHMAN, ELLEN TRACY, SIGRID OLSEN,
MONET, LAUNDRY BY SHELLI SEGAL, JUICY COUTURE, YZZA, KATE SPADE and
JACK SPADE.
  Competitive Profile


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Overall Results for the Three Months Ended March 31, 2007
 Net Sales
  27




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
    
    Net sales in our MEXX brand decreased approximately 2% compared to 2006, excluding the
impact of foreign currency exchange rates, primarily due to decreases in our MEXX Europe
business, partially offset by increases in our MEXX Canada retail business.
    
    Net sales in our LIZ CLAIBORNE brand decreased approximately 5% compared to 2006,
primarily due to decreases in jewelry and fashion accessories.
    
    Net sales for LUCKY BRAND increased approximately 38% compared to 2006, primarily
driven by the launch of our new fragrance in addition to increases in wholesale apparel and
retail. We opened 34 LUCKY BRAND specialty stores in the last twelve months and ended the
quarter with 138 stores.
    
    Net sales in our JUICY COUTURE brand increased approximately 48% compared to last year,
primarily driven by increases in retail and wholesale apparel in
addition to the launch of our new fragrance. We opened 19 JUICY COUTURE specialty retail stores over the last
twelve months and ended the quarter with 22 stores.
 Gross Profit and Net Income
  Balance Sheet
  International Operations
  Recent Acquisitions
 ® ®


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RESULTS OF OPERATIONS
  
    
    Domestic: wholesale customers, Company specialty retail and outlet
stores located in the United States and our e-commerce sites; and
    
    International: wholesale customers and Company specialty retail,
outlet and concession stores located outside of the United States,
primarily in our European and Canadian operations.


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THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED APRIL 1, 2006
  Three months ended
    
    VarianceMarch 31,
    
    April 1,Dollars in millions
    
    2007
    
    2006
    
    $
    
    %Net Sales
    
    $
    1,153.0
    
    
    $
    1,171.2
    
    
    $
    (18.2
    )
    
    
    (1.6
    %)Gross Profit
    
    
    527.8
    
    
    
    544.0
    
    
    
    (16.2
    )
    
    
    (3.0
    %)Selling, general & administrative
expenses
    
    
    488.9
    
    
    
    466.9
    
    
    
    22.0
    
    
    
    4.7
    %Operating Income
    
    
    38.9
    
    
    
    77.1
    
    
    
    (38.2
    )
    
    
    (49.5
    %)Other income (expense), net
    
    
    (0.7
    )
    
    
    3.3
    
    
    
    (4.0
    )
    
    
    (121.2
    %)Interest expense, net
    
    
    (8.6
    )
    
    
    (7.1
    )
    
    
    (1.5
    )
    
    
    (21.1
    %)Provision for income taxes
    
    
    13.4
    
    
    
    26.4
    
    
    
    (13.0
    )
    
    
    (49.2
    %)Net Income
    
    $
    16.2
    
    
    $
    46.9
    
    
    $
    (30.7
    )
    
    
    (65.5
    %)
 Net Sales
  
    
    Wholesale Apparel net sales were $701.4 million decreasing $56.1 million, or 7.4%, as a result of:
 -
    
    A $69.4 million net decrease across our
Wholesale Apparel segment primarily due to the
decreases in our domestic wholesale business and
the change in the retailers calendar, shifting
wholesale shipments historically made in the
first quarter into the second quarter.
Additionally, sales decreased in our domestic
SIGRID OLSEN business (resulting from reduced
distribution and reduced demand) and ELLEN TRACY
(due to a shift in demand toward more modern
offerings), J.H. COLLECTIBLES (due to reduced
distribution and reduced demand) and CITY UNLTD.
(due to the discontinuance of this brand in the
department store channel) businesses, partially offset by
the addition of LIZ & CO and growth in our DKNY®
Jeans womens (due to volume growth and
additional points of sale), ENYCE and LUCKY
BRAND (due to increased demand) businesses; and-
    
    A $13.3 million increase resulting from the
impact of foreign currency exchange rates in our
international businesses.
 
    
    Wholesale Non-Apparel net sales decreased $5.1 million, or 3.7%, to $133.1 million reflecting:
 -
    
    A $21.1 million net decrease in our accessories businesses resulting primarily from
decreases in our department store and Special Markets jewelry and fashion accessories
businesses and the change in the retailers calendar,  shifting
wholesale shipments historically made in the first quarter into the
second quarter, partially offset by increases in JUICY COUTURE, LUCKY BRAND and SIGRID
OLSEN accessories;-
    
    The inclusion of $9.0 million of sales from our recently acquired KATE SPADE business;-
    
    A $7.0 million increase in our cosmetics business primarily resulting from the recent
launches of our new JUICY COUTURE and LUCKY BRAND fragrances; and-
    
    The impact of foreign currency exchange rates was not material in this segment.


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
    
    Retail net sales increased $41.1 million, or 15.6%, to $305.4 million. The increase reflected the following:
 -
    
    A $23.1 million net increase driven by the net
addition over the last 12 months of 30 LUCKY BRAND,
10 SIGRID OLSEN and 19 JUICY COUTURE specialty retail
stores and 10 LIZ CLAIBORNE outlet stores in the
United States, Canada and Europe, partially offset by
closure of 36 ELISABETH and 9 MEXX-USA specialty
retail and outlet stores in the United States;-
    
    The inclusion of $9.1 million from our recent
acquisition of KATE SPADE (acquired December 13,
2006), which in the aggregate included 20 specialty
retail stores, 4 outlets and two E-commerce sites;
and-
    
    An $8.9 million increase resulting from the impact of
foreign currency exchange rates, in our international
businesses.-
    
    Comparable store sales in our Company-operated stores
decreased by 3.5% overall, primarily the result of a
7.8% decrease in our Outlet business, partly offset by
a 0.6% increase in our Specialty Retail business.
    
    Total United States net sales increased 21.1% compared to
last year and comparable store net sales decreased 5.5%.
 -
    
    U.S. specialty net sales increased 47.6% compared to last year, primarily
driven by the opening of new stores, the addition of KATE SPADE and strong comparable
store net sales in our JUICY COUTURE format. U.S. specialty comparable store net sales
were up 0.5% overall.-
    
    U.S. outlet net sales decreased 3.2% and comparable store net sales
decreased 9.8%, primarily driven by decreases in our LIZ CLAIBORNE outlet format due to
reduced customer traffic and reduced promotion.
 
    
    Total Europe net sales, excluding the impact of foreign
currency exchange rates, decreased 2.0% compared
to last year and comparable store net sales decreased 3.5%.
  -
    
    Total Europe specialty retail net sales increased 4.0% compared to last
year and comparable store specialty retail net sales decreased 2.2%, primarily driven
by decreases in our MEXX specialty format.-
    
    Total Europe outlet net sales decreased 9.2% compared to last year and
comparable store outlet net sales decreased 12.9%, primarily driven by decreases in our
MEXX outlet format.-
    
    Total Europe concession net sales decreased 4.8% compared to last year and
comparable store concession net sales decreased 1.9%, primarily driven by decreases in
our MEXX concession format.
 
    
    Total Canada net sales, excluding the impact of foreign
currency exchange rates, increased 25.4% compared to last
year and comparable store net sales increased 8.9%.
  -
    
    Total Canada specialty retail net sales increased 29.5% compared to last
year and comparable store specialty retail net sales increased 13.1%, primarily driven
by improved performance in our MEXX specialty format.-
    
    Total Canada outlet net sales increased 22.6% compared to last year and
comparable store outlet net sales increased 6.1%, primarily driven by improved
performance in our MEXX outlet format.
  
    
    Corporate net sales, consisting of licensing revenue, increased $1.9
million to $13.1 million as a result of revenues from new licenses
primarily from our recently acquired KATE SPADE business.


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Domestic International
 Gross Profit
  Selling, General & Administrative Expenses
  
    
    The inclusion of $10.1 million of expenses from our acquired KATE SPADE business;
    
    An $11.7 million increase primarily resulting from the expansion of our domestic and international
retail businesses;
    
    An $11.4 million increase due to the impact of foreign currency exchange rates, in our
international businesses; and
    
    A reduction of $11.2 million of expenses associated with our year over year streamlining initiatives.
  Operating Income
  
    
    Wholesale Apparel operating income was $50.8 million (7.2% of net
sales) in 2007 compared to $78.7 million (10.4% of net sales) in 2006,
principally reflecting reduced income in our SIGRID OLSEN, J.H.
COLLECTIBLES and LIZ CLAIBORNE wholesale apparel businesses, partly offset by
increased income in our
DKNY®
Jeans womens and MEXX Europe businesses as well as the addition of LIZ &
CO.
    
    Wholesale Non-Apparel operating loss was $1.9 million ((1.4%) of net
sales) in 2007 compared to $15.5 million income (11.2% of net sales)
in 2006, principally reflecting reduced income in our fashion
accessories and jewelry businesses and increase marketing expenses
associated with our LUCKY and JUICY COUTURE fragrance businesses
partially offset by increases in JUICY COUTURE accessories.
    
    Retail operating loss was $21.0 million ((6.9%) of net sales) in 2007
compared to operating loss of $25.3 million ((9.6%) of net sales) in
2006, principally reflecting increased profits in our domestic
specialty and outlet
business, mostly offset by decreased income in our Canadian retail
business.


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
    
    Corporate operating income, primarily consisting of licensing
operating income, increased $2.9 million to $11.0 million as a result
of increased revenues from our new licenses primarily from our
recently acquired KATE SPADE business.
 Domestic International
 Other Income (Expense), Net
  Interest Expense, Net
  Provision for Income Taxes
  Net Income
   FORWARD OUTLOOK
 Fiscal 2007
  
    
    a greater reliance on private brands magnified by retail
consolidation;
    
    a squeeze on moderate brands like EMMA JAMES, J.H.
COLLECTIBLES and TAPEMEASURE;
    
    a reduction in sales plans and consumer demand for traditional better and
bridge brands including LIZ CLAIBORNE, SIGRID OLSEN, ELLEN TRACY and DANA BUCHMAN; and
    
    ever-growing demands for increased margin.
  
    
    retailers intensified focus on improving inventory turns and natural
margins on branded goods; and
    
    retailers continued demand for exclusively branded labels along with a
reduced reliance on more broadly distributed lines.


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
    
    In our wholesale apparel segment, we expect 2007 net sales to decrease high
single digits compared to 2006.
    
    In our wholesale non-apparel segment, we expect 2007 net sales to be flat
to up low single digits compared to 2006.
    
    In our retail segment, we expect 2007 net sales to increase in the low teens compared to 2006.
    
    In our corporate segment, we expect 2007 licensing revenue to increase by 10% compared to 2006.
  FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
 Cash Requirements.
 Sources of Cash.
 2007 vs. 2006
 Cash and Debt Balances.


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Accounts Receivable
 Inventories
 Borrowings
 Net cash used in operating activities
 Net cash used in investing activities
 Net cash provided by financing activities
 Commitments and Capital Expenditures
  
    
    The prAna acquisition agreement provides for contingent payments in
fiscal years 2008, 2009 and 2010 that will be based upon a multiple
of prAnas earnings in each year. We estimate that the aggregate
contingent payments will be in the range of approximately $15-20
million. The contingent payments will be accounted for as
additional purchase price when paid.
    
    On January 16, 2007 and January 17, 2006, we purchased 1.5 percent
and 1.9 percent, respectively, of the remaining outstanding shares
of Lucky Brand for a payment of $10.0 million each. The remaining
3.35 percent will be purchased as follows: 1.1 percent in January
2008 for $10.0 million and the final 2.25 percent in June 2008 at a
price equal to the value of the sellers Lucky Brand shares based
on a multiple of Lucky Brands 2007


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earnings. We estimate that
this final payment will be $17-21 million.
 
    
    The Juicy Couture acquisition agreement provides for a contingent
payment to be determined as a multiple of Juicy Coutures earnings
for one of the years ended 2005, 2006 or 2007. This payment will be
made in either cash or shares of our common stock at the option of
the Company. In March of 2005, the contingent payment agreement was
amended to include an advance option for the sellers provided that
(i) if the 2005 measurement year is not selected, the sellers may
elect to receive up to 70 percent of the estimated contingent
payment based upon 2005 results; and (ii) if the 2005 and 2006
measurement years are not selected, the sellers may elect to
receive up to 85 percent of the estimated contingent payment based
on the 2006 measurement year net of any 2005 advances. In April
2006, the sellers elected to receive a 70 percent advance against
the contingent purchase price and were paid $80.3 million on April
20, 2006. The payment was accounted for as additional purchase
price and an increase to goodwill. We estimate that, if the 2006
measurement year is selected, the remaining contingent payment
would be approximately $38 million. The contingent payments will be
accounted for as additional purchase price when paid.
    
    On January 26, 2006, we acquired 100 percent of the equity
interests of Westcoast Contempo Fashions Limited and Mac & Jac
Holdings Limited for an initial payment of 26.2 million Canadian
dollars (or $22.7 million). The Mac & Jac acquisition agreement
provides for contingent payments in fiscal years 2006, 2008, 2009
and 2010 that will be based upon a multiple of Mac & Jacs earnings
in each year. There was no contingent payment made based on 2006
fiscal year earnings. We estimate that the aggregate contingent
payments will be in the range of approximately $8-12 million. The
contingent payments will be accounted for as additional purchase
price when paid.
    
    Under the Segrets acquisition agreement, we may elect, or be
required, to purchase the remaining minority interest in Segrets.
We estimate that if the eligible payment for Segrets is triggered
in 2006, it would fall in the range of $0.2-1.0 million and the
payment will be made in either cash or shares of our common stock
at our option or the option of the seller.
 Financing Arrangements


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Off-Balance Sheet Arrangements
  Hedging Activities


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USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
  Use of Estimates


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Revenue Recognition
  Income Taxes
  Accounts Receivable  Trade, Net
  Inventories, Net


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Goodwill and Other Intangibles, Net


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Accrued Expenses
  Derivative Instruments
      Share-Based Compensation


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RECENT ACCOUNTING PRONOUNCEMENTS
    STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE


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Risks Associated with Competition and the Marketplace
  
    
    The continuing challenging retail and macroeconomic environment,
including the levels of consumer confidence and discretionary spending,
and levels of customer traffic within department stores, malls and
other shopping and selling environments, and a continuation of the
deflationary trend for apparel products;
    
    Our ability to successfully continue to evolve its supply chain system,
including its product development, sourcing, logistics and technology
functions, to reduce product cycle-time and costs and meet customer
demands;
    
    Our ability to effectively anticipate, gauge and respond to changing
consumer demands and tastes, across multiple product lines, shopping
channels and geographies;
    
    Our ability to translate market trends into appropriate, saleable
product offerings relatively far in advance, while minimizing excess
inventory positions, including our ability to correctly balance the
level of its fabric and/or merchandise commitments with actual customer
orders;
    
    Consumer and customer demand for, and acceptance and support of, our
products (especially by our largest customers) which are in turn
dependent, among other things, on product design, quality, value and
service;
    
    Risks associated with the possible failure of our unaffiliated
manufacturers to manufacture and deliver products in a timely manner,
to meet quality standards or to comply with our policies regarding
labor practices or applicable laws or regulations;
    
    Our ability to adapt to and compete effectively in the current quota
environment, including changes in sourcing patterns resulting from the
elimination of quota on apparel products, as well as lowered barrier to
entry;
    
    Risks associated with our dependence on sales to a limited number of
large United States department store customers, including risks related
to our ability to respond effectively to:
 -
    
    these customers buying patterns, including their
purchase and retail floor space commitments for apparel
in general (compared with other product categories they
sell) and our products specifically (compared with
products offered by our competitors, including with
respect to customer and consumer acceptance, pricing
and new product introductions);-
    
    these customers strategic and operational initiatives,
including their continued focus on further development
of their private label initiatives;-
    
    these customers desire to have us provide them with
exclusive and/or differentiated designs and product
mixes;-
    
    these customers requirements for vendor margin support;-
    
    any credit risks presented by these customers,
especially given the significant proportion of our
accounts receivable they represent; and-
    
    the effect that any potential consolidation among one
or more of these larger customers, such as the merger
between Federated Department Stores, Inc. and The May
Department Store Company, might have on the foregoing
and/or other risks;
 
    
    Risks associated with maintaining and enhancing favorable brand
recognition, which may be affected by consumer attitudes towards the
desirability of fashion products bearing a mega brand label and which
are widely available at a broad range of retail stores; and
    
    Risks associated with our operation and expansion of retail business,
including the ability to successfully find appropriate sites, negotiate
favorable leases, design and create appealing merchandise,
appropriately manage inventory levels, install and operate effective
retail systems, apply appropriate pricing strategies and integrate such
stores into our overall business mix.
 Management and Employee Risks
 
    
    Our ability to attract and retain talented, highly qualified executives and other key
personnel in design, merchandising, sales, marketing, production, systems and other
functions;
    
    Our ability to hire and train qualified retail management and associates;
    
    Risks associated with any significant disruptions in our relationship with our employees,
including union employees and any work stoppages by our employees, including union
employees;
    
    Risks associated with providing for the succession of senior management; and
    
    Risks associated with realignment of responsibilities among the Companys management team.


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Economic, Social and Political Factors
  
    
    Risks associated with war, the threat of war and terrorist activities, including
reduced shopping activity as a result of public safety concerns and disruption in the
receipt and delivery of merchandise;
    
    Changes in national and global microeconomic and macroeconomic conditions in the
markets where we sell or source our products, including the levels of consumer
confidence and discretionary spending, consumer income growth, personal debt levels,
rising energy costs and energy shortages, fluctuations in foreign currency exchange
rates, interest rates and stock market volatility and currency devaluations in
countries in which we source product;
    
    Changes in social, political, legal and other conditions affecting foreign operations;
    
    Risks of increased sourcing costs, including costs for materials and labor, including
as a result of the elimination of quota on apparel products;
    
    Any significant disruption in our relationships with our suppliers, manufacturers as
well as work stoppages by any of our suppliers or service providers;
    
    The enactment of new legislation or the administration of current international trade
regulations, or executive action affecting international textile agreements,
including the United States reevaluation of the trading status of certain countries
and/or retaliatory duties, quotas or other trade sanctions, which, if enacted, would
increase the cost of products purchased from suppliers in such countries and the
January 1, 2005 elimination of quota, which may significantly impact sourcing
patterns; and
    
    Risks related to our ability to establish, defend and protect its trademarks and
other proprietary rights and other risks relating to managing intellectual property
issues.
 Risks Associated with Acquisitions and New Product Lines and Markets
  
    
    Ability to identify appropriate acquisition candidates and negotiate favorable financial and other
terms, against the background of increasing market competition (from both strategic and financial
buyers) for the types of acquisitions we have been making;
    
    Risks that the new product lines or market activities may require methods of operations and marketing
and financial strategies different from those employed in our other businesses, including risks
associated with acquisitions with significant foreign operations. In addition, these businesses may
involve buyers, store customers and/or competitors different from our historical buyers, store
customers and competitors;
    
    Risks associated with selling our Liz & Co. and Concepts by Claiborne brands outside of better
department stores;
    
    Possible difficulties, delays and/or unanticipated costs in integrating the business, operations,
personnel and/or systems of an acquired business;
    
    Risks that projected or satisfactory level of sales, profits and/or return on investment for a new
business will not be generated;
    
    Risks involving our ability to retain and appropriately motivate key personnel of an acquired business;
    
    Risks that expenditures required for capital items or working capital will be higher than anticipated;
    
    Risks associated with unanticipated events and unknown or uncertain liabilities;
    
    Uncertainties relating to our ability to successfully integrate an acquisition, maintain product
licenses, or successfully launch new products and lines;
    
    Certain new businesses may be lower margin businesses and may require us to achieve significant cost
efficiencies; and
    
    With respect to businesses where we act as licensee, the risks inherent in such transactions,
including compliance with terms set forth in the applicable license agreements, including among other
things the maintenance of certain levels of sales and the public perception and/or acceptance of the
licensors brands or other product lines, which are not within our control.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Dollars in millions
    
    March 31, 2007
    
    December 30, 2006
    
    April 1, 2006Variable rate debt
    
    $
    247.9
    
    
    $
    100.6
    
    
    $
    64.0Average interest rate
    
    
    5.23
    %
    
    
    5.14
    %
    
    
    4.0
    %
      U.S. Dollar
    
    Hong Kong
    
    Contract
    
    UnrealizedCurrency in thousands
    
    Amount
    
    Dollar Amount
    
    Rate
    
    Gain (Loss)Forward Contracts:Euro
    
    
    
    
    
    
    565,751
    
    
    
    0.0968 to 0.0998
    
    
    $
    (2,064
    )Canadian Dollars
    
    $
    8,190
    
    
    
    
    
    
    
    0.8702 to 0.8728
    
    
    
    Canadian Dollars
    
    
    
    
    
    
    74,229
    
    
    
    0.1482 to 1.1482
    
    
    
    (24
    )Foreign Exchange Collar Contracts:Euro
    
    
    
    
    
    
    23,250
    
    
    
    0.0980 to 0.1007
    
    
    $
    (78
    )Canadian Dollars
    
    $
    7,363
    
    
    
    
    
    
    
    0.8403 to 0.8925
    
    
    
    Canadian Dollars
    
    
    
    
    
    
    61,764
    
    
    
    0.1428 to 0.1527
    
    
    
    (11
    )


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U.S. Dollar
    
    Hong Kong
    
    Contract
    
    UnrealizedCurrency in thousands
    
    Amount
    
    Dollar Amount
    
    Rate
    
    Gain (Loss)Forward Contracts:Euro
    
    
    
    
    
    
    589,000
    
    
    
    0.0973 to 0.1067
    
    
    $
    (1,368
    )Canadian Dollars
    
    $
    8,190
    
    
    
    
    
    
    
    0.8702 to 0.8728
    
    
    
    Canadian Dollars
    
    
    
    
    
    
    105,980
    
    
    
    0.1480 to 0.1482
    
    
    
    180Foreign Exchange Collar Contracts:Euro
    
    
    
    
    
    
    23,250
    
    
    
    0.0980 to 0.1007
    
    
    $
    (506
    )Canadian Dollars
    
    $
    8,659
    
    
    
    
    
    
    
    0.8547 to 0.8925
    
    
    
    Canadian Dollars
    
    
    
    
    
    
    45,345
    
    
    
    0.1454 to 0.1508
    
    
    
    107
  U.S. Dollar
    
    Hong Kong
    
    Contract
    
    UnrealizedCurrency in thousands
    
    Amount
    
    Dollar Amount
    
    Rate
    
    Gain (Loss)Forward Contracts:Euro
    
    
    
    
    
    
    127,875
    
    
    
    0.1037 to 0.1086
    
    
    $
    (63
    )Canadian Dollars
    
    $
    15,440
    
    
    
    
    
    
    
    0.8565 to 0.8592
    
    
    
    Canadian Dollars
    
    
    
    
    
    
    113,377
    
    
    
    0.1491 to 0.1505
    
    
    
    Foreign Exchange Collar Contracts:Euro
    
    
    
    
    
    
    344,875
    
    
    
    0.0991 to 0.1143
    
    
    $
    (386
    )Canadian Dollars
    
    $
    9,834
    
    
    
    
    
    
    
    0.8403 to 0.8917
    
    
    
    Canadian Dollars
    
    
    
    
    
    
    5,308
    
    
    
    0.1468 to 0.1538
    
    
    
    
 
 ITEM 4. CONTROLS AND PROCEDURES


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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  MaximumApproximate DollarTotal Number of
    
    
    Value of Shares thatTotal Number
    
    
    
    
    
    
    Shares Purchased as
    
    
    May Yet Beof Shares
    
    
    
    
    
    
    Part of Publicly
    
    
    Purchased Under thePurchased
    
    
    Average Price
    
    
    Announced Plans or
    
    
    Plans or ProgramsPeriod
    
    (in thousands)
    
    
    Paid Per Share
    
    
    Programs
    
    
    (in thousands) (2)December 31, 2006 - January 27, 2007
    
    
    52.3
    (1)
    
    $
    42.95
    
    
    
    
    
    
    $
    229,237January 28, 2007 - March 3, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    229,237March 4, 2007 - March 31, 2007
    
    
    132.2
    (1)
    
    
    43.08
    
    
    
    
    
    
    
    229,237Total 13 weeks ended March 31, 2007
    
    
    184.5
    
    
    $
    43.36
    
    
    
    
    
    
    $
    229,237
 
 (1)
    
    Includes shares withheld to cover tax-withholding requirements
relating to the vesting of restricted stock issued to employees
pursuant to the Companys shareholder-approved stock incentive plans.(2)
    
    The Company initially announced the authorization of a share buyback
program in December 1989. Since its inception, the Companys Board of
Directors has authorized the purchase under the program of an
aggregate of $2.175 billion. As of March 31, 2007, the Company had
$229.2 million remaining in buyback authorization under its program. 
 ITEM 5. OTHER INFORMATION


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ITEM 6. EXHIBITS
 31(a)
    
    Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31(b)
    
    Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32(a)*
    
    Certification of Chief Executive Officer Pursuant to Section 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32(b)*
    
    Certification of Chief Financial Officer Pursuant to Section 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    A signed original of the written statement required by Section 906 has
been provided to the Company and will be retained by the Company and
forwarded to the S.E.C. or its staff upon request.


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SIGNATURES
   LIZ CLAIBORNE, INC.
    
    
    
    LIZ CLAIBORNE, INC.By:
    
    /s/ Michael Scarpa

MICHAEL SCARPA
    
    
    
    By:
    
    /s/ Elaine H. Goodell

ELAINE H. GOODELLChief Operating Officer 
and
Chief Financial Officer

(Principal financial officer)
    
    
    
    
    
    Vice President  Corporate
Controller 
and
Chief Accounting Officer

(Principal accounting officer)


50