##### 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 September 30, 2006
 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  (Registrants telephone number, including area code)
 þ o
  þ o o
 o þ




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##### 



2  
 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
SEPTEMBER 30, 2006
 PAGENUMBERPART I -
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of September 30, 2006
(Unaudited), December 31, 2005 and October 1, 2005 (Unaudited)
    
    
    3Condensed Consolidated Statements of Income for the Nine and
Three Month Periods Ended September 30, 2006 (Unaudited) and
October 1, 2005 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine
Month Periods Ended September 30, 2006 (Unaudited) and October
1, 2005 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    29Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 4.
    
    Controls and Procedures
    
    
    54PART II -
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    54Item 1A.
    
    Risk Factors
    
    
    55Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    55Item 5.
    
    Other Information
    
    
    55Item 6.
    
    Exhibits
    
    
    56SIGNATURES
    
    
    57EX-31.A: CERTIFICATIONEX-31.B: CERTIFICATIONEX-32.A: CERTIFICATIONEX-32.B: CERTIFICATION




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##### Table of Contents



3 
 PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  (Unaudited)
    
    
    
    
    
    
    (Unaudited)September 30,
    
    
    December 31,
    
    
    October 1,2006
    
    
    2005
    
    
    2005AssetsCurrent Assets:Cash and cash equivalents
    
    $
    99,940
    
    
    $
    328,527
    
    
    $
    141,331Marketable securities
    
    
    8,864
    
    
    
    14,638
    
    
    
    9,078Accounts receivable  trade, net
    
    
    735,387
    
    
    
    415,849
    
    
    
    684,448Inventories, net
    
    
    675,660
    
    
    
    536,296
    
    
    
    636,751Deferred income taxes
    
    
    67,393
    
    
    
    47,688
    
    
    
    50,456Other current assets
    
    
    130,951
    
    
    
    113,539
    
    
    
    114,323Total current assets
    
    
    1,718,195
    
    
    
    1,456,537
    
    
    
    1,636,387Property and Equipment, Net
    
    
    521,641
    
    
    
    494,693
    
    
    
    477,284Goodwill, Net
    
    
    966,678
    
    
    
    858,565
    
    
    
    856,446Intangibles, Net
    
    
    343,548
    
    
    
    332,017
    
    
    
    293,079Other Assets
    
    
    12,637
    
    
    
    10,224
    
    
    
    9,821Total Assets
    
    $
    3,562,699
    
    
    $
    3,152,036
    
    
    $
    3,273,017Liabilities and Stockholders EquityCurrent Liabilities:Short term borrowings
    
    $
    55,935
    
    
    $
    48,729
    
    
    $
    110,772Accounts payable
    
    
    302,750
    
    
    
    250,768
    
    
    
    282,127Accrued expenses
    
    
    303,632
    
    
    
    288,370
    
    
    
    292,193Income taxes payable
    
    
    43,990
    
    
    
    19,872
    
    
    
    40,806Total current liabilities
    
    
    706,307
    
    
    
    607,739
    
    
    
    725,898Long-Term Debt
    
    
    674,663
    
    
    
    413,227
    
    
    
    423,294Obligations Under Capital Leases
    
    
    2,508
    
    
    
    4,606
    
    
    
    4,153Other Non-Current Liabilities
    
    
    70,887
    
    
    
    66,692
    
    
    
    57,646Deferred Income Taxes
    
    
    63,809
    
    
    
    54,170
    
    
    
    55,142Commitments and Contingencies (Note 9)Minority Interest
    
    
    2,970
    
    
    
    2,896
    
    
    
    3,016Stockholders 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
    
    
    226,562
    
    
    
    187,689
    
    
    
    220,368Retained earnings
    
    
    3,286,615
    
    
    
    3,122,487
    
    
    
    3,044,074Unearned compensation expense
    
    
    
    
    
    
    
    
    
    
    (42,579
    )Accumulated other comprehensive income (loss)
    
    
    (43,758
    )
    
    
    (33,738
    )
    
    
    (38,124
    )3,645,856
    
    
    
    3,452,875
    
    
    
    3,360,176Common stock in treasury, at cost, 74,346,643,
71,451,550 and 68,937,654 shares
    
    
    (1,604,301
    )
    
    
    (1,450,169
    )
    
    
    (1,356,308
    )Total stockholders equity
    
    
    2,041,555
    
    
    
    2,002,706
    
    
    
    2,003,868Total Liabilities and Stockholders Equity
    
    $
    3,562,699
    
    
    $
    3,152,036
    
    
    $
    3,273,017




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##### Table of Contents



4 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
   Nine Months Ended
    
    
    Three Months Ended(39 Weeks)
    
    
    (39 Weeks)
    
    
    (13 Weeks)
    
    
    (13 Weeks)September 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005Net Sales
    
    $
    3,665,750
    
    
    $
    3,648,165
    
    
    $
    1,369,511
    
    
    $
    1,336,654Cost of goods sold
    
    
    1,924,117
    
    
    
    1,926,027
    
    
    
    720,386
    
    
    
    702,206Gross Profit
    
    
    1,741,633
    
    
    
    1,722,138
    
    
    
    649,125
    
    
    
    634,448Selling, general & administrative expenses
    
    
    1,428,485
    
    
    
    1,327,119
    
    
    
    488,135
    
    
    
    450,220Restructuring (gain)
    
    
    
    
    
    
    (221
    )
    
    
    
    
    
    
    (221
    )Operating Income
    
    
    313,148
    
    
    
    395,240
    
    
    
    160,990
    
    
    
    184,449Other income (expense), net
    
    
    3,080
    
    
    
    (1,534
    )
    
    
    23
    
    
    
    (474
    )Interest expense, net
    
    
    (26,641
    )
    
    
    (23,624
    )
    
    
    (10,903
    )
    
    
    (8,255
    )Income Before Provision for Income Taxes
    
    
    289,587
    
    
    
    370,082
    
    
    
    150,110
    
    
    
    175,720Provision for income taxes
    
    
    108,065
    
    
    
    131,009
    
    
    
    54,940
    
    
    
    62,205Net Income
    
    $
    181,522
    
    
    $
    239,073
    
    
    $
    95,170
    
    
    $
    113,515Net Income per Weighted Average Share, Basic
    
    $
    1.77
    
    
    $
    2.24
    
    
    $
    0.94
    
    
    $
    1.07Net Income per Weighted Average Share, Diluted
    
    $
    1.75
    
    
    $
    2.20
    
    
    $
    0.93
    
    
    $
    1.06Weighted Average Shares, Basic
    
    
    102,277
    
    
    
    106,910
    
    
    
    100,868
    
    
    
    105,995Weighted Average Shares, Diluted
    
    
    103,726
    
    
    
    108,574
    
    
    
    102,384
    
    
    
    107,285Dividends Paid per Common Share
    
    $
    0.17
    
    
    $
    0.17
    
    
    $
    0.06
    
    
    $
    0.06




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##### Table of Contents



5 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
   Nine Months Ended(39 Weeks)
    
    
    (39 Weeks)September 30,
    
    
    October 1,2006
    
    
    2005Cash Flows from Operating Activities:Net income
    
    $
    181,522
    
    
    $
    239,073Adjustments to reconcile net income to net cash used in operating
activities:Depreciation and amortization
    
    
    101,146
    
    
    
    88,640Deferred income taxes
    
    
    (8,504
    )
    
    
    1,031Share-based compensation
    
    
    19,192
    
    
    
    17,899Tax benefit on exercise of stock options
    
    
    4,532
    
    
    
    6,840Gain on sale of securities
    
    
    (3,583
    )
    
    
    Streamlining initiatives, fixed asset write-downs
    
    
    13,244
    
    
    
    Restructuring gain
    
    
    
    
    
    
    (425
    )Other, net
    
    
    (73
    )
    
    
    (17
    )Change in assets and liabilities, exclusive of acquisitions:Increase in accounts receivable  trade, net
    
    
    (302,224
    )
    
    
    (266,235
    )Increase in inventories, net
    
    
    (123,305
    )
    
    
    (105,427
    )Increase in other current and non-current assets
    
    
    (13,033
    )
    
    
    (23,529
    )Increase in accounts payable
    
    
    50,585
    
    
    
    21,394Increase in accrued expenses
    
    
    19,032
    
    
    
    8,488Increase in income taxes payable
    
    
    23,441
    
    
    
    10,053Net cash used in operating activities
    
    
    (38,028
    )
    
    
    (2,215
    )Cash Flows from Investing Activities:Purchases of investment instruments
    
    
    (107
    )
    
    
    (980
    )Proceeds from sales of securities
    
    
    8,054
    
    
    
    Purchases of property and equipment
    
    
    (112,612
    )
    
    
    (98,089
    )Payments for acquisitions, net of cash acquired
    
    
    (143,487
    )
    
    
    (99,896
    )Payments for in-store merchandise shops
    
    
    (8,953
    )
    
    
    (6,966
    )Other, net
    
    
    (465
    )
    
    
    2,529Net cash used in investing activities
    
    
    (257,570
    )
    
    
    (203,402
    )Cash Flows from Financing Activities:Short term borrowings
    
    
    7,206
    
    
    
    54,654Principal payments under capital lease obligations
    
    
    (2,524
    )
    
    
    (1,445
    )Commercial paper, net
    
    
    232,466
    
    
    
    Proceeds from exercise of common stock options
    
    
    35,136
    
    
    
    31,076Purchase of common stock
    
    
    (174,071
    )
    
    
    (105,166
    )Dividends paid
    
    
    (17,394
    )
    
    
    (17,978
    )Excess tax benefits related to stock options
    
    
    844
    
    
    
    844Proceeds from issuance of 5% euro Notes
    
    
    445,099
    
    
    
    Repayment of 6.625% euro Notes
    
    
    (449,505
    )
    
    
    Other, net
    
    
    323
    
    
    
    Net cash
provided by (used in) financing activities
    
    
    77,580
    
    
    
    (38,015
    )Effect of Exchange Rate Changes on Cash
    
    
    (10,569
    )
    
    
    (674
    )Net Change in Cash and Cash Equivalents
    
    
    (228,587
    )
    
    
    (244,306
    )Cash and Cash Equivalents at Beginning of Period
    
    
    328,527
    
    
    
    385,637Cash and Cash Equivalents at End of Period
    
    $
    99,940
    
    
    $
    141,331




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##### Table of Contents



6 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
     Table of Contents  7
 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Income Taxes
  Accounts Receivable  Trade, Net
  Inventories, Net
  Goodwill and Other Intangibles, Net
      Table of Contents  8
 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      Accrued Expenses
  Derivative Instruments




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##### Table of Contents



9 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




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##### Table of Contents



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




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##### Table of Contents



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




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




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##### Table of Contents



13 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Capital in
    
    
    
    
    
    
    Unearned
    
    
    Common stockexcess of par
    
    
    Retained
    
    
    compensation
    
    
    in treasury, atIn thousands
    
    value
    
    
    earnings
    
    
    expense
    
    
    costBalance as of December 31, 2005
    
    $
    187,689
    
    
    $
    3,122,487
    
    
    $
    
    
    
    $
    (1,450,169
    )Net income
    
    
    
    
    
    
    181,522
    
    
    
    
    
    
    
    Restricted shares issued, net of cancellations
    
    
    (6,715
    )
    
    
    
    
    
    
    
    
    
    
    5,823Purchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (174,071
    )Stock options exercised
    
    
    21,020
    
    
    
    
    
    
    
    
    
    
    
    14,116Share-based compensation
    
    
    19,192
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit on stock options exercised
    
    
    4,532
    
    
    
    
    
    
    
    
    
    
    
    Excess tax benefits related to stock options
    
    
    844
    
    
    
    
    
    
    
    
    
    
    
    Dividends declared
    
    
    
    
    
    
    (17,394
    )
    
    
    
    
    
    
    Balance as of September 30, 2006
    
    $
    226,562
    
    
    $
    3,286,615
    
    
    $
    
    
    
    $
    (1,604,301
    )
 Capital in
    
    
    
    
    
    
    Unearned
    
    
    Common stockexcess of par
    
    
    Retained
    
    
    compensation
    
    
    in treasury, atIn thousands
    
    value
    
    
    earnings
    
    
    expense
    
    
    costBalance as of January 1, 2005
    
    $
    176,182
    
    
    $
    2,828,968
    
    
    $
    (36,793
    )
    
    $
    (1,269,355
    )Net income
    
    
    
    
    
    
    239,073
    
    
    
    
    
    
    
    Restricted shares issued, net of cancellations
    
    
    13,685
    
    
    
    
    
    
    
    (19,017
    )
    
    
    5,286Purchase of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105,166
    )Stock options exercised
    
    
    18,149
    
    
    
    
    
    
    
    
    
    
    
    12,927Stock option expense
    
    
    4,668
    
    
    
    
    
    
    
    
    
    
    
    Tax benefit on stock options exercised
    
    
    6,840
    
    
    
    
    
    
    
    
    
    
    
    Excess tax benefits related to stock options
    
    
    844
    
    
    
    
    
    
    
    
    
    
    
    Dividends declared
    
    
    
    
    
    
    (23,967
    )
    
    
    
    
    
    
    Amortization of restricted stock
    
    
    
    
    
    
    
    
    
    
    13,231
    
    
    
    Balance as of October 1, 2005
    
    $
    220,368
    
    
    $
    3,044,074
    
    
    $
    (42,579
    )
    
    $
    (1,356,308
    )




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14 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Nine Months Ended
    
    
    Three Months Ended(39 Weeks)
    
    
    (39 Weeks)
    
    
    (13 Weeks)
    
    
    (13 Weeks)September 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,In thousands
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net income as reported
    
    $
    181,522
    
    
    $
    239,073
    
    
    $
    95,170
    
    
    $
    113,515Other comprehensive income (loss), net of tax:Change in cumulative translation gain (loss)
    
    
    24,168
    
    
    
    (36,292
    )
    
    
    (2,792
    )
    
    
    579Change in cumulative translation (loss)
gain of net investment hedge
    
    
    (33,303
    )
    
    
    53,384
    
    
    
    961
    
    
    
    3,679Changes in unrealized (losses) gains on
securities, net of income tax benefit
(provision) of $509, $(98), $(164) and
$(138), respectively
    
    
    (924
    )
    
    
    187
    
    
    
    291
    
    
    
    251Changes in fair value of cash flow hedges,
net of income tax benefit (provision) of
$40, $(4,613), $(537) and $(764),
respectively
    
    
    39
    
    
    
    8,247
    
    
    
    1,065
    
    
    
    (274
    )Total comprehensive income, net of tax
    
    $
    171,502
    
    
    $
    264,599
    
    
    $
    94,695
    
    
    $
    117,750
  September 30,
    
    
    December 31,
    
    
    October 1,In thousands
    
    2006
    
    
    2005
    
    
    2005Cumulative translation adjustment
    
    $
    (43,684
    )
    
    $
    (34,549
    )
    
    $
    (37,425
    )Unrealized (losses) gains on securities, net of taxes of
$264, $(245) and $440, respectively
    
    
    (490
    )
    
    
    434
    
    
    
    (808
    )Gains on cash flow hedging derivatives, net of
taxes of $(247), $(287) and $(234), respectively
    
    
    416
    
    
    
    377
    
    
    
    109Accumulated other comprehensive (loss), net of tax
    
    $
    (43,758
    )
    
    $
    (33,738
    )
    
    $
    (38,124
    )




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##### Table of Contents



15 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Unrealized
    
    
    EstimatedIn thousands
    
    
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueSeptember 30, 2006:
    
    Equity investments
    
    $
    9,166
    
    
    $
    
    
    
    $
    (705
    )
    
    $
    8,461Other investments
    
    
    451
    
    
    
    
    
    
    
    (48
    )
    
    
    403Total
    
    $
    9,617
    
    
    $
    
    
    
    $
    (753
    )
    
    $
    8,864December 31, 2005:
    
    Equity investments
    
    $
    13,530
    
    
    $
    2,023
    
    
    $
    (1,261
    )
    
    $
    14,292Other investments
    
    
    434
    
    
    
    
    
    
    
    (88
    )
    
    
    346Total
    
    $
    13,964
    
    
    $
    2,023
    
    
    $
    (1,349
    )
    
    $
    14,638October 1, 2005:
    
    Equity investments
    
    $
    9,898
    
    
    $
    219
    
    
    $
    (1,376
    )
    
    $
    8,741Other investments
    
    
    428
    
    
    
    
    
    
    
    (91
    )
    
    
    337Total
    
    $
    10,326
    
    
    $
    219
    
    
    $
    (1,467
    )
    
    $
    9,078
    September 30,
    
    
    December 31,
    
    
    October 1,In thousands
    
    2006
    
    
    2005
    
    
    2005Raw materials
    
    $
    30,342
    
    
    $
    34,512
    
    
    $
    33,115Work in process
    
    
    17,866
    
    
    
    9,298
    
    
    
    19,972Finished goods
    
    
    627,452
    
    
    
    492,486
    
    
    
    583,664Total
    
    $
    675,660
    
    
    $
    536,296
    
    
    $
    636,751
   September 30,
    
    
    December 31,
    
    
    October 1,In thousands
    
    2006
    
    
    2005
    
    
    2005Land and buildings
    
    $
    142,384
    
    
    $
    140,961
    
    
    $
    139,993Machinery and equipment
    
    
    381,690
    
    
    
    358,914
    
    
    
    365,545Furniture and fixtures
    
    
    250,640
    
    
    
    216,911
    
    
    
    203,090Leasehold improvements
    
    
    443,139
    
    
    
    397,946
    
    
    
    389,6741,217,853
    
    
    
    1,114,732
    
    
    
    1,098,302Less: Accumulated depreciation and
amortization
    
    
    696,212
    
    
    
    620,039
    
    
    
    621,018Total property and equipment, net
    
    $
    521,641
    
    
    $
    494,693
    
    
    $
    477,284




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##### Table of Contents



16 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Estimated
    
    
    September 30,
    
    
    December 31,
    
    
    October 1,In thousands
    
    Lives
    
    
    2006
    
    
    2005
    
    
    2005Amortized intangible assets:Gross Carrying Amount:Licensed trademarks
    
    5-15 years
    
    $
    32,449
    
    
    $
    32,449
    
    
    $
    42,849Owned trademarks
    
    20 years
    
    
    7,600
    
    
    
    7,600
    
    
    
    7,500Customer relationships
    
    5-25 years
    
    
    46,082
    
    
    
    40,184
    
    
    
    28,100Merchandising rights
    
    4 years
    
    
    54,131
    
    
    
    49,460
    
    
    
    59,591Subtotal
    
    
    
    
    
    $
    140,262
    
    
    $
    129,693
    
    
    $
    138,040Accumulated Amortization:Licensed trademarks
    
    
    
    
    
    $
    (13,484
    )
    
    $
    (11,697
    )
    
    $
    (20,774
    )Owned trademarks
    
    
    
    
    
    
    (657
    )
    
    
    (372
    )
    
    
    (273
    )Customer relationships
    
    
    
    
    
    
    (5,840
    )
    
    
    (2,960
    )
    
    
    (2,414
    )Merchandising rights
    
    
    
    
    
    
    (27,185
    )
    
    
    (18,590
    )
    
    
    (37,856
    )Subtotal
    
    
    
    
    
    $
    (47,166
    )
    
    $
    (33,619
    )
    
    $
    (61,317
    )Net:Licensed trademarks
    
    
    
    
    
    $
    18,965
    
    
    $
    20,752
    
    
    $
    22,075Owned trademarks
    
    
    
    
    
    
    6,943
    
    
    
    7,228
    
    
    
    7,227Customer relationships
    
    
    
    
    
    
    40,242
    
    
    
    37,224
    
    
    
    25,686Merchandising rights
    
    
    
    
    
    
    26,946
    
    
    
    30,870
    
    
    
    21,735Total amortized intangible assets, net
    
    
    
    
    
    $
    93,096
    
    
    $
    96,074
    
    
    $
    76,723Unamortized intangible assets:Owned trademarks
    
    
    
    
    
    $
    250,452
    
    
    $
    235,943
    
    
    $
    216,356Total intangible assets
    
    
    
    
    
    $
    343,548
    
    
    $
    332,017
    
    
    $
    293,079
   (In millions)Fiscal Year
    
    Amortization Expense2006
    
    $
    18.62007
    
    
    17.42008
    
    
    14.92009
    
    
    11.82010
    
    
    7.7




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##### Table of Contents



17 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Wholesale
    
    
    WholesaleIn thousands
    
    Apparel
    
    
    Non-Apparel
    
    
    TotalBalance, December 31, 2005
    
    $
    848,970
    
    
    $
    9,595
    
    
    $
    858,565Additional purchase price of C & C
    
    
    16,981
    
    
    
    
    
    
    
    16,981Additional purchase price of prAna
    
    
    10,801
    
    
    
    
    
    
    
    10,801Additional purchase price of Juicy Couture
    
    
    80,345
    
    
    
    
    
    
    
    80,345Other
    
    
    (3,445
    )
    
    
    
    
    
    
    (3,445
    )Translation difference
    
    
    3,431
    
    
    
    
    
    
    
    3,431Balance, September 30, 2006
    
    $
    957,083
    
    
    $
    9,595
    
    
    $
    966,678




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##### Table of Contents



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




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##### Table of Contents



19 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   2006 Actions
     Nine Months Ended
    
    
    Three Months EndedIn thousands
    
    September 30, 2006
    
    
    September 30, 2006Wholesale Apparel
    
    $
    35,132
    
    
    $
    11,810Wholesale Non-Apparel
    
    
    5,403
    
    
    
    165Retail
    
    
    9,053
    
    
    
    965Total
    
    $
    49,588
    
    
    $
    12,940
  LeasePayroll and
    
    
    Termination
    
    
    Fixed AssetIn thousands
    
    Related Costs
    
    
    Costs
    
    
    Write-Downs
    
    
    Other Costs
    
    
    Total2006 provision
    
    $
    27,979
    
    
    $
    3,351
    
    
    $
    13,244
    
    
    $
    5,014
    
    
    $
    49,5882006 fixed asset write-downs
    
    
    
    
    
    
    
    
    
    
    (13,244
    )
    
    
    
    
    
    
    (13,244
    )Translation difference
    
    
    (1
    )
    
    
    (7
    )
    
    
    
    
    
    
    6
    
    
    
    (2
    )2006 spending
    
    
    (25,672
    )
    
    
    (1,382
    )
    
    
    
    
    
    
    (5,000
    )
    
    
    (32,054
    )Balance at September 30, 2006
    
    $
    2,306
    
    
    $
    1,962
    
    
    $
    
    
    
    $
    20
    
    
    $
    4,288
 2004 Actions




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##### Table of Contents



20 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Operating &AdministrativeIn thousands
    
    Exit CostsBalance at December 31, 2005
    
    $
    1,016Spending for nine months ended September 30, 2006
    
    
    (1,035
    )Translation difference
    
    
    19Balance at September 30, 2006
    
    $
    
   Nine Months EndedSeptember 30, 2006
    
    
    October 1, 2005Weighted
    
    
    Net Income
    
    
    
    
    
    
    Weighted
    
    
    Net IncomeAverage
    
    
    per Common
    
    
    
    
    
    
    Average
    
    
    per CommonIn thousands except per share data
    
    Net Income
    
    
    Shares
    
    
    Share
    
    
    Net Income
    
    
    Shares
    
    
    ShareBasic
    
    $
    181,522
    
    
    
    102,277
    
    
    $
    1.77
    
    
    $
    239,073
    
    
    
    106,910
    
    
    $
    2.24Effect of dilutive
securities:Stock options and
restricted stock grants
    
    
    
    
    
    
    1,449
    
    
    
    (0.02
    )
    
    
    
    
    
    
    1,664
    
    
    
    (0.04
    )Diluted
    
    $
    181,522
    
    
    
    103,726
    
    
    $
    1.75
    
    
    $
    239,073
    
    
    
    108,574
    
    
    $
    2.20
 Three Months EndedSeptember 30, 2006
    
    
    October 1, 2005Weighted
    
    
    Net Income
    
    
    
    
    
    
    Weighted
    
    
    Net IncomeAverage
    
    
    per Common
    
    
    
    
    
    
    Average
    
    
    per CommonIn thousands except per share data
    
    Net Income
    
    
    Shares
    
    
    Share
    
    
    Net Income
    
    
    Shares
    
    
    ShareBasic
    
    $
    95,170
    
    
    
    100,868
    
    
    $
    0.94
    
    
    $
    113,515
    
    
    
    105,995
    
    
    $
    1.07Effect of dilutive
securities:Stock options and
restricted stock grants
    
    
    
    
    
    
    1,516
    
    
    
    (0.01
    )
    
    
    
    
    
    
    1,290
    
    
    
    (0.01
    )Diluted
    
    $
    95,170
    
    
    
    102,384
    
    
    $
    0.93
    
    
    $
    113,515
    
    
    
    107,285
    
    
    $
    1.06




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##### Table of Contents



21 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
       For the Nine Months Ended September 30, 2006Wholesale
    
    
    Wholesale
    
    
    
    
    
    
    Corporate/In thousands
    
    Apparel
    
    
    Non-Apparel
    
    
    Retail
    
    
    Eliminations
    
    
    TotalNET SALES:Total net sales
    
    $
    2,344,906
    
    
    $
    521,699
    
    
    $
    932,712
    
    
    $
    (133,567
    )
    
    $
    3,665,750Intercompany sales
    
    
    (143,193
    )
    
    
    (23,917
    )
    
    
    
    
    
    
    167,110
    
    
    
    Sales from external customers
    
    $
    2,201,713
    
    
    $
    497,782
    
    
    $
    932,712
    
    
    $
    33,543
    
    
    $
    3,665,750% to total
    
    
    60.1
    %
    
    
    13.6
    %
    
    
    25.4
    %
    
    
    0.9
    %
    
    
    100.0
    %OPERATING INCOME:Total operating income
    
    $
    219,294
    
    
    $
    73,649
    
    
    $
    3,780
    
    
    $
    16,425
    
    
    $
    313,148Intercompany segment operating
(income) loss
    
    
    (5,958
    )
    
    
    (4,213
    )
    
    
    
    
    
    
    10,171
    
    
    
    Segment operating income
from external customers
    
    $
    213,336
    
    
    $
    69,436
    
    
    $
    3,780
    
    
    $
    26,596
    
    
    $
    313,148% of sales
    
    
    9.7
    %
    
    
    13.9
    %
    
    
    0.4
    %
    
    
    79.3
    %
    
    
    8.5
    %




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##### Table of Contents



22 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  For the Nine Months Ended October 1, 2005Wholesale
    
    
    Wholesale
    
    
    
    
    
    
    Corporate/In thousands
    
    Apparel
    
    
    Non-Apparel
    
    
    Retail
    
    
    Eliminations
    
    
    TotalNET SALES:Total net sales
    
    $
    2,438,849
    
    
    $
    494,520
    
    
    $
    839,767
    
    
    $
    (124,971
    )
    
    $
    3,648,165Intercompany sales
    
    
    (138,647
    )
    
    
    (18,019
    )
    
    
    
    
    
    
    156,666
    
    
    
    Sales from external customers
    
    $
    2,300,202
    
    
    $
    476,501
    
    
    $
    839,767
    
    
    $
    31,695
    
    
    $
    3,648,165% to total
    
    
    63.0
    %
    
    
    13.1
    %
    
    
    23.0
    %
    
    
    0.9
    %
    
    
    100.0
    %OPERATING INCOME:Total operating income (loss)
    
    $
    294,259
    
    
    $
    81,629
    
    
    $
    24,406
    
    
    $
    (5,054
    )
    
    $
    395,240Intercompany segment operating
(income) loss
    
    
    (23,558
    )
    
    
    (5,935
    )
    
    
    
    
    
    
    29,493
    
    
    
    Segment operating income
from external customers
    
    $
    270,701
    
    
    $
    75,694
    
    
    $
    24,406
    
    
    $
    24,439
    
    
    $
    395,240% of sales
    
    
    11.8
    %
    
    
    15.9
    %
    
    
    2.9
    %
    
    
    77.1
    %
    
    
    10.8
    %
 For the Three Months Ended September 30, 2006Wholesale
    
    
    Wholesale
    
    
    
    
    
    
    Corporate/In thousands
    
    Apparel
    
    
    Non-Apparel
    
    
    Retail
    
    
    Eliminations
    
    
    TotalNET SALES:Total net sales
    
    $
    884,914
    
    
    $
    216,897
    
    
    $
    330,684
    
    
    $
    (62,984
    )
    
    $
    1,369,511Intercompany sales
    
    
    (64,017
    )
    
    
    (10,706
    )
    
    
    
    
    
    
    74,723
    
    
    
    Sales from external customers
    
    $
    820,897
    
    
    $
    206,191
    
    
    $
    330,684
    
    
    $
    11,739
    
    
    $
    1,369,511% to total
    
    
    59.9
    %
    
    
    15.1
    %
    
    
    24.1
    %
    
    
    0.9
    %
    
    
    100.0
    %OPERATING INCOME:Total operating income (loss)
    
    $
    116,672
    
    
    $
    41,091
    
    
    $
    (2,237
    )
    
    $
    5,464
    
    
    $
    160,990Intercompany segment operating
(income) loss
    
    
    (1,959
    )
    
    
    (2,005
    )
    
    
    
    
    
    
    3,964
    
    
    
    Segment operating income
(loss)
from external customers
    
    $
    114,713
    
    
    $
    39,086
    
    
    $
    (2,237
    )
    
    $
    9,428
    
    
    $
    160,990% of sales
    
    
    14.0
    %
    
    
    19.0
    %
    
    
    (0.7
    %)
    
    
    80.3
    %
    
    
    11.8
    %
 For the Three Months Ended October 1, 2005Wholesale
    
    
    Wholesale
    
    
    
    
    
    
    Corporate/In thousands
    
    Apparel
    
    
    Non-Apparel
    
    
    Retail
    
    
    Eliminations
    
    
    TotalNET SALES:Total net sales
    
    $
    885,744
    
    
    $
    206,912
    
    
    $
    289,823
    
    
    $
    (45,825
    )
    
    $
    1,336,654Intercompany sales
    
    
    (48,404
    )
    
    
    (8,453
    )
    
    
    
    
    
    
    56,857
    
    
    
    Sales from external customers
    
    $
    837,340
    
    
    $
    198,459
    
    
    $
    289,823
    
    
    $
    11,032
    
    
    $
    1,336,654% to total
    
    
    62.6
    %
    
    
    14.9
    %
    
    
    21.7
    %
    
    
    0.8
    %
    
    
    100.0
    %OPERATING INCOME:Total operating income
    
    $
    125,913
    
    
    $
    51,218
    
    
    $
    5,315
    
    
    $
    2,003
    
    
    $
    184,449Intercompany segment operating
(income) loss
    
    
    (4,075
    )
    
    
    (2,123
    )
    
    
    
    
    
    
    6,198
    
    
    
    Segment operating income
from external customers
    
    $
    121,838
    
    
    $
    49,095
    
    
    $
    5,315
    
    
    $
    8,201
    
    
    $
    184,449% of sales
    
    
    14.6
    %
    
    
    24.7
    %
    
    
    1.8
    %
    
    
    74.3
    %
    
    
    13.8
    %




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##### Table of Contents



23 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  September 30,
    
    
    December 31,
    
    
    October 1,In thousands
    
    2006
    
    
    2005
    
    
    2005SEGMENT ASSETS:Wholesale Apparel
    
    $
    2,723,310
    
    
    $
    2,502,783
    
    
    $
    2,526,671Wholesale Non-Apparel
    
    
    275,531
    
    
    
    149,397
    
    
    
    235,023Retail
    
    
    838,856
    
    
    
    759,871
    
    
    
    774,504Corporate
    
    
    78,445
    
    
    
    151,924
    
    
    
    161,629Eliminations
    
    
    (353,443
    )
    
    
    (411,939
    )
    
    
    (424,810
    )Total assets
    
    $
    3,562,699
    
    
    $
    3,152,036
    
    
    $
    3,273,017
  Nine Months Ended
    
    
    Three Months Ended(39 Weeks)
    
    
    (39 Weeks)
    
    
    (13 Weeks)
    
    
    (13 Weeks)September 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005NET SALES:Domestic
    
    $
    2,631,620
    
    
    $
    2,712,929
    
    
    $
    962,239
    
    
    $
    984,485International
    
    
    1,034,130
    
    
    
    935,236
    
    
    
    407,272
    
    
    
    352,169Total net sales
    
    $
    3,665,750
    
    
    $
    3,648,165
    
    
    $
    1,369,511
    
    
    $
    1,336,654OPERATING INCOME:Domestic
    
    $
    246,494
    
    
    $
    321,334
    
    
    $
    112,941
    
    
    $
    140,097International
    
    
    66,654
    
    
    
    73,906
    
    
    
    48,049
    
    
    
    44,352Total operating income
    
    $
    313,148
    
    
    $
    395,240
    
    
    $
    160,990
    
    
    $
    184,449
 September 30,
    
    
    December 31,
    
    
    October 1,In thousands
    
    2006
    
    
    2005
    
    
    2005TOTAL ASSETS:Domestic
    
    $
    2,876,635
    
    
    $
    1,955,142
    
    
    $
    2,037,169International
    
    
    686,064
    
    
    
    1,196,894
    
    
    
    1,235,848Total assets
    
    $
    3,562,699
    
    
    $
    3,152,036
    
    
    $
    3,273,017




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##### Table of Contents



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




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##### Table of Contents



25 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      Nine Months Ended
    
    
    Three Months Ended(39 Weeks)
    
    
    (39 Weeks)
    
    
    (13 Weeks)
    
    
    (13 Weeks)September 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,In thousands except per common share data
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net income as reported
    
    $
    181,522
    
    
    $
    239,073
    
    
    $
    95,170
    
    
    $
    113,515Add: Share-based employee
compensation expense included in
reported net income, net of taxes
($7,292 and $6,336 for the nine
months ended and $2,969 and $3,190
for the three months ended,
respectively)
    
    
    11,899
    
    
    
    11,563
    
    
    
    5,142
    
    
    
    5,821Less: Total share-based employee
compensation expense determined under
fair value based method for all
awards*, net of tax
    
    
    (11,899
    )
    
    
    (19,496
    )
    
    
    (5,142
    )
    
    
    (5,821
    )Pro forma
    
    $
    181,522
    
    
    $
    231,140
    
    
    $
    95,170
    
    
    $
    113,515Basic earnings per share:As reported
    
    $
    1.77
    
    
    $
    2.24
    
    
    $
    0.94
    
    
    $
    1.07Pro forma
    
    $
    1.77
    
    
    $
    2.16
    
    
    $
    0.94
    
    
    $
    1.07Diluted earnings per share:As reported
    
    $
    1.75
    
    
    $
    2.20
    
    
    $
    0.93
    
    
    $
    1.06Pro forma
    
    $
    1.75
    
    
    $
    2.14
    
    
    $
    0.93
    
    
    $
    1.06
 
 *
    
    All awards refers to awards granted, modified, or settled in fiscal
periods beginning after December 15, 1994  that is, awards for which
the fair value was required to be measured under SFAS No. 123, net of
tax ($7,292 and $10,683 for the nine months ended September 30, 2006
and October 1, 2005, respectively, and $2,969 and $3,190 for the three
months ended September 30, 2006 and October 1, 2005, respectively).




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26 LIZ CLAIBORNE, INC. AND SUBSIDIARIES
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Nine Months EndedSeptember 30,
    
    October 1,Binomial Lattice Valuation Assumptions:
    
    2006
    
    2005Weighted-average fair value of options granted
    
    $
    9.60
    
    
    $
    12.92Expected volatility
    
    23.1% to 39.5%
    
    28.8% to 42%Weighted-average volatility
    
    
    24.4
    %
    
    
    29.4
    %Expected term (in years)
    
    
    4.4
    
    
    
    5.2Dividend yield
    
    
    0.61
    %
    
    
    0.55
    %Risk-free rate
    
    4.4% to 4.8%
    
    3.2% to 4.6%Expected annual forfeiture
    
    
    7.05
    %
    
    
    9.3
    %
 Stock Options
  Weighted
    
    
    Weighted Average
    
    
    AggregateAverage Exercise
    
    
    Remaining
    
    
    Intrinsic ValueShares
    
    
    Price
    
    
    Contractual Term
    
    
    ($000)Outstanding at December 31, 2005
    
    
    7,923,930
    
    
    $
    30.70
    
    
    
    6.9
    
    
    $
    68,637Granted
    
    
    586,774
    
    
    
    36.69Exercised
    
    
    (1,310,011
    )
    
    
    27.07Cancelled
    
    
    (502,089
    )
    
    
    35.65Outstanding at September 30, 2006
    
    
    6,698,604
    
    
    $
    31.56
    
    
    
    6.5
    
    
    $
    63,091Exercisable at September 30, 2006
    
    
    4,709,091
    
    
    $
    28.89
    
    
    
    5.8
    
    
    $
    56,956
    Restricted Stock
  Weighted AverageShares
    
    
    Exercise PriceOutstanding at December 31, 2005
    
    
    1,228,619
    
    
    $
    37.88Granted
    
    
    806,729
    
    
    
    36.00Vested
    
    
    (64,570
    )
    
    
    33.51Cancelled
    
    
    (282,808
    )
    
    
    37.40Outstanding at September 30, 2006
    
    
    1,687,970
    
    
    $
    37.23




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




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




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29




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 owned by the
Company or licensed by the Company from third-party owners. This
segment includes our better apparel (LIZ CLAIBORNE, CLAIBORNE (mens),
CITY UNLTD., INTUITIONS, MAC & JAC, MEXX and SIGRID OLSEN), bridge
priced (DANA BUCHMAN and ELLEN TRACY), our mid-tier brands (AXCESS,
BELONGINGS, CRAZY HORSE, FIRST ISSUE, METROCONCEPTS, 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, KENZIE,
KENZIEGIRL 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 and MARVELLA 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 330
outlet stores, 368 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,
the Company owns 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 and YZZA.




Competitive Profile








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30






















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31 Overall Results for the Nine Months Ended September 30, 2006
 Net Sales
  Gross Profit and Net Income
  Balance Sheet
  International Operations
  Recent Acquisitions




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32




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33    Share-Based Compensation




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34 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 stores and concession stores located outside of the United
States, primarily in our European and Canadian operations.
  THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED OCTOBER 1, 2005
  Three months ended
    
    VarianceSeptember 30,
    
    October 1,Dollars in millions
    
    2006
    
    2005
    
    $
    
    %Net Sales
    
    $
    1,369.5
    
    
    $
    1,336.7
    
    
    $
    32.8
    
    
    
    2.5
    %Gross Profit
    
    
    649.1
    
    
    
    634.5
    
    
    
    14.6
    
    
    
    2.3
    %Selling, general & administrative
expenses
    
    
    488.1
    
    
    
    450.2
    
    
    
    37.9
    
    
    
    8.4
    %Restructuring (gain)
    
    
    0.0
    
    
    
    (0.2
    )
    
    
    0.2
    
    
    
    100.0
    %Operating Income
    
    
    161.0
    
    
    
    184.5
    
    
    
    (23.5
    )
    
    
    (12.7
    %)Other income (expense), net
    
    
    0.0
    
    
    
    (0.5
    )
    
    
    0.5
    
    
    
    100.0
    %Interest expense, net
    
    
    (10.9
    )
    
    
    (8.3
    )
    
    
    (2.6
    )
    
    
    (31.3
    %)Provision for income taxes
    
    
    54.9
    
    
    
    62.2
    
    
    
    (7.3
    )
    
    
    (11.7
    %)Net Income
    
    $
    95.2
    
    
    $
    113.5
    
    
    $
    (18.3
    )
    
    
    (16.1
    %)
 Net Sales
  
    
    Wholesale Apparel net sales were $820.9 million decreasing $16.4 million, or 2.0%, as a result of:
 -
    
    A $35.4 million net decrease across our Wholesale Apparel businesses primarily reflecting
a decrease in our domestic LIZ CLAIBORNE business (resulting from lower unit volume and,
to a lesser extent, lower unit pricing due to the factors discussed above in Competitive
Profile) and decreases in our CRAZY HORSE womens (resulting from lower volume due to
reduced demand), ELLEN TRACY and DANA BUCHMAN (due to the discontinuation of special
sizes and a shift in demand toward more modern offerings), SIGRID OLSEN (resulting from
lower volume due to reduced distribution and reduced demand as well as the
discontinuation of special sizes), CITY UNLTD. (due to the planned discontinuance of this
brand in the department store channel) and AXCESS mens (due to reduced demand and the
licensing out of our dress shirts business), partially offset by growth in our MEXX
Europe business (due to volume growth primarily in France, Eastern Europe and new
specialty retail customers), DKNY® Jeans womens (due to volume growth in petite sizes
and additional points of sale), C & C CALIFORNIA (due to increased demand) and the launch
of STAMP 10;




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35 -
    
    The inclusion of the 2005 reimbursement of $12.3 million from a customer of improperly
collected markdown allowances, partly offset by;-
    
    The impact of $20.3 million of sales from our acquired prAna and MAC & JAC businesses; and-
    
    An $11.0 million increase resulting from the impact of foreign currency exchange rates in
our international businesses.
 
    
    Wholesale Non-Apparel net sales increased $7.7 million, or 3.9%, to $206.2 million reflecting:
 -
    
    A $5.8 million net increase in our accessories businesses resulting primarily
from increases in our JUICY COUTURE, LUCKY BRAND, SIGRID OLSEN and LAUNDRY
businesses, partially offset by decreases in our department store jewelry
businesses; and-
    
    A $2.0 million increase in our cosmetics business primarily resulting from the
launch of our new LUCKY BRAND, JUICY COUTURE and ELLEN TRACY fragrances,
partly offset by reduced sales of our SOUL by CURVE fragrance, (launched in
the third quarter of 2005).-
    
    The impact of foreign currency exchange rates was not material in this segment.
 
    
    Retail net sales increased $40.9 million, or 14.1%, to $330.7 million. The increase reflected the following:
 -
    
    A $32.8 million net increase driven by the net
addition over the last 12 months of 59 specialty
retail and 14 outlet stores, reflecting in part the
opening of 33 LUCKY BRAND, 17 SIGRID OLSEN, and 11
JUICY COUTURE specialty retail stores, and 11 MEXX
and 14 LIZ CLAIBORNE outlet stores in the United
States, Canada and Europe;-
    
    An $8.1 million increase resulting from the impact of
foreign currency exchange rates, in our international
businesses; and-
    
    Comparable store sales in our Company-operated stores
increased by 2.6% overall, primarily the result of a
2.9% increase in our Specialty Retail business and a
2.3% increase in our Outlet business.
  
    
    Corporate net sales, consisting of licensing revenue, increased $0.7
million to $11.7 million as a result of revenues from new licenses and
growth from our existing license portfolio.
 Domestic International
 Gross Profit




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36 Selling, General & Administrative Expenses
  
    
    The inclusion of $8.1 million of expenses from our acquired prAna and MAC & JAC businesses;
    
    A $24.0 million increase primarily resulting from the expansion of our domestic and
international retail businesses;
    
    An $8.5 million increase due to the impact of foreign currency exchange rates, in our
international businesses;
    
    $12.8 million of expenses primarily lease termination costs and fixed asset write-downs,
offset by savings of $12.3 million associated with our streamlining initiatives;
    
    $5.9 million of reinvestment in marketing and in-store activities of realized savings from
our growth initiative; and
    
    A $9.1 million net decrease in wholesale and corporate expenses.
  Operating Income
  
    
    Wholesale Apparel operating income was $114.7 million (14.0% of net
sales) in 2006 compared to $121.8 million (14.6% of net sales) in
2005, principally reflecting reduced income in our DANA BUCHMAN,
SIGRID OLSEN, CRAZY HORSE womens, JUICY COUTURE and LUCKY BRAND
wholesale apparel businesses and associated with our streamlining
initiatives, as well as the impact of the 2005 reimbursement of $12.3
million from a customer of improperly collected markdown allowances,
partly offset by increased income in our DKNY® Jeans womens, LAUNDRY,
ENYCE, MEXX Europe, and LIZ CLAIBORNE businesses.
    
    Wholesale Non-Apparel operating income was $39.1 million (19.0% of net
sales) in 2006 compared to $49.1 million (24.7% of net sales) in 2005,
principally reflecting reduced income in our Cosmetics (due to
expenses related to the launch of our new JUICY COUTURE and LUCKY
BRAND fragrances) and MONET jewelry businesses, as well as expenses
associated with our streamlining initiatives, partly offset by
increases in our fashion accessories business.
    
    Retail operating loss was ($2.2) million ((0.7)% of net sales) in 2006
compared to operating income of $5.3 million (1.8% of net sales) in
2005, principally reflecting decreased income in our European retail
business, reduced income in our outlet business, $3.6 million of net
expenses (before reinvestment) associated with our streamlining
initiatives and approximately $1.7 million of construction period rent
resulting from our adoption of Financial Accounting Standards Board
(FASB) Staff Position No. FAS 13-1, partially offset by increased
operating profit in our Canadian retail business.
    
    Corporate operating income, primarily consisting of licensing
operating income, increased $1.2 million to $9.4 million as a result
of increased revenues from our new licenses and growth from our
existing license portfolio, as well as expense reductions.
 Domestic International
 Other Income (Expense), Net




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##### Table of Contents



37  Interest Expense, Net
  Provision for Income Taxes
  Net Income
   NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED OCTOBER 1, 2005
  Nine months ended
    
    VarianceSeptember 30,
    
    October 1,Dollars in millions
    
    2006
    
    2005
    
    $
    
    %Net Sales
    
    $
    3,665.8
    
    
    $
    3,648.2
    
    
    $
    17.6
    
    
    
    0.5
    %Gross Profit
    
    
    1,741.6
    
    
    
    1,722.1
    
    
    
    19.5
    
    
    
    1.1
    %Selling, general & administrative
expenses
    
    
    1,428.5
    
    
    
    1,327.1
    
    
    
    101.4
    
    
    
    7.6
    %Restructuring (gain)
    
    
    0.0
    
    
    
    (0.2
    )
    
    
    0.2
    
    
    
    100.0
    %Operating Income
    
    
    313.1
    
    
    
    395.2
    
    
    
    (82.1
    )
    
    
    (20.8
    %)Other income (expense), net
    
    
    3.1
    
    
    
    (1.5
    )
    
    
    4.6
    
    
    
    306.7
    %Interest expense, net
    
    
    (26.6
    )
    
    
    (23.6
    )
    
    
    (3.0
    )
    
    
    (12.7
    %)Provision for income taxes
    
    
    108.1
    
    
    
    131.0
    
    
    
    (22.9
    )
    
    
    (17.5
    %)Net Income
    
    $
    181.5
    
    
    $
    239.1
    
    
    $
    (57.6
    )
    
    
    (24.1
    %)
 Net Sales




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##### Table of Contents



38 
    
    Wholesale Apparel net sales were $2.202 billion, reflecting a decrease of $98.5 million, or 4.3%, as a result
of:
 -
    
    A $150.7 million net decrease across our comparable Wholesale Apparel businesses primarily
reflecting a decrease in our domestic LIZ CLAIBORNE business (resulting from lower unit volume
and, to a lesser extent, lower unit pricing due to the factors discussed above in Competitive
Profile), decreases in our CRAZY HORSE womens (resulting from lower volume due to reduced
demand), CLAIBORNE (due to lower unit volume), ELLEN TRACY and DANA BUCHMAN (due to the
discontinuation of special sizes and a shift in demand toward more modern offerings), LUCKY
BRAND (due to lower unit volume related to a change in specialty retail strategy) and SIGRID
OLSEN (resulting from lower volume due to reduced demand) businesses, partially offset by
growth in our MEXX Europe (due to volume growth primarily in France, Eastern Europe and new
specialty retail customers), DKNY® Jeans womens (due to volume growth in petite sizes), ENYCE
(due to timing of shipments and increased distribution), moderate businesses (due to higher
unit volume, most notably growth in our J.H. COLLECTIBLES and TAPEMEASURE due to higher unit
volume among existing customers and the addition of new retail customers) and the recent
launch of STAMP 10; and-
    
    The inclusion of $52.2 million of sales from our acquired prAna and MAC & JAC businesses.-
    
    The impact of foreign currency exchange rates in our international businesses was not material.
 
    
    Wholesale Non-Apparel net sales increased $21.3 million, or 4.5%, to $497.8 million.
 -
    
    An $18.7 million increase compared to
2005, in our accessories businesses
resulting primarily from increases in our
AXCESS, JUICY COUTURE, LUCKY BRAND,
SIGRID OLSEN, and LAUNDRY businesses,
partly offset by declines in our
department store jewelry businesses; and-
    
    A $2.6 million increase compared to 2005,
in our cosmetics business (excluding
sales to the off-price channel) primarily
resulting from the launch of our ELLEN
TRACY and New LUCKY BRAND fragrances.-
    
    The impact of foreign currency exchange
rates in our international business was
not material in this segment.
 
    
    Retail net sales increased $92.9 million, or 11.1%, to $932.7 million. The increase reflected the following:
 -
    
    An $89.0 million net increase driven by the net
addition over the last 12 months of 59 specialty
retail and 14 outlet stores, mentioned above;-
    
    A $3.9 million increase resulting from the impact of
foreign currency exchange rates primarily as a result
of the strengthening of the Canadian dollar, in our
international businesses; and-
    
    Comparable store sales in our Company-operated stores
increased by 0.4% overall, primarily the result of a
3.4% increase in our Specialty Retail business
(including a 5.4% comparable store sales increase in
our domestic Specialty Retail business), partially
offset by a 2.3% decrease in our Outlet business.
 
    
    Corporate net sales, consisting of licensing revenue, increased $1.9
million to $33.5 million as a result of revenues from new licenses and
growth from our existing license portfolio.
 Domestic International
 Gross Profit




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##### Table of Contents



39 Selling, General & Administrative Expenses
  
    
    $20.6 million of expenses from our acquired prAna and MAC & JAC businesses;
    
    A $70.6 million increase primarily resulting from the expansion of our domestic and
international retail businesses;
    
    $48.0 million of expenses, offset by savings of $20.1 million associated with our
streamlining initiatives, primarily employee severance costs;
    
    $8.9 million of reinvestment in marketing and in-store activities of realized savings from
our growth initiative;
    
    An additional $8.4 million of expense resulting from the adoption of SFAS No. 123(R) and the
shift in the composition of our equity-based management compensation program; and
    
    A $35.0 million net decrease in wholesale and corporate expenses.
    
    The impact of foreign currency exchange rates, in our international business was not material.
  Operating Income
  
    
    Wholesale Apparel operating income was $213.3 million (9.7% of net
sales) in the first nine months of 2006 compared to $270.7 million
(11.8% of net sales) in 2005, principally reflecting reduced income in
our DANA BUCHMAN, ELLEN TRACY, SIGRID OLSEN, CRAZY HORSE womens, and
to a lesser extent, LIZ CLAIBORNE, JUICY COUTURE and LUCKY BRAND
apparel businesses and $21.3 million of net expenses associated with
our streamlining initiatives, partly offset by increased income in our
ENYCE, DKNY® Jeans womens and LAUNDRY businesses.
    
    Wholesale Non-Apparel operating income was $69.4 million (13.9% of net
sales) in the first nine months of 2006 compared to $75.7 million
(15.9% of net sales) in 2005, principally reflecting decreases in our
department store jewelry businesses and $3.3 million of net
reinvestment expenses associated with our streamlining initiatives,
mostly offset increases in our Cosmetics business.
    
    Retail operating income was $3.8 million (0.4% of net sales) in 2006
compared to a $24.4 million (2.9% of net sales) in 2005, principally
reflecting $12.5 million of net expenses associated with our
streamlining initiatives, reduced income in our outlet business due to
reduced sales and higher costs associated with new store openings
higher costs in our European retail business.
    
    Corporate operating income, primarily consisting of licensing
operating income, increased $2.2 million to $26.6 million as a result
of increased revenues from our new licenses and growth from our
existing license portfolio.
 Domestic ® International




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##### Table of Contents



40 Other Income (Expense), Net
  Interest Expense, Net
  Provision for Income Taxes
  Net Income
   FORWARD OUTLOOK
   
    
    A $0.49 reduction in EPS (previously $0.36, this increase is primarily related to
additional real estate and format rationalization opportunities in our retail businesses as
well as additional organizational realignment opportunities in our international
businesses) associated with the expenses resulting from the Companys previously announced
streamlining initiatives;
    
    A $0.20 increase in EPS (previously $0.18) associated with the savings resulting from
the above initiatives;
    
    A $0.09 reduction in EPS associated with the reinvestment of a portion of these savings
in marketing and in-store support; and
    
    A $0.07 reduction in EPS associated with the impact of the adoption of FASB No. 123(R)
at the beginning of the third quarter of 2005 and the shift in the composition of our
equity-based management compensation program in 2005.
  
    
    In our wholesale apparel segment, we expect 2006 net sales to decrease low single digits
compared to 2005.
    
    In our wholesale non-apparel segment, we expect 2006 net sales to increase mid to high
single digits compared to 2005.
    
    In our retail segment, we expect 2006 net sales to increase in the mid teens compared to 2005.
    
    We expect 2006 licensing revenue to increase by 10% compared to 2005.




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##### Table of Contents



41 
   
    
    A $0.19 reduction in EPS associated with the expenses resulting from the Companys
previously announced streamlining initiatives;
    
    A $0.07 increase in EPS associated with the savings resulting from the above
initiatives; and
    
    A $0.04 reduction in EPS associated with the reinvestment of a portion of the savings in
marketing and in-store support.
  
    
    In our wholesale apparel segment, we expect fourth quarter 2006 net sales to increase
low single digits compared to 2005.
    
    In our wholesale non-apparel segment, we expect fourth quarter 2006 net sales to
increase low teens compared to 2005.
    
    In our retail segment, we expect fourth quarter 2006 net sales to increase in the mid
teens compared to 2005.
    
    We expect fourth quarter 2006 licensing revenue to increase by 10% compared to 2005.
   FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
 Cash Requirements.
 Sources of Cash.




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##### Table of Contents



42 2006 vs. 2005
 Cash and Debt Balances.
 Accounts Receivable
 Inventories
 Borrowings
 Net cash used in operating activities
 Net cash used in investing activities
 Net cash provided by financing activities




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##### Table of Contents



43 Commitments and Capital Expenditures
  
    
    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. We estimate that the aggregate contingent payments
will be in the range of approximately $11-20 million. The
contingent payments will be accounted for as additional purchase
price when paid.
    
    On January 17, 2006, we purchased 1.9 percent of the remaining
outstanding shares of Lucky Brand for $10.0 million. The remaining
4.85 percent will be purchased as follows: 1.5 percent in January
2007 and 1.1 percent in January 2008 for $10 million each year 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 earnings. We estimate that this final payment will be
$20-23 million.
    
    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 the option of either the Company or the seller.
    
    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; (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 in the range of approximately $12-15 million. The
contingent payments will be accounted for as additional purchase
price when paid.
    
    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 $47-53
million. The contingent payments will be accounted for as
additional purchase price when paid.
 Financing Arrangements




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44    Off-Balance Sheet Arrangements




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45  Hedging Activities




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46 USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
  Use of Estimates
    Revenue Recognition
  Income Taxes




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47  Accounts Receivable -  Trade, Net
  Inventories, Net
  Goodwill and Other Intangibles, Net




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48     Accrued Expenses
  Derivative Instruments




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49   Share-Based Compensation
  RECENT ACCOUNTING PRONOUNCEMENTS




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50    STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
  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;
    
    The Companys 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;
    
    The Companys ability to effectively anticipate, gauge and respond to
changing consumer demands and tastes, across multiple product lines,
shopping channels and geographies;
    
    The Companys ability to translate market trends into appropriate,
saleable product offerings relatively far in advance, while minimizing
excess inventory positions, including the Companys 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,
Company products (especially by the Companys largest customers) which
are in turn dependent, among other things, on product design, quality,
value and service;
    
    Risks associated with the possible failure of the Companys
unaffiliated manufacturers to manufacture and deliver products in a
timely manner, to meet quality standards or to comply with the
Companys policies regarding labor practices or applicable laws or
regulations;
    
    The Companys 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 the Companys dependence on sales to a limited
number of large United States




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51 department store customers, including risks related to the Companys 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 the Companys 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 the Companys overall business mix.
 Management and Employee Risks
 
    
    The Companys ability to attract and retain talented, highly qualified executives and
other key personnel in design, merchandising, sales, marketing, production, systems
and other functions;
    
    The Companys ability to hire and train qualified retail management and associates; and
    
    Risks associated with any significant disruptions in the Companys relationship with
its employees, including union employees, and any work stoppages by the Companys
employees, including union employees.
 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 the Company sells or sources its products, including the levels of
consumer confidence and discretionary spending, consumer income growth, personal debt
levels, rising energy costs and energy shortages, and 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 the Companys relationships with its suppliers,
manufacturers as well as work stoppages by any of the Companys 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 the Companys 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




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52 
    
    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 the Company 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 the Companys 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 the Companys historical
buyers, store customers and competitors;
    
    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 the Companys 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 the Companys 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 the Company to achieve
significant cost efficiencies; and
    
    With respect to businesses where the Company acts 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 the Companys
control.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Dollars in millions
    
    September 30, 2006
    
    December 31, 2005
    
    October 1, 2005Variable rate debt
    
    $
    289.0
    
    
    $
    48.4
    
    
    $
    110.8Average interest rate
    
    
    5.1
    %
    
    
    3.0
    %
    
    
    2.8
    %




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53   U.S. Dollar
    
    Hong Kong
    
    Contract
    
    UnrealizedCurrency in thousands
    
    Amount
    
    Dollar Amount
    
    Rate
    
    Gain (Loss)Forward Contracts:Euro
    
    
    
    
    
    
    379,750
    
    
    
    0.0987 to 0.1067
    
    
    $
    442Canadian Dollars
    
    
    
    
    
    
    5,952
    
    
    
    0.1428 to 0.1428
    
    
    
    (1
    )Foreign Exchange
Collar Contracts:Euro
    
    
    
    
    
    
    201,500
    
    
    
    0.0980 to 0.1143
    
    
    $
    39Canadian Dollars
    
    $
    5,322
    
    
    
    
    
    
    
    0.8403 to 0.8917
    
    
    
    Canadian Dollars
    
    
    
    
    
    
    24,921
    
    
    
    0.1442 to 0.1538
    
    
    
    (144
    )
  U.S. Dollar
    
    Hong Kong
    
    Contract
    
    UnrealizedCurrency in thousands
    
    Amount
    
    Dollar Amount
    
    Rate
    
    GainForward Contracts:Euro
    
    
    
    
    
    
    193,750
    
    
    
    0.1037 to 0.1094
    
    
    $
    498Canadian Dollars
    
    $
    16,723
    
    
    
    
    
    
    
    0.8549 to 0.8592
    
    
    
    Canadian Dollars
    
    
    
    
    
    
    199,806
    
    
    
    0.1491 to 0.1508
    
    
    
    Foreign Exchange Collar Contracts:Euro
    
    
    
    
    
    
    325,362
    
    
    
    0.0992 to 0.1143
    
    
    $
    208Canadian Dollars
    
    $
    21,072
    
    
    
    
    
    
    
    0.8403 to 0.8881
    
    
    
    




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54  U.S. Dollar
    
    Euro
    
    Hong Kong
    
    Contract
    
    UnrealizedCurrency in thousands
    
    Amount
    
    Amount
    
    Dollar Amount
    
    Rate
    
    Gain (Loss)Forward Contracts:Euro
    
    $
    19,000
    
    
    
    
    
    
    
    
    
    
    1.2010 to 1.2755
    
    
    $9Euro
    
    
    
    
    
    
    
    
    
    
    93,000
    
    
    0.1037 to 0.1049
    
    
    182Canadian Dollars
    
    
    24,371
    
    
    
    
    
    
    
    
    
    
    0.8183 to 0.8592
    
    
    (690
    )Canadian Dollars
    
    
    
    
    
    
    
    
    
    
    132,926
    
    
    0.1500 to 0.1508
    
    
    (150
    )Pounds Sterling
    
    
    
    
    
    
    7,313
    
    
    
    
    
    
    0.6778 to 0.6932
    
    
    (13
    )Foreign Exchange Collar Contracts:Euro
    
    $
    17,000
    
    
    
    
    
    
    
    
    
    
    1.2000 to 1.3753
    
    
    $542Euro
    
    
    
    
    
    
    
    
    
    
    217,000
    
    
    0.0991 to 0.1099
    
    
    155Canadian Dollars
    
    
    18,016
    
    
    
    
    
    
    
    
    
    
    0.8000 to 0.8850
    
    
    (79
    )
 
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART - II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS




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55  
 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
    
    Average
    
    Part of Publicly
    
    Purchased Under thePurchased
    
    Price
    
    Announced Plans or
    
    Plans or ProgramsPeriod
    
    (in thousands)
    
    Paid Per Share
    
    Programs
    
    (in thousands) (2)January 1, 2006 - January 28, 2006
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    153,308January 29, 2006 - March 4, 2006
    
    
    269.8
    
    
    
    36.93
    
    
    
    269.8
    
    
    
    143,345March 5, 2006 - April 1, 2006 (1)
    
    
    1,767.6
    
    
    
    37.57
    
    
    
    1,738.2
    
    
    
    78,023April 2, 2006 - April 29, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,023April 30, 2006 - June 3, 2006
    
    
    8.5
    
    
    
    37.95
    
    
    
    8.5
    
    
    
    327,701June 4, 2006 - July 1, 2006
    
    
    1,489.4
    
    
    
    37.54
    
    
    
    1,489.4
    
    
    
    271,796July 2, 2006 - July 29, 2006
    
    
    100.0
    
    
    
    35.59
    
    
    
    100.0
    
    
    
    268,236July 30, 2006 - September 2, 2006
    
    
    957.7
    
    
    
    35.82
    
    
    
    957.7
    
    
    
    233,930September 3, 2006 - September 30, 2006
    
    
    124.4
    
    
    
    37.72
    
    
    
    124.4
    
    
    
    229,237Total 39 weeks ended September 30,
2006
    
    
    4,717.4
    
    
    $
    37.13
    
    
    
    4,688.0
    
    
    $
    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 September 30, 2006, the Company had
$229.2 million remaining in buyback authorization under its program. 
 ITEM 5. OTHER INFORMATION




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56 
 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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57 
 SIGNATURES
   LIZ CLAIBORNE, INC.
    
    
    
    LIZ CLAIBORNE, INC.By:
    
    /s/ Michael Scarpa
    
    
    
    By:
    
    /s/ Elaine H. GoodellMICHAEL SCARPA
    
    
    
    
    
    ELAINE H. GOODELLSenior Vice President - Finance and
    
    
    
    
    
    Vice President - Corporate Controller andDistribution and Chief Financial Officer
    
    
    
    
    
    Chief Accounting Officer(Principal financial officer)
    
    
    
    
    
    (Principal accounting officer)