Successful Investing: Liz Claiborne gets lift, but debt issues loom

Q:What is the outlook for my investment in Liz Claiborne Inc.? -- P.V., via the Internet

Answer: Sales of this famous women's clothing maker have picked up, and management says the company has become "less melancholy" about the upcoming holiday season. Inventory is also much lower than a year ago.

Nonetheless, the economy continued to take its toll in the third quarter, with the company losing $90.5 million. That's why Liz Claiborne initiated changes to better control the sale and pricing of its merchandise.

The company is pulling its main brands out of numerous department stores so they can be sold exclusively at J.C. Penney Co. next fall. Liz Claiborne will still design the brands, but they will be produced by J.C. Penney suppliers.

In addition, the Liz Claiborne New York brand designed by Isaac Mizrahi will be sold by the QVC television shopping channel. These shifts will not affect the company's Juicy Couture, Lucky Brand, Kate Spade and overseas Mexx brands and their stand-alone stores.

Spurred by those moves, shares of Liz Claiborne (LIZ) are up 99 percent this year after declines of 86 percent last year and 53 percent in 2007.

The company hired turnaround firm Alvarez & Marsal in September to review its operations for ways to improve cash flow in the U.S. and Europe, stressing that the action does not indicate an initial step toward bankruptcy.

Consensus rating on Liz Claiborne stock is currently "hold," according to Thomson Reuters, consisting of one "buy," five "holds" and one "underperform."

William McComb, who became CEO in 2006, spent 14 years at Johnson & Johnson, where he earned a reputation for enhancing brand names. He has been cutting costs by outsourcing some corporate functions, consolidating distribution centers and closing some stores.

He must improve the company's financial health to properly handle its heavy debt burden. Earlier this year, Standard & Poor's Ratings Service lowered its rating on the company two levels to B, from BB-, and said the outlook was negative through year-end.

Earnings are expected to decline 241 percent this year, compared with a 1 percent decline for the textile-apparel clothing industry, according to Thomson Reuters. Next year's projected 101 percent gain compares with the forecast of a 13 percent rise for its peers. The five-year annualized growth rate is expected to be 14 percent, compared with the forecast of an 11 percent increase industrywide.

Q:What investments are tax-exempt? -- T.L., via the Internet

Answer: The higher your individual tax bracket, the greater the benefit from tax-exempt investments.

One popular choice, the municipal bond, is federally tax-exempt, with some also exempt from state taxes, depending on the state. Treasury securities and U.S. savings bonds are subject to federal tax, but not to state and local tax. However, interest earnings on savings bonds may be excluded from federal income tax when the bonds are used to finance education, with some restrictions.

"Usually, if you're in a tax bracket of 20 [percent] to 25 percent or higher, the math works out more favorably for tax-exempt securities," said Mark Balasa, certified financial planner and co-president of Balasa Diverno Foltz LLC in Schaumburg, Ill.

For example, a taxpayer in the 28 percent bracket would need a taxable return of about 6.94 percent to match a tax-free yield of 5 percent. Someone in the 35 percent bracket would need a 7.69 percent return. That isn't taking into account state and local taxes.

"You take the return on the tax-exempt investment and then you divide it by one minus your tax bracket," Balasa explained. "That gives you the tax-equivalent yield so you can compare the two and choose."

Send questions to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, AZ 85004-1248 or .