Kate Spade & Co 10Q 2008 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 29, 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.

(Exact name of registrant as specified in its charter)


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)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerate d filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of Registrant’s Common Stock, par value $1.00 per share, outstanding at October 19, 2007 was 99,482,986.

LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
September 29, 2007


		PAGE
		NUMBER
PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of September 29, 2007 (Unaudited), December 30, 2006 and September 30, 2006 (Unaudited)		3

	Condensed Consolidated Statements of Income for the Nine and Three Month Periods Ended September 29, 2007 (Unaudited) and September 30, 2006 (Unaudited)		4

	Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 29, 2007 (Unaudited) and September 30, 2006 (Unaudited)		5-6

	Notes to Condensed Consolidated Financial Statements (Unaudited)		7-27

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		28-49

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50-51

Item 4.	Controls and Procedures		51

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings		51

Item 1A.	Risk Factors		52-54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		54

Item 5.	Other Information		55

Item 6.	Exhibits		55

SIGNATURES			56
EX-31.A: CERTIFICATION
EX-31.B: CERTIFICATION
EX-32.A: CERTIFICATION
EX-32.B: CERTIFICATION

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LIZ CLAIBORNE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	(Unaudited)						(Unaudited)
	September 29,			December 30,			September 30,
	2007			2006			2006

Assets
Current Assets:
Cash and cash equivalents	$	111,634		$	185,645		$	99,940
Marketable securities		406			9,451			8,864
Accounts receivable — trade, net		663,197			499,012			735,387
Inventories, net		725,802			593,445			675,660
Deferred income taxes		91,396			60,627			67,393
Other current assets		155,165			121,937			130,951
Assets held for sale		19,360			—			—

Total current assets		1,766,960			1,470,117			1,718,195


Property and Equipment, Net		583,343			581,992			521,641
Goodwill, Net		1,041,723			1,007,859			966,678
Intangibles, Net		411,858			413,962			343,548
Other Assets		21,890			21,838			12,637

Total Assets	$	3,825,774		$	3,495,768		$	3,562,699


Liabilities and Stockholders’ Equity
Current Liabilities:
Short term borrowings	$	455,852		$	22,266		$	55,935
Accounts payable		282,342			281,413			302,750
Accrued expenses		304,124			336,773			303,632
Income taxes payable		15,464			33,470			43,990

Total current liabilities		1,057,782			673,922			706,307


Long-Term Debt		520,749			570,469			677,171
Other Non-Current Liabilities		113,933			63,565			70,887
Deferred Income Taxes		71,821			54,571			63,809
Commitments and Contingencies (Note 11)
Minority Interest		3,510			3,260			2,970
Stockholders’ 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			176,437
Capital in excess of par value		293,636			249,573			226,562
Retained earnings		3,389,225			3,354,081			3,286,615
Accumulated other comprehensive loss		(41,340	)		(56,156	)		(43,758	)

		3,817,958			3,723,935			3,645,856
Common stock in treasury, at cost 76,928,623, 73,281,103 and 74,346,643 shares		(1,759,979	)		(1,593,954	)		(1,604,301	)

Total stockholders’ equity		2,057,979			2,129,981			2,041,555

Total Liabilities and Stockholders’ Equity	$	3,825,774		$	3,495,768		$	3,562,699

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

LIZ CLAIBORNE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per common share data)

(Unaudited)


	Nine Months Ended						Three Months Ended

	(39 Weeks)			(39 Weeks)			(13 Weeks)			(13 Weeks)
	September 29,			September 30,			September 29,			September 30,
	2007			2006			2007			2006

Net Sales	$	3,455,057		$	3,499,283		$	1,262,895		$	1,313,848

Cost of goods sold		1,790,491			1,808,659			652,804			679,650


Gross Profit		1,664,566			1,690,624			610,091			634,198

Selling, general & administrative expenses		1,521,559			1,408,067			528,058			481,044

Trademark impairment		12,300			—			12,300			—


Operating Income		130,707			282,557			69,733			153,154

Other income (expense), net		(1,874	)		3,080			(1,519	)		24

Interest expense, net		(30,126	)		(26,641	)		(11,739	)		(10,903	)


Income Before Provision for Income Taxes		98,707			258,996			56,475			142,275

Provision for income taxes		41,303			96,225			23,569			51,907


Income from Continuing Operations		57,404			162,771			32,906			90,368

Income from discontinued operations, net of tax		7,944			18,751			2,613			4,802
Loss on disposal of discontinued operations, net of tax		(2,468	)		—			(2,468	)		—


Net Income	$	62,880		$	181,522		$	33,051		$	95,170


Earnings per Share:
Basic
Income from Continuing Operations	$	0.57		$	1.59		$	0.33		$	0.90
Net Income	$	0.62		$	1.77		$	0.33		$	0.94

Diluted
Income from Continuing Operations	$	0.56		$	1.57		$	0.33		$	0.88
Net Income	$	0.62		$	1.75		$	0.33		$	0.93

Weighted Average Shares, Basic		101,157			102,277			99,820			100,868
Weighted Average Shares, Diluted		102,219			103,726			100,700			102,384

Dividends Paid per Common Share	$	0.17		$	0.17		$	0.06		$	0.06

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

LIZ CLAIBORNE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended

	(39 Weeks)			(39 Weeks)
	September 29,			September 30,
	2007			2006

Cash Flows from Operating Activities:
Net income	$	62,880		$	181,522
Adjustments to arrive at income from continuing operations		(5,476	)		(18,751	)

Income from continuing operations		57,404			162,771

Adjustments to reconcile income from continuing operations to net cash used in operating activities:	��
Depreciation and amortization		114,808			100,915
Trademark impairment		12,300			—
Streamlining initiatives; asset write-down		19,052			13,244
Gain on sale of equity instrument		(364	)		(3,583	)
Deferred income taxes		9,478			(8,504	)
Share-based compensation		16,746			19,192
Tax benefit on exercise of stock options		5,603			4,532
Other, net		(495	)		(73	)
Change in assets and liabilities, exclusive of acquisitions:
Increase in accounts receivable – trade, net		(146,777	)		(302,224	)
Increase in inventories, net		(131,810	)		(123,305	)
Increase in other current and non-current assets		(6,421	)		(13,033	)
Increase in accounts payable		5,543			50,585
(Decrease) increase in accrued expenses		(43,513	)		19,032
(Decrease) increase in income taxes payable		(23,123	)		23,441
Net cash provided by operating activities of discontinued operations		5,702			18,982

Net cash used in operating activities		(105,867	)		(38,028	)


Cash Flows from Investing Activities:
Purchase of investment instruments		(40	)		(107	)
Sales of investment instruments		9,616			8,054
Purchases of property and equipment		(112,455	)		(112,612	)
Proceeds from sales of property and equipment		1,410			—
Purchases of new businesses and payment of related debt		(49,512	)		(143,487	)
Payments for in-store merchandise shops		(4,584	)		(8,914	)
Other, net		512			(465	)
Net cash used in investing activities of discontinued operations		(3	)		(39	)

Net cash used in investing activities		(155,056	)		(257,570	)

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

LIZ CLAIBORNE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT’D)

(In thousands)

(Unaudited)


Cash Flows from Financing Activities:
Short term borrowings, net		432,144			7,206
Principal payments under capital lease obligations		(4,288	)		(2,524	)
Commercial paper, net		(82,075	)		232,466
Proceeds from exercise of common stock options		42,726			35,136
Purchase of common stock		(181,616	)		(174,071	)
Dividends paid		(17,102	)		(17,394	)
Excess tax benefits related to stock options		2,410			844
Proceeds from issuance of 5% euro Notes		—			445,099
Repayment of 6.625% euro Notes		—			(449,505	)
Other, net		(1,076	)		323

Net cash provided by financing activities		191,123			77,580


Effect of exchange rate changes on cash and cash equivalents		(4,211	)		(10,569	)


Net Change in Cash and Cash Equivalents		(74,011	)		(228,587	)
Cash and Cash Equivalents at Beginning of Period		185,645			328,527

Cash and Cash Equivalents at End of Period	$	111,634		$	99,940

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

1. BASIS OF PRESENTATION

The condensed consolidated financial statements of Liz Claiborne, Inc. and its wholly-owned and majority-owned subsidiaries (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from this report, as is permitted by such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K. Results of acquired companies are included in the Company’s operating results from the date of acquisition and therefore, operating results on a period-to-period basis may not be comparable. Information presented as of December 30, 2006 is derived from audited statements.

In the second quarter of 2007, the Company revised its segment reporting structure to reflect the strategic realignment of its businesses and internal reporting. The strategic realignment reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of the Company’s businesses across multiple functional areas including specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce and licensing. Prior periods have been conformed to the current period’s presentation. The two reportable segments described below represent the Company’s brand based activities for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker (“CODM”) to evaluate performance and allocate resources. In identifying its segments, the Company considers economic characteristics, as well as products, customers, sales growth potential and long-term profitability. The Company aggregates its operating segments to form reportable segments, where applicable. As such, the Company now reports its operations in two reportable segments as follows:

	•		The Direct Brands segment — consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry, handbags and fragrances), e-commerce and licensing operations of the Company’s four retail-based brands: JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX; and

	•		The Partnered Brands segment — consists of the wholesale apparel, wholesale non-apparel, outlet and specialty retail, e-commerce and licensing operations of the Company’s wholesale-based brands including: AXCESS, C & C CALIFORNIA, CLAIBORNE (men’s), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, ELLEN TRACY, ENYCE, FIRST ISSUE, KENSIE, KENSIEGIRL, LAUNDRY BY DESIGN, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA, MONET, NARCISO RODRIGUEZ, prAna, SIGRID OLSEN, STAMP 10, TINT, TRIFARI, VILLAGER, the Company’s licensed DKNY® JEANS and DKNY® ACTIVE brands as well as the Company’s other non-Direct Brands fragrances including: BORA BORA, CLAIBORNE, CURVE, ELLEN TRACY, LIZ CLAIBORNE, LIZ WOMAN, MAMBO, REALITIES, SOUL and our licensed USHER fragrance.

In July 2007, the Company announced its long-term strategic plans, which included a strategic review and potential divestiture or closure of 16 of its brands. On September 13, 2007, the Company completed the first phase of such review by entering a definitive agreement to dispose certain assets of its EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands in a single transaction. The transaction closed on October 4, 2007. Pursuant to Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” certain assets of the EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands have been segregated and reported as held for sale as of September 29, 2007 and the activities of such brands have been segregated and reported as discontinued operations for all periods presented. Summarized financial data for the aforementioned brands are provided in Note 3 — Discontinued Operations.

In the opinion of management, the information furnished reflects all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of the results for the reported interim periods. Results of operations for interim periods are not necessarily indicative of results for the full year.

SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Liz Claiborne, Inc. is engaged primarily in the design and marketing of a broad range of apparel, accessories and fragrances.

PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements include the accounts of Liz Claiborne, Inc. and its wholly-owned and majority-owned subsidiaries. All inter-company balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses. Estimates by their nature are based on judgments and available information. Therefore, actual results could materially differ from those estimates under different assumptions and conditions.

Critical accounting policies are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s most critical accounting policies, discussed below, pertain to revenue recognition, income taxes, accounts receivable – trade, net, inventories, net, the valuation of goodwill and intangible assets with indefinite lives, accrued expenses, derivative instruments and share-based compensation. In applying such policies, management must use some amounts that are based upon its informed judgments and best estimates. Because of the uncertainty inherent in these estimates, actual results could differ from estimates used in applying the critical accounting policies. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.

Revenue Recognition

The Company recognizes revenue from its wholesale, retail and licensing operations. Revenue within the Company’s wholesale operations is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of returns, discounts and allowances. Returns and allowances require pre-approval from management. Discounts are based on trade terms. Estimates for end-of-season allowances are based on historical trends, seasonal results, an evaluation of current economic conditions and retailer performance. The Company reviews and refines these estimates on a monthly basis based on current experience, trends and retailer performance. The Company’s historical estimates of these costs have not differed materially from actual results. Retail store revenues are recognized net of estimated returns at the time of sale to consumers. Proceeds received from the sale of gift cards are recorded as a liability and recognized as sales when redeemed by the holder. Licensing revenues are recorded based upon contractually guaranteed minimum levels and adjusted as actual sales data is received from licensees.

Income Taxes

Income taxes are accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” In accordance with SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as measured by enacted tax rates that are expected to be in effect in the periods when the deferred tax assets and liabilities are expected to be realized or settled. Significant judgment is required in determining the worldwide provision for income taxes. In the ordinary course of a global business, the ultimate tax outcome is uncertain for many transactions. Changes in estimates may create volatility in the Company’s effective tax rate in future periods due to settlements with various tax authorities, either favorable or unfavorable, the expiration of the statute of limitations on some tax positions or obtaining new information about particular tax positions that may cause management to change its estimates. In the ordinary course of a global business, the ultimate tax outcome is uncertain for many transactions. It is the Company’s policy to recognize, at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority, the impact of an uncertain income tax position on its income tax return. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company establishes the provisions based upon

management’s assessment of exposure associated with permanent tax differences, tax credits and interest expense applied to temporary difference adjustments. The tax provisions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments to those provisions. The Company records interest expense and penalties payable to relevant tax authorities as income tax expense.

Accounts Receivable – Trade, Net

In the normal course of business, the Company extends credit to customers that satisfy pre-defined credit criteria. Accounts receivable – trade, net, as shown on the Condensed Consolidated Balance Sheets, is net of allowances and anticipated discounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectibility based on an evaluation of historical and anticipated trends, the financial condition of the Company’s customers and an evaluation of the impact of economic conditions. An allowance for discounts is based on those discounts relating to open invoices where trade discounts have been extended to customers. Costs associated with potential returns of products as well as allowable customer markdowns and operational charge backs, net of expected recoveries, are included as a reduction to net sales and are part of the provision for allowances included in Accounts receivable – trade, net. These provisions result from seasonal negotiations with the Company’s customers, as well as historical deduction trends, net of expected recoveries and the evaluation of current market conditions. The Company’s historical estimates of these costs have not differed materially from actual results.

Inventories, Net

Inventories are stated at lower of cost (using the first-in, first-out method) or market value. The Company continually evaluates the composition of its inventories assessing slow-turning, ongoing product as well as prior seasons’ fashion product. Market value of distressed inventory is valued based on historical sales trends for this category of inventory of the Company’s individual product lines, the impact of market trends and economic conditions and the value of current orders in-house relating to the future sales of this type of inventory. Estimates may differ from actual results due to quantity, quality and mix of products in inventory, consumer and retailer preferences and market conditions. The Company’s historical estimates of these costs and its provisions have not differed materially from actual results.

Goodwill and Other Intangibles, Net

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite lives are not amortized, but rather tested for impairment at least annually. Intangible assets with finite lives are amortized over their respective lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

A two-step impairment test is performed on goodwill. In the first step, the Company compares the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the market approach as is typically used for companies providing products where the value of such a company is more dependent on the ability to generate earnings than the value of the assets used in the production process. Under this approach, the Company estimates fair value based on market multiples of revenues and earnings for comparable companies. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets of the impaired reporting unit, determining the fair value of the impaired reporting unit’s goodwill based upon the residual of the summed identified tangible and intangible assets and the fair value of the enterprise as determined in the first step and determining the magnitude of the goodwill impairment based upon a comparison of the fair value residual goodwill and the carrying value of goodwill of the reporting unit. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value, then the Company must record an impairment loss equal to the difference.

The fair values of purchased intangible assets with indefinite lives, primarily trademarks and trade names, are estimated and compared to their carrying values. The Company estimates the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. The Company bases its fair value estimates on assumptions it believes to be reasonable, but which are unpredictable and inherently uncertain. Actual

future results may differ from those estimates. The Company recognizes an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.

Owned trademarks that have been determined to have indefinite lives are not subject to amortization and are reviewed at least annually for potential impairment, as mentioned above. Trademarks having finite lives are amortized over their estimated useful lives. Acquired trademarks are valued using the relief-from-royalty method. Trademarks that are licensed by the Company from third parties are amortized over the individual terms of the respective license agreements, which range from 5 to 15 years. Intangible merchandising rights are amortized over a period of 3 to 4 years. Customer relationships are amortized assuming gradual attrition over time. Existing relationships are amortized over periods ranging from 5 to 25 years.

The recoverability of the carrying values of all long-lived assets with finite lives is re-evaluated when changes in circumstances indicate the assets’ value may be impaired. Impairment testing is based on a review of forecasted operating cash flows and the profitability of the related business.

The Company completed its annual goodwill impairment tests as of the first day of the third quarter of fiscal 2007. No impairment was recognized at that date as a result of such tests. However, as a result of the impairment analysis performed in connection with the Company’s purchased trademarks with indefinite lives, the Company determined that the carrying value of such intangible asset related to its ELLEN TRACY brandname exceeded its estimated fair value.

Accordingly, the Company recorded a pretax charge of $12.3 million ($7.5 million after tax) to reduce the value of the Ellen Tracy trademark to its estimated fair value. This impairment resulted from a decline in future anticipated cash flows of the ELLEN TRACY brand. Apart from this impairment, there were no other impairments relating to intangible assets during the nine months ended September 29, 2007 or September 30, 2006.

Accrued Expenses

Accrued expenses for employee insurance, workers’ compensation, profit sharing, contracted advertising and other outstanding Company obligations are assessed based on claims experience and statistical trends, open contractual obligations and estimates based on projections and current requirements. If these trends change significantly, actual results would likely be impacted.

Derivative Instruments

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, requires that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the Condensed Consolidated Balance Sheets as either an asset or liability and measured at its fair value. The statement also requires that changes in the derivative’s fair value be recognized currently in earnings or Accumulated other comprehensive income (loss), depending on whether the derivative qualifies for hedge accounting treatment. Hedge accounting requires that the Company test for effectiveness at inception of each hedge and at the end of each reporting period.

The Company uses foreign currency forward contracts and options for the purpose of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by the Company’s European and Canadian entities. These instruments are designated as cash flow hedges. To the extent the hedges are highly effective, the effective portion of the changes in fair value is included in Accumulated other comprehensive income (loss), net of related tax effects, with the corresponding asset or liability recorded in the Condensed Consolidated Balance Sheets. The ineffective portion of the cash flow hedge is recognized primarily as a component of Cost of goods sold in current period earnings or, in the case of the swaps, if any, within Selling, general & administrative expenses (“SG&A”). Amounts recorded in Accumulated other comprehensive income (loss) are reflected in current period earnings when the hedged transaction affects earnings. If fluctuations in the relative value of the currencies involved in the hedging activities were to move dramatically, such movement could have a significant impact on the Company’s results of operations.

The Company hedges its net investment position in euro functional subsidiaries by borrowing directly in foreign currency and designating a portion of foreign currency debt as a hedge of net investments. The foreign currency transaction gain or loss recognized for a foreign currency denominated debt instrument that is designated as the hedging instrument in a net investment hedge is recorded to cumulative translation adjustment. The Company also uses derivative instruments to hedge the changes in the fair value of debt due to fluctuations in interest rates. Changes in fair value are recognized currently in Interest expense, net together with the change in fair value of the hedged item attributable to fluctuation in interest rates.

Occasionally, the Company purchases short-term foreign currency contracts and options outside of the cash flow hedging program to neutralize quarter-end balance sheet and other expected exposures. These derivative instruments do not qualify as cash flow hedges under SFAS No. 133 and are recorded at fair value with all gains or losses, which have not been significant, recognized as a component of SG&A expenses in current period earnings.

Share-Based Compensation

On July 3, 2005, the Company adopted SFAS No. 123(R) “Share-Based Payment,” requiring the recognition of compensation expense in the Condensed Consolidated Statements of Income related to the fair value of employee share-based awards, including stock options as well as restricted stock. Determining the fair value of stock options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Prior to adopting SFAS No. 123(R), the Company applied Accounting Principles Board (“APB”) Opinion No. 25 and related Interpretations, in accounting for its share-based compensation plans. All employee stock options were granted at or above the grant date market price. Accordingly, no compensation cost was recognized for fixed stock option grants prior to July 3, 2005. In accordance with SFAS No. 123(R), judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.

OTHER SIGNIFICANT ACCOUNTING POLICIES

Fair Value of Financial Instruments

The fair value of cash and cash equivalents, receivables, short-term borrowings and accounts payable approximates their carrying value due to their short-term maturities. The fair value of variable rate long-term debt instruments approximates the carrying value and is estimated based on the current rates offered to the Company for debt of similar maturities. Fixed-rate long-term debt is carried at its value on the date of issuance. Fair values for derivatives are either obtained from counter parties or developed using dealer quotes or cash flow models.

Cash and Cash Equivalents

All highly-liquid investments with an original maturity of three months or less at the date of purchase are classified as cash equivalents.

Marketable Securities

Investments are stated at market value. The estimated fair value of marketable securities is based on quoted prices in an active market. Gains and losses on investment transactions are determined using the specific identification method and are recorded based on settlement dates. Unrealized gains and losses on securities held for sale are included in accumulated other comprehensive income (loss) until realized. Interest is recognized when earned. All marketable securities are considered available-for-sale. Management evaluates securities held with unrealized losses for other-than-temporary impairment at least on a quarterly basis. Consideration is given to (a) the length of time and the extent to which the fair value has been less than cost; (b) the financial condition and near-term prospects of the issuer; and (c) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Property and Equipment, Net

Property and equipment is stated at cost less accumulated depreciation and amortization. Buildings and building improvements are depreciated using the straight-line method over their estimated useful lives of 20 to 39 years. Machinery and equipment and furniture and fixtures are depreciated using the straight-line method over their estimated useful lives of three to seven years. Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful lives of the assets. Leased property meeting certain capital lease criteria is capitalized and the present value of the related lease payments is recorded as a liability. Amortization of capitalized leased assets is computed on the straight-line method over the shorter of the estimated useful life or the initial lease term. The Company recognizes a liability for the fair value of a conditional asset retirement obligation

(“ARO”) if the fair value can be reasonably estimated. The Company’s ARO’s are primarily associated with the removal and disposal of leasehold improvements at the end of a lease term when the Company is contractually obligated to restore the facility back to a condition specified in the lease agreement. Amortization of ARO’s is recorded on a straight-line basis over the life of the lease term.

Foreign Currency Translation

Assets and liabilities of non-U.S. subsidiaries have been translated at period-end exchange rates. Revenues and expenses have been translated at average rates of exchange in effect during the year. Resulting translation adjustments have been included in accumulated other comprehensive income (loss). Gains and losses on translation of inter-company loans with foreign subsidiaries of a long-term investment nature are also included in this component of Stockholders’ Equity.

Cost of Goods Sold

Cost of goods sold for wholesale operations include the expenses incurred to acquire and produce inventory for sale, including product costs, freight-in, import costs, third-party inspection activities, buying agent commissions and provisions for shrinkage. For retail operations, in-bound freight from the Company’s warehouse to its own retail stores is also included. Warehousing activities including receiving, storing, picking, packing and general warehousing charges are included in SG&A and, as such, the Company’s gross profit may not be comparable to others who may include these expenses as a component of Cost of goods sold.

Advertising, Promotion and Marketing

All costs associated with advertising, promoting and marketing of Company products are expensed during the periods when the activities take place. Costs associated with cooperative advertising programs involving agreements with customers, whereby customers are required to provide documentary evidence of specific performance and when the amount of consideration paid by the Company for these services at or below fair value, are charged to SG&A. Costs associated with customer cooperative advertising allowances without specific performance guidelines are reflected as a reduction of sales revenue.

Shipping and Handling Costs

Shipping and handling costs, which are mostly comprised of warehousing activities, are included as a component of SG&A in the Condensed Consolidated Statements of Income.

Fiscal Year

The Company’s fiscal year ends on the Saturday closest to December 31. The 2007 and 2006 fiscal years each reflect a 52-week period resulting in a 13-week, three-month period for the third quarter.

Cash Dividend and Common Stock Repurchase

On June 19, 2007, the Company’s Board of Directors declared a quarterly cash dividend on the Company’s common stock at the rate of $0.05625 per share, paid on September 17, 2007 to stockholders of record at the close of business on August 24, 2007. On May 18, 2006, the Company’s Board of Directors authorized the Company to purchase up to an additional $250 million of its common stock for cash in open market purchases and privately negotiated transactions. As of October 19, 2007, the Company had $47.7 million remaining in buyback authorization under its share repurchase programs.

2. ACQUISITIONS

On May 18, 2007, the Company acquired a 50 percent ownership of the Narciso Rodriguez Corporation “Narciso Rodriguez” including rights to the Narciso Rodriguez name and trademarks, entered into an exclusive license to operate the Narciso Rodriguez business worldwide, and formed a new company to develop the NARCISO RODRIGUEZ brand worldwide. The purchase price totaled $13.9 million, which includes closing fees and certain post-closing adjustments. The Company believes the addition of Narciso Rodriguez provides considerable opportunity to build a broad business in the growing and profitable luxury designer category (a category in which the Company did not previously participate) that is sold in productive and partnership-oriented upscale retailers. The Company allocated $8.9 million of purchase price to the value of trademarks and trade names associated with the business, $0.3 million to the value of the non-compete agreement, $0.6 million to the value of the beneficial lease and $4.9 million to goodwill. As the Company maintains control over the assets and activities of the NARCISO RODRIGUEZ brand, the related financial results have been consolidated from the date of acquisition. Unaudited pro

forma information related to this acquisition is not included, as the impact of this transaction is not material to the Company’s consolidated results.

On December 13, 2006, the Company acquired 100 percent of the equity interest of Kate Spade LLC (“Kate Spade”). Based in New York City, Kate Spade is a designer, marketer, wholesaler and retailer of fashion accessories for women and men through its KATE SPADE® and JACK SPADE® brands. The Company believes the KATE SPADE brand enjoys widespread consumer recognition in the accessible luxury category and provides considerable opportunity for growth in its direct-to-consumer business. The purchase price totaled approximately $124 million, plus $3.4 million in fees and for certain post-closing adjustments and assumption of liabilities that were accounted for as additional purchase price. On a preliminary basis, the Company allocated $74.9 million of purchase price to the value of trademarks and trade names associated with the business, $6.5 million to the value of customer relationships and $36.8 million to goodwill. Unaudited pro forma information related to this acquisition is not included, as the impact of this transaction is not material to the Company’s consolidated results.

On January 26, 2006, the Company acquired 100 percent of the equity interest of Westcoast Contempo Fashions Limited and Mac & Jac Holdings Limited, which collectively design, market and sell the Mac & Jac, Kensie and Kensiegirl apparel lines (“Mac & Jac”), a privately held fashion apparel company. The purchase price totaled 26.2 million Canadian dollars (or $22.7 million), which includes the retirement of debt at closing and fees, but excludes contingent payments to be determined based upon a multiple of Mac & Jac’s earnings in fiscal years 2006, 2008, 2009 and 2010. There was no contingent payment made based on 2006 fiscal year earnings. The Company utilizes various valuation methods to determine the fair value of acquired tangible and intangible assets. For inventory, the method considers the expected selling prices of finished goods and intangible assets acquired are valued using a discounted cash flow model. The Company allocated $13.9 million of purchase price to the value of trademarks and trade names associated with the business and $5.6 million has been allocated to the value of customer relationships. The trademarks and trade names are deemed to have indefinite lives and are subject to an annual test for impairment. The value of customer relationships is being amortized over 12 years. The Company currently estimates that the aggregate of the contingent payments will be in the range of approximately $10-12 million and will be accounted for as additional purchase price when paid. Unaudited pro forma information related to this acquisition is not included, as the impact of this transaction is not material to the Company’s consolidated results.

In connection with the Company’s acquisition of Skylark Sport Marketing Corporation (“prAna”), the Company may be required to make contingent acquisition payments to the former owners in the range of $20-25 million. The ultimate amount of such payments is based on certain performance parameters of the company over a pre-determined time frame and will be accounted for as additional purchase price when paid.

On April 7, 2003, the Company acquired 100 percent of the equity interest of Juicy Couture, Inc. (formerly, Travis Jeans, Inc.) (“Juicy Couture”), a privately held fashion apparel company. The total purchase price consisted of: (a) a payment, including the assumption of debt and fees of $53.1 million and (b) a contingent payment to be determined as a multiple of Juicy Couture’s earnings for one of the years ended 2005, 2006 or 2007. The selection of the measurement year for the contingent payment is at either party’s option. In March of 2005, the contingent payment agreement was amended to include an advance option for the sellers providing 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 are eligible to 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. In May 2007, the sellers elected to receive an 85 percent advance against the contingent purchase price and were paid $19.9 million on May 23, 2007. The payment was accounted for as additional purchase price and an increase to goodwill. The Company estimates that if the 2007 measurement year is selected, the remaining contingent payment would be approximately $45-50 million. The contingent payment will be accounted for as additional purchase price when paid.

On June 8, 1999, the Company acquired 85.0 percent of the equity interest of Lucky Brand Dungarees, Inc. (“Lucky Brand”), whose core business consists of the Lucky Brand Dungarees line of women and men’s denim-based sportswear. The total purchase price consisted of a cash payment made at the closing date of approximately $85.0 million and a payment made in April 2003 of $28.5 million. An additional payment of $12.7 million was made in 2000 for tax-related purchase price adjustments. On January 16, 2007, January 17, 2006 and January 28, 2005, the Company paid $10.0 million, $10.0 million and $35.0 million, respectively, for 1.5 percent, 1.9 percent and 8.25 percent, respectively, of the equity interest of Lucky Brand. On September 20, 2007, the Company entered into an agreement to acquire the remaining shares that were owned by the sellers of Lucky Brand, amending an agreement

signed on January 28, 2005. The Company will acquire 0.4% in each of January of 2008, 2009 and 2010 of the equity interest in Lucky for payments of $5.0 million each. The Company recorded the present value of fixed amounts owed of $14.0 million in Accrued expenses and Other Non-Current Liabilities. As of September 29, 2007, the excess of the liability recorded over the related amount of minority interest has been recorded as goodwill. The remaining 2.28% of the original shares outstanding will be settled for an aggregate purchase price composed of the following two installments: (i) the 2008 payment will be based on a multiple of Lucky Brand’s 2007 earnings, which we estimate will be in the range of $15-20 million and (ii) the 2011 payment will be based on a multiple of Lucky Brand’s 2010 earnings, net of the 2008 payment which the Company estimates will be in the range of $3-7 million.

3. DISCONTINUED OPERATIONS

On October 4, 2007, the Company completed the sale of its EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands in a single transaction. As of September 29, 2007 the Company recorded a pretax non-cash charge of $4,040 ($2,468 net of tax), to reflect the estimated difference between the carrying value of the assets sold and their estimated fair value, less costs to dispose. Estimated costs incurred in connection with the transaction are also included within loss on disposal of discontinued operations, net of tax on the accompanying Condensed Consolidated Statements of Income. The Company expects to record post closing adjustments related to the sale of such brands during the fourth quarter of 2007. Consideration for the sale is represented by a note maturing in February 2008 issued to the Company from the buyer. The Company has agreed to provide transition services to the buyer through the first quarter of 2008, to ensure a smooth transition for retailers, vendors and employees.

Summarized balance sheet data for discontinued operations are as follows:


	September 29,
	2007
Assets held for sale:
Inventories	$	15,691
Intangible assets		3,669

Total assets held for sale	$	19,360

Summarized statement of income data for discontinued operations are as follows:


	Nine Months Ended				Three Months Ended
	(39 Weeks)		(39 Weeks)		(13 Weeks)		(13 Weeks)
	September 29,		September 30,		September 29,		September 30,
	2007		2006		2007		2006
Net sales	$	132,347	$	166,467	$	40,828	$	55,662

Income before provision for income taxes		13,002		30,591		4,276		7,836
Provision for income taxes		5,058		11,840		1,663		3,034

Income from discontinued operations, net of tax	$	7,944	$	18,751	$	2,613	$	4,802

4. STOCKHOLDERS’ EQUITY

Activity for the nine months ended September 29, 2007 and September 30, 2006 in the Capital in excess of par value, Retained earnings and Common stock in treasury, at cost accounts is summarized as follows:


	Capital in						Common stock
	excess of par			Retained			in treasury, at
In thousands	value			earnings			cost

Balance as of December 30, 2006	$	249,573		$	3,354,081		$	(1,593,954	)
Net income		—			62,880			—
Cumulative impact of change in accounting for income tax uncertainty		—			(10,494	)		—
Restricted shares issued, net of cancellations and shares withheld for taxes		(9,356	)		—			1,618
Purchase of common stock		—			—			(181,616	)
Stock options exercised		28,660			—			13,973
Share-based compensation		16,746			—			—
Tax benefit on stock options exercised		5,603			—			—
Excess tax benefits related to stock options		2,410			—			—
Dividends declared		—			(17,242	)		—

Balance as of September 29, 2007	$	293,636		$	3,389,225		$	(1,759,979	)

Comprehensive income is comprised of net income, the effects of foreign currency translation, changes in the net investment hedge, changes in unrealized gains and losses on available-for-sale securities and changes in the fair value of cash flow hedges. Total comprehensive income for interim periods was as follows:


	Nine Months Ended
	(39 Weeks)			(39 Weeks)
In thousands	September 29, 2007			September 30, 2006
Net income	$	62,880		$	181,522
Other comprehensive income (loss), net of tax:
Change in cumulative translation adjustment		55,082			24,168
Change in cumulative translation adjustment on Eurobonds		(36,004	)		(33,303	)
Changes in unrealized gains on available-for-sale securities, net of income tax provision of $(187) and $(781), respectively		325			1,369
Reclassification of holding gains on available-for-sale securities, net of income tax provision of $133 and $1,290, respectively		(231	)		(2,293	)
Changes in fair value of cash flow hedges, net of income tax benefit (provision) of $626 and $(40), respectively		(4,356	)		39

Total comprehensive income, net of tax	$	77,696		$	171,502

Accumulated other comprehensive loss consists of the following:


	September 29,			December 30,			September 30,
In thousands	2007			2006			2006
Cumulative translation adjustment	$	(36,193	)	$	(55,271	)	$	(43,684	)
Unrealized losses on available-for-sale securities, net of taxes of $46, $99 and $264, respectively		(48	)		(142	)		(490	)
Unrealized losses on cash flow hedging derivatives, net of taxes of $1,121, $495 and $(247), respectively		(5,099	)		(743	)		416

Accumulated other comprehensive loss, net of tax	$	(41,340	)	$	(56,156	)	$	(43,758	)

5. MARKETABLE SECURITIES

In May 2007, the Company sold 69,419 shares of an equity index mutual fund, which was previously considered available-for-sale, for total proceeds of $9.6 million and a realized gain of $0.4 million. Amounts previously recognized in Accumulated other comprehensive income (loss) were reclassified to other income (expense), net upon the sale of the securities.

In March 2006, the Company sold 341,246 shares of certain equity investments, which were previously considered available-for-sale, for total proceeds of $8.1 million and a realized gain of $3.6 million. Amounts previously recognized in Accumulated other comprehensive income (loss) were reclassified to other income (expense), net upon the sale of the securities.

The following is a summary of available-for-sale marketable securities at September 29, 2007, December 30, 2006 and September 30, 2006:


				Unrealized			Estimated
In thousands		Cost		Losses			Fair Value
September 29, 2007:	Other investments	$	477	$	(71	)	$	406

	Total	$	477	$	(71	)	$	406


December 30, 2006:	Equity investments	$	9,212	$	(186	)	$	9,026
	Other investments		458		(33	)		425

	Total	$	9,670	$	(219	)	$	9,451


September 30, 2006:	Equity investments	$	9,166	$	(705	)	$	8,461
	Other investments		451		(48	)		403

	Total	$	9,617	$	(753	)	$	8,864

For the nine months ended September 29, 2007 and September 30, 2006, there were realized gains of $364 and $3,583, respectively, on available-for-sale securities. For the three months ended September 29, 2007 and September 30, 2006, there were no realized gains or losses on sales of available-for-sale securities. The net adjustments to unrealized holding gains on available-for-sale securities for the nine months ended September 29, 2007 and September 30, 2006 were $325 (net of $(187) in taxes) and $1,369 (net of $(781) in taxes), respectively, which were included in Accumulated other comprehensive loss. The net adjustments to unrealized holding gains (losses) on available-for-sale securities for the three months ended September 29, 2007 and September 30, 2006 were $(16) (net of $8 in taxes) and $291 (net of $164 in taxes), respectively, which were included in Accumulated other comprehensive loss.

6. INVENTORIES, NET

Inventories consist of the following:


	September 29,		December 30,		September 30,
In thousands	2007		2006		2006
Raw materials	$	35,734	$	34,521	$	30,342
Work in process		19,121		13,566		17,866
Finished goods		670,947		545,358		627,452

Total inventories, net	$	725,802	$	593,445	$	675,660

7. PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:


	September 29,		December 30,		September 30,
In thousands	2007		2006		2006
Land and buildings	$	136,042	$	141,451	$	142,384
Machinery and equipment		442,148		407,511		381,690
Furniture and fixtures		294,894		276,685		250,640
Leasehold improvements		519,423		460,784		443,139

		1,392,507		1,286,431		1,217,853
Less: Accumulated depreciation and amortization		809,164		704,439		696,212

Total property and equipment, net	$	583,343	$	581,992	$	521,641

Depreciation and amortization expense on property and equipment for the nine months ended September 29, 2007 and September 30, 2006, including property and equipment under capital leases, was $97.9 million and $84.4 million, respectively. Depreciation and amortization expense on property and equipment for the three months ended September 29, 2007 and September 30, 2006, including property and equipment under capital leases, was $30.1 million and $29.0 million, respectively. Machinery and Equipment under capital leases amounted to $48.2 million, $50.7 million and $19.4 million as of September 29, 2007, December 30, 2006 and September 30, 2006, respectively. Depreciation expense on property and equipment under capital leases for the nine months ended September 29, 2007 and September 30, 2006 was $5.5 million and $4.0 million, respectively and $1.7 million and $1.4 million for the three months ended September 29, 2007 and September 30, 2006, respectively.

8. GOODWILL AND INTANGIBLES, NET

The following tables disclose the carrying value of all intangible assets:


	Weighted
	Average
	Amortization	September 29,			December 30,			September 30,
In thousands	Period	2007			2006			2006
Amortized intangible assets:
Gross Carrying Amount:
Licensed trademarks	15 years	$	34,589		$	32,449		$	32,449
Owned trademarks	13 years		16,501			7,600			7,600
Customer relationships	13 years		52,637			49,351			46,082
Merchandising rights	4 years		54,904			57,695			54,131

Subtotal	10 years		158,631			147,095			140,262

Accumulated Amortization:
Licensed trademarks			(16,343	)		(14,330	)		(13,484	)
Owned trademarks			(1,503	)		(752	)		(657	)
Customer relationships			(10,139	)		(6,800	)		(5,840	)
Merchandising rights			(31,949	)		(29,563	)		(27,185	)

Subtotal			(59,934	)		(51,445	)		(47,166	)

Net:
Licensed trademarks			18,246			18,119			18,965
Owned trademarks			14,998			6,848			6,943
Customer relationships			42,498			42,551			40,242
Merchandising rights			22,955			28,132			26,946

Total amortized intangible assets, net			98,697			95,650			93,096


Unamortized intangible assets:
Owned trademarks^(a)			313,161			318,312			250,452

Total intangible assets		$	411,858		$	413,962		$	343,548


^(a)		The balance at September 29, 2007 reflects a non-cash impairment charge of $12.3 million recorded within the Company’s Partnered Brands segment (see Note 1 – Basis of Presentation).

The estimated amortization expense for intangible assets for the next five years is as follows:


	(In millions)
Fiscal Year	Amortization Expense

2007	$	20.6
2008		19.1
2009		16.2
2010		11.4
2011		9.4

Excluding the $12.3 million impairment charge above, amortization expense of intangible assets was $15.1 million and $14.1 million for the nine months ended September 29, 2007 and September 30, 2006, respectively and $5.4 million and $4.7 million for the three months ended September 29, 2007 and September 30, 2006, respectively. The Company reclassified its segment goodwill to conform with its new segment reporting structure, which is discussed in Note 1 – Basis of Presentation. The changes in carrying amount of goodwill for the nine months ended September 29, 2007 are as follows:


	Direct			Partnered
In thousands	Brands			Brands			Total
Balance as of December 30, 2006	$	560,764		$	447,095		$	1,007,859
Acquisition of Narciso Rodriguez		—			4,940			4,940
Additional purchase price – Juicy Couture		19,882			—			19,882
Additional purchase price – Lucky Brand		4,087			—			4,087
Kate Spade working capital adjustment		1,662			—			1,662
Kate Spade purchase price allocation		(9,567	)		—			(9,567	)
Other		—			(210	)		(210	)
Translation difference		13,070			—			13,070

Balance as of September 29, 2007	$	589,898		$	451,825		$	1,041,723

9. INCOME TAXES

On July 13, 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109 and prescribes recognition threshold and measurement attributes for financial statement disclosure of tax positions on the income tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will be recognized if it has more than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted the provisions of FIN 48 on December 31, 2006, the first day of the 2007 fiscal year. As a result of the implementation of FIN 48, the Company recognized an increase of approximately $10.5 million in the liability for unrecognized tax benefits which was accounted for as cumulative effect adjustment to reduce retained earnings. The balance of unrecognized tax benefits at December 31, 2006 was $47.2 million, inclusive of interest and penalties. Included in the balance of unrecognized tax benefits at December 31, 2006 is $18.9 million that, if recognized, would impact the effective tax rate.

During the nine and three months ended September 29, 2007, the Company recognized $1.5 and $0.5 million, respectively, of interest and penalties related to unrecognized tax benefits in taxes payable and provision for income taxes. As of December 30, 2006, the last day of the 2006 fiscal year, the Company accrued interest and penalties related to uncertain tax positions in taxes payable and provision for income taxes of approximately $2.7 million for open tax years in US Federal, state, local and foreign jurisdictions. Upon adoption of FIN 48, the Company increased its accrual for interest and penalties to $9.1 million. At September 29, 2007, the accrual for interest and penalties was $10.6 million.

The Company is subject to taxation in the US and various state, local and foreign jurisdictions. The Company remains subject to examination by US Federal, state, local and foreign tax authorities for tax years 2003 through

2006. With a few exceptions, the Company is no longer subject to US Federal, state, local or foreign examinations by tax authorities for the tax year 2002 and prior. The Company expects to settle its 2003 Federal audit within the next 12 months.

During the nine months ended September 29, 2007, the Company established a $0.6 million valuation allowance against the net operating loss carry-forward of a foreign subsidiary.

10. DEBT

Long-term debt consists of the following:


	September 29,		December 30,		September 30,
In thousands	2007		2006		2006
5% Notes	$	495,153	$	458,907	$	441,270
Revolving credit facility and commercial paper program		394,600		82,075		232,466
Capital lease obligations		29,787		32,284		2,601
Other^(a)		57,061		19,469		56,769

Total debt		976,601		592,735		733,106
Less: current portion^(b)		455,852		22,266		55,935

Long-term debt	$	520,749	$	570,469	$	677,171


^(a)		At September 29, 2007, the balance consists primarily of amounts outstanding under working capital lines of credit.

^(b)		At September 29, 2007, the balance consists primarily of borrowings under the revolving credit facility, working capital lines of credit and obligations under capital leases.

On October 13, 2004, the Company entered into a $750 million, five-year revolving credit agreement (the “Agreement”). A portion of the funds available under the Agreement not in excess of $250 million is available for the issuance of letters of credit. Additionally, at the request of the Company, the amount of funds available under the Agreement may be increased at any time or from time to time by an aggregate principal amount of up to $250 million with only the consent of the lenders (which may include new lenders) participating in such increase. The Agreement includes a $150 million multi-currency revolving credit line, which permits the Company to borrow in U.S. dollars, Canadian dollars and euro. The Agreement has two borrowing options, an “Alternative Base Rate” option, as defined in the Agreement and a Eurocurrency rate option with a spread based on the Company’s long-term credit rating. The Agreement contains certain customary covenants, including financial covenants requiring the Company to maintain specified debt leverage and fixed charge coverage ratios and covenants restricting the Company’s ability to, among other things, incur indebtedness, grant liens, make investments and acquisitions and sell assets. The Company believes it is in compliance with such covenants as of September 29, 2007. Both Standard & Poor’s (“S&P”) and Moody’s credit rating services placed the Company’s ratings under review in May 2007 based on the 2007 outlook provided as part of its first quarter 2007 earnings release. During the third quarter of 2007, Moody’s completed its review and lowered the Company’s senior unsecured debt rating to Baa3 from Baa2 and its commercial paper rating to Prime-3 from Prime-2. Also during the third quarter of 2007, S&P completed its review and affirmed the Company’s BBB unsecured debt rating and lowered the Company’s commercial paper rating to A-3 from A-2. The funds available under the Agreement may be used to refinance existing debt, to provide working capital and for general corporate purposes of the Company, including, without limitation, the repurchase of capital stock and the support of the Company’s $750 million commercial paper program. At September 29, 2007, the Company had $394.6 million of borrowings outstanding under the Agreement.

On July 6, 2006, the Company completed the issuance of 350 million euro (or $446.9 million based on the exchange rate in effect on such date) 5% Notes (the “Notes”) due July 8, 2013. The net proceeds of the offering were used to refinance the Company’s outstanding 350 million euro 6.625% Notes due August 7, 2006, which were originally issued on August 7, 2001. The Notes bear interest from and including July 6, 2006, payable annually in arrears on July 8 of each year beginning on July 8, 2007. The Notes have been listed on the Luxembourg Stock Exchange and received a credit rating of BBB from Standard & Poor’s and Baa2 from Moody’s Investor Services. During the third quarter of 2007, Moody’s lowered the rating to Baa3 and S&P affirmed the BBB rating. These Notes are designated as a hedge of the Company’s net investment in a foreign subsidiary.

On November 21, 2006, the Company entered into a seven year capital lease with a financial institution totaling $30.6 million. The purpose of the lease was to finance the equipment associated with its distribution facilities in Ohio and Rhode Island, which had been previously financed through the Company’s 2001 synthetic lease, which matured in 2006 (see Note 11 – Commitments and Contingencies).

As of September 29, 2007, the committed credit facilities, commercial paper program and letter of credit facilities available to the Company were as follows:


			Outstanding		Letters of Credit		Available
In thousands	Total Capacity		Borrowings		Issued		Capacity
Revolving credit facility and commercial paper program^(a)	$	750,000	$	394,600	$	—	$	355,400
Letter of credit facility		400,000		—		245,936		154,064
Short-term borrowing facilities		195,381		56,112		10,992		128,277


^(a)		The Company’s $750 million revolving credit facility has a final maturity date of October 2009 and contains the committed capacity to issue $250 million in letters of credit.

11. COMMITMENTS AND CONTINGENCIES

On May 22, 2001, the Company entered into an off-balance sheet financing arrangement (commonly referred to as a “synthetic lease”) to acquire various land and equipment and construct buildings and real property improvements associated with warehouse and distribution facilities in Ohio and Rhode Island totaling $63.7 million. The synthetic lease expired on November 22, 2006. On November 21, 2006, the Company entered into a new synthetic lease with a financial institution for a five–year period, totaling $32.8 million to refinance the land and buildings referred to above. The lessor is a sole member, whose ownership interest is without limitation as to profits, losses and distribution of the lessor’s assets. The Company’s lease represents less than 1% of the lessor’s assets. The leases include guarantees by the Company for a substantial portion of the financing and options to purchase the facilities at original cost; the maximum guarantee is approximately $27 million. The lessor’s risk included an initial capital investment in excess of 10% of the total value of the lease, which is at risk during the entire term of the lease. The equipment portion of the original synthetic lease was sold to another financial institution and leased back to the Company through a seven-year capital lease totaling $30.6 million. The lessor does not meet the definition of a variable interest entity under FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” and therefore consolidation by the Company is not required.

The Company has not entered into any other off-balance sheet arrangements.

The Company is a party to several pending legal proceedings and claims. Although the outcome of any such actions cannot be determined with certainty, management is of the opinion that the final outcome of any of these actions should not have a materially adverse effect on the Company’s financial position, results of operations, liquidity or cash flows (see Notes 10 and 24 of Notes to Consolidated Financial Statements in the Company’s 2006 Annual Report on Form 10-K).

12. STREAMLINING INITIATIVES

On June 20, 2007, the Company announced its long-term strategic plan and further details were provided at the Company’s July 11th Investor Conference. The major elements of the Company’s strategy are as follows:

- Realigning its organization into two new reporting segments: Direct Brands (comprised of our JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX retail-based lifestyle brands) and Partnered Brands (comprised of LIZ CLAIBORNE and other Company-owned and licensed wholesale-based brands). The strategic realignment reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of the Company’s businesses across multiple functional areas including specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce and licensing;

- Conducting a review of strategic alternatives, including possible divestitures, discontinuation or licensing of sixteen of our brands:

- On October 4, 2007, the Company completed the sale of its EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands. The Company also announced the consolidation of its TINT brand into LIZ & CO. and STAMP 10 brand into AXCESS and the closure of its FIRST ISSUE brand, each of which is anticipated to occur at the end of the fourth quarter of 2007 delivery period.

- The remaining brands currently under review are: C & C CALIFORNIA, DANA BUCHMAN, ELLEN TRACY, ENYCE, KENSIE, LAUNDRY BY DESIGN, MAC & JAC, prAna, and SIGRID OLSEN.

- Implementing and maintaining a more competitive cost structure: The Company has accelerated its structural realignment and other initiatives and is currently anticipating annual cost savings of $150 million in 2008, an additional $70 million in 2009 and $45 million in 2010, totaling $265 million by the end of fiscal 2010. The Company anticipates that these savings will be realized through staff reductions of approximately 800, consolidations of distribution facilities and office space, discretionary expense cuts, process re-engineering and supply chain cost rationalization.

The above mentioned announcement followed the Company’s streamlining activities previously announced in 2006. From inception through September 29, 2007, the Company recorded $135.5 million ($85.1 million after-tax) related to this initiative, including $70.1 million of payroll and related costs, $19.8 million of lease termination costs, $36.9 million of fixed asset write-downs and disposals and $8.7 million of other costs. Approximately $37 million of these charges were non-cash. The Company expects to pay substantially all accrued streamlining costs by the end of the first quarter of 2008.

For the nine and three months ended September 29, 2007 and September 30, 2006, these expenses, primarily recorded in SG&A in the Condensed Consolidated Statements of Income, impacted business segments as follows:


	Nine Months Ended				Three Months Ended
	September 29,		September 30,		September 29,		September 30,
In thousands	2007		2006		2007		2006
Direct Brands	$	13,810	$	15,132	$	7,910	$	7,370
Partnered Brands		34,991		34,456		13,707		5,570

Total	$	48,801	$	49,588	$	21,617	$	12,940

A summary rollforward of streamlining initiatives is as follows:


				Lease
	Payroll and			Termination			Fixed Asset
In thousands	Related Costs			Costs			Write-Downs			Other Costs			Total
Balance at December 30, 2006	$	15,943		$	5,525		$	—		$	111		$	21,579
2007 provision		24,174			9,198			13,760			1,669			48,801
2007 fixed asset write-downs		—			—			(13,760	)		—			(13,760	)
Translation difference		408			153			—			17			578
2007 spending		(31,742	)		(11,241	)		—			(1,797	)		(44,780	)

Balance at September 29, 2007	$	8,783		$	3,635		$	—		$	—		$	12,418

13. EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted earnings per common share (“EPS”) in accordance with SFAS No. 128, “Earnings per Share.”


	Nine Months Ended					Three Months Ended
	(39 Weeks)			(39 Weeks)		(13 Weeks)			(13 Weeks)
	September 29,			September 30,		September 29,			September 30,
In thousands	2007			2006		2007			2006
Income from continuing operations	$	57,404		$	162,771	$	32,906		$	90,368
Income from discontinued operations, net of tax		7,944			18,751		2,613			4,802
Loss on disposal of discontinued operations, net of tax		(2,468	)		—		(2,468	)		—

Net income	$	62,880		$	181,522	$	33,051		$	95,170


Basic weighted average shares outstanding		101,157			102,277		99,820			100,868
Stock options and restricted stock grants^(a)(b)		1,062			1,449		880			1,516

Diluted weighted average shares outstanding		102,219			103,726		100,700			102,384


Earnings per share:
Basic
Income from continuing operations	$	0.57		$	1.59	$	0.33		$	0.90
Income from discontinued operations		0.07			0.18		0.02			0.04
Loss on disposal of discontinued operations		(0.02	)		—		(0.02	)		—

Net income	$	0.62		$	1.77	$	0.33		$	0.94

Diluted
Income from continuing operations	$	0.56		$	1.57	$	0.33		$	0.88
Income from discontinued operations		0.08			0.18		0.02			0.05
Loss on disposal of discontinued operations		(0.02	)		—		(0.02	)		—

Net income	$	0.62		$	1.75	$	0.33		$	0.93


^(a)		Options to purchase 3,321,661 and 2,472,503 shares of common stock were outstanding as of September 29, 2007 and September 30, 2006, respectively, but were not included in the computation of diluted EPS for the three and nine month periods then ended because such options were anti-dilutive.

^(b)		For 2007, excludes restricted stock for which the performance period has not yet lapsed and criteria have not yet been achieved.

14. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES

During the nine months ended September 29, 2007, the Company made income tax payments of $52.3 million and interest payments of $38.6 million. During the nine months ended September 30, 2006, the Company made income tax payments of $87.4 million and interest payments of $33.5 million.

15. SEGMENT REPORTING

In the second quarter of 2007, the Company revised its segment reporting structure to reflect the strategic realignment of its businesses and internal reporting. The strategic realignment reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of the Company’s businesses across multiple functional areas including specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce and licensing. Prior periods have been conformed to the current period’s presentation. The two reportable segments described below represent the Company’s brand based activities for which separate financial information is available and which is utilized on a regular basis by its CODM to evaluate performance and allocate resources. In identifying its segments, the Company considers economic characteristics, as well as products,

customers, sales growth potential and long-term profitability. The Company aggregates its operating segments to form reportable segments, where applicable. As such, the Company now reports its operations in two reportable segments as follows:

	•		The Direct Brands segment — consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry, handbags and fragrances), e-commerce and licensing operations of the Company’s four retail-based brands: JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX; and

	•		The Partnered Brands segment — consists of the wholesale apparel, wholesale non-apparel, outlet and specialty retail, e-commerce and licensing operations of the Company’s wholesale-based brands including: AXCESS, C & C CALIFORNIA, CLAIBORNE (men’s), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, ELLEN TRACY, ENYCE, FIRST ISSUE, KENSIE, KENSIEGIRL, LAUNDRY BY DESIGN, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA, MONET, NARCISO RODRIGUEZ, prAna, SIGRID OLSEN, STAMP 10, TINT, TRIFARI, VILLAGER, the Company’s licensed DKNY® JEANS and DKNY® ACTIVE brands as well as the Company’s other non-Direct Brands fragrances including: BORA BORA, CLAIBORNE, CURVE, ELLEN TRACY, LIZ CLAIBORNE, LIZ WOMAN, MAMBO, REALITIES, SOUL and our licensed USHER fragrance.

In July 2007, the Company announced its long-term strategic plans, which included a strategic review and potential divestiture or closure of 16 of its brands. On September 13, 2007, the Company completed the first phase of such review by entering a definitive agreement to dispose certain assets of its EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands in a single transaction. The transaction closed on October 4, 2007. Pursuant to Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” certain assets of the EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands have been segregated and reported as held for sale as of September 29, 2007 and the activities of such brands previously included in the Partnered Brands Segment have been segregated and reported as discontinued operations for all periods presented. Summarized financial data for the aforementioned brands are provided in Note 3 — Discontinued Operations.

The Company also announced the consolidation of its TINT and STAMP 10 brands into its AXCESS and LIZ & CO. brands, respectively and the closure of its FIRST ISSUE brand, which is anticipated to occur at the end of the fourth quarter of 2007 delivery period.

The Company’s Chief Executive Officer has been identified as the CODM. The CODM evaluates performance and allocates resources based primarily on operating income of each reportable segment. The accounting policies of the Company’s reportable segments are the same as those described in the summary of significant accounting policies in its 2006 Annual Report on Form 10-K. There are no inter-segment sales or transfers. The Company also presents its results on a geographic basis based on selling location, between Domestic (wholesale customers, Company specialty retail and outlet stores located in the United States and e-commerce sites) and International (wholesale customers and Company specialty retail and outlet and concession stores located outside of the United States). The Company, as licensor, also licenses to third parties the right to produce and market products bearing certain Company-owned trademarks; the resulting royalty income is included within the results of the associated segment.


	Nine Months Ended
	September 29, 2007									September 30, 2006
	Direct			Partnered						Direct			Partnered
In thousands	Brands			Brands			Total			Brands			Brands			Total
Total net sales	$	1,608,376		$	1,846,681		$	3,455,057		$	1,332,965		$	2,166,318		$	3,499,283

% to total		46.6	%		53.4	%		100.0	%		38.1	%		61.9	%		100.0	%

Total operating income^(a)	$	166,871		$	(36,164	)	$	130,707		$	141,752		$	140,805		$	282,557

% of sales		10.4	%		(2.0%	)		3.8	%		10.6	%		6.5	%		8.1	%


	Three Months Ended
	September 29, 2007									September 30, 2006
	Direct			Partnered						Direct			Partnered
In thousands	Brands			Brands			Total			Brands			Brands			Total
Total net sales	$	628,705		$	634,190		$	1,262,895		$	532,742		$	781,106		$	1,313,848

% to total		49.8	%		50.2	%		100.0	%		40.5	%		59.5	%		100.0	%

Total operating income^(a)	$	87,046		$	(17,313	)	$	69,733		$	82,772		$	70,382		$	153,154

% of sales		13.8	%		(2.7%	)		5.5	%		15.5	%		9.0	%		11.7	%


^(a)		The Partnered Brands operating loss includes a pre-tax, non-cash impairment charge of $12.3 million related to the Company’s Ellen Tracy trademark (see Note 1 – Basis of Presentation).

In connection with the realignment of its segment reporting structure, the Company reclassified its segment assets as follows:


	September 29,		December 30,		September 30,
In thousands	2007		2006		2006
SEGMENT ASSETS
Direct Brands	$	1,941,682	$	1,622,205	$	1,702,408
Partnered Brands		1,824,785		1,810,077		1,857,317
Corporate		39,947		63,486		2,974

Assets of continuing operations		3,806,414		3,495,768		3,562,699
Assets of discontinued operations		19,360		—		—

Total Assets	$	3,825,774	$	3,495,768	$	3,562,699

GEOGRAPHIC DATA:


	Nine Months Ended				Three Months Ended
	(39 Weeks)		(39 Weeks )		(13 Weeks)		(13 Weeks)
	September 29,		September 30,		September 29,		September 30,
In thousands	2007		2006		2007		2006
NET SALES:
Domestic	$	2,366,461	$	2,465,153	$	842,673	$	906,576
International (including MEXX sales of $917,636, $862,658, $365,451 and $343,919, respectively)		1,088,596		1,034,130		420,222		407,272

Total net sales	$	3,455,057	$	3,499,283	$	1,262,895	$	1,313,848


OPERATING INCOME:
Domestic	$	62,328	$	215,903	$	25,981	$	105,105
International		68,379		66,654		43,752		48,049

Total operating income	$	130,707	$	282,557	$	69,733	$	153,154

16. DERIVATIVE INSTRUMENTS

At September 29, 2007, the Company had various Canadian currency collars outstanding with a notional amount of $3.3 million, maturing through March 2008 and with contract rates ranging between 1.0030 and 1.1900 Canadian dollars per U.S. dollar, various Canadian currency collars outstanding with a notional amount of 15.4 million Hong Kong dollars, maturing through October 2007 and with contract rates ranging between 6.5500 and 7.0012 Hong Kong dollars per Canadian dollar and various euro currency collars outstanding with a notional amount of 7.8 million Hong Kong dollars, maturing through October 2007 and with contract rates ranging between 9.9685 and 10.2000 Hong Kong dollars per euro. The Company had $8.7 million and 45.3 million Hong Kong dollars in Canadian currency collars and 23.3 million Hong Kong dollars in euro currency collars at December 30, 2006 and 5.3 million and 24.9 million Hong Kong dollars in Canadian currency collars and 201.5 million Hong Kong dollars

in euro currency collars at September 30, 2006. At September 29, 2007, the Company also had forward contracts maturing through December 2008 to sell 9.5 million Canadian dollars for $8.8 million, to sell 13.1 million Canadian dollars for 95.5 million Hong Kong dollars and to sell 72.0 million euro for 759.5 million Hong Kong dollars. The notional value of the foreign exchange forward contracts at September 29, 2007 was $118.8 million, as compared with $97.5 million at December 30, 2006 and $49.5 million at September 30, 2006. Unrealized losses for outstanding foreign exchange forward contracts and currency options were $(6.1) million at September 29, 2007, $(1.6) million at December 30, 2006 and a gain of $0.3 million at September 30, 2006. The ineffective portion of these trades is recognized currently in earnings and was $(1.5) million for the nine months ended September 29, 2007. Approximately $(5.1) million in Accumulated other comprehensive loss relating to cash flow hedges will be reclassified into earnings in the next twelve months as the inventory is sold.

In connection with the variable rate financing under the 2001 synthetic lease agreement, the Company entered into two interest rate swap agreements with an aggregate notional amount of $40.0 million that began in January 2003 and terminated in May 2006, in order to fix the interest component of rent expense at a rate of 5.56%. The Company entered into these arrangements to hedge against potential future interest rate increases. The ineffective portion of these swaps, recognized currently in earnings, was not material for the periods presented.

The Company hedges its net investment position in euro functional subsidiaries by designating the 350 million euro-denominated bonds as the hedging instrument in a net investment hedge. As a result, the foreign currency transaction gains and losses that are recognized on the euro-denominated bonds in accordance with SFAS No. 52 are accounted for as a component of accumulated other comprehensive loss rather than recognized in current income in accordance with SFAS No. 52. The unrealized gains (losses) recorded to Cumulative translation adjustment were $(36.2) million and $(33.3) million for the nine months ended September 29, 2007 and September 30, 2006, respectively and $(24.0) million and $1.0 million for the three months ended September 29, 2007 and September 30, 2006, respectively.

On February 11, 2004, the Company entered into interest rate swap agreements for the notional amount of 175 million euro in connection with its 350 million Eurobonds that matured on August 7, 2006. This converted a portion of the fixed rate Eurobonds interest expense to floating rate at a spread over six month EURIBOR. This was designated as a fair value hedge. The first interest rate setting occurred on August 7, 2004 and was reset each six-month period thereafter until maturity. Interest accrued related to these swaps was not material for the periods presented.

In May 2006, the Company entered into multiple forward starting swaps to lock the underlying interest rate on the notional amount of 175 million euro in connection with the July 6, 2006 issuance of the Notes (see Note 10 — Debt of Notes to Condensed Consolidated Financial Statements). These swaps were terminated on June 29, 2006 and the Company subsequently received payment of 1.0 million euro. This amount, net of tax, is recorded in Accumulated other comprehensive loss and will be reclassified into earnings over the seven year term of the Notes. The amount reclassified out of Accumulated other comprehensive loss was not material for the nine months and three months ended September 29, 2007.

17. SHARE-BASED COMPENSATION

Since July 3, 2005, the Company has recognized the cost of all employee stock options on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures. Prior to adopting SFAS No. 123(R), the Company applied APB Opinion No. 25 and related Interpretations in accounting for its share-based compensation plans. The Company’s policy is to grant all employee stock options at or above the grant date market price; and accordingly, no compensation cost was recognized for fixed stock option grants in periods prior to the adoption of SFAS 123(R).

The Company has issued stock options and restricted shares to employees under share-based compensation plans. Stock options are issued at the current market price, subject to a three-year vesting period with a contractual term of 7-10 years. As of September 29, 2007, the Company has not changed the terms of any outstanding awards.

Expected volatilities are based on a term structure of implied volatility, which assumes changes in volatility over the life of an option. The Company utilizes historical optionee behavioral data to estimate the option exercise and termination rates that are used in the valuation model. The expected term represents an estimate of the period of time options are expected to remain outstanding. The expected term provided in the table below represents an option

weighted-average expected term based on the estimated behavior of distinct groups of employees who received options in 2006 and 2007. The range of risk-free rates is based on a forward curve of interest rates at the time of option grant.

Compensation expense for restricted stock awards is measured at fair value on the date of grant based on the number of shares granted and the quoted market price of the Company’s common stock. Such value is recognized as expense over the vesting period of the award, net of estimated forfeitures.


	Nine Months Ended
Binomial Lattice Valuation Assumptions:	September 29, 2007			September 30, 2006
Weighted-average fair value of options granted	$	10.24		$	9.60
Expected volatility	25.3% to 37.6%			23.1% to 39.5%
Weighted-average volatility		25.7	%		24.4	%
Expected term (in years)		4.5			4.4
Dividend yield		0.61	%		0.61	%
Risk-free rate	4.8% to 5.2%			4.4% to 4.8%
Expected annual forfeiture		10.19	%		7.05	%

Stock Options

A summary of award activity under the stock option plans as of September 29, 2007 and changes therein during the nine month period then ended are summarized as follows:


				Weighted		Weighted Average		Aggregate
				Average Exercise		Remaining		Intrinsic Value
	Shares			Price		Contractual Term		($000)

Outstanding at December 30, 2006		5,889,216		$	32.58		5.8	$	64,519
Granted		794,440			37.14
Exercised		(1,534,237	)		27.79
Cancelled		(291,945	)		38.30

Outstanding at September 29, 2007		4,857,474			34.49		5.49	$	11,679


Vested or expected to vest at September 29, 2007		4,641,237		$	34.33		5.44	$	11,667


Exercisable at September 29, 2007		3,527,347		$	32.91		5.20	$	11,645

The total intrinsic value of options exercised during the nine months ended September 29, 2007 and September 30, 2006 was $22.3 million and $15.3 million, respectively.

As of September 29, 2007, there were 1,330,127 stock options that were unvested. The weighted average grant date fair value per award for nonvested stock options was $10.62.

As of September 29, 2007, there was $10.0 million of total unrecognized compensation cost related to nonvested stock options granted under stock option plans. That expense is expected to be recognized over a weighted average period of 2.3 years. The total fair value of shares vested during the nine month periods ended September 29, 2007 and September 30, 2006 was $16.8 million and $20.7 million, respectively.

Restricted Stock

A summary of award activity under the restricted stock plans as of September 29, 2007 and changes during the nine month period are summarized as follows:


				Weighted
				Average
	Shares			Exercise Price

Nonvested stock at December 30, 2006		1,718,493		$	37.63
Granted^(a)		762,652			40.63
Vested^(b)		(347,062	)		37.85
Cancelled		(337,795	)		38.10

Nonvested stock at September 29, 2007		1,796,288		$	38.77


Expected to vest as of September 29, 2007		1,432,413		$	38.76


^(a)		In the third quarter of 2007, performance shares were granted to a group of key executives. These shares are subject to certain service and performance conditions to be measured as of the fiscal 2009 year-end. The ultimate amount of shares earned will be determined by the extent of achievement of the performance criteria set forth in the performance share agreements and will range from 0 — 150% of target.

^(b)		Includes shares whose vesting was accelerated due to involuntary termination.

As of September 29, 2007, there was $29.8 million of total unrecognized compensation expense related to nonvested stock granted under restricted stock plans. That expense is expected to be recognized over a weighted average period of 2.03 years. The total fair value of shares vested during the nine month periods ended September 29, 2007 and September 30, 2006 was $13.1 million and $2.2 million, respectively.

18. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS No. 159 allows companies the choice to measure financial instruments and certain other items at fair value. This allows the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Statement is effective for fiscal years beginning after November 15, 2007. The Company is currently reviewing the impact of SFAS No. 159 on its financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS No. 157 on its financial statements.

19. SUBSEQUENT EVENT

As discussed in Note 1, on October 4, 2007, the Company completed the previously announced sale of four brands under strategic review — EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE. The Company has agreed to provide transition services to the buyer to ensure a smooth transition for retailers, vendors and employees.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Business/Segments

In the second quarter of 2007, we revised our segment reporting structure to reflect the strategic realignment of our businesses and internal reporting. The strategic realignment reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of our businesses across multiple functional areas including specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce and licensing. Prior periods have been conformed to the current period’s presentation. The two reportable segments described below represent our brand based activities for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker (“CODM”) to evaluate performance and allocate resources. In identifying our segments, we consider economic characteristics, as well as products, customers, sales growth potential and long-term profitability. We aggregate our operating segments to form reportable segments, where applicable. As such, we now report our operations in two reportable segments as follows:

	•		The Direct Brands segment — consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry, handbags and fragrances), e-commerce and licensing operations of our four retail-based brands: JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX; and

	•		The Partnered Brands segment — consists of the wholesale apparel, wholesale non-apparel, outlet and specialty retail, e-commerce and licensing operations of our wholesale-based brands including: AXCESS, C & C CALIFORNIA, CLAIBORNE (men’s), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, ELLEN TRACY, ENYCE, FIRST ISSUE, KENSIE, KENSIEGIRL, LAUNDRY BY DESIGN, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA, MONET, NARCISO RODRIGUEZ, prAna, SIGRID OLSEN, STAMP 10, TINT, TRIFARI, VILLAGER, our licensed DKNY® JEANS and DKNY® ACTIVE brands as well as our other non-Direct Brands fragrances including: BORA BORA, CLAIBORNE, CURVE, ELLEN TRACY, LIZ CLAIBORNE, LIZ WOMAN, MAMBO, REALITIES SOUL and our licensed USHER fragrance.

In July 2007, we announced our long-term strategic plans, which included a strategic review and potential divestiture or closure of 16 of our brands. On October 4, 2007, we completed the previously announced sale of certain assets of four brands under strategic review — EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE. The results of these brands previously included in the Partnered Brand Segment have been segregated and reported as discontinued operations for all periods presented (see Note 3 to the Condensed Consolidated Financial Statements).

We also present our results on a geographic basis based on selling location, between Domestic (wholesale customers, Company specialty retail and outlet stores located in the United States and e-commerce sites) and International (wholesale customers and Company specialty retail and outlet and concession stores located outside of the United States). The Company, as licensor, also licenses to third parties the right to produce and market products bearing certain Company-owned trademarks; the resulting royalty income is included within the results of the associated segment.

Competitive Profile

We operate in global fashion markets that are intensely competitive. Our ability to continuously evaluate and respond to changing consumer demands and tastes across multiple markets, distribution channels and geographies is critical to our success. Although our brand portfolio approach is aimed at diversifying our risks in this regard, misjudging shifts in consumer preferences could have a negative effect on our results of operations. Other key aspects of competition include quality, brand image, market share, distribution methods, price, size and location of our retail stores and department store selling space, customer service and intellectual property protection. We believe that our size and global operating capabilities can enable us to compete successfully by positioning us to take advantage of synergies in product design, development, sourcing and distribution of our products throughout the world.

Consumers have migrated, and are continuing to migrate, away from traditional department stores, turning instead to specialty retailers, national chains and off-price retailers. This factor, combined with the complexities and impacts of the ongoing retail industry consolidation and changes in the domestic department store business model, including the rise in private labels, have presented a multitude of challenges for us in the sector for a number of years. As our larger department store customers have been focusing on inventory productivity and product differentiation to gain competitive market share, improve natural margins, reduce their dependency on vendor margin support and improve cash flows, they have executed, and we believe will continue to execute, their buying activities very cautiously and conservatively. Over the past few years, this operating environment has adversely affected the results of our wholesale-based businesses.

Since 1999, we have acquired a number of brands in an effort to diversify our business across price points and channels and to decrease our dependence on the domestic department store channel. We have also diversified geographically, with our international operations representing 31.5% and 33.3% of total Company net sales for the nine months and three months ended September 29, 2007, respectively. Also, we expanded our own retail business by increasing the number of doors in a variety of formats. As we expanded our brand portfolio, our management structure was based on channel and category management, and our reliance on the domestic department store channel remained significant.

After the appointment of our new CEO in November 2006, we initiated a review of our operations to assess options to best allocate our resources to those businesses with the maximum potential for growth in sales and earnings and to best evolve our multi-brand, multi-channel and multi-geography strategy on a going forward basis. On July 11, 2007, we announced the results of this review. The major elements of our strategy are as follows:

•

Reconfiguring our organization into two new reporting segments: Direct Brands (comprised of our JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX retail-based lifestyle brands) and Partnered Brands (comprised of LIZ CLAIBORNE and our other owned and licensed wholesale-based brands). The strategic realignment reflects a brand-focused approach, designed to optimize the operational coordination and resource allocation of our businesses across multiple functional areas including specialty retail, retail outlets, wholesale apparel, wholesale non-apparel, e-commerce and licensing;

•

Narrowing our portfolio to a select group that we believe we can fully resource and develop into powerful, sustaining brands. On October 4, 2007, we completed the sale of our EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES AND TAPEMEASURE brands. We also announced the consolidation of our TINT brand into LIZ & CO. and STAMP 10 brand into AXCESS and the closure of our FIRST ISSUE brand, each of which is anticipated to occur at the end of the fourth quarter of 2007 delivery period.

The remaining brands currently under review are: C & C CALIFORNIA, DANA BUCHMAN, ELLEN TRACY, ENYCE, KENSIE, LAUNDRY BY DESIGN, MAC & JAC, prAna, and SIGRID OLSEN;

•

Implementing and maintaining a more competitive cost structure: We have accelerated our structural realignment and other initiatives and are currently anticipating annual cost savings of $150 million in 2008, an additional $70 million in 2009 and $45 million in 2010 totaling $265 million by the end of fiscal 2010. We anticipate that these savings will be realized through staff reductions of approximately 800, consolidations of distribution facilities and office space, discretionary expense cuts, process re-engineering and supply chain cost rationalization;

•

Committing the resources, structure and marketing investment necessary to fully support and maximize the growth of our brands; and

•

Developing best-in-class retail capabilities, and initiating investments to innovate our supply chain and accelerate the flow of goods to our stores in both retail and wholesale formats.

In summary, the measure of our success in the future will depend on our ability to execute on our strategic vision, including attracting and retaining the management talent necessary for such execution, designing and delivering products that are acceptable to the marketplaces that we serve, sourcing the manufacture of our products on a competitive and efficient basis, and evolving our retail capabilities.

Reference is also made to the other economic, competitive, governmental and technological factors affecting our operations, markets, products, services and prices as are set forth under “Statement Regarding Forward-Looking Disclosure” below and in our 2006 Annual Report on Form 10-K, including, without limitation, those set forth under the heading “Item 1A – Risk Factors.”

Overall Results for the Nine Months Ended September 29, 2007

Net Sales

Net sales for the first nine months of 2007 were $3.455 billion, a decrease of $44.2 million (or 1.3%) when compared to net sales for the first nine months of 2006, primarily due to decreases in our Partnered Brands segment, partially offset by increased sales in our Direct Brands segment and the inclusion of our recently acquired KATE SPADE brand. The impact of foreign currency exchange rates in our international businesses, primarily as a result of the strengthening of the Euro, increased sales by approximately $72.3 million during the first nine months of 2007.

Gross Profit and Income from Continuing Operations

Gross profit as a percentage of net sales decreased to 48.2% in 2007 from 48.3% in 2006, reflecting decreased gross profit rates in our Partnered Brands segment due to higher levels of retailer support and an increased proportion of off-priced sales, partially offset by an increased proportion of sales from our Direct Brands segment, which operates at a higher gross profit rate than the Company average. Overall income from Continuing Operations decreased to $57.4 million in the first nine months of 2007 from $162.8 million in 2006, primarily reflecting the impact of decreased sales in our Partnered Brands segment.

Balance Sheet

We ended the third quarter of 2007 with a net debt position of $864.6 million as compared to $624.3 million at the end of the third quarter of 2006. We generated $326.2 million in cash from operations over the past twelve months, which enabled us to fund $172.8 million of acquisition related payments, share repurchases of $181.6 million and capital expenditures of $177.4 million, while only increasing our net debt by $240.3 million. The effect of foreign currency translation on our Eurobond increased our debt balance by $53.8 million.

International Operations

In the first nine months of 2007, international sales represented 31.5% of our overall sales, as compared to 29.6% in the first nine months of 2006. Accordingly, our overall results can be greatly impacted by changes in foreign currency exchange rates, which increased sales in the first nine months of 2007 by $72.3 million. The strengthening of the Euro against the U.S. dollar has positively impacted the results in our European and Canadian businesses. Although we use foreign currency forward contracts and options to hedge against our exposure to exchange rate fluctuations affecting the actual cash flows associated with our international operations, unanticipated shifts in exchange rates could have an impact on our financial results.

Recent Acquisitions

On May 18, 2007, we acquired a 50 percent ownership of the Narciso Rodriguez Corporation “Narciso Rodriguez” including rights to the Narciso Rodriguez name and trademarks, entered into an exclusive license to operate the

Narciso Rodriguez business worldwide, and formed a new company to develop the NARCISO RODRIGUEZ brand worldwide. The purchase price totaled $13.9 million, which includes closing fees and certain post-closing adjustments. We believe the addition of Narciso Rodriguez provides considerable opportunity to build a broad business in the growing and profitable luxury designer category (a category in which we did not previously participate) that is sold in productive and partnership-oriented upscale retailers. We allocated $8.9 million of purchase price to the value of trademarks and trade names associated with the business, $0.3 million to the value of the non-compete agreement, $0.6 million to the value of the beneficial lease and $4.9 million to goodwill. As we maintain control over the assets and activities of the NARCISO RODRIGUEZ brand, the related financial results have been consolidated from the date of acquisition.

On December 13, 2006, we acquired 100 percent of the equity interest of Kate Spade LLC (“Kate Spade”). Based in New York City, Kate Spade is a designer, marketer, wholesaler and retailer of fashion accessories for women and men through its KATE SPADE® and JACK SPADE® brands. We believe the KATE SPADE brand enjoys widespread consumer recognition in the accessible luxury category and provides considerable opportunity for growth in its direct-to-consumer business. The purchase price totaled approximately $124 million, plus $3.4 million in fees and for certain post-closing adjustments and assumption of liabilities that were accounted for as additional purchase price. On a preliminary basis, we allocated $74.9 million of purchase price to the value of trademarks and trade names associated with the business, $6.5 million to the value of customer relationships and $36.8 million to goodwill.

On January 26, 2006, we acquired 100 percent of the equity interest of Westcoast Contempo Fashions Limited and Mac & Jac Holdings Limited, which collectively design, market and sell the Mac & Jac, Kensie and Kensiegirl apparel lines (“Mac & Jac”), a privately held fashion apparel company. The purchase price totaled 26.2 million Canadian dollars (or $22.7 million), which includes the retirement of debt at closing and fees, contingent payments to be determined based upon a multiple of Mac & Jac’s earnings in fiscal years 2006, 2008, 2009 and 2010. There was no contingent payment made based on 2006 fiscal year earnings. We utilize various valuation methods to determine the fair value of acquired tangible and intangible assets. For inventory, the method considers the expected selling prices of finished goods and intangible assets acquired are valued using a discounted cash flow model. We allocated $13.9 million of purchase price to the value of trademarks and trade names associated with the business and $5.6 million has been allocated to the value of customer relationships. The trademarks and trade names are deemed to have indefinite lives and are subject to an annual test for impairment. The value of customer relationships is being amortized over 12 years. We currently estimate that the aggregate of the contingent payments will be in the range of approximately $10-12 million and will be accounted for as additional purchase price when paid.

In connection with our acquisition of Skylark Sport Marketing Corporation (“prAna”), we may be required to make contingent acquisition payments to the former owners in the range of $20-25 million. The ultimate amount of such payments is based on certain performance parameters of the company over a pre-determined time frame and will be accounted for as additional purchase price when paid.

On April 7, 2003, we acquired 100 percent of the equity interest of Juicy Couture, Inc. (formerly, Travis Jeans, Inc.) (“Juicy Couture”), a privately held fashion apparel company. The total purchase price consisted of: (a) a payment, including the assumption of debt and fees of $53.1 million and (b) a contingent payment to be determined as a multiple of Juicy Couture’s earnings for one of the years ended 2005, 2006 or 2007. The selection of the measurement year for the contingent payment is at either party’s option. In March of 2005, the contingent payment agreement was amended to include an advance option for the sellers providing 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 are eligible to 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. In May 2007, the sellers elected to receive an 85 percent advance against the contingent purchase price and were paid $19.9 million on May 23, 2007. The payment was accounted for as additional purchase price and an increase to goodwill. We estimate that if the 2007 measurement year is selected, the remaining contingent payment would be approximately $45-50 million. The contingent payment will be accounted for as additional purchase price when paid.

On June 8, 1999, we acquired 85.0 percent of the equity interest of Lucky Brand Dungarees, Inc. (“Lucky Brand”), whose core business consists of the Lucky Brand Dungarees line of women and men’s denim-based sportswear. The total purchase price consisted of a cash payment made at the closing date of approximately $85.0 million and a payment made in April 2003 of $28.5 million. An additional payment of $12.7 million was made in 2000 for tax-related purchase price adjustments. On January 16, 2007, January 17, 2006 and January 28, 2005, we paid $10.0 million, $10.0 million and $35.0 million, respectively, for 1.5 percent, 1.9 percent and 8.25 percent, respectively, of the equity interest of Lucky Brand. On September 20, 2007, we entered into an agreement to acquire the remaining shares that were owned by the sellers of Lucky Brand amending an agreement signed on January 28, 2005. We will acquire 0.4% in each of January of 2008, 2009 and 2010 of the equity interest in Lucky for payments of $5.0 million each. We recorded the present value of fixed amounts owed of $14.0 million as Accrued expenses and Other Non-Current Liabilities. As of September 29, 2007, the excess of the liability recorded over the related amount of minority interest has been recorded as goodwill. The remaining 2.28% of the original shares outstanding will be settled for an aggregate purchase price composed of the following two installments: (i) the 2008 payment will be based on a multiple of Lucky Brand’s 2007 earnings, which we estimate will be in the range of $15-20 million and (ii) the 2011 payment will be based on a multiple of Lucky Brand’s 2010 earnings, net of the 2008 payment which we estimate will be in the range of $3-7 million.

RESULTS OF OPERATIONS

As discussed in the overview section above, in the second quarter of 2007, we revised our segment reporting structure to reflect the strategic realignment of our businesses and internal reporting. Prior periods have been conformed to the current period’s presentation. We now report our operations in two reportable segments as follows:

•

The Direct Brands segment — consists of the specialty retail, outlet, wholesale apparel, wholesale non-apparel (including accessories, jewelry, handbags and fragrances), e-commerce and licensing operations of our four retail-based brands: JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX; and

•

The Partnered Brands segment — consists of the wholesale apparel, wholesale non-apparel, outlet and specialty retail, e-commerce and licensing operations of our wholesale-based brands including: AXCESS, C & C CALIFORNIA, CLAIBORNE (men’s), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, ELLEN TRACY, ENYCE, FIRST ISSUE, KENSIE, KENSIEGIRL, LAUNDRY BY DESIGN, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA, MONET, NARCISO RODRIGUEZ, prAna, SIGRID OLSEN, STAMP 10, TINT, TRIFARI, VILLAGER, our licensed DKNY® JEANS and DKNY® ACTIVE brands as well as our other non-Direct Brands fragrances including: BORA BORA, CLAIBORNE, CURVE, ELLEN TRACY, LIZ CLAIBORNE, LIZ WOMAN, MAMBO, REALITIES, SOUL and licensed USHER fragrance.

A geographic basis based on selling location:

•

Domestic: wholesale customers, Company-owned specialty retail and outlet stores located in the United States and our e-commerce sites; and

•

International: wholesale customers and Company-owned an operated specialty retail, outlet and concession stores located outside of the United States, primarily in our European and Canadian operations.

On October 4, 2007, we completed the previously announced sale of certain assets of four brands under strategic review — EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE. The results of these brands previously included in the Partnered Brands Segment have been segregated and reported as discontinued operations for all periods presented (see Note 3 to the Condensed Consolidated Financial Statements).

All data and discussion with respect to our specific segments included within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is presented after applicable inter-company eliminations.

THREE MONTHS ENDED SEPTEMBER 29, 2007 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006

The following table sets forth our operating results for the three months ended September 29, 2007 (comprised of 13 weeks) compared to the three months ended September 30, 2006 (comprised of 13 weeks):


	Three months ended						Variance
	September 29,			September 30,
Dollars in millions	2007			2006			$			%

Net Sales	$	1,262.9		$	1,313.8		$	(50.9	)		(3.9	%)

Gross Profit		610.1			634.2			(24.1	)		(3.8	%)

Selling, general & administrative expenses		528.1			481.0			47.1			9.8	%

Trademark Impairment		12.3			—			12.3			—


Operating Income		69.7			153.2			(83.5	)		(54.5	%)

Other income (expense), net		(1.5	)		—			(1.5	)		—

Interest expense, net		(11.7	)		(10.9	)		(0.8	)		(7.3	%)

Provision for income taxes		23.6			51.9			(28.3	)		(54.5	%)


Income from Continuing Operations		32.9			90.4			(57.5	)		(63.6	%)

Income from discontinued operations, net of tax		2.6			4.8			(2.2	)		(45.8	%)

Loss on disposal of discontinued operations, net of tax		(2.5	)		—			(2.5	)		—


Net Income	$	33.0		$	95.2		$	(62.2	)		(65.3	%)

Net Sales

Net sales for the third quarter of 2007 were $1.263 billion, a decrease of $50.9 million, or 3.9%, of net sales for the third quarter of 2006. The impact of foreign currency exchange rates in our international sales, primarily as a result of the strengthening of the Euro, increased net sales by approximately $31.4 million in the third quarter. Net sales results for our segments are provided below:

•

Direct Brands net sales were $628.7 million increasing $96.0 million, or 18.0%, reflecting the following:

Net sales for MEXX were $365.4 million, a 6.3% increase compared to 2006. Excluding the impact of foreign currency exchange rates, net sales for MEXX were $338.9 million, a 1.5% decrease as compared to the third quarter of 2006, primarily due to decreases in our MEXX Europe retail and wholesale businesses, partly offset by increases in our MEXX Canada retail business.

	—		We ended the quarter with 137 specialty stores, 84 outlets and 306 concessions, reflecting the net addition over the last 12 months of 10 specialty retail, 1 outlet store and 18 concession stores;

	—		Average retail square footage in the third quarter was approximately 1.345 million square feet, a 5.0% increase compared to 2006;

	—		Sales productivity was $102 per average square foot as compared to $106 for the third quarter of fiscal 2006;

	—		Comparable store sales in our MEXX Company-owned stores decreased by 2.2% overall, primarily the result of a decrease in our MEXX Europe business, partly offset by an increase in our MEXX Canada business; and

—

A $26.6 million increase resulting from the impact of foreign currency exchange rates in our European and Canadian businesses.

Net sales for LUCKY BRAND were $108.6 million, an 11.5% increase compared to 2006, primarily driven by increases in retail and wholesale apparel;

	—		We ended the quarter with 159 specialty stores and 10 outlet stores, reflecting the net addition over the last 12 months of 32 specialty stores and 3 outlet stores;

	—		Average retail square footage in the third quarter was approximately 384 thousand square feet, a 27.4% increase compared to 2006;

	—		Sales productivity was $130 per average square foot as compared to $141 for the third quarter of fiscal 2006; and

	—		Comparable store sales in our Company-owned stores decreased by 2.5% in the third quarter.

Net sales for JUICY COUTURE were $135.1 million, a 47.7% increase compared to 2006, primarily driven by increases in retail, and wholesale non-apparel (including fragrance).

	—		We ended the quarter with 33 specialty stores and 13 outlet stores, reflecting the net addition over the last 12 months of 21 specialty stores and 9 outlet stores;

	—		Average retail square footage in the third quarter was approximately 125 thousand square feet, a 290.7% increase compared to 2006;

	—		Sales productivity was $267 per average square foot as compared to $328 for the third quarter of fiscal 2006, as the brand has evolved from limited to broader distribution; and

	—		Comparable store sales in our Company-owned stores increased by 17.7% in the third quarter.

Net sales for KATE SPADE (acquired in December 2006) were $19.6 million.

	—		We ended the quarter with 23 specialty retail stores and 6 outlet stores;

	—		Average retail square footage in the third quarter was 57 thousand square feet; and

	—		Sales productivity was $162 per average square foot for the third quarter of 2007.

Comparable Company-owned store sales are calculated as follows:

	—		New stores become comparable after 15 full months of operations;

	—		Closed stores become non-comparable when they begin final liquidation or no longer receive new merchandise, usually 1-3 months before closure;

	—		A store that undergoes renovations and increases or decreases substantially in size as the result of renovations becomes non-comparable;

	—		A store that is relocated stays the same size and has no interruption of selling remains comparable. If, however, a location change causes a significant increase or decrease in size, then the location becomes non-comparable; and

	—		Stores that are acquired are not considered comparable until they have been reflected in our results for a period of 12 months.

Net sales per average square foot are defined as net sales divided by the average of beginning and end of period gross square feet.

•

Partnered Brands net sales were $634.2 million, a decrease of $146.9 million or 18.8%, reflecting:

	-		Our department store customers’ continued focus on inventory productivity and product differentiation to gain competitive market share, improve margins and cash flows, as they continue to execute their buying activities very cautiously, while aggressively growing their private label businesses. This operating environment adversely affects our Partnered Brand segment which is reflected in reduced sales for the following brands: LIZ CLAIBORNE, SIGRID OLSEN, CLAIBORNE, licensed DKNY® Jeans FIRST ISSUE, MONET, DANA BUCHMAN and ENYCE. The sales decline also reflects the elimination of our CITY UNLTD. and CRAZY HORSE brands, partially offset by the addition of our LIZ & CO., CONCEPTS BY CLAIBORNE brands and the launch of our licensed USHER fragrance; and

	-		The impact of foreign currency exchange rates increased sales by $3.7 million primarily related to our LIZ CLAIBORNE operations in Europe and Canada.

Viewed on a geographic basis,Domestic net sales decreased by $63.9 million, or 7.0%, to $842.7 million, reflecting the declines in our Partnered Brands segment, partially offset by increases in our Direct Brands segment.International net sales increased $13.0 million, or 3.2%, to $420.2 million primarily due to the $31.4 million impact of currency exchange rates on international sales as well as increases in our Canadian sales in our Direct Brands segment. Excluding the impact of currency exchange rates, sales declined by $18.4 million primarily due to a decline in our MEXX Europe retail business, mostly offset by increases in our MEXX Canada retail business.

Gross Profit

Gross profit in the third quarter of 2007 was $610.1 million, a $24.1 million decrease as compared to the third quarter of 2006. Gross profit as a percentage of net sales was virtually flat at 48.3% in 2007 as compared to 2006, reflecting decreased gross profit rates in our Partnered Brands segment due to higher levels of retailer support, partially offset by an increased proportion of sales from our Direct Brands segment, which operates at a higher gross profit rate than the Company average. Gross profit increased approximately $17.4 million due to the impact of foreign currency exchange rates in our international businesses. Warehousing activities including receiving, storing, picking, packing and general warehousing charges are included in SG&A; accordingly, our gross profit may not be comparable to others who may include these expenses as a component of cost of goods sold.

Selling, General & Administrative Expenses

Selling, general and administrative expenses (“SG&A”) increased $47.1 million or 9.8%, to $528.1 million in the third quarter of 2007 over the third quarter of 2006. The SG&A increase reflected the following:

•

The inclusion of $12.7 million of expenses from our acquisition KATE SPADE;

•

A $14.1 million increase primarily resulting from the retail expansion in our Direct Brands segment;

•

A $14.2 million increase due to the impact of foreign currency exchange rates in our international operations;

•

An increase of $19.6 million of expenses associated with the strategic review of our brand portfolio and our year over year streamlining initiatives; and

•

A net decrease of $13.5 associated with other SG&A items.

SG&A as a percent of net sales was 41.8%, compared to 36.6% in the third quarter of 2006, primarily reflecting an increased SG&A rate in our Partnered Brands segment resulting from the de-leveraging impact of decreased wholesale net sales, higher expenses associated with our streamlining activities, expenses associated with the strategic review of our brand portfolio as well as an increased proportion of expenses from our Direct Brands segment, which runs at a higher SG&A rate than the Company average.

Trademark Impairment

A $12.3 million non-cash charge resulting from the impairment of the ELLEN TRACY trademark was recorded due to decreases in sales projections over the next few years.

Operating Income

Operating income for the third quarter of 2007 was $69.7 million, a decrease of $83.5 million, or 54.5%, compared to the third quarter of 2006. Operating income as a percent of net sales decreased to 5.5% in 2007 compared to 11.7% in 2006. The impact of foreign currency exchange rates in our international operations added $3.2 million to operating income for the quarter. Operating income by segment is provided below:

•

Direct Brands operating income was $87.0 million increasing $4.2 million, or 5.2%, as a result of growth in our JUICY COUTURE brand and the impact of foreign currency exchange rates in our international operations, partially offset by reduced income in our LUCKY BRAND operations as a result of expenses associated with brand building and reduced income in our MEXX Europe retail operations.

•

The Partnered Brands operating loss in the third quarter was $17.3 million ((2.7) % of net sales), compared to operating income of $70.4 million (9.0% of net sales) in 2006, as a result of lower sales and increased retailer support as well as an increase in expenses associated with our streamlining initiatives.

On a geographic basis,Domestic operating income decreased by $79.1 million, or 75.3%, to $26.0 million. The Domestic decreases predominantly reflect reduced income in our domestic Partnered Brands segment partly offset by an increase in the domestic operations of our Direct Brands segment.International operating income decreased $4.4 million or 8.9% to $43.7 million. The international increase primarily reflected the impact of $3.2 million of foreign currency exchange rates in our international businesses.

Other Income (Expense), Net

Other income (expense), net in the third quarter of 2007 was $1.5 million of expense and was insignificant in the third quarter of 2006.

Interest Expense, Net

Net interest expense in the third quarter of 2007 was $11.7 million compared to $10.9 million in the third quarter of 2006, both of which were principally related to borrowings incurred to finance our strategic initiatives, including acquisitions.

Provision for Income Taxes

The income tax rate in the third quarter of 2007 increased to 41.7% from 36.5% in the third quarter of 2006, primarily due to a shift in earnings to jurisdictions with higher statutory tax rates and the impact of discrete tax items in both domestic and foreign tax jurisdictions.

Income from Continuing Operations

Income from continuing operations in the third quarter of 2007 decreased to $32.9 million, or 2.6% of net sales, from $90.4 million in the third quarter of 2006, or 6.9% of net sales. Diluted Earnings per share (“EPS”) from continuing operations decreased to $0.33 in 2007 from $0.88 in 2006.

Income from Discontinued Operations, Net of Tax

Income from discontinued operations in the third quarter of 2007 decreased to $2.6 million, from $4.8 million in the third quarter of 2006. Diluted EPS from discontinued operations decreased to $0.02 in 2007 from $0.05 in 2006.

Loss on Disposal of Discontinued Operations, Net of Tax

Loss on disposal of discontinued operations in the third quarter of 2007 was $2.5 million, or $(0.02) per diluted share.

Net Income

Net income in the third quarter of 2007 decreased to $33.0 million from $95.2 million in the third quarter of 2006. Diluted EPS decreased to $0.33 in 2007, from $0.93 in 2006, a 64.5% decrease.

Average diluted shares outstanding decreased by 1.7 million shares to 100.7 million in the third quarter of 2007 on a period-to-period basis, as a result of the repurchases of common shares and a decrease in the dilutive effect of outstanding stock awards, partially offset by the impact of stock option exercises.

NINE MONTHS ENDED SEPTEMBER 29, 2007 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006

The following table sets forth our operating results for the nine months ended September 29, 2007 (comprised of 39 weeks) compared to the nine months ended September 30, 2006 (comprised of 39 weeks):


	Nine months ended						Variance
	September 29,			September 30,
Dollars in millions	2007			2006			$			%

Net Sales	$	3,455.1		$	3,499.3		$	(44.2	)		(1.3	%)


Gross Profit		1,664.6			1,690.6			(26.0	)		(1.5	%)

Selling, general & administrative expenses		1,521.6			1,408.0			113.6			8.1	%

Trademark Impairment		12.3			—			12.3			—


Operating Income		130.7			282.6			(151.9	)		(53.8	%)

Other income (expense), net		(1.9	)		3.1			(5.0	)		(161.3	%)

Interest expense, net		(30.1	)		(26.6	)		(3.5	)		(13.2	%)

Provision for income taxes		41.3			96.3			(55.0	)		(57.1	%)


Income from Continuing Operations		57.4			162.8			(105.4	)		(64.7	%)

Income from discontinued operations, net of tax		8.0			18.7			(10.7	)		(57.2	%)

Loss on disposal of discontinued operations, net of tax		(2.5	)		—			(2.5	)		—


Net Income	$	62.9		$	181.5		$	(118.6	)		(65.3	%)

Net Sales

Net sales for the first nine months of 2007 were $3.455 billion, a decrease of $44.2 million, or 1.3%, compared to the first nine months of 2006, primarily driven by decreases in our Partnered Brands segment, mostly offset by increases in our Direct Brands segment including, the addition of $59.4 million from our KATE SPADE brand (acquired in December of 2006). The impact of foreign currency exchange rates in our international businesses, primarily as a result of the strengthening of the Euro, increased net sales by $72.3 million in the first nine months of 2007. Net sales results for our segments are provided below:

•

Direct Brands net sales were $1.608 billion increasing $275.4 million, or 20.7%, reflecting the following:

Net sales for MEXX were $917.6 million, a 6.4% increase compared to 2006. Excluding the impact of foreign currency exchange rates, net sales for MEXX were $855.2 million, a decline of $7.4 million as compared to the first nine months of 2006, primarily due to decreases in our MEXX Europe retail business, mostly offset by increases in our MEXX Canada retail business.

	—		Comparable store sales in our MEXX Company-owned stores decreased by 1.4% overall, primarily the result of a decrease in our MEXX Europe specialty retail business, partly offset by an increase in our MEXX Canada business;

	—		Average retail square footage in the first nine months of 2007 was approximately 1.319 million square feet, a 3.9% increase compared to 2006;

	—		Sales productivity was $297 per average square foot as compared to $307 for the first nine months of fiscal 2006; and

	—		A $62.4 million increase resulting from the impact of foreign currency exchange rates in our European and Canadian businesses.

Net sales for LUCKY BRAND were $307.2 million, a 19.7% increase compared to 2006, primarily driven by increases in retail, wholesale apparel and wholesale non-apparel (including fragrance).

	—		Average retail square footage in the first nine months of 2007 was approximately 367 thousand square feet, a 27.8% increase compared to 2006;

	—		Sales productivity was $409 per average square foot as compared to $432 for the first nine months of fiscal 2006; and

	—		Comparable store sales in our LUCKY BRAND Company-owned stores increased by 0.1% in the first nine months of 2007.

Net sales for JUICY COUTURE were $324.2 million, a 51.7% increase compared to 2006, primarily driven by increases in retail, wholesale apparel and non-apparel (including fragrance).

	—		Average retail square footage in the first nine months of 2007 was approximately 107 thousand square feet, a 304.1% increase compared to 2006;

	—		Sales productivity was $743 per average square foot as compared to $783 for the first nine months of fiscal 2006, as the brand has evolved from limited to broader distribution; and

	—		Comparable store sales in our Company-owned stores increased by 20.7% in the first nine months of 2007.

Net sales for KATE SPADE (acquired in December 2006) were $59.4 million.

	—		Average retail square footage in the first nine months of 2007 was 57 thousand square feet; and

	—		Sales productivity was $460 per average square foot for the first nine months of 2007.

•

Partnered Brands net sales decreased $319.6 million, or 14.8%, to $1.847 billion reflecting:

	-		Our department store customers’ continued focus on inventory productivity and product differentiation to gain competitive market share, improve margins and cash flows, as they continue to execute their buying activities very cautiously, while aggressively growing their private label businesses. This operating environment adversely affects our Partnered Brand segment which is reflected in reduced sales for the following brands: LIZ CLAIBORNE, SIGRID OLSEN, CURVE fragrance, MONET, CLAIBORNE, ELLEN TRACY, FIRST ISSUE, and LAUNDRY. The sales decline also reflects the elimination of our CITY UNLTD. and CRAZY HORSE brands, partially offset by the addition of our LIZ & CO., CONCEPTS BY CLAIBORNE brands and the launch of our licensed USHER fragrance; and

	-		The impact of foreign currency exchange rates increased sales by $8.6 million primarily related to our LIZ CLAIBORNE operations in Europe and Canada.

Viewed on a geographic basis,Domestic net sales decreased by $98.7 million, or 4.0%, to $2.366 billion reflecting the declines in the domestic operations of our Partnered Brands segment, partially offset by increases in our Direct Brands segment.International net sales increased $54.5 million, or 5.3%, to $1.089 billion primarily due to the $72.3 million impact of currency exchange rates on international sales as well as increases in the Canadian operations of our Direct Brands segment.

Gross Profit

Gross profit decreased $26.0 million, or 1.5%, to $1.665 billion in the first nine months of 2007 when compared to the first nine months of 2006. Gross profit as a percentage of net sales decreased to 48.2% in 2007 from 48.3% in 2006, reflecting decreased gross profit rates in our Partnered Brands segment due to higher levels of retailer support and an increased proportion of off-priced sales, partially offset by an increased proportion of sales from our Direct Brands segment, which operates at a higher gross profit rate than the Company average. Gross profit increased approximately $41.9 million due to the impact of foreign currency exchange rates in our international businesses. Warehousing activities including receiving, storing, picking, packing and general warehousing charges are included in SG&A; accordingly, our gross profit may not be comparable to others who may include these expenses as a component of cost of goods sold.

Selling, General & Administrative Expenses

SG&A increased $113.6 million, or 8.1%, to $1.522 billion in the first nine months of 2007 over the first nine months of 2006 and as a percent of net sales increased to 44.0% from 40.2%. The SG&A increase reflected the following:

•

The inclusion of $32.7 million of expenses from our acquisition of KATE SPADE;

•

A $60.1 million increase primarily resulting from the retail expansion and increased marketing expenses, including expenses associated with the expansion of our fragrance businesses, in our Direct Brands segment;

•

An increase of $19.7 million of expenses associated with the strategic review of our brand portfolio and our year over year streamlining initiatives;

•

A $36.4 million increase due to the impact of foreign currency exchange rates in our international operations; and

•

A net decrease of $35.3 million associated with other SG&A items.

The SG&A rate primarily reflected increased expense rates in our Partnered Brands segment resulting from the de-leveraging impact of decreased wholesale net sales, higher expenses associated with our streamlining activities as well as an increased proportion of expenses from our Direct Brands segment, which runs at a higher SG&A rate than the Company average.

Trademark Impairment

A $12.3 million non-cash charge resulting from the impairment of the ELLEN TRACY trademark was recorded due to decreases in sales projections over the next few years.

Operating Income

Operating income for the first nine months of 2007 was $130.7 million, a decrease of $151.9 million, or 53.8%, compared to the first nine months of 2006. Operating income as a percent of net sales decreased to 3.8% in 2007 compared to 8.1% in 2006. The impact of foreign currency exchange rates in our international businesses added $5.5 million to operating income for the first nine months. Operating income by segment is provided below:

•

Direct Brands operating income was $166.9 million increasing $25.1 million or 17.7%, as a result of growth in our JUICY COUTURE brand, partially offset by additional expenses due to our retail expansion activities, as well as reduced profits in our LUCKY BRAND operations as a result of expenses associated with brand building.

•

The Partnered Brands operating loss was $36.2 million, a $177.0 million decrease, as a result of lower sales, increased retailer support and expenses associated with our streamlining activities.

On a geographic basis,Domestic operating income decreased by $153.6 million, or 71.1%, to $62.3 million. The Domestic decreases predominantly reflect reduced income in our domestic Partnered Brands segment partly offset by an increase in the domestic operations of our Direct Brands segment.International operating income increased $1.7 million, or 2.6%, to $68.4 million. The international increase reflected the increased profitability in our European and Canadian operations in our Direct Brands segment.

Other Income (Expense), Net

Other income (expense), net in the first nine months of 2007 was $1.9 million of expense compared to $3.1 million of income in the first nine months of 2006. In 2007, net other income (expense) was principally comprised of $1.4 million of foreign exchange losses and $0.7 million of minority interest expense, partially offset by a $0.4 million realized gain from the sale of certain equity investments. In 2006, net other income (expense) was comprised of a $3.6 million realized gain from the sale of certain equity investments, partially offset by $0.8 million of minority interest expense.

Interest Expense, Net

Net interest expense in the first nine months of 2007 was $30.1 million compared to $26.6 million in the first nine months of 2006, both of which were principally related to borrowings incurred to finance our strategic initiatives, including acquisitions. Net interest expense includes $4.6 million and $3.4 million of interest income in first nine months of 2007 and 2006, respectively.

Provision for Income Taxes

The income tax rate in the first nine months of 2007 increased to 41.8% from 37.2% in the first nine months of 2006, primarily due to a shift in earnings to jurisdictions with higher statutory tax rates and the impact of discrete tax items in both domestic and foreign tax jurisdictions.

Income from Continuing Operations

Income from continuing operations in the first nine months of 2007 decreased to $57.4 million, or 1.7% of net sales, from $162.8 million in the first nine months of 2006, or 4.7% of net sales. Diluted EPS from continuing operations decreased to $0.56 in 2007 from $1.57 in 2006.

Income from Discontinued Operations, Net of Tax

Income from discontinued operations in the first nine months of 2007 decreased to $8.0 million, from $18.7 million in the first nine months of 2006. Diluted EPS from discontinued operations decreased to $0.08 in 2007 from $0.18 in 2006.

Loss on Disposal of Discontinued Operations, Net of Tax

Loss on disposal of discontinued operations in the first nine months of 2007 was $2.5 million, or $(0.02) per diluted share.

Net Income

Net income in the first nine months of 2007 decreased to $62.9 million from $181.5 million in the first nine months of 2006. Diluted EPS decreased to $0.62 in 2007, from $1.75 in 2006, a 64.6% decrease.

Average diluted shares outstanding decreased by 1.5 million shares to 102.2 million in the first nine months of 2007 on a period-to-period basis, as a result of the repurchases of common shares, and a decrease in the dilutive effect of outstanding stock awards, partially offset by the impact of stock option exercises.

FORWARD OUTLOOK

Fiscal 2007

For fiscal 2007, we are projecting net sales to be down low single digits compared to fiscal 2006, operating margin in the range of 5.1% to 5.5% and EPS in the range of $1.20 — $1.30, down from a range of $1.71 — $1.81. Approximately $0.15 of the decline is due to the impact of the reduced financial outlook for, and the earlier than expected sale of, the brands under review, while an additional $0.04 of the decline is due to the increased investment in marketing for our Direct Brands.

It is important to note that this guidance includes the impact of expenses associated with our streamlining initiatives in the nine months of 2007 the loss on sale of our Emma James, Intuitions, J.H. Collectibles and Tapemeasure brands and the non-cash charge associated with the impairment of our Ellen Tracy trademark (which amounted to $0.39 per share), but excludes additional streamlining expenses we expect to incur for the balance of the year. This guidance excludes the potential impact of any acquisition or additional divestiture. Foreign currency exchange rates are projected to increase 2007 net sales by approximately 2% and 2007 EPS by approximately $0.04.

Our 2007 capital expenditures, including shops, will be approximately $200 million. We plan on opening approximately 135 retail stores worldwide.

FISCAL 2008 OUTLOOK

We remain confident that the strategies we outlined in July will drive sustained improvement in operating performance in 2008 and beyond. The fiscal 2008 preliminary outlook we provided in July did not assume a robust economy, but it also did not assume the challenging macroeconomic environment we are now facing. Economic uncertainty, warm weather and low levels of mall traffic have all contributed to weak sales for retailers during 2007. The financial framework presented at our Analyst Day on July 11th remains management’s guidance for decisions around resource management, cost reductions and capital allocation. As we execute this plan, we will continue to monitor the external environment throughout the fourth quarter of 2007 and assess its impact on fiscal 2008. We will provide an updated fiscal 2008 outlook in the first quarter of 2008.

The foregoing forward-looking statements are qualified in their entirety by reference to the risks and uncertainties set forth under the heading “STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE” below.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Requirements. Our primary ongoing cash requirements are to fund growth in our retail store expansion and our working capital requirements (primarily accounts receivable and inventory) and to invest in the technological

upgrading of our distribution centers and information systems. We also require cash to fund payments related to our previous acquisitions. See “Commitments and Capital Expenditures,” below. In addition, we will require cash to fund any repurchase of Company stock under our previously announced share repurchase programs. On May 18, 2006, the Company’s Board of Directors authorized us to purchase up to an additional $250 million of our common stock for cash in open market purchases and privately negotiated transactions. As of October 19, 2007, we had $47.7 million remaining in buyback authorization under the share repurchase programs.

Sources of Cash. Our historical sources of liquidity to fund ongoing cash requirements include cash flows from operations, cash and cash equivalents and securities on hand, as well as borrowings through our commercial paper program and bank lines of credit (which include revolving and trade letter of credit facilities). On July 6, 2006, we completed the issuance of 350 million euro 5% Notes (the “Notes”) due July 8, 2013. The net proceeds of the offering were used to refinance our outstanding 350 million euro 6.625% Notes that matured on August 7, 2006, which were originally issued on August 7, 2001 (see Note 10 to our Condensed Consolidated Financial Statements). We anticipate that cash flows from operations, our commercial paper program and bank and letter of credit facilities will be sufficient to fund our liquidity requirements for the next twelve months and that we will be able to adjust the amounts available under these facilities if necessary (see “Commitments and Capital Expenditures” for more information on future requirements). Such sufficiency and availability may be adversely affected by a variety of factors, including, without limitation, retailer and consumer acceptance of our products, which may impact our financial performance, maintenance of our investment-grade credit rating, as well as interest rate and exchange rate fluctuations. On August 8, 2007 and September 10, 2007 Moody’s and Standard & Poor’s (“S&P”), respectively, completed a review of our credit rating. Moody’s lowered the senior unsecured debt rating to Baa3 from Baa2 and the commercial paper rating to Prime-3 from Prime-2. S&P affirmed our BBB unsecured debt rating and lowered the commercial paper rating to A-3 from A-2.

2007 vs. 2006

Cash and Debt Balances. We ended the first nine months of 2007 with $112.0 million in cash and marketable securities, compared to $108.8 million at the end of the first nine months of 2006 and with $976.6 million of debt outstanding, compared to $733.1 million at the end of the first nine months of 2006. This $240.3 million increase in our net debt (total debt less cash and marketable securities) position over the last twelve months is primarily attributable to $181.6 million in share repurchases, $177.4 million in capital and in-store expenditures, $172.8 million in acquisition-related payments and the effect of foreign currency translation on our Eurobond (which increased our debt balance by $53.8 million), partially offset by cash flows from operations for the last twelve months of $326.2 million. We ended the first nine months of 2007 with $2.058 billion in stockholders’ equity, giving us a total debt to total capital ratio of 32.2% at the end of the first nine months of 2007, compared to $2.130 billion in stockholders’ equity at year end 2006 with a total debt to capital ratio of 21.8% and $2.042 billion in stockholders’ equity at the end of the first nine months of 2006 with a total debt to total capital ratio of 26.4%.

Accounts Receivable decreased $72.2 million, or 9.8%, at September 29, 2007, compared to September 30, 2006, primarily due to a $103.1 million reduction in receivables in the domestic portion of our Partnered Brands apparel businesses due to reduced sales, partially offset by increases in our the fragrance businesses of both our Direct Brands and Partnered Brands segments and the inclusion of $10.0 million of receivables from our acquired KATE SPADE brand and the impact of foreign currency exchange rates of $23.4 million primarily related to the strengthening of the euro. Accounts receivable increased $164.2 million, or 32.9%, at September 29, 2007 compared to December 30, 2006, due primarily due to the timing of shipments in our domestic operations.

Inventories increased $50.1 million, or 7.4% at the end of the first nine months of 2007 compared to the end of the first nine months of 2006, primarily due to a $67.2 million increase due to retail expansion and the addition of our LIZ & CO., CONCEPTS and KATE SPADE brands and a $22.8 million increase resulting from the impact of foreign currency exchange rate fluctuations, primarily due to the strengthening of the euro in our international businesses. Inventories increased by $132.4 million, or 22.3%, compared to December 30, 2006, primarily due to seasonal timing of wholesale shipments as well as increases resulting from foreign exchange rate fluctuations.

Borrowings under our revolving credit facility and other credit facilities peaked at $461.1 million during the first nine months of 2007; at the end of the first nine months of 2007, our borrowings under these facilities were $450.7 million.

Net cash used in operating activities was $105.9 million in the first nine months of 2007, compared to $38.0 million used in operating activities in the first nine months of 2006. This $67.9 million incremental use of cash was

primarily due to a decrease in employee related obligations, increased inventories and reduced net income, partially offset by changes in accounts receivable due to reduced shipments in our Partnered Brands segment.

Net cash used in investing activities was $155.1 million in the first nine months of 2007, compared to $257.6 million in 2006. Net cash used in the first nine months of 2007 primarily reflected $117.0 million for capital and in-store expenditures and $49.5 million in acquisition-related payments, partially offset by proceeds from the sale of other equity investments. Net cash used in the first nine months of 2006 primarily reflected $121.5 million for capital and in-store expenditures and $143.5 million in acquisition-related payments, partially offset by proceeds from the sale of certain equity investments.

Net cash provided by financing activities was $191.1 million in the first nine months of 2007, compared to $77.6 million used in financing activities in the first nine months of 2006. The $113.5 million year-over-year increase in cash provided primarily reflected a $7.5 million decrease in stock repurchases, $424.9 million increase in short-term borrowings, a $314.5 million decrease in commercial paper and a $7.6 million increase in proceeds from the exercise of stock options.

Commitments and Capital Expenditures

We may be required to make additional payments in connection with our acquisitions. If paid in cash, these payments will be funded with net cash provided by operating activities, our revolving credit and other credit facilities and/or the issuance of debt:

•

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 $20-25 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. We will acquire 0.4% in each of January of 2008, 2009 and 2010 of the equity interest in Lucky for payments of $5 million each. The remaining 2.28% of the original shares outstanding will be settled for an aggregate purchase price composed of the following two installments: (i) the 2008 payment will be based on a multiple of Lucky Brand’s 2007 earnings, which we estimate will be in the range of $15-20 million and (ii) the 2011 payment will be based on a multiple of Lucky Brand’s 2010 earnings, net of the 2008 payment which we estimate will be in the range of $3-7 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 our option. 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. In May of 2007, the sellers elected to receive an 85 percent advance against the contingent purchase price and were paid $19.9 million on May 23, 2007. These payments were accounted for as additional purchase price and an increase to goodwill. We estimate the remaining contingent payment would be approximately $45-50 million. The contingent payment 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 currently estimate that the aggregate of these contingent payments will be in the range of approximately $10-12 million and will be accounted for as additional purchase price when paid.

Financing Arrangements

Long-term debt consists of the following:


	September 29,		December 30,		September 30,
In thousands	2007		2006		2006
5% Notes	$	495,153	$	458,907	$	441,270
Revolving credit facility and commercial paper program		394,600		82,075		232,466
Capital lease obligations		29,787		32,284		2,601
Other^(a)		57,061		19,469		56,769

Total debt	$	976,601	$	592,735	$	733,106


^(a)		At September 29, 2007, the balance consists primarily of amounts outstanding under working capital lines of credit.

On October 13, 2004, we entered into a $750 million, five-year revolving credit agreement (the “Agreement”). A portion of the funds available under the Agreement not in excess of $250 million is available for the issuance of letters of credit. Additionally, at our request, the amount of funds available under the Agreement may be increased at any time or from time to time by an aggregate principal amount of up to $250 million with only the consent of the lenders (which may include new lenders) participating in such increase. The Agreement includes a $150 million multi-currency revolving credit line, which permits us to borrow in U.S. dollars, Canadian dollars and euro. The Agreement has two borrowing options, an “Alternative Base Rate” option, as defined in the Agreement and a Eurocurrency rate option with a spread based on our long-term credit rating. The Agreement contains certain customary covenants, including financial covenants requiring us to maintain specified debt leverage and fixed charge coverage ratios and covenants restricting our ability to, among other things, incur indebtedness, grant liens, make investments and acquisitions and sell assets. We believe we are in compliance with such covenants as of September 29, 2007. Both Standard & Poor’s (“S&P”) and Moody’s credit rating services placed our ratings under review in May 2007 based on the 2007 outlook provided as part of its first quarter 2007 earnings release. During the third quarter of 2007, Moody’s completed its review lowered our senior unsecured debt rating to Baa3 from Baa2 and our commercial paper rating to Prime-3 from Prime-2. Also during the third quarter of 2007, S&P completed its review affirmed our BBB unsecured debt rating and lowered our commercial paper rating to A-3 from A-2. The funds available under the Agreement may be used to refinance existing debt, to provide working capital and for our general corporate purposes, including, without limitation, the repurchase of capital stock and the support of our $750 million commercial paper program. At September 29, 2007, we had $394.6 million of borrowings outstanding under the Agreement.

On July 6, 2006, we completed the issuance of 350 million euro (or $446.9 million based on the exchange rate in effect on such date) 5% Notes (the “Notes”) due July 8, 2013. The net proceeds of the offering were used to refinance our outstanding 350 million euro 6.625% Notes due August 7, 2006, which were originally issued on August 7, 2001. The Notes bear interest from and including July 6, 2006, payable annually in arrears on July 8 of each year beginning on July 8, 2007. The Notes have been listed on the Luxembourg Stock Exchange and received a credit rating of BBB from Standard & Poor’s and Baa2 from Moody’s Investor Services. During the third quarter of 2007, Moody’s lowered the rating to Baa3 and S&P affirmed the BBB rating. These Notes are designated as a hedge of our net investment in a foreign subsidiary.

On November 21, 2006, we entered into a seven year capital lease with a financial institution totaling $30.6 million. The purpose of the lease was to finance the equipment associated with its distribution facilities in Ohio and Rhode Island, which had been previously financed through our 2001 synthetic lease, which matured in 2006 (see Note 11 to our Condensed Consolidated Financial Statements).

As of September 29, 2007, the committed credit facilities, commercial paper program and letter of credit facilities available to us were as follows:


			Outstanding		Letters of Credit
In thousands	Total Capacity		Borrowings		Issued		Available Capacity
Revolving credit facility and commercial paper program^(a)	$	750,000	$	394,600	$	—	$	355,400
Letter of credit facility		400,000		—		245,936		154,064
Short-term borrowing facilities		195,381		56,112		10,992		128,277


^(a)		Our $750 million revolving credit facility has a final maturity date of October 2009 and contains the committed capacity to issue $250 million in letters of credit.

Off-Balance Sheet Arrangements

On May 22, 2001, we entered into an off-balance sheet financing arrangement (commonly referred to as a “synthetic lease”) to acquire various land and equipment and construct buildings and real property improvements associated with warehouse and distribution facilities in Ohio and Rhode Island totaling $63.7 million. The synthetic lease expired on November 22, 2006. On November 21, 2006, we entered into a new synthetic lease with a financial institution for a five–year period, totaling $32.8 million to refinance the land and buildings referred to above. The lessor is a wholly owned subsidiary of a publicly traded corporation. The lessor is a sole member, whose ownership interest is without limitation as to profits, losses and distribution of the lessor’s assets. Our lease represents less than 1% of the lessor’s assets. The leases include our guarantees for a substantial portion of the financing and options to purchase the facilities at original cost; the maximum guarantee is approximately $27 million. The lessor’s risk included an initial capital investment in excess of 10% of the total value of the lease, which is at risk during the entire term of the lease. The equipment portion of the original synthetic lease was sold to another financial institution and leased back to us through a seven-year capital lease totaling $30.6 million. The lessor does not meet the definition of a variable interest entity under Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest Entities” and therefore consolidation by the Company is not required.

Hedging Activities

At September 29, 2007, we had various Canadian currency collars outstanding with a notional amount of $3.3 million, maturing through March 2008 and with contract rates ranging between 1.0030 and 1.1900 Canadian dollars per U.S. dollar, various Canadian currency collars outstanding with a notional amount of 15.4 million Hong Kong dollars, maturing through October 2007 and with contract rates ranging between 6.5500 and 7.0012 Hong Kong dollars per Canadian dollar and various euro currency collars outstanding with a notional amount of 7.8 million Hong Kong dollars, maturing through October 2007 and with contract rates ranging between 9.9685 and 10.2000 Hong Kong dollars per euro. We had $8.7 million and 45.3 million Hong Kong dollars in Canadian currency collars and 23.3 million Hong Kong dollars in euro currency collars at December 30, 2006 and 5.3 million and 24.9 million Hong Kong dollars in Canadian currency collars and 201.5 million Hong Kong dollars in euro currency collars at September 30, 2006. At September 29, 2007, we also had forward contracts maturing through December 2008 to sell 9.5 million Canadian dollars for $8.8 million, to sell 13.1 million Canadian dollars for 95.5 million Hong Kong dollars and to sell 72.0 million euro for 759.5 million Hong Kong dollars. The notional value of the foreign exchange forward contracts at September 29, 2007 was $118.8 million, as compared with $97.5 million at December 30, 2006 and $49.5 million at September 30, 2006. Unrealized losses for outstanding foreign exchange forward contracts and currency options were $(6.1) million at September 29, 2007, $(1.6) million at December 30, 2006 and a gain of $0.3 million at September 30, 2006. The ineffective portion of these trades is recognized currently in earnings and was $(1.5) million for the nine months ended September 29, 2007. Approximately $(5.1) million in Accumulated other comprehensive loss relating to cash flow hedges will be reclassified into earnings in the next twelve months as the inventory is sold.

In connection with the variable rate financing under the 2001 synthetic lease agreement, we entered into two interest rate swap agreements with an aggregate notional amount of $40.0 million that began in January 2003 and terminated in May 2006, in order to fix the interest component of rent expense at a rate of 5.56%. We entered into these arrangements to hedge against potential future interest rate increases. The ineffective portion of these swaps, recognized currently in earnings, was not material for the periods presented.

We hedge our net investment position in euro functional subsidiaries by designating the 350 million euro-denominated bonds as the hedging instrument in a net investment hedge. As a result, the foreign currency transaction gains and losses that are recognized on the euro-denominated bonds in accordance with SFAS No. 52 are accounted for as a component of accumulated other comprehensive loss rather than recognized in current income in accordance with SFAS No. 52. The unrealized gains (losses) recorded to Cumulative translation adjustment were $(36.2) million and $(33.3) million for the nine months ended September 29, 2007 and September 30, 2006, respectively and $(24.0) million and $1.0 million for the three months ended September 29, 2007 and September 30, 2006, respectively.

On February 11, 2004, we entered into interest rate swap agreements for the notional amount of 175 million euro in connection with its 350 million Eurobonds that matured on August 7, 2006. This converted a portion of the fixed rate Eurobonds interest expense to floating rate at a spread over six month EURIBOR. This was designated as a fair value hedge. The first interest rate setting occurred on August 7, 2004 and was reset each six-month period thereafter until maturity. Interest accrued related to these swaps was not material for the periods presented.

In May 2006, we entered into multiple forward starting swaps to lock the underlying interest rate on the notional amount of 175 million euro in connection with the July 6, 2006 issuance of the Notes (see Note 10 — Debt of Notes to Condensed Consolidated Financial Statements). These swaps were terminated on June 29, 2006 and we subsequently received payment of 1.0 million euro. This amount, net of tax, is recorded in Accumulated other comprehensive loss and will be reclassified into earnings over the seven year term of the Notes. The amount reclassified out of Accumulated other comprehensive loss was not material for the nine months and three months ended September 29, 2007.

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenues and expenses. Significant accounting policies employed by us, including the use of estimates, are presented in the Notes to Consolidated Financial Statements in our 2006 Annual Report on Form 10-K.

Use of Estimates

Estimates by their nature are based on judgments and available information. The estimates that we make are based upon historical factors, current circumstances and the experience and judgment of our management. We evaluate our assumptions and estimates on an ongoing basis and may employ outside experts to assist in our evaluations. Therefore, actual results could materially differ from those estimates under different assumptions and conditions.

Critical accounting policies are those that are most important to the portrayal of our financial condition and the results of operations and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our most critical accounting policies, discussed below, pertain to revenue recognition, income taxes, accounts receivable – trade, net, inventories, net, the valuation of goodwill and intangible assets with indefinite lives, accrued expenses, derivative instruments and share-based compensation. In applying such policies, management must use some amounts that are based upon its informed judgments and best estimates. Because of the uncertainty inherent in these estimates, actual results could differ from estimates used in applying the critical accounting policies. Changes in such estimates, based on more accurate future information, may affect amounts reported in future periods.

For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends as well as an evaluation of economic conditions and the financial positions of our customers. For inventory, we review the aging and salability of our inventory and estimate the amount of inventory that we will not be able to sell in the normal course of business. This distressed inventory is written down to the expected recovery value to be realized through off-price channels. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected. We utilize various valuation methods to determine the fair value of acquired tangible and intangible assets. For inventory, the method uses the expected selling prices of finished goods and intangible assets acquired are valued using a discounted cash flow model. Should any of the assumptions used in these projections differ significantly from actual results, material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts. For accrued expenses related to items

such as employee insurance, workers’ compensation and similar items, accruals are assessed based on outstanding obligations, claims experience and statistical trends; should these trends change significantly, actual results would likely be impacted. Derivative instruments in the form of forward contracts and options are used to hedge the exposure to variability in probable future cash flows associated with inventory purchases and sales collections primarily associated with our European and Canadian entities. If fluctuations in the relative value of the currencies involved in the hedging activities were to move dramatically, such movement could have a significant impact on our results. Changes in such estimates, based on more accurate information, may affect amounts reported in future periods. We are not aware of any reasonably likely events or circumstances, which would result in different amounts being reported that would materially affect our financial condition or results of operations.

Revenue Recognition

Revenue is recognized from our wholesale, retail and licensing operations. Revenue within our wholesale operations is recognized at the time title passes and risk of loss is transferred to customers. Wholesale revenue is recorded net of returns, discounts and allowances. Returns and allowances require pre-approval from management. Discounts are based on trade terms. Estimates for end-of-season allowances are based on historic trends, seasonal results, an evaluation of current economic conditions and retailer performance. We review and refine these estimates on a monthly basis based on current experience, trends and retailer performance. Our historical estimates of these costs have not differed materially from actual results. Retail store revenues are recognized net of estimated returns at the time of sale to consumers. Proceeds received from the sale of gift cards are recorded as a liability and recognized as sales when redeemed by the holder. Licensing revenues are recorded based upon contractually guaranteed minimum levels and adjusted as actual sales data is received from licensees.

Income Taxes

Income taxes are accounted for under SFAS No. 109, “Accounting for Income Taxes.” In accordance with SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as measured by enacted tax rates that are expected to be in effect in the periods when the deferred tax assets and liabilities are expected to be realized or settled. Significant judgment is required in determining the worldwide provision for income taxes. In the ordinary course of a global business, the ultimate tax outcome is uncertain for many transactions. Changes in estimates may create volatility in our effective tax rate in future periods due to settlements with various tax authorities, either favorable or unfavorable, the expiration of the statute of limitations on some tax positions or obtaining new information about particular tax positions that may cause management to change its estimates. In the ordinary course of a global business, the ultimate tax outcome is uncertain for many transactions. It is our policy to recognize, at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority, the impact of an uncertain income tax position on its income tax return. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. We establish the provisions based upon our assessment of exposure associated with permanent tax differences, tax credits and interest expense applied to temporary difference adjustments. The tax provisions are analyzed periodically (at least quarterly) and adjustments are made as events occur that warrant adjustments to those provisions. We record interest expense and penalties payable to relevant tax authorities as income tax expense.

Accounts Receivable – Trade, Net

In the normal course of business, we extend credit to customers that satisfy pre-defined credit criteria. Accounts receivable – trade, net, as shown on the Condensed Consolidated Balance Sheets, is net of allowances and anticipated discounts. An allowance for doubtful accounts is determined through analysis of the aging of accounts receivable at the date of the financial statements, assessments of collectibility based on an evaluation of historical and anticipated trends, the financial condition of our customers and an evaluation of the impact of economic conditions. An allowance for discounts is based on those discounts relating to open invoices where trade discounts have been extended to customers. Costs associated with potential returns of products as well as allowable customer markdowns and operational charge backs, net of expected recoveries, are included as a reduction to net sales and are part of the provision for allowances included in Accounts receivable – trade, net. These provisions result from seasonal negotiations with our customers, as well as historical deduction trends, net of expected recoveries and the evaluation of current market conditions. Should circumstances change or economic or distribution channel conditions deteriorate significantly, we may need to increase our provisions. Our historical estimates of these costs have not differed materially from actual results.

Inventories, Net

Inventories are stated at lower of cost (using the first-in, first-out method) or market value. We continually evaluate the composition of our inventories assessing slow-turning, ongoing product as well as prior seasons’ fashion product. Market value of distressed inventory is valued based on historical sales trends for this category of inventory of our individual product lines, the impact of market trends and economic conditions and the value of current orders in-house relating to the future sales of this type of inventory. Estimates may differ from actual results due to quantity, quality and mix of products in inventory, consumer and retailer preferences and market conditions. We review our inventory position on a monthly basis and adjust our estimates based on revised projections and current market conditions. If economic conditions worsen, we incorrectly anticipate trends or unexpected events occur, our estimates could be proven overly optimistic and required adjustments could materially adversely affect future results of operations. Our historical estimates of these costs and our provisions have not differed materially from actual results.

Goodwill and Other Intangibles, Net

A two-step impairment test is performed on goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. We determine the fair value of our reporting units using the market approach as is typically used for companies providing products where the value of such a company is more dependent on the ability to generate earnings than the value of the assets used in the production process. Under this approach, we estimate fair value based on market multiples of revenues and earnings for comparable companies. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets of the impaired reporting unit, determining the fair value of the impaired reporting unit’s goodwill based upon the residual of the summed identified tangible and intangible assets and the fair value of the enterprise as determined in the first step and determining the magnitude of the goodwill impairment based upon a comparison of the fair value residual goodwill and the carrying value of goodwill of the reporting unit. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value, then we must record an impairment loss equal to the difference.

The fair values of purchased intangible assets with indefinite lives, primarily trademarks and trade names, are estimated and compared to their carrying values. We estimate the fair value of these intangible assets based on an income approach using the relief-from-royalty method. This methodology assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of these types of assets. This approach is dependent on a number of factors, including estimates of future growth and trends, royalty rates in the category of intellectual property, discount rates and other variables. We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We recognize an impairment loss when the estimated fair value of the intangible asset is less than the carrying value.

The recoverability of the carrying values of all long-lived assets with finite lives is reevaluated when changes in circumstances indicate the assets’ value may be impaired. Impairment testing is based on a review of forecasted operating cash flows and the profitability of the related business.

We completed our annual goodwill impairment tests as of the first day of the third quarter of fiscal 2007. No impairment was recognized at that date as a result of such tests. However, as a result of the impairment analysis performed in connection with our purchased trademarks with indefinite lives, we determined that the carrying value of such intangible asset related to its ELLEN TRACY brandname exceeded its estimated fair value.

Accordingly, we recorded a pretax charge of $12.3 million to reduce the value of the Ellen Tracy trademark to its estimated fair value. This impairment resulted from a decline in future anticipated cash flows of the ELLEN TRACY brand. Apart from this impairment, there were no other impairments relating to intangible assets during the nine months ended September 29, 2007 or September 30, 2006.

Accrued Expenses

Accrued expenses for employee insurance, workers’ compensation, profit sharing, contracted advertising and other outstanding obligations are assessed based on claims experience and statistical trends, open contractual obligations and estimates based on projections and current requirements. If these trends change significantly, actual results would likely be impacted. Our historical estimates of these costs and our provisions have not differed materially from actual results.

Derivative Instruments

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, requires that each derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the Condensed Consolidated Balance Sheets as either an asset or liability and measured at its fair value. The statement also requires that changes in the derivative’s fair value be recognized currently in earnings or Accumulated other comprehensive income (loss), depending on whether the derivative qualifies for hedge accounting treatment. Hedge accounting requires that we test for effectiveness at inception of each hedge and at the end of each reporting period.

We use foreign currency forward contracts and options for the purpose of hedging the specific exposure to variability in forecasted cash flows associated primarily with inventory purchases mainly by our European and Canadian entities. These instruments are designated as cash flow hedges. To the extent the hedges are highly effective, the effective portion of the changes in fair value is included in Accumulated other comprehensive income (loss), net of related tax effects, with the corresponding asset or liability recorded in the Condensed Consolidated Balance Sheets. The ineffective portion of the cash flow hedge is recognized primarily as a component of Cost of goods sold in current period earnings or, in the case of the swaps, if any, within SG&A expenses. Amounts recorded in Accumulated other comprehensive income (loss) are reflected in current period earnings when the hedged transaction affects earnings. If fluctuations in the relative value of the currencies involved in the hedging activities were to move dramatically, such movement could have a significant impact on our results of operations. We are not aware of any reasonably likely events or circumstances, which would result in different amounts being reported that would materially affect our financial condition or results of operations.

Hedge accounting requires that at the beginning of each hedge period, we justify an expectation that the hedge will be highly effective. This effectiveness assessment also involves an estimation of the probability of the occurrence of transactions for cash flow hedges. The use of different assumptions and changing market conditions may impact the results of the effectiveness assessment and ultimately the timing of when changes in derivative fair values and underlying hedged items are recorded in earnings.

We hedge our net investment position in euro functional subsidiaries by borrowing directly in foreign currency and designating a portion of foreign currency debt as a hedge of net investments. The foreign currency transaction gain or loss recognized for a foreign currency denominated debt instrument that is designated as the hedging instrument in a net investment hedge is recorded to cumulative translation adjustment. We also use derivative instruments to hedge the changes in the fair value of debt due to fluctuations in interest rates. Changes in fair value is recognized currently in Interest expense, net together with the change in fair value of the hedged item attributable to fluctuations in interest rates.

Occasionally, we purchase short-term foreign currency contracts and options outside of the cash flow hedging program to neutralize quarter-end balance sheet and other expected exposures. These derivative instruments do not qualify as cash flow hedges under SFAS No. 133 and are recorded at fair value with all gains or losses, which have not been significant, recognized as a component of SG&A expenses in current period earnings.

Share-Based Compensation

On July 3, 2005, we adopted SFAS No. 123(R) “Share-Based Payment,” requiring the recognition of compensation expense in the Condensed Consolidated Statements of Income related to the fair value of employee share-based awards, including stock options as well as restricted stock. Determining the fair value of stock options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Prior to adopting SFAS No. 123(R), we applied Accounting Principles Board (“APB”) Opinion No. 25 and related Interpretations, in accounting for its share-based compensation plans. All employee stock options were granted at or above the grant date market price. Accordingly, no compensation cost was recognized for fixed stock option grants prior to July 3, 2005. In accordance with SFAS No. 123(R), judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS No. 159 allows companies the choice to measure financial instruments and certain other items at fair value. This allows the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Statement is effective for fiscal years beginning after November 15, 2007. We are currently reviewing the impact of SFAS No. 159 on our financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The statement is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS No. 157 on our financial statements.

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

Statements contained herein and in future filings by the Company with the Securities and Exchange Commission (“SEC”), in the Company’s press releases and in oral statements made by, or with the approval of, authorized personnel that relate to the Company’s future performance, including, without limitation, statements with respect to the Company’s anticipated results of operations or level of business for fiscal 2007, any fiscal quarter of 2007 or any other future period, including those herein under the heading “Forward Outlook” or otherwise, are forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements, which are indicated by words or phrases such as “intend,” “anticipate,” “plan,” “estimate,” “project,” “management expects,” “the Company believes,” “we are optimistic that we can,” “current visibility indicates that we forecast” or “currently envisions” and similar phrases are based on current expectations only and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Factors that could cause actual results to materially differ are also discussed in Item 1A “Risk Factors” included below.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have exposure to interest rate volatility relating to interest rate changes applicable to our revolving credit facility and other credit facilities. These loans bear interest at rates which vary with changes in prevailing market rates.

We do not speculate on the future direction of interest rates. As of September 29, 2007, December 30, 2006 and September 30, 2006, our exposure to changing market rates was as follows:


Dollars in millions	September 29, 2007			December 30, 2006			September 30, 2006

Variable rate debt	$	450.7		$	100.6		$	289.0
Average interest rate		5.78	%		5.14	%		5.1	%

A ten percent change in the average rate would have resulted in a $1.0 million change in interest expense during the first nine months of 2007.

We finance our capital needs through available cash and marketable securities, operating cash flows, letters of credit, synthetic lease and bank revolving credit facilities, other credit facilities and commercial paper issuances. Our floating rate bank revolving credit facility, bank lines and commercial paper program expose us to market risk for changes in interest rates. As of September 29, 2007, we have not employed interest rate hedging to mitigate such risks with respect to our floating rate facilities. We believe that our Eurobond offering, which is a fixed rate obligation, partially mitigates the risks with respect to our variable rate financing.

MEXX transacts business in multiple currencies exposing us to exchange rate fluctuations. We mitigate the risks associated with changes in foreign currency rates through foreign exchange forward contracts and collars to hedge transactions denominated in foreign currencies for periods of generally less than one year and to hedge expected payment of intercompany transactions with our non-U.S. subsidiaries, which include MEXX. Gains and losses on contracts, which hedge specific foreign currency denominated commitments, are recognized in the period in which the transaction is completed.

At September 29, 2007, December 30, 2006 and September 30, 2006, we had outstanding foreign currency collars with net notional amounts aggregating to $6.3 million, $17.5 million and $34.4 million, respectively. We had forward contracts aggregating to $118.8 million at September 29, 2007, $97.5 million at December 30, 2006 and $49.5 million at September 30, 2006. Unrealized losses for outstanding foreign currency options and foreign exchange forward contracts were approximately $(6.1) million at September 29, 2007, $(1.6) million at December 30, 2006 and a gain of $0.3 million at September 30, 2006. A sensitivity analysis to changes in the foreign currencies when measured against the U.S. dollar indicates if the U.S. dollar uniformly weakened by 10% against all of the hedged currency exposures, the fair value of instruments would decrease by $13.2 million. Conversely, if the U.S. dollar uniformly strengthened by 10% against all of the hedged currency exposures, the fair value of these instruments would increase by $12.5 million. Any resulting changes in the fair value of the hedged instruments would be partially offset by changes in the underlying balance sheet positions. The sensitivity analysis assumes a parallel shift in foreign currency exchange rates. The assumption that exchange rates change in a parallel fashion may overstate the impact of changing exchange rates on assets and liabilities denominated in foreign currency. We do not hedge all transactions denominated in foreign currency.

The table below presents the amount of contracts outstanding, the contract rate and unrealized gain (loss), as of September 29, 2007:


	U.S. Dollar		Hong Kong		Contract		Unrealized
Currency in thousands	Amount		Dollar Amount		Rate		(Loss)

Forward Contracts:
Euro				759,500		0.0927 to 0.0996	$	(4,878	)
Canadian Dollars	$	8,799				0.8721 to 0.9993		—
Canadian Dollars				95,505		0.1335 to 0.1482		(928	)

Foreign Exchange Collar Contracts:
Euro				7,750		0.0980 to 0.1003		(83	)
Canadian Dollars	$	3,276				0.8403 to 0.9970		—
Canadian Dollars				15,403		0.1428 to 0.1527		(231	)


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The table below presents the amount of contracts outstanding, the contract rate and unrealized gain, as of December 30, 2006:


	U.S. Dollar		Hong Kong		Contract		Unrealized
Currency 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		180

Foreign 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

The table below presents the amount of contracts outstanding, the contract rate and unrealized gain (loss), as of September 30, 2006:


	U.S. Dollar		Hong Kong		Contract		Unrealized
Currency in thousands	Amount		Dollar Amount		Rate		(Loss)

Forward Contracts:
Euro				379,750		0.0987 to 0.1067	$	442
Canadian Dollars				5,952		0.1428 to 0.1428		(1	)

Foreign Exchange Collar Contracts:
Euro				201,500		0.0980 to 0.1143	$	39
Canadian Dollars	$	5,322				0.8403 to 0.8917		—
Canadian Dollars				24,921		0.1442 to 0.1538		(144	)

ITEM 4. CONTROLS AND PROCEDURES

The Company, under the supervision and with participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, as of the end of the period covered by this report. Based upon that evaluation, our management,under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated our disclosure controls and procedures at the end of each of our fiscal quarters. Our Chief Executive Officer and Chief Financial Officer concluded that as of September 29, 2007 our disclosure controls and procedures were effective to ensure that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified and that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosure. There was no change in the Company’s internal control over financial reporting during the third quarter of fiscal 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is a party to several pending legal proceedings and claims. Although the outcome of any such actions cannot be determined with certainty, management is of the opinion that the final outcome of any of these actions should not have a material adverse effect on the Company’s financial position, results of operations, liquidity or cash flows. (See Notes 10 and 24 of Notes to Consolidated Financial Statements in the Company’s 2006 Annual Report on Form 10-K).

Our previously owned Augusta, Georgia facility became listed during 2004 on the State of Georgia’s Hazardous Site Inventory of environmentally impacted sites due to the detection of certain chemicals at the site. In November 2005,


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the Georgia Department of Natural Resources requested that we submit a compliance status report and compliance status certification regarding the site. The Company submitted the requested materials in the second quarter of 2006. In October 2006, the Company received a letter from the Department of Natural Resources requesting that we provide additional information and perform additional tests to complete the compliance status report, which was previously submitted. Additional testing has been completed and we submitted the requested information to the Department of Natural Resources in March.

ITEM 1A. RISK FACTORS

The following risk factors have been updated from those included in our 2006 Annual Report on Form 10-K to include risks associated with our long-term strategic plan.

Risks Associated with Our Recently Announced Long-Term Strategic Plan

Our ability to execute the long-term growth plan discussed during our investor conference on July 11, 2007 will depend on a variety of factors, including the following:

•		Risks relating to the reorganization of the Company into two new segments and the related realignment of the Company’s management structure;

•		Our ability to attract and retain talented, highly qualified executives and other key personnel to execute the plan;

•		Our ability to successfully execute on the strategic review of the brands we have designated for such review, including the risks associated with our having designated the appropriate brands for such review, the risks associated with retaining key personnel working for such brands, and risks associated with appropriately valuing the assets related to brands that may be identified for divestiture;

•		Risks associated with our operation and expansion of our specialty retail business, including the ability to successfully expand the specialty store base of our Direct Brands segment, 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;

•		Risks associated with our ability to achieve greater collaboration with our wholesale customers and to improve results of our wholesale-based brands and the wholesale businesses of our Direct Brands; and

•		Our ability to achieve projected cost savings.

Risks Associated with Competition and the Marketplace

The apparel and related product markets are highly competitive, both within the United States and abroad. Our ability to compete successfully within the marketplace depends on a variety of factors, including:

•		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 our supply chain system, including our product development, sourcing, logistics and technology functions, to reduce product cycle-time and costs and meet customer demands and the requirements of the projected growth of our retail-based Direct Brands segment;

•		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


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			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, including in the areas of design, merchandising, sales, supply chain, marketing, production and systems;

•

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.

Economic, Social and Political Factors

Also impacting us and our operations are a variety of economic, social and political factors, including the following:

•

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 our trademarks and other proprietary rights and other risks relating to managing intellectual property issues.


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Risks Associated with Acquisitions and New Product Lines and Markets

We have in the past and may from time to time acquire or develop new product lines and/or enter new markets or product categories, including through licensing arrangements. These activities are accompanied by a variety of risks inherent in any such new business venture, including the following:

•		Our ability to identify appropriate new product lines and markets, as well as acquisition candidates;

•		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 acquired companies, 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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table summarizes information about purchases by the Company during the nine months ended September 29, 2007 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:


							Maximum
							Approximate Dollar
					Total Number of		Value of Shares that
	Total Number		Average		Shares Purchased as		May Yet Be
	of Shares		Price		Part of Publicly		Purchased Under the
	Purchased		Paid Per		Announced Plans or		Plans or Programs
Period	(in thousands)		Share		Programs		(in thousands)⁽²⁾

December 31, 2006 — January 27, 2007	52.3	⁽¹⁾	$	44.08		—	$	229,237
January 28, 2007 — March 3, 2007	—			—		—		229,237
March 4, 2007 — March 31, 2007	132.2	⁽¹⁾		43.08		—		229,237
April 1, 2007 – April 28, 2007	0.1	⁽¹⁾		43.80		—		229,237
April 29, 2007 – June 2, 2007	1,808.8	⁽¹⁾		34.21		1,808.7		167,364
June 3, 2007 – June 30, 2007	547.6	⁽¹⁾		35.87		547.5		147,724
July 1, 2007 – July 28, 2007	—			—		—		147,724
July 29, 2007 – September 1, 2007	1,769.9	⁽¹⁾		33.95		1,769.4		87,661
September 2, 2007 – September 29, 2007	1,216.4	⁽¹⁾		32.84		1,216.1		47,728

Total 39 weeks ended September 29, 2007	5,527.3	⁽¹⁾	$	34.29		5,341.7	$	47,728


⁽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 29, 2007, the Company had $47.7 million remaining in buyback authorization under its program.


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ITEM 5. OTHER INFORMATION

None.

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

Pursuant to the requirements of the securities exchange act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DATE: October 30, 2007


LIZ CLAIBORNE, INC.		LIZ CLAIBORNE, INC.

By:	/s/ Andrew Warren	By:	/s/ Elaine H. Goodell

	ANDREW WARREN Chief Financial Officer (Principal financial officer)		ELAINE H. GOODELL Vice President — Corporate Controller and Chief Accounting Officer (Principal accounting officer)

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Kate Spade & Co (KATE) 10-Q2008 Q1 Quarterly report

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