Kate Spade & Co 10Q 2008 Q3 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 endedApril 5, 2008


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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filerþ		Accelerated filero		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting companyo

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 May 2, 2008 was 94,782,920.

LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
April 5, 2008


		PAGE
		NUMBER
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets as of April 5, 2008 (Unaudited), December 29, 2007 and March 31, 2007 (Unaudited)		4

Condensed Consolidated Statements of Operations for the Three Month Periods Ended April 5, 2008 (Unaudited) and March 31, 2007 (Unaudited)		5

Condensed Consolidated Statements of Cash Flows for the Three Month Periods Ended April 5, 2008 (Unaudited) and March 31, 2007 (Unaudited)		6 – 7

Notes to Condensed Consolidated Financial Statements (Unaudited)		8 – 29

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30 – 48

Item 3. Quantitative and Qualitative Disclosures About Market Risk		48 – 49

Item 4. Controls and Procedures		49

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		50

Item 1A. Risk Factors		50 – 56

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		56

Item 5. Other Information		56

Item 6. Exhibits		57

SIGNATURES		58
EX-31.A: CERTIFICATION
EX-31.B: CERTIFICATION
EX-32.A: CERTIFICATION
EX-32.B: CERTIFICATION

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this Form 10-Q (or incorporated by reference into this Form 10-Q), in future filings by us with the Securities and Exchange Commission (“the SEC”), in our press releases, and in oral statements made by, or with the approval of, our authorized personnel, that relate to the Company’s future performance or future events are forward-looking statements under the Private Securities Litigation Reform Act of 1995. Such statements are indicated by words or phrases such as “intend,” “anticipate,” “plan,” “estimate,” “project,” “expect,” “we believe,” “we are optimistic that we can,” “current visibility indicates that we forecast” or “currently envisions” and similar phrases. Forward-looking statements include statements regarding, among other items:

	•		Our long-term growth strategies;

	•		Anticipated results of operations or level of business for fiscal 2008, any fiscal quarter of 2008 or any other future period, including those contained in this Form 10-Q under the heading “Forward Outlook;”

	•		Our ability to continue to implement appropriate expense savings initiatives and maintain a competitive cost structure;

	•		Our ability to develop our retail and supply chain capabilities;

	•		Our ability to expand internationally;

	•		Our ability to successfully integrate the acquisitions of our KATE SPADE and NARCISO RODRIGUEZ brands;

	•		Our ability to be able to commit the resources, structure and marketing investment necessary to support and grow our brands;

	•		Our ability to navigate the difficult macroeconomic environment and challenges presented in the wholesale and retail industries;

	•		Our ability to offer products that are acceptable to our department store customers and consumers; and

	•		Our ability to realize sufficient cash flows from operations and to have access to financing on acceptable terms to enable us to fund our liquidity requirements.

The forward-looking statements are based on current expectations only and are not guarantees of future performance, and are subject to certain risks, uncertainties and assumptions, including those described in “Item 1A – Risk Factors” as well as in our 2007 annual report on Form 10-K. The Company may change its intentions, beliefs or expectations at any time and without notice, based upon any change in the Company’s assumptions or otherwise. 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. In addition, some factors are beyond our control. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LIZ CLAIBORNE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	(Unaudited)							(Unaudited)
	April 5,			December 29,				March 31,
	2008			2007				2007
Assets
Current Assets:
Cash and cash equivalents	$	111,142		$	205,401			$	96,504
Marketable securities		295			328				9,485
Accounts receivable — trade, net		566,656			440,160				601,294
Inventories, net		526,052			540,807				644,180
Deferred income taxes		99,506			103,288				73,290
Other current assets		287,205			209,525				151,383
Assets held for sale		31,227			65,332				—

Total current assets		1,622,083			1,564,841				1,576,136


Property and Equipment, Net		587,404			580,733				567,105
Goodwill, Net		676,238			677,852				1,010,122
Intangibles, Net		316,939			347,119				410,013
Deferred Income Taxes		20,417			75,445				—
Other Assets		23,236			22,477				21,570

Total Assets	$	3,246,317		$	3,268,467			$	3,584,946


Liabilities and Stockholders’ Equity
Current Liabilities:
Short term borrowings	$	77,087		$	50,828			$	26,824
Accounts payable		225,425			223,522				238,533
Accrued expenses		416,730			459,309				284,578
Income taxes payable		34,045			32,266				—
Deferred income taxes		497			497				—
Liabilities held for sale		—			3,963				—

Total current liabilities		753,784			770,385				549,935


Long-Term Debt		912,025			836,883				715,950
Other Non-Current Liabilities		109,885			140,764				102,227
Deferred Income Taxes		1,157			1,111				65,445
Commitments and Contingencies (Note 11)
Minority Interest		3,858			3,760				3,375
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		295,170			296,158				261,770
Retained earnings		2,911,835			2,948,085				3,353,919
Accumulated other comprehensive loss		(37,822	)		(24,582	)			(57,147	)

		3,345,620			3,396,098				3,734,979

Common stock in treasury, at cost 81,610,514, 81,695,077 and 72,382,307 shares		(1,880,012	)		(1,880,534	)	��		(1,586,965	)

Total stockholders’ equity		1,465,608			1,515,564				2,148,014

Total Liabilities and Stockholders’ Equity	$	3,246,317		$	3,268,467			$	3,584,946

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

LIZ CLAIBORNE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per common share data)

(Unaudited)


	Three Months Ended
	April 5,			March 31,
	2008			2007
	(14 Weeks)			(13 Weeks)
Net Sales	$	1,121,542		$	1,069,200

Cost of goods sold		590,615			570,092


Gross Profit		530,927			499,108

Selling, general & administrative expenses		554,904			469,378


Operating (Loss) Income		(23,977	)		29,730

Other expense, net		(2,748	)		(729	)

Interest expense, net		(12,103	)		(8,532	)


(Loss) Income before (Benefit) Provision for Income Taxes		(38,828	)		20,469

(Benefit) Provision for income taxes		(23,984	)		9,987


(Loss) Income from Continuing Operations		(14,844	)		10,482

(Loss) income from discontinued operations, net of tax		(3,975	)		5,716

Loss on disposal of discontinued operations, net of tax		(12,202	)		—


Net (Loss) Income	$	(31,021	)	$	16,198


Earnings per Share:
Basic
(Loss) Income from Continuing Operations	$	(0.16	)	$	0.10
Net (Loss) Income	$	(0.33	)	$	0.16

Diluted
(Loss) Income from Continuing Operations	$	(0.16	)	$	0.10
Net (Loss) Income	$	(0.33	)	$	0.16

Weighted Average Shares, Basic		93,507			101,796
Weighted Average Shares, Diluted		93,507			103,127

Dividends Paid per Common Share	$	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)


	Three Months Ended
	April 5,			March 31,
	2008			2007
	(14 Weeks)			(13 Weeks)

Cash Flows from Operating Activities:

Net (loss) income	$	(31,021	)	$	16,198
Adjustments to arrive at (loss) income from continuing operations		16,177			(5,716	)

(Loss) income from continuing operations		(14,844	)		10,482

Adjustments to reconcile (loss) income from continuing operations to net cash used in operating activities:
Depreciation and amortization		40,860			37,512
Streamlining initiatives; asset write-down		2,707			4,692
Loss on asset disposals		14,152			—
Share-based compensation		3,391			7,535
Tax benefit on exercise of stock options		7			2,074
Other, net		17			(329	)
Change in assets and liabilities, exclusive of acquisitions:
Increase in accounts receivable – trade, net		(117,060	)		(100,555	)
Decrease (increase) in inventories, net		8,791			(48,698	)
Decrease (increase) in other current and non-current assets		47,038			(22,622	)
Increase (decrease) in accounts payable		1,911			(30,860	)
Decrease in accrued expenses		(49,697	)		(56,448	)
Decrease in deferred income taxes and income taxes payable		(87,582	)		(5,831	)
Net cash (used in) provided by operating activities of discontinued operations		(4,043	)		6,867

Net cash used in operating activities		(154,352	)		(196,181	)


Cash Flows from Investing Activities:
Purchases of property and equipment		(46,105	)		(34,193	)
Proceeds from sales of property and equipment		—			1,410
Purchases of new businesses and payment of related debt		(5,066	)		(13,431	)
Payments for in-store merchandise shops		(1,632	)		(924	)
Other, net		(392	)		(652	)
Net cash provided by (used in) investing activities of discontinued operations		60,344			(238	)

Net cash provided by (used in) investing activities		7,149			(48,028	)

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)


	Three Months Ended
	April 5,			March 31,
	2008			2007
	(14 Weeks)			(13 Weeks)

Cash Flows from Financing Activities:
Short term borrowings, net		61,698			4,531
Principal payments under capital lease obligations		(1,075	)		(1,756	)
Commercial paper, net		—			142,355
Proceeds from exercise of common stock options		51			15,976
Dividends paid		(5,257	)		(5,726	)
Tax (deficiency) excess benefit related to share-based compensation		(2,058	)		1,091
Other, net		(798	)		(330	)

Net cash provided by financing activities		52,561			156,141


Effect of exchange rate changes on cash and cash equivalents		383			(1,073	)
Net Change in Cash and Cash Equivalents		(94,259	)		(89,141	)
Cash and Cash Equivalents at Beginning of Period		205,401			185,645

Cash and Cash Equivalents at End of Period	$	111,142		$	96,504

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

LIZ CLAIBORNE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unless otherwise noted all amounts are in thousands, except per share amounts)

(Unaudited)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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 its 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 2007 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 29, 2007 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. The prior period has 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 reportable segments, the Company considers economic characteristics, as well as products, customers, sales growth potential and long-term profitability. The Company aggregates its five 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 operating segments: JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX; and

	•		The Partnered Brands segment — consists of one operating segment including the wholesale apparel, wholesale non-apparel, outlet and specialty retail, e-commerce and licensing operations of the Company’s wholesale-based brands including: AXCESS, CLAIBORNE (men’s), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, ENYCE, KENSIE, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA, MONET, NARCISO RODRIGUEZ, SIGRID OLSEN, TRIFARI, VILLAGER, the Company’s licensed DKNY^® JEANS, DKNY^® ACTIVE and DKNY^® MENS brands as well as the Company’s other non-Direct Brands fragrances including: CLAIBORNE, CURVE, LIZ CLAIBORNE and our licensed USHER fragrance.

In July 2007, the Company announced its long-term strategic plan, which included a strategic review and potential divestiture or closure of 16 of its brands. On October 4, 2007, the Company completed the first phase of such review by finalizing the disposal of certain assets of its former EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands in a single transaction. The Company completed the second phase of such review by completing the disposition of certain assets and liabilities of its former C&C CALIFORNIA and LAUNDRY BY DESIGN brands on February 4, 2008 and substantially all of the assets and liabilities of its former prAna brand on April 4, 2008. Also in 2007, the Company closed a distribution center and implemented a plan to sell the building, land and other assets associated with such facility. On April 10, 2008, the Company disposed of substantially all of the assets and liabilities of its ELLEN TRACY brand. Pursuant to Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), certain assets and liabilities of the C&C CALIFORNIA, LAUNDRY BY DESIGN and prAna brands, as well as the assets associated with the Company’s closed distribution center, have been segregated and reported as held for sale as of December 29, 2007. Also pursuant to SFAS No. 144, certain assets and liabilities associated with the ELLEN TRACY brand

and the assets associated with the Company’s closed distribution center have been segregated and reported as held for sale as of April 5, 2008.

The activities of the Company’s former EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES, TAPEMEASURE, C&C CALIFORNIA, LAUNDRY BY DESIGN and prAna brands and the retail operations of its former ELLEN TRACY brand have been segregated and reported as discontinued operations for all periods presented. As indicated, only the retail operations of the Company’s former ELLEN TRACY brand have been presented as discontinued operations, as the ELLEN TRACY wholesale activities do not represent operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes from the remainder of the Company.

During the quarter ended April 5, 2008, the Company recognized a pretax charge of $9.5 million on the ELLEN TRACY transaction, of which $1.8 million was allocated to the ELLEN TRACY retail operations and therefore recorded within discontinued operations. The remaining charge of $7.7 million was allocated to the ELLEN TRACY wholesale operations and has been recorded within Selling, general and administrative expenses (“SG&A”).

Summarized financial data for the aforementioned brands are provided in Note 3 — Discontinued Operations.

During 2007, the Company decided to close the SIGRID OLSEN brand, which is expected to occur in the second quarter of 2008. On January 17, 2008, the Company announced that it entered into an exclusive license agreement with Kohl’s, whereby Kohl’s will source and sell products under the DANA BUCHMAN brand which has not been presented as a discontinued operation due in part to the Company’s continuing involvement with the DANA BUCHMAN brand.

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.

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 the Company. 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 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. 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. Due to 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. Sales tax collected from customers is excluded from revenue. 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. 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 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 for seasonal merchandise are recorded at actual average cost. Inventories for replenishment and on-going merchandise are recorded 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.

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 reporting 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 based on their fair value and determining the fair value of the impaired reporting unit’s goodwill based upon the residual of the summed identified tangible and intangible assets.

The Company completed its annual goodwill impairment tests as of the first day of the third quarter of fiscal 2007. No impairment of goodwill was recognized at that date as a result of such tests. However, in accordance with SFAS No. 142, the Company performed an additional goodwill impairment test as of December 29, 2007 and recorded a pre-tax impairment charge of $450.8 million related to goodwill previously recorded in its Partnered Brands segment, which is a reporting unit (see Note 8 – Goodwill and Intangible Assets).

Owned trademarks that have been determined to have indefinite lives are not subject to amortization but are reviewed at least annually for potential impairment in accordance with SFAS No. 142, as mentioned above. The fair value of purchased intangible assets with indefinite lives, primarily trademarks and tradenames, are estimated and compared to their carrying value. 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.

Intangible assets with finite lives are amortized over their respective lives to their estimated residual values and are also reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

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.

Accrued Expenses

Accrued expenses for employee insurance, workers’ compensation, profit sharing, contracted advertising professional fees 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, then 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 in either (Loss) Income from Continuing Operations or Accumulated other comprehensive income (loss), depending on whether the derivative qualifies for hedge accounting treatment. Hedge accounting requires the Company to test each derivative 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 are 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 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 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 as a translation adjustment. The Company also uses derivative instruments to hedge the changes in the fair value of the debt due to interest rates, with the change in fair value recognized currently in Interest expense, net, together with the change in fair value of the hedged item attributable to 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

The Company accounts for share-based compensation in accordance with SFAS No. 123(R) “Share-Based Payment,” requiring the recognition of compensation expense in the Condensed Consolidated Statements of Operations related to the fair value of employee share-based awards, including stock options and restricted stock. Determining the fair value of 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. 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 values due to the short-term nature of these instruments. 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 date of issuance. Fair values for derivatives are either developed using dealer quotes or cash flow models (see — Recently Adopted Accounting Policies, Fair Value Measurements).

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

As stated above, investments are stated at market. The estimated fair value of the 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 recognized in income based on settlement dates. Unrealized gains and losses on securities available-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. Improvements are capitalized and depreciated in accordance with the Company’s policies; costs for maintenance and repairs are expensed as incurred. 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.

The Company capitalizes the costs of software developed or obtained for internal use in accordance with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalization of software developed or obtained for internal use commences during the development phase of the project. The Company amortizes software developed or obtained for internal use on a straight-line basis over five years, when such software is substantially ready for use.

The Company evaluates the recoverability of property and equipment if circumstances indicate an impairment may have occurred, pursuant to SFAS No. 144. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. Property and equipment is evaluated separately within each brand. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to the Company’s Consolidated Statements of Operations. As a result of an impairment analysis performed on property and equipment of the Company’s MEXX brand in the United Kingdom “MEXX UK”, the Company determined that the carrying value of such assets exceeded their fair value. Accordingly, during the first quarter of 2008, the Company recorded a pre-tax charge of $2.6 million within SG&A on the accompanying Condensed Consolidated Statement of Operations in order to reduce the carrying value of such assets to their estimated fair value. The impairment resulted from a decline in future anticipated cash flows of the retail operations of MEXX UK due to various factors, including the Company’s decision to close the retail operations of MEXX UK.

Operating Leases

The Company leases office space, retail stores and distribution facilities. Many of these operating leases provide for tenant improvement allowances, rent increases and/or contingent rent provisions. Rental expense is recognized on a straight-line basis commencing with the possession date of the property which is typically the earlier of the lease commencement date or the date when the company takes possession of the property. Certain store leases include contingent rents that are based on a percentage of retail sales over stated thresholds. The current portion of the tenant allowances is included in accrued liabilities, while the long-term portion is recorded as a deferred lease credit. These allowances are amortized on a straight-line basis over the life of the lease as a reduction of rent expense and are included in SG&A expense.

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 loss. Gains and losses on translation of intercompany loans with foreign subsidiaries of a long-term investment nature are also included in this component of Stockholders’ Equity.

Foreign Currency Transactions

Outstanding balances in foreign currencies are translated at the end of period exchange rates. The resulting exchange differences are recorded in the Condensed Consolidated Statement of Operations or Other comprehensive income (loss), as appropriate.

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 are 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 Operations.

Fiscal Year

The Company’s fiscal year ends on the Saturday closest to December 31. The 2008 fiscal year ending January 3, 2009, reflects a 53-week period resulting in a 14-week, three-month period for the first quarter. The 2007 fiscal year reflects a 52-week period resulting in a 13-week, three-month period for the first quarter.

Cash Dividend and Common Stock Repurchase

On January 23, 2008, 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 March 17, 2008 to stockholders of record at the close of business on February 22, 2008. On November 12, 2007, the Company’s Board of Directors authorized the Company to purchase up to an additional $100 million of its common stock for cash in open market purchases and privately negotiated transactions. As of May 2, 2008, the Company had $28.7 million remaining in buyback authorization under its share repurchase programs.

RECENTLY ADOPTED ACCOUNTING POLICIES

Fair Value Measurements

The Company adopted SFAS No. 157, “Fair Value Measurements”, on December 30, 2007, the first day of fiscal year 2008. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. The adoption of SFAS No. 157 did not have any impact on the Company’s condensed consolidated financial statements. SFAS No. 157 establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s assumptions (unobservable inputs). The hierarchy consists of three levels:


Level 1 –		Quoted market prices in active markets for identical assets or liabilities;


Level 2 –		Inputs other than Level 1 inputs that are either directly or indirectly observable; and


Level 3 –		Unobservable inputs developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

The following table presents the financial assets and liabilities we measure at fair value on a recurring basis, based on the fair value hierarchy as of April 5, 2008:


In thousands	Level 2
Financial Assets:
Derivatives		$	457
Financial Liabilities:
Derivatives		$	9,196

The Company adopted 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. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has chosen to not adopt the fair value measurement provisions of SFAS 159 for its existing instruments.

2. ACQUISITIONS

On May 18, 2007, the Company acquired 50 percent ownership of the entity that owns the 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 operate the license and develop the NARCISO RODRIGUEZ brand worldwide. The purchase price totaled $13.9 million, which includes closing fees and certain post-closing adjustments. The Company allocated $8.9 million of purchase price to the value of trademarks and tradenames associated with the business, $0.3 million to the value of a non-compete agreement, $0.6 million to the value of a beneficial lease and $5.0 million to goodwill. The $5.0 million of goodwill that was included in the Partnered Brands Segment was subsequently written off as part of the Company’s fourth quarter 2007 non-cash impairment charge and deducted for tax purposes. The value of trademarks and tradenames, the non-compete agreement and the beneficial lease are being amortized over 7 years, 3 years and 5 years, respectively. 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 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 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. The Company allocated $74.9 million of purchase price to the value of trademarks and tradenames associated with the business, $6.5 million to the value of customer relationships, $2.6 million to the value of beneficial leases and $36.0 million to goodwill. The trademarks and tradenames are deemed to have indefinite lives and are subject to an annual impairment test. The value of customer relationships and beneficial leases are being amortized over 14 years and from 2 to 9 years, respectively.

On January 26, 2006, the Company acquired 100 percent of the equity 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 currently estimates that the aggregate of the contingent payments will be in the range of approximately $20-29 million and will be accounted for as additional purchase price when paid.

The prAna acquisition agreement required the Company to make contingent payments to the former owners of prAna based on certain performance parameters of prAna over a pre-determined time frame. In connection with the sale of the prAna brand, the Company satisfied its contingent obligation for $18.5 million, which was paid concurrently with the closing of the sale of the prAna brand on April 4, 2008 and was recorded within Loss on disposal of discontinued operations, net of tax, in the Company’s Condensed Consolidated Statement of Operations.

On April 7, 2003, the Company acquired 100 percent of the equity of Juicy Couture, Inc. (formerly, Travis Jeans, Inc.) (“Juicy Couture”), a privately held fashion apparel company. The total purchase price consisted of: (i) a payment, including the assumption of debt and fees of $53.1 million and (ii) 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. These payments were accounted for as additional purchase price and as increases to goodwill. The estimated 2008 payment of $72.9 million will be made in the second quarter of 2008 based on a multiple of Juicy Couture’s 2007 earnings, which has been accounted for as additional purchase price and an increase to goodwill.

On June 8, 1999, the Company acquired 85.0 percent of the equity 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, 2008, January 16, 2007, January 17, 2006 and January 28, 2005, the Company paid $5.0 million, $10.0 million, $10.0 million and $35.0 million, respectively, for 0.4 percent, 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% of the equity of Lucky Brand in each of January of 2009 and 2010 for payments of $5.0 million each. The Company recorded the present value of fixed amounts owed of $9.3 million in Accrued expenses and Other Non-Current Liabilities. As of April 5, 2008, 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 of $14.4 million that will be made in the first half of 2008 based on a multiple of Lucky Brand’s 2007 earnings, which the Company has accounted for as additional purchase price and (ii) the 2011 payment that 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 $9-12 million.

3. DISCONTINUED OPERATIONS

On October 4, 2007, the Company completed the sale of its former EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands in a single transaction. Consideration for the sale was represented by a note that matured in February 2008 for which the Company received approximately $15.0 million during 2008.

On February 4, 2008, the Company completed the disposal of certain assets and liabilities of its former C&C CALIFORNIA and LAUNDRY BY DESIGN brands for net proceeds of $33.1 million and on April 4, 2008, the Company completed the disposal of substantially all of the assets and liabilities of its former prAna brand for net proceeds of $15.7 million (which is net of payments to the former owners of prAna of $18.5 million and other transaction related costs). On April 10, 2008, the Company completed the sale of the assets and liabilities of the ELLEN TRACY brand (see Note 19 – Subsequent Events).

The Company recorded a pre-tax non-cash charge of $19.4 million ($12.2 million, net of tax) during the three months ended April 5, 2008, to reflect the estimated difference between the carrying value of the net assets sold and their estimated fair value, less costs to dispose, including estimated transaction costs. This amount may be adjusted in subsequent periods due to customary post-closing adjustments that are not currently estimable, including contingent consideration.

Assets held for sale on the accompanying condensed consolidated balance sheets as of April 5, 2008, consist of assets associated with the Company’s former ELLEN TRACY brand and its closed distribution center. Assets held for sale on the accompanying condensed consolidated balance sheets as of December 29, 2007 consist of the assets associated with the Company’s former C&C CALIFORNIA, LAUNDRY BY DESIGN and prAna brands and its closed distribution center. Assets held for sale include the following:


	April 5,		December 29,
In thousands	2008		2007

Accounts receivable	$	—	$	2,452
Inventories		8,904		13,444
Property and equipment		5,881		7,349
Intangible assets		16,442		41,786
Other assets		—		301

Total assets held for sale	$	31,227	$	65,332

Liabilities held for sale consists of accounts payable and accrued expenses as of December 29, 2007.

Summarized condensed consolidated statements of operations data for discontinued operations are as follows:


	Three Months Ended
	April 5,			March 31,
	2008			2007
	(14 Weeks)			(13 Weeks)

Net sales	$	23,613		$	83,779

(Loss) income before (benefit) provision for income taxes	$	(6,468	)	$	9,153
(Benefit) provision for income taxes		(2,493	)		3,437

(Loss) income from discontinued operations, net of tax	$	(3,975	)	$	5,716

4. STOCKHOLDERS’ EQUITY

Activity for the three months ended April 5, 2008 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 29, 2007	$	296,158		$	2,948,085		$	(1,880,534	)
Net loss		—			(31,021	)		—
Restricted shares issued, net of cancellations and shares withheld for taxes		(2,353	)		—			496
Stock options exercised		25			—			26
Share-based compensation		3,391			—			—
Tax benefit on exercise of stock options		7			—			—
Tax deficiency related to share-based compensation		(2,058	)		—			—
Dividends declared		—			(5,229	)		—

Balance as of April 5, 2008	$	295,170		$	2,911,835		$	(1,880,012	)

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


	Three Months Ended
	April 5,			March 31,
	2008			2007
In thousands	(14 Weeks)			(13 Weeks)

Net (loss) income	$	(31,021	)	$	16,198
Other comprehensive (loss) income, net of tax:
Change in cumulative translation adjustment		25,752			4,252
Change in cumulative translation adjustment on Eurobonds, net of income tax benefit of $2,241.		(36,652	)		(4,810	)
Changes in unrealized losses on available-for-sale securities, net of income tax benefit of $31 and $5, respectively		(10	)		(7	)
Changes in fair value of cash flow hedges, net of income tax benefit of $522 and $69, respectively		(2,330	)		(426	)

Total comprehensive (loss) income, net of tax	$	(44,261	)	$	15,207

Accumulated other comprehensive loss consists of the following:


	April 5,			December 29,			March 31,
In thousands	2008			2007			2007

Cumulative translation adjustment	$	(29,172	)	$	(18,272	)	$	(55,829	)
Unrealized losses on cash flow hedging derivatives, net of taxes of $2,843, $2,321 and $426, respectively		(8,532	)		(6,202	)		(1,169	)
Unrealized losses on available-for-sale securities, net of taxes of $77, $46 and $94, respectively		(118	)		(108	)		(149	)

Accumulated other comprehensive loss, net of tax	$	(37,822	)	$	(24,582	)	$	(57,147	)

5. MARKETABLE SECURITIES

For the three months ended April 5, 2008 and March 31, 2007, there have been no sales or realized gains (losses) of investments previously considered available-for-sale.

The changes in unrealized holding losses on available-for-sale securities included in Accumulated other comprehensive income, net of tax, for the periods ended April 5, 2008 and March 31, 2007 were immaterial.

The following is a summary of available-for-sale marketable securities at April 5, 2008, December 29, 2007 and March 31, 2007:


				Unrealized			Estimated
In thousands		Cost		Losses			Fair Value

April 5, 2008:	Other investments	$	490	$	(195	)	$	295

	Total	$	490	$	(195	)	$	295


December 29, 2007:	Other investments	$	483	$	(155	)	$	328

	Total	$	483	$	(155	)	$	328


March 31, 2007:	Equity investments	$	9,252	$	(169	)	$	9,083
	Other investments		464		(62	)		402

	Total	$	9,716	$	(231	)	$	9,485

6. INVENTORIES, NET

Inventories consist of the following:


	April 5,		December 29,		March 31,
In thousands	2008		2007		2007

Raw materials	$	29,780	$	28,743	$	31,728
Work in process		19,756		13,143		14,534
Finished goods		476,516		498,921		597,918

Total inventories, net	$	526,052	$	540,807	$	644,180

7. PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:


	April 5,		December 29,		March 31,
In thousands	2008		2007		2007

Land and buildings	$	108,099	$	108,097	$	135,291
Machinery and equipment		382,756		385,294		412,039
Furniture and fixtures		308,395		304,411		278,259
Leasehold improvements		543,649		529,427		464,648

		1,342,899		1,327,229		1,290,237
Less: Accumulated depreciation and amortization		755,495		746,496		723,132

Total property and equipment, net	$	587,404	$	580,733	$	567,105

Depreciation and amortization expense on property and equipment for the three months ended April 5, 2008 and March 31, 2007 was $35.8 million and $32.7 million, respectively, which includes depreciation for property and equipment under capital leases of $3.7 million and $2.1 million, respectively. Machinery and equipment under capital leases was $46.9 million, $48.8 million and $50.9 million as of April 5, 2008, December 29, 2007 and March 31, 2007, respectively.

8. GOODWILL AND INTANGIBLES, NET

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


	Weighted
	Average
	Amortization	April 5,			December 29,			March 31,
In thousands	Period	2008			2007			2007

Amortized intangible assets:
Gross Carrying Amount:
Licensed trademarks	15 years	$	32,749		$	32,749		$	32,449
Owned trademarks	7 years		9,900			9,900			7,600
Customer relationships^(a)	14 years		30,671			30,665			49,367
Merchandising rights^(b)	4 years		42,860			57,023			52,265
Other^(c)	5 years		3,235			3,235			—

Subtotal	9 years		119,415			133,572			141,681

Accumulated Amortization:
Licensed trademarks			(17,373	)		(16,641	)		(14,982	)
Owned trademarks			(1,269	)		(901	)		(847	)
Customer relationships			(6,432	)		(5,875	)		(7,824	)
Merchandising rights			(24,181	)		(34,246	)		(26,452	)
Other			(860	)		(675	)		—

Subtotal			(50,115	)		(58,338	)		(50,105	)

Net:
Licensed trademarks			15,376			16,108			17,467
Owned trademarks			8,631			8,999			6,753
Customer relationships			24,239			24,790			41,543
Merchandising rights			18,679			22,777			25,813
Other			2,375			2,560			—

Total amortized intangible assets, net			69,300			75,234			91,576


Unamortized intangible assets:
Owned trademarks^(d)			247,639			271,885			318,437

Total intangible assets		$	316,939		$	347,119		$	410,013


^(a)		The change in the balance compared to March 31, 2007 primarily reflects the impact of dispositions, partially offset by the impact of acquisitions, each subsequent to March 31, 2007.

^(b)		The change in the balance compared to March 31, 2007 primarily reflects the impact of dispositions subsequent thereto.

^(c)		Relates to the Company’s acquisition of Kate Spade and Narciso Rodriguez.

^(d)		The change in the balance compared to March 31, 2007 reflects (i) the inclusion of $24.0 million within Assets held for sale on the accompanying Condensed Consolidated Balance Sheet at April 5, 2008, (ii) a non-cash impairment charge of $36.3 million recorded within the Company’s Partnered Brands segment in the second half of 2007 related to the ELLEN TRACY trademark and (iii) the impact of dispositions subsequent to March 31, 2007, partially offset by the impact of acquisitions subsequent to March 31, 2007.

Amortization expense of intangible assets was $4.6 million and $4.1 million for the three months ended April 5, 2008 and March 31, 2007, respectively.

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


	(In millions)
Fiscal Year	Amortization Expense
2008	$	15.1
2009		13.0
2010		9.6
2011		8.0
2012		7.0

The changes in carrying amount of goodwill for the three months ended April 5, 2008 are as follows:


In thousands
Balance as of December 29, 2007	$	677,852
Other		(52	)
Translation difference		(1,562	)

Balance as of April 5, 2008	$	676,238

As a result of the decline in the actual and projected performance and cash flows of the Company’s Partnered Brands segment, the Company determined that a goodwill impairment test was required to be performed as of December 29, 2007, in accordance with SFAS No. 142. In performing this evaluation, the Company considered declines in its market value, which began in the second half of 2007 and reconciled the sum of the estimated fair values of its five reporting units to the Company’s market value (based on its stock price), plus an estimated control premium.

Accordingly, this assessment compared the carrying value of each of the Company’s reporting units with its estimated fair value using discounted cash flow models and market approaches. As a result, the Company determined that the goodwill of its Partnered Brands segment, which is a reporting unit, was impaired and recorded a pre-tax impairment charge of $450.8 million ($343.1 million after-tax) during the fourth quarter of 2007. Accordingly, all of the Company’s remaining goodwill resides in its Direct Brands segment as of April 5, 2008.

9. INCOME TAXES

The Company’s effective tax rate from continuing operations for the three months ended April 5, 2008 is a benefit of 61.8%. Such rate differs from the Federal statutory rate of 35.0% due to the impact of discrete items recognized during the period then ended, consisting primarily of the reversal of previously accrued interest and penalties that will not be paid due to the resolution of the underlying uncertain tax positions. The Company’s effective tax rate from continuing operations for the three months ended March 31, 2007 is 48.8%. Such rate differs from the Federal statutory rate of 35.0% due to the impact of discrete items recognized during the period then ended, consisting primarily of foreign tax settlements.

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 2007. 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.

The Company expects a reduction in the liability for unrecognized tax benefits of approximately $34.0 million within the next twelve months due to the expiration of the statute of limitations and various other tax settlements.

10. DEBT AND LINES OF CREDIT

Long-term debt consists of the following:


	April 5,		December 29,		March 31,
In thousands	2008		2007		2007

5% Notes, due July 2013	$	548,786	$	512,044	$	463,793
Revolving credit facility and commercial paper program		340,600		301,200		224,430
Capital lease obligations		25,710		26,725		30,509
Other^(a)		74,016		47,742		24,042

Total debt		989,112		887,711		742,774
Less: current portion^(b)		77,087		50,828		26,824

Long-term debt	$	912,025	$	836,883	$	715,950


^(a)		At April 5, 2008, the balance includes $73.1 million of outstanding borrowings under working capital lines of credit.

^(b)		At April 5, 2008, the balance consists primarily of borrowings under 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 euros. 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 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. On February 29, 2008, the Company entered into an amendment to its revolving credit facility, whereby the fixed charge coverage ratio was modified and certain definitions were revised so that certain cash restructuring charges are excluded from the revised calculation. The Company was also provided a waiver of any potential prior defaults for failure to be in compliance with the fixed charge coverage ratio provided that the Company was in compliance with the amended fixed charge coverage ratio as of the end of fiscal 2007. As of the end of fiscal 2007 and as of April 5, 2008, the Company was in compliance with such covenants, as amended. A copy of such amendment was filed on Form 8-K, dated February 29, 2008. 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. On February 15, 2008, Moody’s placed the Company’s Baa3 senior unsecured and Prime-3 commercial paper ratings under review for possible downgrade. On April 10, 2008, Moody’s affirmed the Company’s Baa3 senior unsecured and Prime-3 commercial paper ratings.

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 April 5, 2008, the revolving credit facility and commercial paper program, letter of credit facilities and other borrowing facilities available to the Company were as follows:


			Outstanding		Letters of		Available
In thousands	Total Capacity		Borrowings		Credit Issued		Capacity

Revolving credit facility and commercial paper program^(a)	$	750,000	$	340,600	$	—	$	409,400
Letter of credit facility		400,000		—		159,129		240,871
Short-term borrowing facilities		174,058		73,069		11,509		89,480


^(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 November 21, 2006, the Company entered into an off-balance sheet financing arrangement with a financial institution for a five-year period (commonly referred to as a “synthetic lease”) to refinance the purchase of various land and real property improvements associated with warehouse and distribution facilities in Ohio and Rhode Island totaling $32.8 million. This synthetic lease arrangement replaced the previous synthetic lease arrangement, which expired on November 22, 2006. 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. 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 material adverse effect on the Company’s financial position, results of operations, liquidity or cash flows (see Notes 11 and 25 of Notes to Consolidated Financial Statements in the Company’s 2007 Annual Report on Form 10-K).

12. STREAMLINING INITIATIVES

2007 Actions On July 11, 2007, the Company provided details of its long-term strategic plan. The major elements of the Company’s strategy include the following:

–

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 divestiture, discontinuation or licensing of sixteen of the Company’s brands:

	–		On October 4, 2007, the Company completed the sale of its EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands. The Company also consolidated its TINT brand into LIZ & CO. and STAMP 10 brand into AXCESS and closed its FIRST ISSUE brand.

	–		On January 17, 2008, the Company announced an exclusive license agreement with Kohl’s, naming Kohl’s as the exclusive retailer for the DANA BUCHMAN brand.

	–		On February 4, 2008, the Company completed the sale of its C & C CALIFORNIA and LAUNDRY BY DESIGN brands. The Company also announced retention of ENYCE and closure of SIGRID OLSEN, expected to be completed in the second quarter of 2008.

	–		On April 4, 2008, the Company completed the sale of its prAna brand.

	–		In the first quarter of 2008, the Company also announced its decision to retain the KENSIE and MAC & JAC brands.

	–		On April 10, 2008, the Company completed the sale of its ELLEN TRACY brand.

–

Implementing and maintaining a more competitive cost structure: The Company has accelerated its structural realignment and other initiatives to achieve cost savings targets through staff reductions, closing and consolidation of distribution facilities and office space, discretionary expense cuts, process re-engineering and supply chain cost rationalization.

The above mentioned announcements followed the Company’s streamlining activities announced in 2006.

2006 Actions

In February 2006 and October 2006, the Company announced initiatives to streamline its operations to increase efficiency and more closely align its businesses with customer and consumer needs. These efforts included the redeployment of resources in order to better capitalize on compelling growth opportunities across a number of our brands.

For the period ended April 5, 2008, the Company recorded $39.5 million ($24.9 million after-tax) related to this initiative, including $15.3 million of payroll and related costs, $12.9 million of lease termination costs, $7.7 million of fixed asset write-downs and disposals and $3.6 million of other costs. Approximately $7.7 million of these charges were non-cash. The Company expects to pay substantially all accrued streamlining costs by the end of 2008. For the period ended March 31, 2007, the Company recorded $7.0 million ($4.5 million after-tax) related to this initiative, including $2.2 million of payroll and related costs, $1.4 million of lease termination costs, $3.2 million of fixed asset write-downs and disposals and $0.2 million of other costs. Approximately $3.2 million of these charges were non-cash.

For the three months ended April 5, 2008 and March 31, 2007, these expenses, primarily recorded in SG&A in the Condensed Consolidated Statements of Operations, impacted business segments as follows:


	Three Months Ended
	April 5,		March 31,
	2008		2007
In thousands	(14 Weeks)		(13 Weeks)

Direct Brands	$	6,428	$	2
Partnered Brands		33,027		6,974

Total	$	39,455	$	6,976

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 29, 2007	$	18,567		$	11,823		$	—		$	225		$	30,615
2008 provision		15,283			12,853			7,697			3,622			39,455
2008 fixed asset write-downs		—			—			(7,697	)		—			(7,697	)
Translation difference		571			242			—			20			833
2008 spending		(20,232	)		(7,023	)		—			(3,236	)		(30,491	)

Balance at April 5, 2008	$	14,189		$	17,895		$	—		$	631		$	32,715

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.”


	Three Months Ended
	April 5,			March 31,
	2008			2007
In thousands	(14 Weeks)			(13 Weeks)
(Loss) income from continuing operations	$	(14,844	)	$	10,482
(Loss) income from discontinued operations, net of tax		(3,975	)		5,716
Loss on disposal of discontinued operations, net of tax		(12,202	)		—

Net (loss) income	$	(31,021	)	$	16,198


Basic weighted average shares outstanding^(a)		93,507			101,796
Stock options and restricted stock grants^(a)(b)(c)		—			1,331

Diluted weighted average shares outstanding^(a)		93,507			103,127


Earnings per share:
Basic
(Loss) income from continuing operations	$	(0.16	)	$	0.10
(Loss) income from discontinued operations		(0.04	)		0.06
Loss on disposal of discontinued operations		(0.13	)		—

Net (loss) income	$	(0.33	)	$	0.16

Diluted
(Loss) income from continuing operations	$	(0.16	)	$	0.10
(Loss) income from discontinued operations		(0.04	)		0.06
Loss on disposal of discontinued operations		(0.13	)		—

Net (loss) income	$	(0.33	)	$	0.16


^(a)		Because the Company incurred a loss from continuing operations in the first quarter of 2008, outstanding stock options and restricted shares are anti-dilutive. Accordingly, basic and diluted weighted average shares outstanding are equal for such period.

^(b)		Options to purchase 63,000 shares of common stock were outstanding as of March 31, 2007 but were not included in the computation of diluted EPS for the three month period then ended because such options were anti-dilutive.

^(c)		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 three months ended April 5, 2008 and March 31, 2007, the Company made income tax payments of $8.0 million and $35.5 million and interest payments of $8.2 million and $3.2 million, respectively.

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. The prior period has 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 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, CLAIBORNE (men’s), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, ENYCE, KENSIE, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA, MONET, NARCISO RODRIGUEZ, SIGRID OLSEN, TRIFARI, VILLAGER, the Company’s licensed DKNY^® JEANS, DKNY^® ACTIVE and DKNY^® MENS brands as well as the Company’s other non-Direct Brands fragrances including: CLAIBORNE, CURVE, LIZ CLAIBORNE and our licensed USHER fragrance.

As discussed in Note 1 – Basis of Presentation and Significant Accounting Policies, certain assets and liabilities of the C & C CALIFORNIA, LAUNDRY BY DESIGN and prAna brands, as well as the assets associated with the Company’s closed distribution center, have been segregated and reported as held for sale as of December 29, 2007. Additionally, certain assets associated with the ELLEN TRACY brand have been segregated and reported as held for sale as of April 5, 2008. The activities of these brands that represent operations and cash flows that can be clearly distinguished from the rest of the Company, as well as those of EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE, 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.

In 2007, the Company consolidated its STAMP 10 and TINT brands into its AXCESS and LIZ & CO. brands, respectively, and closed its FIRST ISSUE brand in early 2008.

The Company’s Chief Executive Officer has been identified as the CODM. The CODM evaluates performance and allocates resources based primarily on the operating income of each reportable segment. The accounting policies of the Company’s reportable segments are the same as those described in Note 1 – Basis of Presentation and Significant Accounting Policies. 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, Company specialty retail, 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.


	Three Months Ended
	April 5, 2008									March 31, 2007
	(14 Weeks)									(13 weeks)
	Direct			Partnered						Direct			Partnered
In thousands	Brands			Brands			Total			Brands			Brands			Total

Total net sales	$	620,150		$	501,392		$	1,121,542		$	483,623		$	585,577		$	1,069,200

% to total		55.3	%		44.7	%		100.0	%		45.2	%		54.8	%		100.0	%

Total operating income (loss)	$	27,374		$	(51,351	)	$	(23,977	)	$	50,050		$	(20,320	)	$	29,730

% of sales		4.4	%		(10.2	)%		(2.1	)%		10.3	%		(3.5	)%		2.8	%

GEOGRAPHIC DATA:


	Three Months Ended
	April 5, 2008									March 31, 2007
	(14 Weeks)									(13 weeks)
In thousands	Domestic			International			Total			Domestic			International			Total

Total net sales^(a)	$	722,646		$	398,896		$	1,121,542		$	724,734		$	344,466		$	1,069,200

% to total		64.4	%		35.6	%		100.0	%		67.8	%		32.2	%		100.0	%

Total operating income (loss)	$	(34,657	)	$	10,680		$	(23,977	)	$	17,009		$	12,721		$	29,730

% of sales		(4.8	)%		2.7	%		(2.1	)%		2.3	%		3.7	%		2.8	%


^(a)		International sales include MEXX sales of $342,234 and $281,481, respectively.

There were no significant changes in segment assets during the three months ended April 5, 2008.

16. DERIVATIVE INSTRUMENTS

At April 5, 2008, the Company had various Canadian currency collars outstanding with a notional amount of $5.5 million, maturing through September 2008 and with contract rates ranging between 0.9600 and 1.0300 Canadian dollars per U.S. dollar. The Company had $7.5 million in Canadian currency collars at December 29, 2007 and $7.4 million and 61.8 million Hong Kong dollars in Canadian currency collars and 23.3 million Hong Kong dollars in euro currency collars at March 31, 2007. At April 5, 2008, the Company also had forward contracts maturing through June 2009 to sell 13.8 million Canadian dollars for $13.8 million, to sell 20.0 million Canadian dollars for 154.5 million Hong Kong dollars, to sell 12.4 million euro for $18.5 million and to sell 50.3 million euro for 544.9 million Hong Kong dollars. The notional value of the foreign exchange forward contracts at April 5, 2008 was $122.1 million, as compared with $132.3 million at December 29, 2007 and $90.1 million at March 31, 2007. Unrealized losses for outstanding foreign exchange forward contracts and currency options were $8.9 million at April 5, 2008, $7.1 million at December 29, 2007 and $2.2 million at March 31, 2007. The ineffective portion of these trades is recognized currently in earnings and was immaterial for the three month periods ended April 5, 2008 and March 31, 2007. Approximately $8.8 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.

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, “Foreign Currency Translation,” are accounted for as a component of accumulated other comprehensive loss rather than recognized in current income. The unrealized losses recorded to Cumulative translation adjustment were $36.7 million and $4.8 million for the three months ended April 5, 2008 and March 31, 2007, respectively.

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 and Lines of Credit). 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 three months ended April 5, 2008.

17. SHARE-BASED COMPENSATION

The Company accounts for share-based compensation in accordance with the provisions of SFAS No. 123(R) and recognized the cost of all employee share-based awards on a straight-line attribution basis over their respective vesting periods, net of estimated forfeitures.

The Company issues stock options and restricted shares as well as shares with performance features to employees under share-based compensation plans. Stock options are issued at the current market price, have a three-year vesting period and a contractual term of 7-10 years. As of April 5, 2008, the Company has not changed the terms of any outstanding awards.

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.

Stock Options The Company utilizes the Binomial lattice pricing model to estimate the fair value of options granted. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates and to allow for actual exercise behavior of option holders.


Valuation Assumptions:	April 5, 2008			March 31, 2007

Weighted-average fair value of options granted	$	5.02		$	11.51
Expected volatility	25.3% to 37.6%			23.1% to 39.5%
Weighted-average volatility		25.7	%		24.0	%
Expected term (in years)		4.5			4.7
Dividend yield		1.24	%		0.52	%
Risk-free rate	4.8% to 5.2%			4.4% to 4.8%
Expected annual forfeiture		10.0	%		12.0	%

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 above table represents an option weighted-average expected term based on the estimated behavior of distinct groups of employees who received options in 2008 and 2007. The range of risk-free rates is based on a forward curve of interest rates at the time of option grant.

A summary of award activity under the stock option plans as of April 5, 2008 and changes therein during the three 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 29, 2007		4,636,409		$	34.33		5.3	$	204
Granted		122,250			18.12
Exercised		(3,100	)		16.60
Cancelled		(291,575	)		33.73

Outstanding at April 5, 2008		4,463,984		$	33.93		5.1	$	230


Vested or expected to vest at April 5, 2008		4,284,762		$	33.91		5.0	$	208


Exercisable at April 5, 2008		3,271,371		$	33.30		4.7	$	111

The total intrinsic value of options exercised during the three months ended April 5, 2008 was insignificant and was $9.3 million during the three months ended March 31, 2007.

As of April 5, 2008, there were approximately 1.2 million nonvested stock options. The weighted average grant date fair value per award for nonvested stock options was $9.69.

As of April 5, 2008, there was $7.5 million of total unrecognized compensation cost related to nonvested stock options granted under the Company’s stock option plans. That expense is expected to be recognized over a weighted average period of 2.1 years. The total fair value of shares vested during the three month periods ended April 5, 2008 and March 31, 2007 was $1.7 million and $15.1 million, respectively.

Restricted Stock

A summary of award activity under the restricted stock plans as of April 5, 2008 and changes during the three month period are summarized as follows:


				Weighted
				Average
	Shares			Exercise Price

Nonvested stock at December 29, 2007^(a)		1,538,379		$	38.42
Granted		341,509			18.34
Vested		(306,962	)		35.73
Cancelled		(182,377	)		38.41

Nonvested stock at April 5, 2008^(a)		1,390,549		$	34.09


Expected to vest as of April 5, 2008		1,107,513		$	35.00


^(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.

As of April 5, 2008, there was $21.5 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 1.9 years. The total fair value of shares vested during the three month periods ended April 5, 2008 and March 31, 2007 was $11.0 million and $12.3 million, respectively.

18. RECENT ACCOUNTING PRONOUNCEMENTS

used to measure its fair value. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of FSP 142-3 on its condensed consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment to FASB Statement No. 133.” SFAS No. 161 enhances the disclosure requirements for derivative instruments and hedging activities under FASB Statement No. 133. Entities are required to provide disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No.161 is effective for fiscal years and financial periods beginning after November 15, 2008, with early adoption encouraged. The Company is currently assessing the impact of SFAS No. 161 on its condensed consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently assessing the impact of SFAS 157 on its condensed consolidated financial statements for items within the scope of FSP 157-2, which will become effective beginning with our first quarter of 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and requires (i) classification of noncontrolling interests, commonly referred to as minority interests, within stockholders’ equity, (ii) net income to include the net income attributable to the noncontrolling interest and (iii) enhanced disclosure of activity related to noncontrolling interests. Currently, the Company classifies noncontrolling interests as liabilities and excludes net income attributable to noncontrolling interests from net income. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of SFAS No. 160 on its condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations,” which provides revised guidance for how an acquirer in a business combination recognizes and measures in its financial statements (i) identifiable assets acquired, (ii) liabilities assumed, (iii) noncontrolling interests in the acquiree and (iv) goodwill or a gain from a bargain purchase. SFAS No. 141(R) also sets forth the disclosures required to be made in the financial statements related to effects of a business combination. SFAS No. 141(R) applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company will adopt the provisions of SFAS No. 141(R) as required.

19. SUBSEQUENT EVENTS

On April 10, 2008, the Company completed of the sale of its ELLEN TRACY brand for net cash proceeds of $25.8 million. The Company is also entitled to contingent consideration of up to $15.0 million, based on performance from 2008 through 2012.

On April 10, 2008, Moody’s affirmed the Company’s Baa3 senior unsecured and Prime-3 commercial paper ratings.

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. The prior period has 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 reportable segments, we consider economic characteristics, as well as products, customers, sales growth potential and long-term profitability. We aggregate our five 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 operating segments: JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX; and

	•		The Partnered Brands segment — consists of one operating segment including the wholesale apparel, wholesale non-apparel, outlet and specialty retail, e-commerce and licensing operations of our wholesale-based brands including: AXCESS, CLAIBORNE (men’s), CONCEPTS BY CLAIBORNE, DANA BUCHMAN, ENYCE, KENSIE, LIZ & CO., LIZ CLAIBORNE, MAC & JAC, MARVELLA, MONET, NARCISO RODRIGUEZ, SIGRID OLSEN, TRIFARI, VILLAGER, the Company’s licensed DKNY^® JEANS, DKNY^® ACTIVE and DKNY^® MENS brands as well as our other non-Direct Brands fragrances including: CLAIBORNE, CURVE, LIZ CLAIBORNE and our licensed USHER fragrance.

In July 2007, we announced our long-term strategic plan, which included a strategic review and potential divestiture or closure of 16 of our brands. On October 4, 2007, we completed the first phase of such review by finalizing the disposal of certain assets of our former EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands. We completed the second phase of such review by completing the disposition of certain assets and liabilities of our former C&C CALIFORNIA and LAUNDRY BY DESIGN brands on February 4, 2008, and substantially all of the assets and liabilities of our former prAna brand on April 4, 2008. Also in 2007, we closed a distribution center and implemented a plan to sell the building, land and other assets associated with such facility. On April 10, 2008, we disposed of substantially all of the assets and liabilities of our former ELLEN TRACY brand. Pursuant to Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), certain assets and liabilities of the C&C CALIFORNIA, LAUNDRY BY DESIGN and prAna brands, as well as the assets associated with the Company’s closed distribution center, have been segregated and reported as held for sale as of December 29, 2007. Also pursuant to SFAS No. 144, certain assets and liabilities associated with the ELLEN TRACY brand and the assets associated with our closed distribution center have been segregated and reported as held for sale as of April 5, 2008.

The activities of our former EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES, TAPEMEASURE, C&C CALIFORNIA, LAUNDRY BY DESIGN and prAna brands and the retail operations of our former ELLEN TRACY brand have been segregated and reported as discontinued operations for all periods presented. As indicated, only the retail operations of our former ELLEN TRACY brand have been presented as discontinued operations, as the ELLEN TRACY wholesale activities do not represent operations and cash flows that can be clearly distinguished operationally and for financial reporting purposes from the remainder of the Company.

During the quarter ended April 5, 2008, we recognized a pretax charge of $9.5 million on the ELLEN TRACY transaction, of which $1.8 million was allocated to the ELLEN TRACY retail operations and therefore recorded within discontinued operations. The remaining charge of $7.7 million was allocated to the ELLEN TRACY wholesale operations and has been recorded within Selling General and Administrative expenses “SG&A.”

We also present our results on a geographic basis based on selling location:

•

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

•

International (wholesale customers and Company-owned 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 mitigating 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.

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 35.6% and 32.2% of total Company net sales for the periods ended April 5, 2008 and March 31, 2007, respectively. In addition, 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.

In November 2006, we initiated a review of our operations to assess options to best allocate our resources to those brands we believe have the maximum potential for sustainable growth in sales and earnings and to best evolve our brand-focused strategy on a going forward basis. On June 20, 2007, we announced the reconfiguration of our organization and on July 11, 2007, we announced the preliminary results of our review of operations. The major elements of our strategy are as follows:

Reconfiguring our organization into two new business 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.

The completion of our strategic review of 16 specific brands in our portfolio in an effort to narrow our brand offerings 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 former EMMA JAMES, INTUITIONS, J.H. COLLECTIBLES and TAPEMEASURE brands.

	•		We also consolidated our TINT brand into LIZ & CO. and STAMP 10 brand into AXCESS and closed our FIRST ISSUE brand.

	•		On January 8, 2008, we also announced the decision to retain the ENYCE brand and to close our SIGRID OLSEN brand. We expect such closure to be completed in the second quarter of 2008.

	•		On January 17, 2008, we announced that we entered into an exclusive license agreement with Kohl’s, naming Kohl’s as the exclusive retailer for our DANA BUCHMAN brand. As a result, we expect to close

			our current DANA BUCHMAN operations in the first half of 2008 and that the launch of the DANA BUCHMAN line in Kohl’s stores will occur no later than the first quarter of 2009.

	•		On February 4, 2008, we completed the sale of our former C & C CALIFORNIA and LAUNDRY BY DESIGN brands.

	•		On April 4, 2008, we completed the sale of our prAna brand.

	•		In the first quarter of 2008, we also announced our decision to retain the KENSIE and MAC & JAC brands.

	•		On April 10, 2008, we completed the sale of our ELLEN TRACY brand.

Implementing and maintaining a more competitive cost structure:

	•		We have accelerated our structural realignment and other initiatives to achieve cost savings targets. Key actions taken included significant headcount reductions, the closing of three of our distribution centers, real estate rationalization and discretionary expense cuts.

	•		We anticipate additional cost reductions to be realized through further staff reductions, 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:

	•		We estimate committing approximately $210 million to capital expenditures, including approximately $140 million to open new stores primarily within our Direct Brands segment in 2008;

	•		We are honing our organizational structure to better support the unique opportunities within our reporting units; and

	•		We anticipate spending approximately $100 million in 2008 in marketing activities in support of our growth initiatives.

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

Market Environment

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 continued increase in their emphasis on private label offerings, has 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, while aggressively growing their private label businesses. Over the past few years, this operating environment has adversely affected the results of our wholesale-based brands.

Apparel and non-apparel retailers, in general, including many of our major customers, have recently reported disappointing comparable store sales. Accordingly, we continue to be cautious about the near-term retail environment as evidenced by the slowdown in consumer spending, which reflects the recent deterioration in the macro-economic environment in the U.S., as well as abroad.

This uncertain environment has been a driver in our acceleration of our strategic reviews of the brands mentioned above and the ultimate outcomes for those brands as well as in our acceleration of our streamlining initiatives.

In summary, the measure of our success in the future will depend on our ability to navigate through a difficult macro-economic environment and challenging market conditions, execute on our strategic vision, including evolving our retail capabilities, attracting and retaining the management talent necessary for such execution, designing and delivering products that are acceptable to the marketplaces that we serve and sourcing the manufacture of and distributing 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 in this report, including, without limitation, under “Statement Regarding Forward-Looking Statements” and “Item 1A – Risk Factors,” and in our 2007 Annual Report on Form 10-K.

Overall Results for the Three Months Ended April 5, 2008

Net Sales

Net sales for the first three months of 2008 were $1.122 billion, an increase of $52.3 million (or 4.9%) when compared to net sales for the first three months of 2007, primarily due the inclusion of a 14^th week in the first quarter of 2008, a shift in the retail calendar in 2007, and the impact of foreign currency exchange rates in our international businesses which increased sales by approximately $52.3 million and increased sales in our Direct Brands segment, partially offset by decreases in our Partnered Brands segment.

Gross Profit and (Loss) Income from Continuing Operations

Gross profit as a percentage of net sales increased to 47.3% in 2008 from 46.7% in 2007, reflecting an increased proportion of sales from our Direct Brands segment, which operates at a higher gross profit rate than the Company average, partially offset by decreased gross profit rates in our Partnered Brands and Direct Brands segments. We recorded a loss from continuing operations of $14.8 million in the first three months of 2008 as compared to income from continuing operations of $10.5 million in 2007, primarily reflecting the impact of decreased sales in our Partnered Brands segment and after-tax expenses associated with our streamlining initiatives of $24.9 million.

Balance Sheet

We ended the first quarter of 2008 with a net debt position of $877.7 million as compared to $636.8 million at the end of the first quarter of 2007. We generated $315.7 million in cash from operations over the past twelve months, which enabled us to fund $39.9 million of acquisition related payments, share repurchases of $300.5 million and capital expenditures of $193.6 million, while increasing our net debt by $240.9 million. The effect of foreign currency translation on our Eurobond increased our debt balance by $85.0 million.

International Operations

In the first three months of 2008, international sales represented 35.6% of our overall sales, as compared to 32.2% in the first three months of 2007. Accordingly, our overall results can be greatly impacted by changes in foreign currency exchange rates, which increased sales in the first three months of 2008 by $52.3 million. The strengthening of the euro and Canadian dollar 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.

Acquisitions

On May 18, 2007, we acquired 50 percent ownership of the entity that owns the 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 operate the license and develop the NARCISO RODRIGUEZ brand worldwide. The purchase price totaled $13.9 million, which includes closing fees and certain post-closing adjustments. We allocated $8.9 million of purchase price to the value of trademarks and tradenames associated with the business, $0.3 million to the value of a non-compete agreement, $0.6 million to the value of a beneficial lease and $5.0 million to goodwill. The $5.0 million of goodwill that was included in the Partnered Brands Segment was subsequently written off as part of our fourth quarter 2007 non-cash impairment charge and deducted for tax purposes. The value of trademarks and tradenames, the non-compete agreement and the beneficial lease are being amortized over 7 years, 3 years and 5 years, respectively. 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. 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, we acquired 100 percent of the equity 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 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. We allocated $74.9 million of purchase price to the value of trademarks and

tradenames associated with the business, $6.5 million to the value of customer relationships, $2.6 million to the value of beneficial leases and $36.0 million to goodwill. The trademarks and tradenames are deemed to have indefinite lives and are subject to an annual impairment test. The value of customer relationships and beneficial leases are being amortized over 14 years and from 2 to 9 years, respectively.

On January 26, 2006, we acquired 100 percent of the equity 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. We currently estimate that the aggregate of the contingent payments will be in the range of approximately $20-29 million and will be accounted for as additional purchase price when paid.

The prAna acquisition agreement required us to make contingent payments to the former owners of prAna based on certain performance parameters of prAna over a pre-determined time frame. In connection with the sale of the prAna brand, we satisfied our contingent obligation for $18.5 million, which was paid concurrently with the closing of the sale of the prAna brand on April 4, 2008 and was recorded within Loss on disposal of discontinued operations, net of tax, in our Condensed Consolidated Statement of Operations.

On April 7, 2003, we acquired 100 percent of the equity of Juicy Couture, Inc. (formerly, Travis Jeans, Inc.) (“Juicy Couture”), a privately held fashion apparel company. The total purchase price consisted of: (i) a payment, including the assumption of debt and fees of $53.1 million and (ii) 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. These payments were accounted for as additional purchase price and as increases to goodwill. The estimated 2008 payment of $72.9 million will be made in the second quarter of 2008 based on a multiple of Juicy Couture’s 2007 earnings, which has been accounted for as additional purchase price and an increase to goodwill.

On June 8, 1999, we acquired 85.0 percent of the equity 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, 2008, January 16, 2007, January 17, 2006 and January 28, 2005, we paid $5.0 million, $10.0 million, $10.0 million and $35.0 million, respectively, for 0.4 percent, 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% of the equity of Lucky Brand in each of January of 2009 and 2010 for payments of $5.0 million each. We recorded the present value of fixed amounts owed of $9.3 million in Accrued expenses and Other Non-Current Liabilities. As of April 5, 2008, 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 of $14.4 million that will be made in the first half of 2008 based on a multiple of Lucky Brand’s 2007 earnings, which we have accounted for as additional purchase price and (ii) the 2011 payment that 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 $9-12 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. The prior period has been conformed to the current period’s presentation. As discussed above, we now report our operations in two reportable segments as well as on the following geographic basis based on selling location. 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 APRIL 5, 2008 COMPARED TO THREE MONTHS ENDED MARCH 31, 2007

The following table sets forth our operating results for the three months ended April 5, 2008 (comprised of 14 weeks) compared to the three months ended March 31, 2007 (comprised of 13 weeks):


	Three Months Ended						Variance
	April 5,			March 31,
Dollars in millions	2008			2007			$			%

Net Sales	$	1,121.5		$	1,069.2		$	52.3			4.9	%

Gross Profit		530.9			499.1			31.8			6.4	%

Selling, general & administrative expenses		554.9			469.4			85.5			18.2	%


Operating (Loss) Income		(24.0	)		29.7			(53.7	)		*

Other expense, net		(2.7	)		(0.7	)		(2.0	)		(285.7	)%

Interest expense, net		(12.1	)		(8.5	)		(3.6	)		(42.4	)%

(Benefit) provision for income taxes		(24.0	)		10.0			(34.0	)		*


(Loss) Income from Continuing Operations		(14.8	)		10.5			(25.3	)		*

(Loss) income from discontinued operations, net of tax		(4.0	)		5.7			(9.7	)		*

Loss on disposal of discontinued operations, net of tax		(12.2	)		—			(12.2	)		*


Net (Loss) Income	$	(31.0	)	$	16.2		$	(47.2	)		*


*		Not meaningful.

Net Sales

Net sales for the first quarter of 2008 were $1.122 billion, an increase of $52.3 million (4.9%) when compared to the first quarter of 2007, primarily due to the inclusion of a 14^th week in the first quarter of 2008 and the shift in the retail calendar in 2007 as well as the impact of changes in foreign currency exchange rates in our international businesses, which increased net sales by approximately $52.3 million in the first quarter. Net sales results for our segments are provided below:

•

Direct Brands net sales were $620.2 million, increasing $136.5 million, or 28.2%, reflecting the following:

–

Net sales for MEXX were $342.2 million, a 20.3% increase compared to 2007, primarily due to the impact of the extra week in the quarter, as well as the impact of changes in foreign currency exchange rates of $44.7 million, partially offset by decreases in our MEXX Europe retail operations.

	—		We ended the quarter with 134 specialty retail stores, 90 outlets and 292 concessions, reflecting the net addition over the last 12 months of 4 specialty retail stores and 8 outlet stores and the net closure of 9 concession stores;

	—		Average retail square footage in the first quarter was approximately 1.387 million square feet, a 7.0% increase compared to 2007;

	—		Sales productivity was $91 per average square foot as compared to $110 for the first quarter of fiscal 2007;

	—		Comparable store sales in our MEXX Company-owned stores decreased by 13.2% overall, primarily the result of a decrease in our MEXX Europe and MEXX Canada specialty retail businesses; and

	—		A $44.7 million increase resulting from the impact of fluctuations in foreign currency exchange rates in our European and Canadian businesses.

	–		Net sales for LUCKY BRAND were $110.1 million, a 21.1% increase compared to 2007, primarily driven by increases in retail and wholesale apparel.

	—		We ended the quarter with 173 specialty stores and 20 outlet stores, reflecting the net addition over the last 12 months of 35 specialty stores and 13 outlet stores;

	—		Average retail square footage in the first quarter was approximately 461 thousand square feet, a 37.6% increase compared to 2007;

	—		Sales productivity was $133 per average square foot as compared to $158 for the first quarter of fiscal 2007; and

	—		Comparable store sales in our Company-owned stores decreased by 5.0% in the first quarter.

–

Net sales for JUICY COUTURE were $140.2 million, a 57.5% increase compared to 2007, primarily driven by increases in retail, and wholesale non-apparel (including fragrance).

	—		We ended the quarter with 40 specialty stores and 18 outlet stores, reflecting the net addition over the last 12 months of 18 specialty stores and 7 outlet stores;

	—		Average retail square footage in the first quarter was approximately 169 thousand square feet, a 100.5% increase compared to 2007;

	—		Sales productivity was $263 per average square foot as compared to $265 for the first quarter of fiscal 2007; and

	—		Comparable store sales in our Company-owned stores increased by 15.9% in the first quarter.

–

Net sales for KATE SPADE were $27.7 million a 44.0% increase compared to 2007, primarily driven by an increased number of retail stores, as well as increases in our wholesale operations.

	—		We ended the quarter with 26 specialty retail stores and 16 outlet stores reflecting the net addition over the last 12 months of 6 specialty stores and 12 outlet stores;

	—		Average retail square footage in the first quarter was approximately 87 thousand square feet, a 68.2% increase compared to 2007;

	—		Sales productivity was $155 per average square foot as compared to $166 for the first quarter of fiscal 2007; and

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

Comparable Company-owned store sales are calculated as follows:

—

New stores become comparable after 14 full fiscal months of operations (on the 1st day of the 15th full fiscal month);

	—		Except in unusual circumstances, closing stores become non-comparable one full fiscal month prior to the scheduled closing date;

	—		A remodeled store will be changed to non-comparable when there is a 20% or more increase/decrease in its selling square footage (effective at the start of the fiscal month when construction begins). The store becomes comparable again after 14 full fiscal months from the re-open date;

	—		A store that relocates becomes non-comparable when the new location is materially different from the original location (in respect to selling square footage and/or traffic patterns); and

	—		Stores that are acquired are not 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 $501.4 million, a decrease of $84.2 million or 14.4%, reflecting:

	–		Our department store customers’ continued focus on inventory productivity and product differentiation to gain competitive market share and improve margins and cash flows as discussed above. This operating environment continued to adversely affect our Partnered Brands segment, and contributed to reduced sales in the following brands: LIZ CLAIBORNE, CLAIBORNE, and ENYCE brands. Sales also declined in the following brands; SIGRID OLSEN (closing in the second quarter of 2008), Cosmetics (due to the closure of certain brands), FIRST ISSUE (which closed in early 2008), ELLEN TRACY (which was sold on April 10, 2008), DANA BUCHMAN (licensed on an exclusive basis to Kohl’s in January 2008, with current operations expected to close in the first half of 2008 and the licensed offering expected to be launched no later than the first quarter of 2009), partially offset by increases in our LIZ & CO. and CONCEPTS BY CLAIBORNE, licensed DKNY^® Jeans, KENSIE (due to increased department store distribution), licensed USHER fragrance (launched in the third quarter of 2007) and the inclusion of sales from NARCISO RODRIGUEZ (acquired in May of 2007); and

	–		The impact of foreign currency exchange rates increased sales by $7.1 million primarily related to our LIZ CLAIBORNE operations in Europe and Canada.

Viewed on a geographic basis,Domestic net sales decreased by $2.1 million, or 0.3%, to $722.6 million, reflecting the declines in our Partnered Brands segment, partially offset by increases in our Direct Brands segment.International net sales increased by $54.4 million, or 15.8%, to $398.9 million primarily due to the $52.3 million impact of currency exchange rates on international sales and increases in our Direct Brands segment partially offset by declines in our Partnered Brands segment.

Gross Profit

Gross profit in the first quarter of 2008 was $530.9 million, a $31.8 million increase as compared to the first quarter of 2007 primarily due to the impact of foreign currency exchange rates in our international businesses, which increased gross profit by $29.9 million. Gross profit as a percentage of net sales was 47.3% in 2008 as compared to 46.7% in 2007, reflecting an increased proportion of sales from our Direct Brands segment, which operates at a higher gross profit rate than the Company average, partially offset decreased gross profit rates in our Partnered Brands and Direct Brands segments. 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 $85.5 million or 18.2%, to $554.9 million in the first quarter of 2008 over the first quarter of 2007. The increase in SG&A reflected the following:

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The inclusion of $11.0 million of expenses associated with our NARCISO RODRIGUEZ brand (acquired in May 2007) and the addition of our licensed USHER fragrance;

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A $32.5 million increase in expenses associated with our streamlining initiatives;

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A $23.4 million decrease in Partnered Brands SG&A and marketing expenses;

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A $15.0 million increase in Direct Brands SG&A;

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A $28.6 million increase due to the impact of fluctuations in foreign currency exchange rates in our international operations;

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A $23.0 million increase primarily resulting from the retail expansion in our Direct Brands segment;

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The inclusion of a $7.7 million charge associated with the sale of our former ELLEN TRACY brand; and

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An $8.9 million decrease in corporate SG&A.

SG&A as a percent of net sales was 49.5%, compared to 43.9% in the first quarter of 2007, 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, the charge associated with the sale of the ELLEN TRACY brand 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.

Operating (Loss) Income

Operating loss for the first quarter of 2008 was $24.0 million, a decrease of $53.7 million as compared to the first quarter of 2007. Operating (loss) income as a percent of net sales decreased to (2.1)% in 2008 compared to 2.8% in 2007. The impact of fluctuations in foreign currency exchange rates in our international operations reduced the operating loss in the quarter by $1.3 million. Operating (loss) income by segment is provided below:

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Direct Brands operating income was $27.4 million, decreasing $22.7 million, or 45.3%, as a result of reduced earnings in our JUICY COUTURE and LUCKY BRAND operations as a result of expenses associated with brand building and reduced income in our MEXX Europe operations, partially offset by the $1.6 million impact of foreign currency exchange rates in our international operations.

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Partnered Brands operating loss in the first quarter was $51.4 million ((10.2)% of net sales), compared to operating loss of $20.3 million ((3.5)% of net sales) in 2007, 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 $51.7 million to a loss of $34.7 million. The domestic decreases predominantly reflect increased losses in our domestic Partnered Brands segment and reduced earnings in the operations of our Direct Brands segment.International operating income decreased $2.0 million or 16.0% to $10.7 million, reflecting reduced earning in the international operations of our Direct Brands segment partly offset by reduced losses in the international operations of our Partnered Brands segment. The impact of fluctuations in foreign currency exchange rates in our international operations reduced the operating loss in the quarter by $1.3 million.

Other Expense, Net

Other expense, net consists primarily of foreign currency transaction losses and amounted to $2.7 million and $0.7 million in the three months ended April 5, 2008 and March 31, 2007, respectively.

Interest Expense, Net

Net interest expense increased to $12.1 million in the three months ended April 5, 2008 from $8.5 million in the three months ended March 31, 2007 principally due to increased outstanding borrowings under our revolving credit facility and commercial paper program in 2008 compared to 2007, partially offset by decreased borrowing rates thereunder in 2008 compared to 2007.

(Benefit) Provision for Income Taxes

The income tax rate in the first quarter of 2008 increased to a benefit of 61.8% from a tax rate of 48.8% in the first quarter of 2007. Our 2008 tax rate reflects the impact of discrete tax items, consisting primarily of the reversal of previously accrued interest and penalties due to the resolution of the underlying uncertain tax positions, which decreased our loss from continuing operations by $8.3 million, or $0.09 per share. The 2007 tax rate was impacted by discrete items consisting of charges associated with foreign tax settlements.

(Loss) Income from Continuing Operations

(Loss) income from continuing operations in the first quarter of 2008 decreased to $(14.8) million, or (1.3)% of net sales, from $10.5 million in the first quarter of 2007, or 1.0% of net sales. Earnings per share (“EPS”) from continuing operations decreased to $(0.16) in 2008 from $0.10 in 2007.

(Loss) Income from Discontinued Operations, Net of Tax

(Loss) income from discontinued operations in the first quarter of 2008 decreased to $(4.0) million, from $5.7 million in the first quarter of 2007. EPS from discontinued operations decreased to $(0.04) in 2008 from $0.06 in 2007, primarily due to the impact of the deterioration of the earnings of brands sold.

Loss on Disposal of Discontinued Operations, Net of Tax

Loss on disposal of discontinued operations in the first quarter of 2008 was $12.2 million, or $(0.13) per common share reflecting the estimated difference between the carrying value of the assets sold and their estimated fair values less costs to dispose, including transaction costs.

Net (Loss) Income

Net (loss) income in the first quarter of 2008 decreased to $(31.0) million from $16.2 million in the first quarter of 2007. Diluted EPS decreased to $(0.33) in 2008, from $0.16 in 2007.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Cash Requirements. Our primary ongoing cash requirements are to (i) fund growth in working capital (primarily accounts receivable and inventory), (ii) invest in our supply chain and information systems, (iii) fund investment in marketing and (iv) fund capital expenditures related to our anticipated retail store expansion, as well as expenditures for in-store merchandise shops and normal maintenance activities. We also require cash to fund potential acquisitions and payments related to earn-out provisions of recent acquisition agreements. In addition, we will require cash to fund any repurchase of Company stock under our previously announced share repurchase programs. On November 12, 2007 and May 18, 2006, the Company’s Board of Directors authorized us to purchase up to an additional $100 million and $250 million, respectively, of our common stock for cash in open market purchases and privately negotiated transactions. As of May 2, 2008, we had $28.7 million remaining in buyback authorization under the share repurchase program.

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). We anticipate that cash flows from operations and our 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, our ability to execute our strategy, retailer and consumer acceptance of our products, which may impact our financial performance, maintenance of our investment-grade credit rating, maintenance of financial covenants (as amended) of our debt and credit facilities, 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. On February 15, 2008, Moody’s placed our Baa3 senior unsecured and Prime-3 commercial paper ratings under review for possible downgrade. On April 10, 2008, Moody’s affirmed the Company’s Baa3 senior unsecured and Prime-3 commercial paper ratings.

2008 vs. 2007

Cash and Debt Balances. We ended the first three months of 2008 with $111.4 million in cash and marketable securities, compared to $106.0 million at the end of the first three months of 2007 and with $989.1 million of debt outstanding, compared to $742.8 million at the end of the first three months of 2007. This $240.9 million increase in our net debt position (total debt less cash and marketable securities) over the last twelve months is primarily attributable to $300.5 million in share repurchases, $193.6 million in capital and in-store expenditures, $39.9 million in acquisition-related payments and the effect of foreign currency translation on our Eurobond (which increased our debt balance by $85.0 million), partially offset by cash flows from operations for the last twelve months of $315.7 million. We ended the first quarter of 2008 with $1.466 billion in stockholders’ equity, giving us a total debt to total capital ratio of 40.3%, compared to $1.516 billion in stockholders’ equity at year end 2007 and a total debt to total capital ratio of 36.9%, and $2.148 billion in stockholders’ equity at the end of the first quarter of 2007 and a total debt to total capital ratio of 25.7%.

Accounts Receivable decreased $34.6 million, or 5.8%, at April 5, 2008, compared to March 31, 2007, primarily due to a reduction in receivables in the domestic portion of our Partnered Brands apparel businesses due to the impact of brands sold or discontinued and reduced sales in our LIZ CLAIBORNE brand, partially offset by increases in our MEXX Europe operations, the fragrance businesses of both our Direct Brands and Partnered Brands segments and the impact of foreign currency exchange rates of $34.0 million primarily related to the strengthening of the euro.

Accounts receivable increased $126.5 million, or 28.7%, at April 5, 2008 compared to December 29, 2007, due primarily due to the timing of shipments in our domestic operations.

Inventories decreased $118.1 million, or 18.3% at the end of the first three months of 2008 compared to the end of the first three months of 2007, primarily due to the year-over year impact of decreases in our Partnered Brands segment, the impact of brands sold, discontinued or held for sale, partly offset by increases in our Direct Brands inventory as a result of growth in our retail operations as well as increase in our LIZ & CO and CONCEPTS brands. The impact of changes in foreign currency exchange rates increased inventories by $26.4 million, or 4.1%, in the first quarter of 2008 compared to the first quarter of 2007. Inventories decreased by $14.8 million, or 2.7%, compared to December 29, 2007, 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 $443.7 million during the first three months of 2008; at the end of the first quarter of 2008, our borrowings under these facilities totaled $413.7 million.

Net cash used in operating activities was $154.4 million in the first three months of 2008, compared to $196.2 million in the first three months of 2007. This $41.8 million decrease in the use of cash was primarily due to a decrease in inventories and increased payables and accrued expenses, partially offset by reduced net income and a reduction in income taxes.

Net cash provided by (used in) investing activities was $7.1 million in the first three months of 2008, compared to a usage of $48.0 million in 2007. Net cash provided by investing activities in the first three months of 2008 primarily reflected the receipt of net proceeds of $60.3 million from dispositions, partially offset by $5.1 million in acquisition-related payments and $47.7 million in capital and in-store expenditures. Net cash used in the first three months of 2007 primarily reflected $35.1 million for capital and in-store expenditures and $13.4 million in acquisition-related payments.

Net cash provided by financing activities was $52.6 million in the first three months of 2008, compared to $156.1 million in the first three months of 2007. The $103.5 million year-over-year decrease in cash provided by financing activities primarily reflected a $142.4 million decrease in commercial paper and a $15.9 million decrease in proceeds from the exercise of stock options, partially offset by a $57.2 million increase in short-term borrowings, as we have shifted our source of borrowing from commercial paper to our revolving credit facilities.

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:

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On January 16, 2008, January 16, 2007 and January 17, 2006, we purchased 0.4 percent, 1.5 percent and 1.9 percent, respectively, of the remaining outstanding shares of LUCKY BRAND for payments of $5.0 million, $10.0 million and $10 million, respectively. We will acquire 0.4% of the equity of Lucky Brand in each of January of 2009 and 2010 for payments of $5.0 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 of $14.4 million will be made in the first half of 2008 based on a multiple of LUCKY BRAND’s 2007 earnings 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 $9-12 million.

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The Juicy Couture acquisition agreement provides for a contingent payment to the former owners of Juicy Couture 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 increases to goodwill. The 2008 payment of $72.9 million will be made in the second quarter of 2008 based on a multiple of Juicy Couture’s 2007 earnings, which we have accounted for as additional purchase price and an increase to goodwill.

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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 $20-29 million and will be accounted for as additional purchase price when paid.

Financing Arrangements

Long-term debt consists of the following:


	April 5,		December 29,		March 31,
In thousands	2008		2007		2007

5% Notes	$	548,786	$	512,044	$	463,793
Revolving credit facility and commercial paper program		340,600		301,200		224,430
Capital lease obligations		25,710		26,725		30,509
Other^(a)		74,016		47,742		24,042

Total debt	$	989,112	$	887,711	$	742,774


^(a)		At April 5, 2008, the balance includes $73.1 million of outstanding borrowings 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. 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. On February 29, 2008, we entered into an amendment to our revolving credit facility, whereby the fixed charge coverage ratio was modified and certain definitions were revised so that certain cash restructuring charges are excluded from the revised calculation. We were also provided a waiver of any potential prior defaults for failure to be in compliance with the fixed charge coverage ratio provided that we were in compliance with the amended fixed charge coverage ratio as of the end of fiscal 2007. As of the end of fiscal 2007 and as of April 5, 2008, we were in compliance with such covenants, as amended. A copy of such amendment was filed on Form 8-K, dated February 29, 2008. 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 and 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. On February 15, 2008, Moody’s placed our Baa3 senior unsecured and Prime-3 commercial paper ratings under review for possible downgrade. On April 10, 2008, Moody’s affirmed our Baa3 senior unsecured and Prime-3 commercial paper ratings.

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 our distribution facilities in Ohio and Rhode Island, which had been previously financed through our 2001 synthetic lease, which matured in 2006 (see Note 11 – Commitments and Contingencies).

As of April 5, 2008, the revolving credit facility and commercial paper program, letter of credit facilities and other borrowing facilities available to us 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	$	340,600	$	—	$	409,400
Letter of credit facility		400,000		—		159,129		240,871
Short-term borrowing facilities		174,058		73,069		11,509		89,480


^(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 November 21, 2006, we entered into an off-balance sheet financing arrangement with a financial institution for a five-year period (commonly referred to as a “synthetic lease”) to refinance the purchase of various land and real property improvements associated with warehouse and distribution facilities in Ohio and Rhode Island totaling $32.8 million. This synthetic lease arrangement replaced the previous synthetic lease arrangement, which expired on November 22, 2006. 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 FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities” and therefore consolidation by the Company is not required.

Hedging Activities

At April 5, 2008, we had various Canadian currency collars outstanding with a notional amount of $5.5 million, maturing through September 2008 and with contract rates ranging between 0.9600 and 1.0300 Canadian dollars per U.S. dollar. We had $7.5 million in Canadian currency collars at December 29, 2007 and $7.4 million and 61.8 million Hong Kong dollars in Canadian currency collars and 23.3 million Hong Kong dollars in euro currency collars at March 31, 2007. At April 5, 2008, we also had forward contracts maturing through June 2009 to sell 13.8 million Canadian dollars for $13.8 million, to sell 20.0 million Canadian dollars for 154.5 million Hong Kong dollars, to sell 12.4 million euro for $18.5 million and to sell 50.3 million euro for 544.9 million Hong Kong dollars. The notional value of the foreign exchange forward contracts at April 5, 2008 was $122.1 million, as compared with $132.3 million at December 29, 2007 and $90.1 million at March 31, 2007. Unrealized losses for outstanding foreign exchange forward contracts and currency options were $8.9 million at April 5, 2008, $7.1 million at December 29, 2007 and $2.2 million at March 31, 2007. The ineffective portion of these trades is recognized currently in earnings and was immaterial for the three month periods ended April 5, 2008 and March 31, 2007. Approximately $8.8 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.

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, “Foreign Currency Translation,” are accounted for as a component of accumulated other comprehensive loss rather

than recognized in current income. The unrealized losses recorded to Cumulative translation adjustment were $36.7 million and $4.8 million for the three months ended April 5, 2008 and March 31, 2007, respectively.

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 and Lines of Credit). 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 three months ended April 5, 2008.

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 condensed consolidated 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 2007 Annual Report on Form 10-K.

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. Due to 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.

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.

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 historical 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. Sales tax collected from customers is excluded from revenue. 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. 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 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. Our historical estimates of these costs have not differed materially from actual results.

Inventories, Net

Inventories for seasonal merchandise are recorded at actual average cost. Inventories for replenishment and on-going merchandise are recorded 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 reporting 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 based on their fair value and determining the fair value of the impaired reporting unit’s goodwill based upon the residual of the summed identified tangible and intangible assets.

The Company completed its annual goodwill impairment tests as of the first day of the third quarter of fiscal 2007. No impairment of goodwill was recognized at that date as a result of such tests.

However, due to the decline in the actual and projected performance and cash flows of our Partnered Brands segment, we determined that a goodwill impairment test was required to be performed as of December 29, 2007, in accordance with SFAS No. 142. In performing this evaluation, we considered declines in the Company’s market value, which began in the second half of 2007 and reconciled the sum of the estimated fair values of our five reporting units to the Company’s market value (based on its stock price), plus an estimated control premium.

Accordingly, this assessment compared the carrying value of each of our reporting units with its estimated fair value using discounted cash flow models and market approaches. As a result, we determined that the goodwill of our Partnered Brands segment, which is a reporting unit, was impaired and recorded a pre-tax impairment charge of $450.8 million ($343.1 million after-tax) during the fourth quarter of 2007.

Owned trademarks that have been determined to have indefinite lives are also not subject to amortization and are reviewed at least annually for potential impairment in accordance with SFAS No. 142, as mentioned above. The fair value of purchased intangible assets with indefinite lives, primarily trademarks and tradenames, are estimated and compared to their carrying value. 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.

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.”

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 brand. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value through a charge to our Condensed Consolidated Statements of Operations. As a result of an impairment analysis performed on property and equipment of our MEXX brand in the United Kingdom “MEXX UK”, we determined that the carrying value of such assets exceeded their fair value. Accordingly, during the first quarter of 2008, we recorded a pre-tax charge of $2.6 million in order to reduce the carrying value of such assets to their estimated fair value. The impairment resulted from a decline in

future anticipated cash flows of the retail operations of MEXX UK due to various factors, including our decision to close the retail operations of MEXX UK.

Accrued Expenses

Accrued expenses for employee insurance, workers’ compensation, profit sharing, contracted advertising, professional fees 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, then 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 in either (Loss) Income from Continuing Operations or Accumulated other comprehensive income (loss), depending on whether the derivative qualifies for hedge accounting treatment. Hedge accounting requires that we test each derivative 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 are 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 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.

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 as a translation adjustment. We also use derivative instruments to hedge the changes in the fair value of the debt due to interest rates, with the change in fair value recognized currently in Interest expense, net together with the change in fair value of the hedged item attributable to 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

We account for share-based compensation in accordance with SFAS No. 123(R) “Share-Based Payment,” requiring the recognition of compensation expense in the Condensed Consolidated Statements of Operations related to the fair value of employee share-based awards, including stock options and restricted stock. Determining the fair value of 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. 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.

RECENTLY ADOPTED ACCOUNTING POLICIES

We adopted SFAS No. 157, “Fair Value Measurements”, on December 30, 2007, the first day of fiscal year 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. The adoption of SFAS No. 157 did not have any impact on our condensed consolidated financial statements. SFAS 157 establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:


Level 1 –		Quoted market prices in active markets for identical assets or liabilities;


Level 2 –		Inputs other than Level 1 inputs that are either directly or indirectly observable; and


Level 3 –		Unobservable inputs developed using estimates and assumptions developed by us, which reflect those that a market participant would use.

The following table presents the financial assets and liabilities we measure at fair value on a recurring basis, based on the fair value hierarchy as of April 5, 2008:


In thousands	Level 2
Financial Assets:
Derivatives	$	457
Financial Liabilities:
Derivatives	$	9,196

We adopted 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. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We have chosen not to adopt the fair value measurement provisions of SFAS 159 for our existing instruments.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determining the Useful Life of Intangible Assets.” FSP 142-3 amends the factors to be considered in determining the useful life of intangible assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of FSP 142-3 on its condensed consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment to FASB Statement No. 133.” SFAS No. 161 enhances the disclosure requirements for derivative instruments and hedging activities under FASB Statement No. 133. Entities are required to provide disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under Statement No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years and financial periods beginning after November 15, 2008, with early adoption encouraged. We are currently assessing the impact of SFAS No. 161 on its condensed consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently assessing the impact of SFAS 157 on our condensed consolidated financial statements for items within the scope of FSP 157-2, which will become effective beginning with our first quarter of 2009.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and requires (i) classification of noncontrolling interests, commonly referred to as minority interests, within stockholders’ equity, (ii) net income to include the net income attributable to the noncontrolling interest and (iii) enhanced disclosure of activity related to noncontrolling interests. Currently, we classify noncontrolling interests as liabilities and exclude net income attributable to noncontrolling interests from net income. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of SFAS No. 160 on our condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations,” which provides revised guidance for how an acquirer in a business combination recognizes and measures in its financial statements (i) identifiable assets acquired, (ii) liabilities assumed, (iii) noncontrolling interests in the acquiree and (iv) goodwill or a gain from a bargain purchase. SFAS No. 141(R) also sets forth the disclosures required to be made in the financial statements related to effects of a business combination. SFAS No. 141(R) applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We will adopt the provisions of SFAS No. 141(R) as required.

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 April 5, 2008, December 29, 2007 and March 31, 2007, our exposure to changing market rates was as follows:


In millions	April 5, 2008			December 29, 2007			March 31, 2007

Variable rate debt	$	413.7		$	348.0		$	247.9
Average interest rate		4.31	%		5.65	%		5.23	%

A ten percent change in the average rate would have resulted in a $0.4 million change in interest expense during the first three months of 2008.

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 April 5, 2008, 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 April 5, 2008, December 29, 2007 and March 31, 2007, we had outstanding foreign currency collars with net notional amounts aggregating to $5.5 million, $7.5 million and $18.2 million, respectively. We had forward contracts aggregating to $122.1 million at April 5, 2008, $132.3 million at December 29, 2007 and $90.1 million at March 31, 2007. Unrealized losses for outstanding foreign currency options and foreign exchange forward contracts were approximately $8.9 million at April 5, 2008, $7.1 million at December 29, 2007 and $2.2 million at March 31, 2007. 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 these instruments would decrease by $13.7 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 $13.1 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 April 5, 2008:


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

Forward Contracts:
Euro				544,875		0.0835 to 0.0991	$	(8,383	)
Canadian Dollars	$	13,797				0.9746 to 1.0234		—
Canadian Dollars				154,524		0.1272 to 0.1322		116
Euro	$	18,500				0.6510 to 0.6837		(675	)
Foreign Exchange Collar Contracts:
Canadian Dollars	$	5,549				0.9709 to 1.0417		—

The table below presents the amount of contracts outstanding, the contract rate and unrealized loss, as of December 29, 2007:


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

Forward Contracts:
Euro				736,250		0.0877 to 0.0991	$	(6,179	)
Canadian Dollars	$	14,279				0.9393 to 1.0234		—
Canadian Dollars				185,082		0.1272 to 0.1367		(894	)

Foreign Exchange Collar Contracts:
Canadian Dollars	$	7,505				0.9174 to 1.0417		—

The table below presents the amount of contracts outstanding, the contract rate and unrealized loss, as of March 31, 2007:


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

Forward Contracts:
Euro				565,751		0.0968 to 0.0998	$	(2,064	)
Canadian Dollars	$	8,190				0.8702 to 0.8728		—
Canadian Dollars				74,229		0.1482 to 1.1482		(24	)

Foreign Exchange Collar Contracts:
Euro				23,250		0.0980 to 0.1007	$	(78	)
Canadian Dollars	$	7,363				0.8403 to 0.8925		—
Canadian Dollars			$	61,764		0.1428 to 0.1527		(11	)

ITEM 4. CONTROLS AND PROCEDURES

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 our first fiscal quarter. Our Chief Executive Officer and Chief Financial Officer concluded that, as of April 5, 2008, our disclosure controls and procedures were effective to ensure that all information required to be disclosed is recorded, processed, summarized and reported within the time periods specified, and that information required to be filed 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 were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended April 5, 2008 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 11 and 25 of Notes to Consolidated Financial Statements in the Company’s 2007 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, 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 was completed and we submitted the results in the second quarter of 2007. The Georgia Department of Natural Resources has reviewed our submission and has requested certain modifications to the response and some minimal additional testing. We have submitted the modified response and additional testing results.

ITEM 1A. RISK FACTORS

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this report and in the Company’s 2007 Annual Report on Form 10-K or in any other written or oral communication made by, or with the approval of any of our authorized personnel. Any of the following risks could materially, adversely affect us, our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Report.

Risks Related to Our Business and Our Long-Term Growth Strategy

We cannot assure the successful implementation and results of the long-term strategic plan that we announced in July 2007.

Our ability to execute our long-term growth plan and achieve our projected results is subject to a variety of risks, including the following:

•

In June 2007, we announced that we reorganized our Company into five operating segments that aggregate into two reportable segments, Direct Brands and Partnered Brands, and realigned our management structure around this new organization. There can be no assurances that such restructuring and realignment will improve our operations or our results.

•

As part of our strategic plan, we designated 16 brands for strategic review, which included possible sale, licensing or closure. There can be no assurances that we appropriately identified the appropriate brands for strategic review or that we appropriately valued the assets which we have sold or licensed to third parties.

•

Our strategic plan involves a significant expansion of our specialty retail business. The successful operation and expansion of our specialty retail business in our Direct Brands segment is subject to, among other things, our ability to successfully expand the specialty store base of our Direct Brands segment, our 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. There can be no assurances that we can be successful in this regard, and our inability to successfully expand our specialty retail business would have a material adverse effect on our results.

•

We have announced a number of initiatives designed to achieve greater collaboration with our wholesale customers and to improve results of the Company’s wholesale-based Partnered Brands. These initiatives include design agreements with Isaac Mizrahi with respect to our LIZ CLAIBORNE brand and John Bartlett with respect to our CLAIBORNE (men’s) brand. Our wholesale customers have been seeking differentiated product and we

believe that these design agreements will enable us to distinguish our product offering. However, there can be no assurances that these arrangements will result in improved product or that the resulting products will be acceptable to our wholesale customers or consumers.

•

The successful implementation of our strategic plan will require us 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. There can be no assurances that we can be successful in these efforts and our failure to evolve our supply chain capabilities and reduce costs in this area will have a material adverse impact on our business and results.

•

We previously announced that our structural realignment and other initiatives would yield substantial cost savings, and that we expected such savings would drive operating margin expansion beginning in 2008. There can be no assurances that we can successfully implement the anticipated cost savings as announced on June 20, 2007.

•

Our strategic plan focuses on building strong brands through increased marketing spending. Our ability to fund such efforts is critical to the success of our strategy. Our inability to fund marketing initiatives appropriate to support our strategic plan will have a material adverse impact on our ability to achieve the growth we project in our Direct Brands segment.

We cannot assure that we can attract and retain talented highly qualified executives, or maintain satisfactory relationships with our employees, both union and non-union.

Our success depends, to a significant extent, both upon the continued services of these individuals, as well as our ability to attract, hire, motivate and retain additional talented and highly qualified management in the future, including in the areas of design, merchandising, sales, supply chain, marketing, production and systems, as well as our ability to hire and train qualified retail management and associates. In addition, we will need to provide for the succession of senior management. The loss of key members of management and our failure to successfully plan for succession could disrupt our operations and our ability to successfully operate our business and execute our strategic plan.

We are bound by a variety of collective bargaining agreements with two unions, mostly in our warehouse and distribution facilities. We consider our relations with our non-union and union employees to be satisfactory and to date we have not experienced any interruption of our operations due to labor disputes. While our relations with the unions have historically been amicable, the Company cannot rule out the possibility of a labor dispute at one or more of its facilities, particularly in light of facility closings. Any such dispute could have a material adverse impact on our business.

The success of our business depends on our ability to respond to constantly changing consumer demands and tastes and fashion trends, across multiple product lines, shopping channels and geographies.

The apparel and accessories industries have historically been subject to rapidly changing consumer demands and tastes and fashion trends. We believe that our success is largely dependent on our ability to effectively anticipate, gauge and respond to changing consumer demands and taste, across multiple product lines, shopping channels and geographies, in the design, pricing, styling and production of our products and in the merchandising and pricing of products in our retail stores. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to constant change. Also, we must maintain and enhance 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.

We attempt to schedule a substantial portion of our materials and manufacturing commitments relatively late in the production cycle; however, in order to secure necessary materials and manufacturing facilities, we must make substantial advance commitments, often as much as five months prior to the receipt of firm orders from customers for the items to be produced. We need to translate market trends into appropriate, saleable product offerings relatively far in advance, while minimizing excess inventory positions, and correctly balance the level of our fabric and/or merchandise commitments with actual customer orders. We cannot assure that we will be able to continue to develop appealing styles and brands or successfully meet changing customer and consumer demands in the future. In addition, we cannot assure any new products or brands that we introduce will be successfully received and supported by our wholesale customers or consumers. Our failure to gauge consumer needs and fashion trends and respond appropriately, and to appropriately forecast our ability to sell products, could adversely affect retail and consumer acceptance of our products and leave us with substantial outstanding fabric and/or manufacturing commitments,

resulting in increases in unsold inventory or missed opportunities. If that occurs, we may need to employ markdowns or promotional sales to dispose of excess inventory, which may harm our business and results. At the same time, our focus on inventory management may result, from time to time, in our not having a sufficient supply of products to meet demand and cause us to lose potential sales.

Our business could suffer if we cannot adequately establish, defend and protect our trademarks and other proprietary rights.

We believe that our trademarks and other proprietary rights are significantly important to our success and competitive position. Accordingly, we devote substantial resources to the establishment and protection of our trademarks and anti-counterfeiting activities on a worldwide basis. Counterfeiting of our products, particularly our JUICY COUTURE, LUCKY BRAND and KATE SPADE brands, continues, however, and in the course of our international expansion we have experienced conflicts with various third parties that have acquired or claimed ownership rights in some of our trademarks or otherwise have contested our rights to our trademarks. We have, in the past, resolved certain of these conflicts through both legal action and negotiated settlements, none of which, we believe, has had a material impact on our financial condition and results of operations. There can be no assurances that the actions taken to establish and protect our trademarks and other proprietary rights will be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of their trademarks and proprietary rights. Moreover, there can be no assurances that in certain countries others will not assert rights in, or ownership of, our trademarks and other proprietary rights or that we will be able to successfully resolve such conflicts. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States. The loss of such trademarks and other proprietary rights, or the loss of the exclusive use of such trademarks and other proprietary rights, could have a material adverse effect on us. Any litigation regarding our trademarks or other proprietary rights could be time consuming and costly.

Our success will depend on our ability to successfully develop or acquire new product lines or enter new markets or product categories.

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. This would include our acquisition of KATE SPADE in 2006, our agreement with NARCISO RODRIGUEZ, the license of our DANA BUCHMAN brand to Kohl’s and the sale of our LIZ & CO. and CONCEPTS BY CLAIBORNE brands outside of better department stores. These activities are accompanied by a variety of risks inherent in any such new business venture, including the following:

•

Our ability to identify appropriate business development opportunities, including new product lines and markets.

•

New businesses, product lines or market activities may require methods of operations, investments and marketing and financial strategies different from those employed in our other businesses, and may also involve buyers, store customers and/or competitors different from our historical buyers, store customers and competitors.

•

We may not be able to generate projected or satisfactory level of sales, profits and/or return on investment for a new business or product line, and may also encounter unanticipated events and unknown or uncertain liabilities that could materially impact our business.

•

We may experience possible difficulties, delays and/or unanticipated costs in integrating the business, operations, personnel and/or systems of an acquired business and may also not be able to retain and appropriately motivate key personnel of an acquired business.

•

We may not be able to maintain product licenses, which are subject to agreement with a variety of terms and conditions, or to enter into new licenses to enable us to launch new products and lines.

•

With respect to a business where we act as licensee, such as our licensed DKNY JEANS^®, DKNY ACTIVE^® and DKNY^® MENS brands and our NARCISO RODRIGUEZ brand, there are a number of inherent risks, including, without limitation, 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.

Our ability to continue to have the liquidity necessary, through cash flow from operations and financing, may be adversely impacted by a number of factors, including the downgrading of our credit rating.

Our primary ongoing cash requirements are to fund growth in working capital (primarily accounts receivable and inventory), to invest in our supply chain and information systems, to fund investment in marketing and capital expenditures, and to fund our anticipated retail store expansion, as well as expenditures for in-store merchandise shops and normal maintenance activities. We also require cash to fund potential acquisitions and payments related

to earn-out provisions of existing acquisition agreements. In addition, we will require cash to fund any repurchase of Company stock under our previously announced share repurchase programs. 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 lines of credit (which include revolving and trade letter of credit facilities).

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. Such sufficiency and availability may be adversely affected by a variety of factors, including, without limitation, our ability to execute our strategy, retailer and consumer acceptance of our products, which may impact our financial performance, maintenance of our investment-grade credit rating, maintenance of financial covenants (as amended) of our debt and credit facilities, as well as interest rate and exchange rate fluctuations. We cannot be certain that any additional required financing, whether debt or equity, will be available in amounts needed or on terms acceptable to us, if at all.

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. On February 15, 2008, Moody’s placed our Baa3 senior unsecured and Prime-3 commercial paper ratings under review for possible downgrade. On April 10, 2008, Moody’s affirmed the Company’s Baa3 senior unsecured and Prime-3 commercial paper ratings.

There can be no assurances that we will not be further downgraded by either Moody’s or S&P, and any such additional downgrade could adversely impact our ability to obtain financing in amounts needed or on terms acceptable to us, if at all.

Risks Associated With Competition and the Marketplace

The markets in which we operate are highly competitive, both within the United States and abroad.

We face intense competitive challenges from other domestic and foreign fashion apparel and accessories producers and retailers. Competition is based on a number of factors, including the following:

•

Anticipating and responding to changing consumer demands in a timely manner;

•

Establishing and maintaining favorable brand name and recognition;

•

Product quality;

•

Maintaining and growing market share;

•

Developing quality and differentiated products that appeal to consumers;

•

Establishing and maintaining acceptable relationships with our retail customers;

•

Pricing products appropriately;

•

Providing appropriate service and support to retailers;

•

Optimizing our retail and supply chain capabilities;

•

Size and location of our retail stores and department store selling space; and

•

Protecting intellectual property.

Any increased competition, or our failure to adequately address these competitive factors, could result in reduced sales or prices, or both, which could have a material adverse effect on us. We also believe there is an increasing focus by the department stores to concentrate an increasing portion of their product assortments within their own private label products. These private label lines compete directly with our product lines and may receive prominent positioning on the retail floor by department stores.

Our wholesale business is largely dependent on sales to a limited number of large U. S. department store customers, and our business could suffer as a result of consolidations, restructurings and other ownership changes in the retail industry.

Many major department store groups make centralized buying decisions; accordingly, any material change in our relationship with any such group could have a material adverse effect on our operations. We expect that our largest customers will continue to account for a significant percentage of our sales.

Our dependence on sales to a limited number of large U.S. department store customers is subject to our ability to respond effectively to, among other things, (i) these customers’ buying patterns, including their purchase and retail floor space commitments for apparel in general (compared with other product categories they sell) and our products specifically (compared with products offered by our competitors, including with respect to customer and consumer acceptance, pricing and new product introductions); (ii) these customers’ strategic and operational initiatives, including their continued focus on further development of their “private label” initiatives; (iii) these customers’ desire to have the Company provide them with exclusive and/or differentiated designs and product mixes; (iv) these customers’ requirements for vendor margin support; (v) any credit risks presented by these customers, especially given the significant proportion of the Company’s accounts receivable they represent; and (vi) the effect of any potential consolidation among one or more of these larger customers, such as the merger between Macy’s Inc. and The May Department Store Company.

We do not enter into long-term agreements with any of our customers. Instead, we enter into a number of purchase order commitments with our customers for each of our lines every season. A decision by the controlling owner of a group of stores or any other significant customer, whether motivated by competitive conditions, financial difficulties or otherwise, to decrease or eliminate the amount of merchandise purchased from us or to change their manner of doing business with us could have a material adverse effect on our business or financial condition.

We sell our wholesale merchandise primarily to major department stores across the U.S. and Europe and extend credit based on an evaluation of each customer’s financial condition, usually without requiring collateral. However, the financial difficulties of a customer could cause us to curtail or eliminate business with that customer. We may also assume more credit risk relating to our receivables from that customer. Our inability to collect on our trade accounts receivable from any of our largest customers could have a material adverse effect on our business or financial condition.

Our reliance on independent manufacturers could cause delay and loss and damage our reputation and customer relationships.

We do not own any product manufacturing facilities; all of our products are manufactured in accordance with our specifications through arrangements with independent suppliers. Products produced in Asia represent a substantial majority of our sales. We also source product in the United States and other regions, including several hundred suppliers, located in approximately 46 countries, manufacturing our products, with the largest finished goods supplier accounting for approximately 4% of the total of finished goods we purchased. A supplier’s failure to manufacture and deliver products to us in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items. The failure to make timely deliveries may drive customers to cancel orders, refuse to accept deliveries or demand reduced prices, any of which could have a material adverse effect on us and our reputation in the marketplace. Also, a manufacturer’s failure to comply with safety and content regulations and standards, including with respect to children’s product and fashion jewelry, could result in substantial liability and damage to our reputation. While we provide our manufacturers with standards and we employ independent testing for safety and content issues, there can be no assurances that we will be able to prevent or detect all failures of our manufacturers to comply with such standards and regulations.

We require our independent manufacturers (as well as our licensees) to operate in compliance with applicable laws and regulations. While our internal and vendor operating guidelines promote ethical business practices and our staff periodically visits and monitors the operations of our independent manufacturers, we do not control these manufacturers or their labor practices. The violation of labor or other laws by an independent manufacturer used by us (or any of our licensees), or the divergence of an independent manufacturer’s (or licensee’s) labor practices from those generally accepted as ethical in the U.S., could interrupt, or otherwise disrupt the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations.

Our arrangements with foreign suppliers are also subject generally to the risks of doing business abroad, including currency fluctuations and revaluations, restrictions on the transfer of funds, terrorist activities, pandemic disease and, in certain parts of the world, political, economic and currency instability. Our operations have not been materially affected by any such factors to date. However, due to the very substantial portion of our products that are produced abroad, any substantial disruption of our relationships with our foreign suppliers could adversely effect our operations.

Economic, Social, Political and Regulatory Risks

General economic conditions, including continued weakening of the economy, may affect consumer purchases of discretionary items and fashion and retail products, which could adversely affect our sales.

The industries in which we operate have historically been subject to cyclical variations, recessions in the general economy and future economic outlook. Our results are dependent on a number of factors impacting consumer spending including but not limited to, general economic and business conditions; consumer confidence; wages and employment levels; the housing market; consumer debt levels; availability of consumer credit; credit and interest rates; fluctuations in foreign currency exchange rates; fuel and energy costs; energy shortages; the level of the stock market; taxes; general political conditions, both domestic and abroad; and the level of customer traffic within department stores, malls and other shopping and selling environments.

Consumer purchases of discretionary items, including our products, may decline during recessionary periods and at other times when disposable income is lower. A downturn or an uncertain outlook in the economies in which we sell our products may materially adversely affect our businesses and our revenues and profits. The domestic and international political situation also affects consumer confidence. The threat, outbreak or escalation of terrorism, military conflicts or other hostilities could lead to a decrease in consumer spending.

Fluctuations in the price, availability and quality of the fabrics or other raw materials used by us in our manufactured apparel and in the price of materials used to manufacture our footwear and accessories could have a material adverse effect on our cost of sales or our ability to meet our customers’ demands. The prices for such fabrics depend largely on the market prices for the raw materials used to produce them, particularly cotton, leather and synthetics. The price and availability of such raw materials may fluctuate significantly, depending on many factors, including crop yields and weather patterns. In the future, we may not be able to pass all or a portion of such higher raw materials prices on to our customers.

Our business is exposed to domestic and foreign currency fluctuations.

While we generally purchase our products in U.S. dollars, we source most of our products overseas. As a result, the cost of these products may be affected by changes in the value of the relevant currencies, including currency devaluations. Changes in currency exchange rates may also affect the U.S. dollar value of the foreign currency denominated prices at which our international businesses sell products. Furthermore, our international sales represented approximately 32% of our total sales in fiscal 2007, and such sales were derived from sales in foreign currencies, primarily the euro. Our international sales, as well as our international businesses’ inventory and accounts receivables levels, could be materially affected by currency fluctuations. Although we hedge some exposures to changes in foreign currency exchange rates arising in the ordinary course of business, we cannot assure that foreign currency fluctuations will not have a material adverse impact on our financial condition or results of operations.

Our international operations, including manufacturing, are subject to a variety of legal, regulatory, political and economic risks, including risks relating to the importation and exportation of product.

We source most of our products outside the U.S. through arrangements with independent suppliers in over 46 countries. There are a number of risks associated with importing our products, including but not limited to the following:

•

Quotas imposed by bilateral textile agreements with China and non-WTO countries. These agreements limit the amount and type of goods that may be imported annually from these countries;

•

Changes in social, political, legal and economic conditions or terrorist acts that could result in the disruption of trade from the countries in which our manufacturers or suppliers are located;

•

The imposition of additional regulations relating to imports or exports;

•

The imposition of additional duties, taxes and other charges on imports or exports;

•

Risks of increased sourcing costs, including costs for materials and labor, including as a result of the elimination of quota on apparel products;

•

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 barriers to entry;

•

Significant delays in the delivery of cargo due to security considerations;

•

The imposition of antidumping or countervailing duty proceedings resulting in the potential assessment of special antidumping or countervailing duties; and

•

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 (although China has agreed to safeguard quota on certain classes of apparel products through 2008 as a result of a surge in exports to the United States, political pressure will likely continue for restraint on importation of apparel).

Any one of these factors could have a material adverse effect on our financial condition, results of operations and current business practices.

Our ability to realize growth in new international markets and to maintain the current level of sales in our existing international markets is subject to risks associated with international operations. These include complying with a variety of foreign laws and regulations; unexpected changes in regulatory requirements; new tariffs or other barriers in some international markets; political instability and terrorist attacks; changes in diplomatic and trade relationships; and general economic fluctuations in specific countries or markets.

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

The following table summarizes information about purchases by the Company during the three months ended April 5, 2008 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 30, 2007 - February 2, 2008		10.3	⁽¹⁾	$	20.35		—	$	28,749
February 3, 2008 - March 8, 2008		98.6	⁽¹⁾		18.01		—		28,749
March 9, 2008 - April 5, 2008		3.1	⁽¹⁾		19.12		—		28,749

Total 14 weeks ended April 5, 2008		112.0	⁽¹⁾	$	18.25		—	$	28,749


⁽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 $2.275 billion of the Company’s stock. As of May 2, 2008, the Company had $28.7 million remaining in buyback authorization under its program.

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.

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: May 13, 2008


LIZ CLAIBORNE, INC.		LIZ CLAIBORNE, INC.

By:	/s/ Andrew Warren ANDREW WARREN	By:	/s/ Elaine H. Goodell ELAINE H. GOODELL
	Chief Financial Officer		Vice President — Corporate Controller and
	(Principal financial officer)		Chief Accounting Officer
			(Principal accounting officer)

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Kate Spade & Co (KATE) 10-Q2008 Q3 Quarterly report

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