Friday, April 13, 2012

Liz Claiborne (LIZ) - Dramatic Turnaround Story Sees Rumor Break its Skew to New Equilibrium

LIZ is trading $13.26, up 0.7% with IV30™ also up 0.7%. The LIVEVOL® Pro Summary is below.


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Liz Claiborne, Inc. (Liz Claiborne) designs and markets a portfolio of retail-based brands, including JUICY COUTURE, KATE SPADE, LUCKY BRAND and MEXX. The Company also has a group of department store-based brands with consumer franchises, including the LIZ CLAIBORNE families of brands and the licensed DKNY JEANS and DKNY ACTIVE brands.

This is a vol note on a fascinating company with a dramatic turnaround story, a stock price that has nearly doubled in six months (up 136.85% TTM) and still seen as undervalued by some while a potential takeover target. I'll summarize the happs and then show you some awesome upside skew into earnings.

Let's start with a holistic news report from Bloomberg, below.

Even after losing more money last year than any other U.S. clothing retailer, Liz Claiborne Inc. (LIZ) could still be a bargain in a takeover.

The $1.3 billion owner of the Kate Spade brand will return to profitability in 2012, reversing five years of losses that topped $2 billion, according to analysts’ estimates compiled by Bloomberg. With revenue projected to rise 14 percent next year, New York-based Liz Claiborne still closed yesterday at $12.36 a share, a 28 percent discount to 2013 sales. That’s cheaper than 94 percent of similar-sized U.S. apparel companies, data compiled by Bloomberg show.

Liz Claiborne Inc.'s remaining lines -- Kate Spade, Juicy Couture and Lucky Brand, which are higher priced and contemporary -- could fetch $20 a share in a takeover, said Monness, Crespi, Hardt & Co.

Liz Claiborne, which is changing its name to Fifth & Pacific Cos. next month, may lure buyers from private-equity firms to Warnaco Group Inc. (WRC) or VF Corp. (VFC), according to Imperial Capital LLC, after selling its namesake brand and other units last year. The remaining lines -- Kate Spade, Juicy Couture and Lucky Brand, which are higher priced and contemporary -- could fetch $20 a share in a takeover, said Monness, Crespi, Hardt & Co. An acquirer could then benefit from splitting the three brands into separate companies, said Jim Chartier at Monness.

“It’s a completely different company now than six months ago,” Casey Flavin, an analyst at Hedgeye Risk Management LLC, an independent equities research firm in New Haven, Connecticut, said in a telephone interview. “You are left with three brands that are very attractive and so are inherently attractive to M&A because of the discount to their value.”

Source: Bloomberg via Yahoo! Finance Liz Claiborne Takeover Seen With Allure of Kate Spade: Real M&A, written by Katia Porzecanski and Cotten Timberlake.

Let's look to the Charts Tab (6 months), below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

The stock evolution (read: climb) over the time period has been steadily abrupt (what?), which is to say, up a lot 'n stuff. I highlighted the pop a couple of weeks ago on 3-30-2012. Here's the AP headline and summary:

Liz Claiborne jumps 13 pct on buyout report

Liz Claiborne jumps 13 pct on buyout report, company says "no contemplation" of new strategy

Source: AP via Yahoo! Finance (full article here)

Remember this news tidbit -- it's the culprit for the "broken" skew. More on that in a second... For the record, the 52 wk range in the underlying is [$4.02, $15.39]. A year ago this stock closed at $5.60.

Turning to the vol portion, we can see the pop off of that 3-30-2012 news, and while the implied dipped a touch after, it has found that same level again. The 52 wk range in IV30™ is [45.73%, 104.42%], putting the current level in the 48th percentile (or essentially in the middle). The next earnings release for LIZ is due out 4-25-2012 BMO and is confirmed by Livevol®'s data sources.

But, having said all that, it's the skew that really caught my attention. Let's check it out, below.

While it makes sense for May to lie above Jul due to earnings, that upside skew vol difference is awesome. Keeping in mind that the 13 strike is ATM, we can see how the vol dips to the OTM puts and rises rather significantly to the OTM calls.

I looked back at the historical skew, and whadya know... It was this 3-30-2012 report that "broke" the skew. I have included the Skew Tab from 3-29-2012 and 3-30-2012, below.

The skew as of 3-29-2012 was "normal," with the OTM puts more expensive (in vol) than the ATM options (in vol) and further, with the OTM calls less expensive than the ATM vols. The takeover / private news is not going away -- that is, the new risk it presented to the market (see change in skew charts) has become the new equilibrium. Quite unusual and therefore, quite meaningful.

To read what skew is and why it exists you can go here: Understanding Option Skew.

Finally, let's turn to the Options Tab, for completeness.

We can see that May as a weighted average is priced to 11 vol points higher than Jul. But, looking to the specific strikes we can see that the ATM vol diff is ~11 points while the OTM calls on the 17 strike show a vol diff of more than 20 vol points. In English, the option market reflects substantially more upside risk in the near-term relative to the intermediate-term Jul options. It will be very interesting to see how Jun is priced after Apr expiry. Word...

Happy Friday.

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1 comment:

  1. Very interesting highlight of LIZ. I am - to my husband's chagrin - a big fan of Kate Spade bags and I have a number of other friends who are as well. Juicy Couture is also seen as a respected, higher-end brand. Not sure how LIZ could have gotten in trouble to begin with having that nice stable of brands, but I could easily see how they might be a "juicy" (pardon the pun) takeover target even with the run-up in share price.