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Form 10-Q for CLAIBORNE LIZ INC

13-May-2004

Quarterly Report

OVERVIEW

Business/Segments-

We operate the following business segments: Wholesale Apparel, WholesaleNon-Apparel and Retail.o Wholesale Apparel consists of women's and men's apparel designed and marketed worldwide under various trademarks owned by the Company or licensed by the Company from third-party owners. This segment includes our businesses in our core LIZ CLAIBORNE brand along with our better-priced specialty apparel (INTUITIONS, SIGRID OLSEN and REALITIES), bridge-priced (DANA BUCHMAN and ELLEN TRACY), men's (CLAIBORNE), moderate-priced special markets (AXCESS, CRAZY HORSE, EMMA JAMES, FIRST ISSUE, VILLAGER and J.H. COLLECTIBLES), premium denim (LUCKY BRAND DUNGAREES) and contemporary sportswear and dress (LAUNDRY, JUICY COUTURE, JANE STREET, ENYCE and SWE) businesses, as well as our licensed DKNY(R) JEANS, DKNY(R) ACTIVE, and CITY DKNY(R) businesses and our licensed KENNETH COLE NEW YORK and REACTION KENNETH COLE businesses. The Wholesale Apparel segment also includes wholesale sales of women's, men's and children's apparel designed and marketed in Europe, Canada, the Asia-Pacific Region and the Middle East under our MEXX brand names.o Wholesale Non-Apparel consists of accessories, jewelry and cosmetics designed and marketed worldwide under certain of the above listed and other owned or licensed trademarks, including our MONET, TRIFARI and MARVELLA labels.o Retail consists of our worldwide retail operations that sell most of these apparel and non-apparel products to the public through our 266 outlet stores, 232 specialty retail stores and 560 international concession stores (where the retail selling space is either owned and operated by the department store in which the retail selling space is located or leased and operated by a third party, while, in each case, the Company owns the inventory). This segment includes stores operating under the following formats: MEXX, LUCKY BRAND DUNGAREES, LIZ CLAIBORNE, ELISABETH, DKNY(R)JEANS, DANA BUCHMAN, ELLEN TRACY, SIGRID OLSEN and MONET, as well as our Special Brands Outlets which include products from our Special Markets divisions. On February 20, 2003, we announced our decision to close our 22 LIZ CLAIBORNE domestic Specialty Retail stores (see Note 10 of Notes to Condensed Consolidated Financial Statements).

The Company, as licensor, also licenses to third parties the right to produceand market products bearing certain Company-owned trademarks. The resultingroyalty income is not allocated to any of the specified operating segments, butis rather included in the line "Sales from external customers" under the caption"Corporate/Eliminations" in Note 13 of Notes to Condensed Consolidated FinancialStatements.

Competitive Profile-

We operate in global fashion markets that are highly competitive. Our ability tocontinuously evaluate and respond to changing consumer demands and tastes,across multiple market segments, distribution channels and geographies, iscritical to our success. Although our brand portfolio approach is aimed atdiversifying our risks in this regard, misjudging shifts in consumer preferencescould have a negative effect. Other key aspects of competition include quality,brand image, distribution methods, price, customer service and intellectualproperty protection. Our size and global operating strategies help us tosuccessfully compete by positioning us to take advantage of synergies in productdesign, development, sourcing and distributing of our products throughout theworld. We believe we owe much of our recent success to our having successfullyleveraged our competencies in technology and supply chain management for thebenefit of existing and new (both acquired and internally developed) businesses.Our success in the future will depend on our ability to continue to designproducts that are acceptable to the marketplaces that we serve and to source themanufacture of our products on a competitive basis, particularly in light of theimpact of the elimination of quota for apparel products scheduled for 2005. Weexpect that the anticipated elimination of quota will result in a generalreduction in the cost of sourcing and manufacturing apparel products; however,there can be no assurances that the cost savings will be directly reflected inthe Company's gross profit rate. In addition, the change to a quota-freeenvironment may present operational challenges to the Company and other apparelcompanies as the transition is made to the new quota regime.

Reference is also made to the other economic, competitive, governmental andtechnological factors affecting the Company's operations, markets, products,services and prices as are set forth under "Statement Regarding Forward-LookingDisclosure" below and in our 2003 Annual Report on Form 10-K, including, withoutlimitation, those set forth under the heading "Business-Competition; CertainRisks."

2004 First Quarter Overall Results

Net Sales-

Net sales for the first quarter of 2004 were a record $1.103 billion, anincrease of $27.2 million, or 2.5%, over 2003 first quarter net sales, as wecontinued the disciplined execution of our brand portfolio strategy, under whichwe strive to offer consumers apparel and non-apparel products across a range ofstyles, price points and channels of distribution.

The sales results reflect $59.1 million of sales from our recently acquiredJUICY COUTURE and ENYCE businesses. Approximately $35.9 million of the salesincrease was due to the impact of foreign currency exchange rates, primarily asa result of the strengthening Euro on the reported results of our internationalbusinesses. We also experienced sales increases in our MEXX Europe, SIGRIDOLSEN, DKNY(R) Jeans and LUCKY BRAND DUNGAREES businesses.

These increases more than offset sales decreases in our core LIZ CLAIBORNEbetter-priced department store business and our moderate-priced Special Marketsbusinesses. Our LIZ CLAIBORNE business continues to be challenged byincreasingly conservative buying patterns of our retail store customers as theyfocus on inventory productivity and seek to differentiate their offerings fromthose of their competitors, the growth in department store private label brandsand increased competition in the department store channel as a result of theintroduction of new offerings by our competitors. Because of these challenges,we continue to plan our 2004 core LIZ CLAIBORNE business down in the mid-teenson a percentage basis. Notwithstanding this, we note that the sales performanceof our LIZ CLAIBORNE brands at retail has been positive overall year-to-date,with above plan sales and inventory levels significantly below those of theprior year period. Our moderate businesses also face challenges of retailerfocus on inventory productivity and conservative planning. For our moderatebusinesses, we are planning sales to be down 10%, reflecting an improvement fromthe previously forecasted mid-teens decrease, as a result of the recent improvedperformance of a number of our moderate brands. We believe these expecteddeclines will be more than offset in 2004 by increases in other brands withinour portfolio, including MEXX, as well as our recently acquired JUICY COUTUREand ENYCE brands, which will include a full year's sales in 2004. In addition,we expect to continue to pursue our acquisition strategy, seeking outopportunities that are on strategy, financially attractive and involvemanageable execution risks.

Gross Profit and Net Income-

Our gross profit improved in the first quarter of 2004 reflecting continuedfocus on inventory management and lower sourcing costs. Our gross profit alsobenefited from the acquisition of JUICY COUTURE and the continued growth of ourMEXX Europe business, as each of these businesses run at gross profit rateshigher than the Company average. Overall net income increased to $68.8 millionin the first quarter of 2004 from $64.1 million in 2003, reflecting the benefitreceived from our sales and gross profit rate improvements.

Balance Sheet-

Our financial position continues to be strong. We ended the first quarter of2004 with a net debt position of $215.6 million as compared to $393.0 million atApril 5, 2003. This $177.4 million decrease in our net debt position on ayear-over-year basis is primarily attributable to cash flow from operations forthe trailing twelve months of $465.6 million partially offset by the paymentsmade to acquire Juicy Couture and ENYCE and the effect of foreign currencytranslation on our Eurobonds, which added $49 million to our debt balance.

International Operations

In the first quarter of 2004, sales from our international segment represented24.3% of our overall sales, as opposed to 20.6% in the 2003 first quarter. Weexpect our international sales to continue to represent an increasingly higherpercentage of our overall sales volume as a result of further anticipated growthin our MEXX Europe business and

the planned launch of a number of our brands in Europe utilizing the MEXXcorporate platform, including ELLEN TRACY and LUCKY BRAND DUNGAREES.Accordingly, our overall results can be greatly impacted by changes in foreigncurrency exchange rates. For example, the impact of foreign currency exchangerates represented $35.9 million, or 77.0%, of the increase of internationalsales from the 2003 first quarter. Over the past few years, the Euro and theCanadian dollar have strengthened against the US dollar. While this trend hasbenefited our sales results and earnings in light of the growth of our MEXXEurope and MEXX Canada businesses, these businesses' inventory, accountsreceivable and debt balances have likewise increased. Although we use foreigncurrency forward contracts and options to hedge against our exposure to exchangerate fluctuations affecting the actual cash flows associated with ourinternational operations, unanticipated shifts in exchange rates could have animpact on our financial results.

Recent Acquisitions-

In connection with the May 2001 acquisition of Mexx Group B.V. ("MEXX Europe"),we agreed to make a contingent payment to be determined as a multiple of MEXX'searnings and cash flow performance for the year ended 2003, 2004 or 2005. Theselection of the measurement year is at either party's option. We note that withrespect to the MEXX payment, there have been recent discussions with the MEXXsellers regarding the calculation of any potential payment that may be triggeredin 2004 under the process provided for in the MEXX acquisition agreement. Thesediscussions are in advance of any determination to trigger the payment. At thistime, we estimate that if the eligible payment were triggered in 2004, it wouldfall in the range of 142 - 162 million euros (or $172 - 197 million based onexchange rate in effect at April 3, 2004).

In July 2002, we acquired 100 percent of the equity interest of Mexx Canada,Inc., a privately held fashion apparel and accessories company ("MEXX Canada").The total purchase price consisted of: (a) an initial cash payment made at theclosing date of $15.2 million; (b) a second payment made at the end of the firstquarter 2003 of 26.4 million Canadian dollars (or $17.9 million based on theexchange rate in effect as of April 5, 2003); and (c) a contingent payment to bedetermined as a multiple of MEXX Canada's earnings and cash flow performance forthe year ended either 2004 or 2005. The selection of the measurement year forthe contingent payment is at either party's option. We estimate that if the 2004measurement year is selected the payment would be in the range of 38 - 42million Canadian dollars (or $29 - 32 million based on the exchange rate ineffect at April 3, 2004).

In September 2002, we acquired 100 percent of the equity interest of EllenTracy, Inc., a privately held fashion apparel company, and related companies(collectively "Ellen Tracy") for a purchase price of approximately $177.0million, including the assumption of debt and fees. Ellen Tracy designs,wholesales and markets women's sportswear. Founded in 1949 and based in New YorkCity, Ellen Tracy sells its products predominantly to select specialty storesand upscale department stores at bridge price points which are somewhat higherthan the Company's core better-priced businesses. Brands include ELLEN TRACY,LINDA ALLARD ELLEN TRACY and COMPANY ELLEN TRACY.

On April 7, 2003, we acquired 100 percent of the equity interest of JuicyCouture, Inc. (formerly, Travis Jeans Inc.) ("JUICY COUTURE"), a privately heldfashion apparel company. Founded in 1994 and based in southern California, JUICYCOUTURE is a premium designer, marketer and wholesaler of sophisticated basicsfor women, men and children and is recognized around the world as a leadingcontemporary brand of casual lifestyle clothing. JUICY COUTURE sells itsproducts predominantly through select specialty stores and upscale departmentstores and price points. The total purchase price consisted of (a) a payment,including the assumption of debt and fees, of approximately $53.1 million, and(b) a contingent payment to be determined as a multiple of JUICY COUTURE'searnings for one of the years ended 2005, 2006 or 2007. The selection of themeasurement year for the contingent payment is at either party's option. Weestimate that if the 2005 measurement year is selected, the contingent paymentwould be in the range of $72 - 76 million.

On December 1, 2003, we acquired 100 percent of the equity interest of ENYCEHOLDING LLC ("ENYCE"), a privately held fashion apparel company, for a purchaseprice of approximately $121.9 million, including fees and the retirement of debtat closing. Founded in 1996 and based in New York City, ENYCE is a designer,marketer and wholesaler of fashion forward streetwear, denim-based lifestyleproducts, outerwear, athletic-inspired apparel, casual tops and knitwear for menand women through its ENYCE(R) and Lady ENYCE(R) brands. ENYCE sells itsproducts primarily through specialty store chains, better specialty stores andselect department stores, as well as through international distributors (wherearrangements are under review) in Germany, Canada and Japan. Currently, men'sproducts account for approximately 84% of net sales, while women's productsaccount for the balance.

RESULTS OF OPERATIONS
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We present our results based on the three business segments discussed in theOverview section, as well as on the following geographic basis:o Domestic: wholesale customers and Company specialty retail and outlet stores located in the United States; ando International: wholesale customers and Company specialty retail and outlet - stores and concession stores located outside of the United States, primarily MEXX Europe and MEXX Canada.

All data and discussion with respect to our specific segments included withinthis "Management's Discussion and Analysis" is presented after applicableintercompany eliminations. This presentation reflects a change institutedeffective with the first quarter of Fiscal 2003, from our prior practice ofpresenting specific segment information prior to intercompany eliminations.Fiscal 2003 data presented in this "Management's Discussion and Analysis" havebeen restated to conform to the presentation methodology used for Fiscal 2004.

2004 VS. 2003
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The following table sets forth our operating results for the 13 weeks endedApril 3, 2004 compared to the 14 weeks ended April 5, 2003:

                                 Three months ended              Variance                            ----------------------------------------------------                               April 3,     April 5,            $        %Dollars in millions              2004         2003--------------------------------------------------------------------------------

Net Sales                     $ 1,102.8    $ 1,075.6         $ 27.2     2.5%

Gross Profit                      501.0        455.8           45.2     9.9%

   administrative expenses        386.7        348.3           38.4    11.0%

Operating Income                  114.3        107.4            6.9     6.4%

Other income (expense) - net       (0.6)        (0.3)          (0.3)  100.0%

Interest (expense) - net           (7.6)        (6.7)           0.9    13.4%

Provision for income taxes         37.3         36.4            0.9     2.5%

Net Income                    $    68.8    $    64.1         $  4.7     7.3%

o Wholesale Apparel net sales increased $4.5 million, or 0.6%, to $774.4 million. This result reflected the following: - The addition of $57.0 million of sales from our recently acquired JUICY COUTURE and ENYCE businesses; - A $22.3 million increase resulting from the impact of foreign currency exchange rates in our international businesses; - A $74.8 million net decrease primarily reflecting a 28.8% decrease in our core LIZ CLAIBORNE business (a 22.6% sales decrease excluding the impact of lower shipments to the off-price channel) and an 18.0% decrease in our Special Markets business, partially offset by increases in our MEXX Europe business

(exclusive of the impact of foreign currency exchange rates), due to the strengthening of the euro, SIGRID OLSEN and licensed DKNY(R) Jeans (due to the addition of new retail customers) and LUCKY BRAND DUNGAREES (due to increased customer demand and strong competitive position in the specialty store sector) businesses. The decrease in our LIZ CLAIBORNE and Special Markets businesses resulted from lower volume due to the factors described above in the Overview section, and in the case of the LIZ CLAIBORNE business a lower amount of shipments to off price channels resulting from conservative inventory planning and management.

o Wholesale Non-Apparel net sales were down $3.5 million, or 3.1%, to $111.0 million. This result was primarily due to decreases related to the impact of retailer focus on increased inventory productivity and the same upward migration and differentiation initiatives impacting the LIZ CLAIBORNE Apparel business, as well as the loss of one week's replenishment shipping as last year's first quarter included 14 weeks. These declines were partially offset by continued growth in our MONET, KENNETH COLE, ELLEN TRACY and SIGRID OLSEN businesses, as well as the successful introduction of JUICY COUTURE Accessories.

The impact of foreign currency exchange rates in our international businesses was not material in this segment.

o Retail net sales increased $24.9 million, or 13.6%, to $208.0 million. The increase reflected the following: - A $13.3 million increase resulting from the impact of foreign currency exchange rates in our international businesses; and - An $11.6 million net increase primarily driven by higher comparable store sales in our Specialty Retail business (including a 15.6% comparable store sales increase in our LUCKY BRAND DUNGAREES business), the net addition of 9 new LUCKY BRAND stores and 14 new Specialty Retail and Outlet stores in our MEXX Europe business over the last twelve months in addition to the opening of 3 MEXX USA Specialty Retail stores and 9 SIGRID OLSEN Specialty Retail stores. These gains were partially offset by the decreases related to the strategic decision to close our domestic LIZ CLAIBORNE Specialty Retail stores. These closures were completed by the end of the second quarter of 2003. We also opened 60 net new international concession stores in Europe over the last twelve months.

Comparable store sales decreased by 1.2% in our Outlet business and increased by 2.9% overall in our Specialty Retail business. Excluding the impact of the 14th week in the first quarter of 2003, comparable store sales increased by 8.5% in our Outlet business and increased 11.0% overall in our Specialty Retail business. We ended the quarter with a total of 266 Outlet stores, 232 Specialty Retail stores and 560 international concession stores.

o Corporate net sales, consisting of licensing revenue, increased $1.2 - million to $9.3 million as a result of revenues from new licenses and growth from our existing license portfolio.

Viewed on a geographic basis, Domestic net sales decreased by $19.5 million, or

                               --------2.3%, to $834.5  million,  reflecting the declines in our core LIZ CLAIBORNE andSpecial Markets businesses,  partially offset by the contribution of new productlaunches  and  recent  acquisitions.  International  net sales  increased  $46.7                                      -------------million, or 21.1%, to $268.3 million.  The international  increase reflected theresults  of our  MEXX  Europe  business;  approximately  $35.9  million  of thisincrease was due to the impact of currency exchange rates.

Selling, General & Administrative ExpensesSelling, general & administrative expenses ("SG&A") increased $38.4 million, or11.0%, to $386.7 million in the first quarter of 2004 over the first quarter of2003 and as a percent of net sales increased to 35.1% from 32.4%.

Approximately $16.1 million of the increase due to the impact of foreigncurrency exchange rates, primarily as a result of the strengthening of the euro,while approximately $14.7 million of the increase in the quarter was related tothe acquisitions of JUICY COUTURE and ENYCE. The higher SG&A rate primarilyreflected reduced expense leverage resulting from the sales decreases in our LIZCLAIBORNE and Special Markets businesses and the increased proportion ofexpenses related to our MEXX Europe business, which runs at a higher SG&A ratethan the Company average, partially offset by the favorable impact ofCompany-wide expense control initiatives.

Operating IncomeOperating income for the first quarter of 2004 was $114.3 million, an increaseof $6.9 million, or 6.4%, over last year. Operating income as a percent of netsales increased to 10.4% in 2004 compared to 10.0% in 2003. The increase was theresult of increased sales, lower sourcing costs, improved inventory managementand expense reductions. Approximately $2.9 million of the increase was due tothe impact of foreign currency exchange rates, primarily as a result of thestrengthening of the euro. Operating income by business segment is providedbelow:o Wholesale Apparel operating income increased $9.5 million to $100.0 million - (12.9% of net sales) in 2004 compared to $90.5 million (11.8% of net sales) in 2003, principally reflecting the inclusion of our JUICY COUTURE and ENYCE businesses and increased profits in our MEXX Europe, ELLEN TRACY and licensed DKNY(R) Jeans businesses, LUCKY BRAND and SIGRID OLSEN businesses, partially offset by reduced profits in our core LIZ CLAIBORNE and Special Markets businesses as a result of the lower sales volume discussed above.o Wholesale Non-Apparel operating income was $6.2 million (5.6% of net sales) - in 2004 compared to $9.1 million (7.9% of net sales) in 2003, principally due to reduced sales volume and start-up costs related to new product launches.o Retail operating income decreased $1.7 million to $0.3 million (0.2% of net sales) in 2004 compared to $2.0 million (1.1% of net sales) in 2003, principally reflecting losses in our LIZ CLAIBORNE Europe business (which is primarily a concession business) due to weak consumer response to Spring offerings and investments associated with a new management structure and new product design team put into place in the fourth quarter of 2004, as well as costs associated with our direct-to-consumer initiatives (namely, the MEXX USA and SIGRID OLSEN specialty retail formats and our Liz.com website), partially offset by an increase in profits from our LUCKY BRAND Retail stores.o Corporate operating income, primarily consisting of licensing operating - income, increased $2.0 million to $7.8 million.

Viewed on a geographic basis, Domestic operating profit increased by $3.5

                                 --------million, or 4.0%, to $93.1 million, predominantly reflecting the contribution ofnew and recent acquisitions, offset by reduced profits in our core LIZ CLAIBORNEand Special Markets  businesses.  International  operating profit increased $3.3                                  -------------million,  or 18.6% to $21.2 million.  The international  increase  reflected theresults of our MEXX business and the favorable  impact of foreign exchange ratesof $2.9 million.

Net Interest ExpenseNet interest expense in the first quarter of 2004 was $7.6 million, compared to$6.6 million in the first quarter of 2003, both of which were principallyrelated to borrowings incurred to finance our strategic initiatives, includingacquisitions. The impact of foreign currency exchange rates accounted for themajority of the increase.

Provision for Income TaxesThe income tax rate in the first quarter of 2004 decreased to 35.2% from 36.2%in the prior year as a result of the integration of our LIZ CLAIBORNE Europe andMEXX operations.

Net IncomeNet income in the first quarter of 2004 increased to $68.8 million, or 6.2% ofnet sales, from $64.1 million in the first quarter of 2003, or 6.0% of netsales. Diluted earnings per common share ("EPS") increased to $0.62 in 2004,from $0.59 in 2003, a 5.1% increase.

Average diluted shares outstanding increased by 3.3 million shares to 111.2million in the first quarter of 2004 on a period-to-period basis, as a result ofthe exercise of stock options and the effect of dilutive securities.

FORWARD OUTLOOK
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The retail environment has been quite positive in recent months. We believe thatthis is attributable to several factors, including general consumer confidenceabout the economy and the stock market, seasonal weather patterns which havefacilitated more complete sell through of heavier weight items than isfrequently the case, and, perhaps most importantly, cleaner retail inventoriescoming out of the holiday season as a result of retailer focus on inventorymanagement. In this environment the newest product offerings become the focus ofthe department store rather than the mark down racks filled with previousseason's merchandise. This trend, if it continues, could have a positive impacton retailer margins and, in turn, on full price selling and potentially reduceour vendor markdown liability.

While the retail environment is certainly improving, it is premature to factorthis into our expectations for the remainder of the year. Accordingly, we willcontinue to plan conservatively, and we re-affirm our previous guidance forfiscal 2004, forecasting a net sales increase of 6 - 8% (including a 1.5% salesincrease due to the projected impact of foreign currency exchange rates), anoperating margin in the range of 11.1% - 11.3% and EPS in the range of $2.70 -$2.77.o In our Wholesale Apparel segment, we expect fiscal 2004 net sales to increase in the range of 3 - 5% (including a 1% sales increase due to the projected impact of foreign currency exchange rates), primarily driven by the inclusion of a full year's sales in our JUICY COUTURE and ENYCE businesses, the launches of our REALITIES and INTUITIONS brands and increases in our MEXX Europe, SIGRID OLSEN, LUCKY BRAND, and licensed DKNY(R) Jeans businesses, offset by a mid-teens decrease in our LIZ CLAIBORNE business and an approximate 10% decrease in our Special Markets business.o In our Wholesale Non-Apparel segment, we expect fiscal 2004 net sales to increase in the range of 4 - 6%, primarily driven by the introduction of new products.o In our Retail segment, we expect fiscal 2004 net sales to increase in the range of 16 - 20% (including a 3% sales increase due to the projected impact of foreign currency exchange rates), primarily driven by continued growth in MEXX Europe with plans to open 12 new freestanding doors, the continuation of the LUCKY BRAND roll-out with plans for an additional 14 new doors, and plans for a total of 39 net new outlet doors in various formats in Europe, Canada and the USA. We are proceeding with a conservative rollout of the MEXX USA format with plans for 5 new doors. In addition, we are also planning to open 22 new doors in the SIGRID OLSEN format. Overall, we are planning a low single digit comp sales increase in this segment.o In our Corporate segment, we expect fiscal 2004 licensing revenue to increase by 20% over 2003.o We are estimating our 2004 capital expenditures, including shops, at approximately $125 million. In 2004, depreciation and amortization expense is projected at $110 million, compared with $105 million in 2003.

For the second quarter of 2004, we forecast a net sales increase of 3 - 5%(including a 1% sales increase due to the projected impact of foreign currencyexchange rates), an operating margin in the range of 8.2% - 8.4% and EPS in therange of $0.41 - $0.43.o In our Wholesale Apparel segment, we expect second quarter 2004 net sales to increase in the range of 0 - 2%, primarily driven by the acquisition of ENYCE and increases in our MEXX Europe, JUICY COUTURE, licensed DKNY(R) Jeans, SIGRID OLSEN, and LUCKY BRAND businesses, offset by decreases in our LIZ CLAIBORNE and Special Markets businesses.o In our Wholesale Non-Apparel segment, we expect second quarter 2004 net sales to increase in the range of 0 - 2%, primarily driven by the introduction of new products.o In our Retail segment, we expect second quarter 2004 net sales to increase in the range of the 14 - 19%, primarily driven by increases in our LUCKY BRAND and MEXX Europe businesses as well as the conservative rollout of the MEXX USA and SIGRID OLSEN formats which were introduced in the second half of fiscal 2003.o In our Corporate segment, we expect second quarter 2004 licensing revenue to increase by 20%.

All of these forward-looking statements exclude the impact of any futureacquisitions or stock repurchases. The foregoing forward-looking statements arequalified in their entirety by reference to the risks and uncertainties setforth under the heading "STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE" below.

FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
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Cash Requirements. Our primary ongoing cash requirements are to fund growth in-working capital (primarily accounts receivable and inventory) to supportprojected sales increases, investment in the technological upgrading of ourdistribution centers and information systems, and other expenditures related toretail store expansion, in-store merchandise shops and normal maintenanceactivities. We also require cash to fund our acquisition program. In addition,the Company will require cash to fund any repurchase of Company stock under itspreviously announced share repurchase program; as of May 5, 2004, the Companyhad $218.3 million remaining in buyback authorization under the program.

Sources of Cash. Our historical sources of liquidity to fund ongoing cashrequirements include cash flows from operations, cash and cash equivalents andsecurities on hand, as well as borrowings through our commercial paper programand bank lines of credit (which include revolving and trade letter of creditfacilities); in 2001, we issued euro-denominated bonds (the "Eurobonds") to fundthe initial payment in connection with our acquisition of MEXX Europe. Thesebonds are designated as a hedge of our net investment in MEXX (see Note 2 ofNotes to Condensed Consolidated Financial Statements). We anticipate that cashflows from operations, our commercial paper program and bank and letter ofcredit facilities will be sufficient to fund our next twelve months' liquidityrequirements and that we will be able to adjust the amounts available underthese facilities if necessary (see "Commitments and Capital Expenditures" formore information on future requirements). Such sufficiency and availability maybe adversely affected by a variety of factors, including, without limitation,retailer and consumer acceptance of our products, which may impact our financialperformance, maintenance of our investment-grade credit rating, as well asinterest rate and exchange rate fluctuations.

2004 vs. 2003-

Cash and Debt Balances. We ended the first quarter of 2004 with $240.1 millionin cash and marketable securities, compared to $82.7 million at April 5, 2003and $343.9 million at January 3, 2004, and with $455.7 million of debtoutstanding compared to $475.7 million at April 5, 2003 and $459.2 million atJanuary 3, 2004. The $177.4 million decrease in our net debt position on ayear-over-year basis is primarily attributable to cash flow from operations forthe trailing twelve months of $465.6 million partially offset by the paymentsmade to acquire Juicy Couture and ENYCE and the effect of foreign currencytranslation on our Eurobonds, which added $49 million to our debt balance. Theincrease in our net debt position from year-end of $100.3 million wasattributable to timing of cash flows from operations. We ended the quarter with$1.685 billion in stockholders' equity, giving us a total debt to total capitalratio of 21.3% compared to $1.354 billion in stockholders' equity last year witha debt to total capital ratio of 26.0% and $1.578 billion in stockholders'equity at year end with a debt to total ratio of 22.5%.

Accounts Receivable increased $41.6 million, or 7.5%, at the end of the firstquarter 2004 compared to the end of first quarter 2003, primarily due to $32.7million from our recently acquired JUICY COUTURE and ENYCE businesses and theimpact of foreign currency exchange rates of $15.1 million, primarily related tothe strengthening of the euro. Declines in our some of our domestic wholesalebusinesses were partially offset by timing differences of shipments during thequarter. Days' sales outstanding remained the same on a year over year basis.Accounts receivable increased $206.0 million, or 52.7%, at April 3, 2004compared to January 3, 2004 due primarily to the timing of shipments in ourdomestic operations.

Inventories increased $49.7 million, or 11.0% at the end of first quarter 2004-

compared to the end of first quarter 2003, and increased $16.8 million, or 3.5%at April 3, 2004 compared to January 3, 2004. The acquisitions of JUICY COUTUREand ENYCE as well as other new business initiatives were responsible for $32.2million of the increase in inventory over April 5, 2003. Inventories in ourcomparable domestic businesses declined by $42.5 million while our internationalinventories grew by $60.0 million. In-transit and new season inventories in ourMexx Europe business accounted for $31.4 million of the international increasewhile approximately $19.6 million of the increase is related to the impact ofcurrency exchange rates, primarily relating to the strengthening of the euro.The increase of $16.8 million compared to January 3, 2004 is primarily due to ashift in timing of our current season and in-transit inventories within ourdomestic wholesale apparel businesses. Our average inventory turnover rate

was relatively flat at 4.6 times for the twelve-month period ended April 3,2004, 4.8 times for the twelve-month period ended April 5, 2003 and 4.7 timesfor the twelve-month period ended January 3, 2004. We continue to take aconservative approach to inventory management in 2004.

Borrowings under our revolving credit facility and other credit facilitiespeaked at $48 million during the first quarter of 2004; at the end of the firstquarter of 2004, our borrowings under these facilities were $29.9 million.

Net cash used in operating activities was $101.0 million in the first quarter of-2004, compared to $174.6 million the first quarter of 2003. This $73.6 millionincrease in cash flow was primarily due to a $203.4 million use of cash forworking capital in 2004 compared to a $275.1 million use of cash for workingcapital in 2003, driven primarily by year-over-year changes in the accountspayable due to timing of payments for inventory purchases and in accruedexpenses due to the payment of certain employment-related obligations, partiallyoffset by year-over-year changes in the accounts receivable and inventorybalances as described above.

Net cash used in investing activities was $38.1 million in the first quarter of2004, compared to $69.1 million in 2003. Net cash used in the first quarter of2004 primarily reflected $30.7 million for capital and in-store expenditures.Net cash used in the first quarter of 2003 primarily reflected $43.1 million forthe additional payments made in connection with the acquisitions of LUCKY BRANDDUNGAREES and MEXX Canada and $24.0 million in capital and in-storeexpenditures.

Net cash provided by financing activities was $26.2 million in the first quarter-of 2004, compared to $71.4 million in the first quarter of 2003. The $45.2million year-over-year decrease primarily reflected reduced proceeds fromcommercial paper in the first quarter of 2004, partially offset by an increasein proceeds received from the exercise of stock options and proceeds fromshort-term debt.

Commitments and Capital Expenditures

We may be required to make additional payments in 2004, 2005 and 2006 inconnection with our acquisitions of the MEXX, LUCKY BRAND DUNGAREES, Segrets,MEXX Canada and JUICY COUTURE businesses (see Note 2 of Notes to CondensedConsolidated Financial Statements). These payments become due when triggered byus or the seller, pursuant to provisions in the MEXX, MEXX Canada and JUICYCOUTURE acquisition agreements that call for contingent purchase price payments,as well as provisions contained in the LUCKY BRAND DUNGAREES and Segretsacquisition agreements which could require us to purchase the minority interestshares in these businesses. We estimate that if the eligible payments for LUCKYBRAND DUNGAREES and Segrets are triggered in 2004, they would fall in the rangeof $32 - 45 million and $2 - 4 million, respectively. We note that with respectto the MEXX payment, there have been recent discussions with the MEXX sellersregarding the calculation of any potential payment that may be triggered in 2004under the process provided for in the MEXX acquisition agreement. Thesediscussions are in advance of any determination to trigger the payment. At thistime, we estimate that if the eligible payment were triggered in 2004, it wouldfall in the range of 142 - 162 million euros (or $172 - 197 million based on theexchange rate in effect at April 3, 2004). These payments will be made in eithercash or shares of our common stock at the option of either the Company or, withrespect to LUCKY BRAND DUNGAREES and Segrets, the seller. If paid in cash, thesepayments will be funded with net cash provided by operating activities, ourrevolving credit and other credit facilities and/or the issuance of debt.

Our anticipated capital expenditures for 2004 are expected to approximate $125million. These expenditures will consist primarily of the continuedtechnological upgrading and expansion of our management information systems anddistribution facilities (including certain building and equipment expenditures)and the opening of retail stores and in-store merchandise shops. Capitalexpenditures and working capital cash needs will be financed with net cashprovided by operating activities and our revolving credit and other creditfacilities.

Financing Arrangements

On August 7, 2001, we issued 350 million euros (or $307.2 million based on theexchange rate in effect on such date) of 6.625% notes due in 2006 (the"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange andreceived a credit rating of BBB from Standard & Poor's and Baa2 from Moody'sInvestor Services. Interest on the Eurobonds is being paid on an annual basisuntil maturity.

On October 21, 2002, we entered into a $750 million credit agreement (the"Agreement") consisting of a $375 million, 364-day unsecured financingcommitment under a bank revolving credit facility, replacing a $500 million,364-day unsecured credit facility scheduled to mature in November 2002, and a$375 million, three-year bank revolving credit facility, replacing an existing$250 million bank revolving credit facility which was scheduled to mature inNovember 2003. On October 17, 2003, we entered into a $375 million, 364-dayunsecured financing commitment under a bank revolving credit facility, replacingthe existing $375 million, 364-day unsecured credit facility scheduled to maturein October 2003. The three-year facility includes a $75 million multi-currencyrevolving credit line, which permits us to borrow in U.S. dollars, Canadiandollars and euro. Repayment of outstanding balances of the 364-day facility canbe extended for one year after the maturity date. The Agreement has twoborrowing options, an "Alternative Base Rate" option, as defined in theAgreement, and a Eurocurrency rate option with a spread based on our long-termcredit rating. The Agreement contains certain customary covenants, includingfinancial covenants requiring us to maintain specified debt leverage and fixedcharge coverage ratios, and covenants restricting our ability to, among otherthings, incur indebtedness, grant liens, make investments and acquisitions, andsell assets. We believe we are in compliance with such covenants. The Agreementmay be directly drawn upon, or used, to support our $750 million commercialpaper program, which is used from time to time to fund working capital and othergeneral corporate requirements. Our ability to obtain funding through itscommercial paper program is subject to, among other things, the Companymaintaining an investment-grade credit rating. At April 3, 2004, we had noborrowings outstanding under the Agreement.

As of April 3, 2004, January 3, 2004 and April 5, 2003, we had lines of creditaggregating $503 million, $487 million and $479 million, respectively, whichwere primarily available to cover trade letters of credit. At April 3, 2004,January 3, 2004 and April 5, 2003, we had outstanding trade letters of credit of$298 million, $254 million and $288 million, respectively. These letters ofcredit, which have terms ranging from one to ten months, primarily collateralizeour obligations to third parties for the purchase of inventory. The fair valueof these letters of credit approximates contract values.

Our Canadian and European subsidiaries have unsecured lines of credit totalingapproximately $93.1 million (based on the exchange rates as of April 3, 2004),which is included in the aforementioned $503 million available lines of credit.As of April 3, 2004, a total of $29.9 million of borrowings denominated inforeign currencies was outstanding at an average interest rate of 2.7%. Theselines of credit bear interest at rates based on indices specified in thecontracts plus a margin. The lines of credit are in effect for less than oneyear and mature at various dates in 2004 and 2005. These lines are guaranteed bythe Company. With the exception of the Eurobonds, which mature in 2006,substantially all of our debt will mature in less than one year and will berefinanced under existing credit lines.

Off-Balance Sheet ArrangementsOn May 22, 2001, we entered into an off-balance sheet financing arrangement(commonly referred to as a "synthetic lease") to acquire various land andequipment and construct buildings and real property improvements associated withwarehouse and distribution facilities in Ohio and Rhode Island. The leasesexpire on November 22, 2006 with renewal subject to the consent of the lessor.The lessor under the operating lease arrangements is an independent third-partylimited liability company, which has contributed equity of 5.75% of the $63.7million project costs. The leases include guarantees by us for a substantialportion of the financing and options to purchase the facilities at originalcost; the maximum guarantee is approximately $54 million. The guarantee becomeseffective if we decline to purchase the facilities at the end of the lease andthe lessor is unable to sell the property at a price equal to or greater thanthe original cost. We selected this financing arrangement to take advantage ofthe favorable financing rates such an arrangement afforded as opposed to therates available under alternative real estate financing options. The lessorfinanced the acquisition of the facilities through funding provided bythird-party financial institutions. The lessor has no affiliation orrelationship with the Company or any of its employees, directors or affiliates,and the Company's transactions with the lessor are limited to the operatinglease agreements and the associated rent expense that will be included inSelling, general & administrative expense in the Consolidated Statements ofIncome.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation ofVariable Interest Entities (an interpretation of ARB No. 51)", which was revisedin December 2003 ("FIN 46"). The third party lessor does not meet the definitionof a variable interest entity under FIN 46, and therefore consolidation by theCompany is not required.

Hedging ActivitiesAt April 3, 2004, we had various euro currency collars outstanding with a netnotional amount of $26 million, maturing through July 2004 and with valuesranging between 1.08 and 1.14 U.S. dollar per euro as compared to $42 million ineuro currency collars at year-end 2003 and $80 million in euro currency collarsat the end of the first quarter of 2003. At the end of the first quarter of2004, we also had forward contracts maturing through December 2004 to sell 66million euro for $75 million, 5 million Pounds Sterling for 7.4 million euro and12 million Canadian dollars for $9 million. The notional value of the foreignexchange forward contracts at the end of the first quarter of 2004 wasapproximately $93 million, as compared with approximately $76 million atyear-end 2003 and approximately $23 million at the end of the first quarter of2003. Unrealized losses for outstanding foreign exchange forward contracts andcurrency options were approximately $5.5 million at the end of the first quarterof 2004, $11.8 million at year-end 2003 and approximately $1.8 million the endof the first quarter of 2003. The ineffective portion of these contracts wasapproximately $1.2 million and was expensed in 2004.

In connection with the variable rate financing under the synthetic leaseagreement, we have entered into two interest rate swap agreements with anaggregate notional amount of $40.0 million that began in January 2003 and willterminate in May 2006, in order to fix the interest component of rent expense ata rate of 5.56%. We have entered into this arrangement to provide protectionagainst potential future interest rate increases. The change in fair value ofthe effective portion of the interest rate swap is recorded as a component ofAccumulated Other Comprehensive Income (Loss) since these swaps are designatedas cash flow hedges. The ineffective portion of these swaps is recognizedcurrently in earnings and was not material for the quarter ended April 3, 2004.

On February 11, 2004, we entered into interest rate swap agreements for thenotional amount of 175 million euro in connection with our 350 million Eurobondsmaturing August 7, 2006. This converted a portion of the fixed rate Eurobondsinterest expense to floating rate at a spread over six month EURIBOR. The firstinterest rate setting will be August 7, 2004 and will be reset each six-monthperiod thereafter until maturity. This is designated as a fair value hedge. Thefavorable interest accrual was not material for the quarter ended April 3, 2004.

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
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The preparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the financial statements and revenues and expenses during theperiod. Significant accounting policies employed by the Company, including theuse of estimates, are presented in the Notes to Consolidated FinancialStatements in our 2003 Annual Report on Form 10-K.

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

Critical Accounting Policies are those that are most important to the portrayalof our financial condition and the results of operations and requiremanagement's most difficult, subjective and complex judgments as a result of theneed to make estimates about the effect of matters that are inherentlyuncertain. Our most critical accounting policies, discussed below, pertain torevenue recognition, income taxes, accounts receivable - trade, net,inventories, net, the valuation of goodwill and intangible assets withindefinite lives, accrued expenses and derivative instruments. In applying suchpolicies, management must use some amounts that are based upon its informedjudgments and best estimates. Because of the uncertainty inherent in theseestimates, actual results could differ from estimates used in applying thecritical accounting policies. Changes in such estimates, based on more accuratefuture information, may affect amounts reported in future periods.

For accounts receivable, we estimate the net collectibility, considering bothhistorical and anticipated trends as well as an evaluation of economicconditions and the financial positions of our customers. For inventory, wereview the aging and salability of our inventory and estimate the amount ofinventory 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 berealized through off-price channels. If we incorrectly anticipate these trendsor unexpected events occur, our results of operations could be materiallyaffected. We use independent third-party appraisals to estimate the fair valuesof both our goodwill and intangible assets with indefinite lives. Theseappraisals are based on projected cash flows,

interest rates and other competitive market data. Should any of the assumptionsused in these projections differ significantly from actual results, materialimpairment losses could result where the estimated fair values of these assetsbecome less than their carrying amounts. For accrued expenses related to itemssuch as employee insurance, workers' compensation and similar items, accrualsare assessed based on outstanding obligations, claims experience and statisticaltrends; should these trends change significantly, actual results would likely beimpacted. Derivative instruments in the form of forward contracts and optionsare used to hedge the exposure to variability in probable future cash flowsassociated with inventory purchases and sales collections primarily associatedwith our European and Canadian entities. If fluctuations in the relative valueof the currencies involved in the hedging activities were to move dramatically,such movement could have a significant impact on our results. Changes in suchestimates, based on more accurate information, may affect amounts reported infuture periods. We are not aware of any reasonably likely events orcircumstances which would result in different amounts being reported that wouldmaterially affect our financial condition or results of operations.

Revenue Recognition-Revenue within our wholesale operations is recognized at the time title passesand risk of loss is transferred to customers. Wholesale revenue is recorded netof returns, discounts and allowances. Returns and allowances requirepre-approval from management. Discounts are based on trade terms. Estimates forend-of-season allowances are based on historic trends, seasonal results, anevaluation of current economic conditions and retailer performance. We reviewand refine these estimates on a monthly basis based on current experience,trends and retailer performance. Our historical estimates of these costs havenot differed materially from actual results. Retail store revenues arerecognized net of estimated returns at the time of sale to consumers. Retailrevenues are recorded net of returns. Licensing revenues are recorded based uponcontractually guaranteed minimum levels and adjusted as actual sales data isreceived from licensees.

Income TaxesIncome taxes are accounted for under Statement of Financial Accounting Standards("SFAS") No. 109, "Accounting for Income Taxes." In accordance with SFAS No.109, deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases, as measured by enacted tax rates that are expected to be in effect in theperiods when the deferred tax assets and liabilities are expected to be settledor realized. Significant judgment is required in determining the worldwideprovisions for income taxes. In the ordinary course of a global business, thereare many transactions for which the ultimate tax outcome is uncertain. It is ourpolicy to establish provisions for taxes that may become payable in future yearsas a result of an examination by tax authorities. We establish the provisionsbased upon management's assessment of exposure associated with permanent taxdifferences, tax credits and interest expense applied to temporary differenceadjustments. The tax provisions are analyzed periodically (at least annually)and adjustments are made as events occur that warrant adjustments to thoseprovisions.

Accounts Receivable - Trade, NetIn the normal course of business, we extend credit to customers that satisfypre-defined credit criteria. Accounts Receivable - Trade, Net, as shown on theConsolidated Balance Sheets, is net of allowances and anticipated discounts. Anallowance for doubtful accounts is determined through analysis of the aging ofaccounts receivable at the date of the financial statements, assessments ofcollectibility based on an evaluation of historic and anticipated trends, thefinancial condition of our customers, and an evaluation of the impact ofeconomic conditions. An allowance for discounts is based on those discountsrelating to open invoices where trade discounts have been extended to customers.Costs associated with potential returns of products as well as allowablecustomer markdowns and operational charge backs, net of expected recoveries, areincluded as a reduction to net sales and are part of the provision forallowances included in Accounts Receivable - Trade, Net. These provisions resultfrom seasonal negotiations with our customers as well as historic deductiontrends net of expected recoveries and the evaluation of current marketconditions. Should circumstances change or economic or distribution channelconditions deteriorate significantly, we may need to increase its provisions.Our historical estimates of these costs have not differed materially from actualresults.

Inventories, NetInventories are stated at lower of cost (using the first-in, first-out method)or market. We continually evaluate the composition of our inventories assessingslow-turning, ongoing product as well as prior seasons' fashion product. Marketvalue of distressed inventory is determined based on historical sales trends forthe category of inventory involved, the impact of market trends and economicconditions, and the value of current orders in-house relating to the futuresales of this type of inventory. Estimates may differ from actual results due toquantity, quality and mix

of products in inventory, consumer and retailer preferences and marketconditions. We review our inventory position on a monthly basis and adjust ourestimates based on revised projections and current market conditions. Ifeconomic conditions worsen, we incorrectly anticipate trends or unexpectedevents occur, our estimates could be proven overly optimistic, and requiredadjustments could materially adversely affect future results of operations. Ourhistorical estimates of these costs and our provisions have not differedmaterially from actual results.

Goodwill And Other IntangiblesSFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill andintangible assets with indefinite lives no longer be amortized, but rather betested at least annually for impairment. This pronouncement also requires thatintangible assets with finite lives be amortized over their respective lives totheir estimated residual values, and reviewed for impairment in accordance withSFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

A two-step impairment test is performed on goodwill. In the first step, wecompare the fair value of each reporting unit to its carrying value. Ourreporting units are consistent with the reportable segments identified in Note13 of Notes to Condensed Consolidated Financial Statements. We determine thefair value of our reporting units using the market approach as is typically usedfor companies providing products where the value of such a company is moredependent on the ability to generate earnings than the value of the assets usedin the production process. Under this approach we estimate the fair value basedon market multiples of revenues and earnings for comparable companies. If thefair value of the reporting unit exceeds the carrying value of the net assetsassigned to that unit, goodwill is not impaired and we are not required toperform further testing. If the carrying value of the net assets assigned to thereporting unit exceeds the fair value of the reporting unit, then we mustperform the second step in order to determine the implied fair value of thereporting unit's goodwill and compare it to the carrying value of the reportingunit's goodwill. The activities in the second step include valuing the tangibleand intangible assets of the impaired reporting unit, determining the fair valueof the impaired reporting unit's goodwill based upon the residual of the summedidentified tangible and intangible assets and the fair value of the enterpriseas determined in the first step, and determining the magnitude of the goodwillimpairment based upon a comparison of the fair value residual goodwill and thecarrying value of goodwill of the reporting unit. If the carrying value of thereporting unit's goodwill exceeds the implied fair value, then we must record animpairment loss equal to the difference.

SFAS No. 142 also requires that the fair value of the purchased intangibleassets, primarily trademarks and trade names, with indefinite lives be estimatedand compared to the carrying value. We estimate the fair value of theseintangible assets using independent third parties who apply the income approachusing the relief-from-royalty method, based on the assumption that in lieu ofownership, a firm would be willing to pay a royalty in order to exploit therelated benefits of these types of assets. This approach is dependent on anumber of factors including estimates of future growth and trends, estimatedroyalty rates in the category of intellectual property, discounted rates andother variables. We base our fair value estimates on assumptions we believe tobe reasonable, but which are unpredictable and inherently uncertain. Actualfuture results may differ from those estimates. We recognize an impairment losswhen the estimated fair value of the intangible asset is less than the carryingvalue.

Owned trademarks that have been determined to have indefinite lives are notsubject to amortization and are reviewed at least annually for potential valueimpairment as mentioned above. Trademarks that are licensed by the Company fromthird parties are amortized over the individual terms of the respective licenseagreements, which range from 5 to 15 years. Intangible merchandising rights areamortized over a period of four years. Customer relationships are amortizedassuming gradual attrition over time. Existing relationships are being amortizedover periods ranging from 9 to 12 years.

The recoverability of the carrying values of all long-lived assets with definitelives is reevaluated when changes in circumstances indicate the assets' valuemay be impaired. Impairment testing is based on a review of forecasted operatingcash flows and the profitability of the related business. For the three monthsended April 3, 2004, there were no adjustments to the carrying values of anylong-lived assets resulting from these evaluations.

Accrued ExpensesAccrued expenses for employee insurance, workers' compensation, profit sharing,contracted advertising, professional fees, and other outstanding Companyobligations are assessed based on claims experience and statistical trends, opencontractual obligations, and estimates based on projections and currentrequirements. If these trends change significantly, then actual results wouldlikely be impacted. Our historical estimates of these costs and our provisionshave not differed materially from actual results.

Derivative InstrumentsSFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," asamended and interpreted, requires that each derivative instrument (includingcertain derivative instruments embedded in other contracts) be recorded in thebalance sheet as either an asset or liability and measured at its fair value.The statement also requires that changes in the derivative's fair value berecognized currently in earnings in either income (loss) from continuingoperations or Accumulated Other Comprehensive Income (Loss), depending onwhether the derivative qualifies for hedge accounting treatment.

We use foreign currency forward contracts and options for the specific purposeof hedging the exposure to variability in forecasted cash flows associatedprimarily with inventory purchases mainly with our European and Canadianentities and other specific activities and the swapping of floating interestrate debt for fixed rate debt in connection with the synthetic lease as well asthe swapping of 175 million euro of fixed rate debt to floating rate debt inconnection with our 350 million Eurobonds. These instruments are designated ascash flow and fair value hedges and, in accordance with SFAS No. 133, to theextent the hedges are highly effective, the changes in fair value are includedin Accumulated Other Comprehensive Income (Loss), net of related tax effects,with the corresponding asset or liability recorded in the balance sheet. Theineffective portions of the cash flow and fair value hedges, if any, arerecognized in current-period earnings. Amounts recorded in Accumulated OtherComprehensive Income (Loss) are reflected in current-period earnings when thehedged transaction affects earnings. If fluctuations in the relative value ofthe currencies involved in the hedging activities were to move dramatically,such movement could have a significant impact on our results of operations. Weare not aware of any reasonably likely events or circumstances, which wouldresult in different amounts being reported that would materially affect itsfinancial condition or results of operations.

Hedge accounting requires that at the beginning of each hedge period, we justifyan expectation that the hedge will be highly effective. This effectivenessassessment involves an estimation of the probability of the occurrence oftransactions for cash flow hedges. The use of different assumptions and changingmarket conditions may impact the results of the effectiveness assessment andultimately the timing of when changes in derivative fair values and underlyinghedged items are recorded in earnings.

We hedge our net investment position in euro-functional subsidiaries byborrowing directly in foreign currency and designating a portion of foreigncurrency debt as a hedge of net investments. Under SFAS No. 133, changes in thefair value of these instruments are immediately recognized in foreign currencytranslation, a component of Accumulated Other Comprehensive Income (Loss), tooffset the change in the value of the net investment being hedged.

Occasionally, we purchase short-term foreign currency contracts and options tohedge quarter-end balance sheet and other expected exposures. These derivativeinstruments do not qualify as cash flow hedges under SFAS No. 133 and arerecorded at fair value with all gains or losses recognized in current periodearnings. No gains or losses were incurred during the quarter.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, the FASB published an Exposure Draft, "Share-Based Payment," anamendment of FASB Statements No. 123 and 95. Under this FASB proposal, all formsof share-based payment to employees, including employee stock options, would betreated as compensation and recognized in the income statement. This proposedstatement would be effective for fiscal years beginning after December 15, 2004.The Company currently accounts for stock options under APB No. 25. The pro-formaimpact of expensing options is disclosed in Note 1 of Notes to CondensedConsolidated Financial Statements.

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

Statements contained herein and in future filings by the Company with theSecurities and Exchange Commission (the "S.E.C."), in the Company's pressreleases, and in oral statements made by, or with the approval of, authorizedpersonnel that relate to the Company's future performance, including, withoutlimitation, statements with respect to the Company's anticipated results ofoperations or level of business for fiscal 2004, any fiscal quarter of 2004 orany other future period, including those herein under the heading "ForwardOutlook" or otherwise, are forward-looking statements within the safe harborprovisions of the Private Securities Litigation Reform Act of 1995. Such

statements, which are indicated by words or phrases such as "intend,""anticipate," "plan," "estimate," "project," "management expects," "the Companybelieves," "we are optimistic that we can," "current visibility indicates thatwe forecast" or "currently envisions" and similar phrases are based on currentexpectations only, and are subject to certain risks, uncertainties andassumptions. Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual results may varymaterially from those anticipated, estimated or projected. Included among thefactors that could cause actual results to materially differ are risks withrespect to the following:

Risks Associated with Competition and the Marketplace-The apparel and related product markets are highly competitive, both within theUnited States and abroad. The Company's ability to compete successfully withinthe marketplace depends on a variety of factors, including:o The current challenging retail and macroeconomic environment, including the levels of consumer confidence and discretionary spending, and levels of customer traffic within department stores, malls and other shopping and selling environments, and a continuation of the deflationary trend for apparel products;o The Company's ability to effectively anticipate, gauge and respond to changing consumer demands and tastes, across multiple product lines, shopping channels and geographies;o The Company's ability to translate market trends into appropriate, saleable product offerings relatively far in advance, while minimizing excess inventory positions, including the Company's ability to correctly balance the level of its fabric and/or merchandise commitments with actual customer orders;o Consumer and customer demand for, and acceptance and support of, Company products (especially by the Company's largest customers) which are in turn dependent, among other things, on product design, quality, value and service;o The ability of the Company, especially through its sourcing, logistics and technology functions, to operate within substantial production and delivery constraints, including risks associated with the possible failure of the Company's unaffiliated manufacturers to manufacture and deliver products in a timely manner, to meet quality standards or to comply with the Company's policies regarding labor practices or applicable laws or regulations;o The financial condition of, and consolidations, restructurings and other ownership changes in, the apparel (and related products) industry and the retail industry;o Risks associated with the Company's dependence on sales to a limited number of large department store customers, including risks related to customer requirements for vendor margin support, and those related to extending credit to customers, risks relating to retailers' buying patterns and purchase commitments for apparel products in general and the Company's products specifically;o The Company's ability to respond to the strategic and operational initiatives of its largest customers, as well as to the introduction of new products or pricing changes by its competitors; ando The Company's ability to obtain sufficient retail floor space and to effectively present products at retail.

Economic, Social and Political FactorsAlso impacting the Company and its operations are a variety of economic, socialand political factors, including the following:o Risks associated with war, the threat of war, and terrorist activities, including reduced shopping activity as a result of public safety concerns and disruption in the receipt and delivery of merchandise;o Changes in national and global microeconomic and macroeconomic conditions in the markets where the Company sells or sources its products, including the levels of consumer confidence and discretionary spending, consumer income growth, personal debt levels, rising energy costs and energy shortages, and fluctuations in foreign currency exchange rates, interest rates and stock market volatility, and currency devaluations in countries in which we source product;o Changes in social, political, legal and other conditions affecting foreign operations;o Risks of increased sourcing costs, including costs for materials and labor;o Any significant disruption in the Company's relationships with its suppliers, manufacturers and employees, including its union employees;o Work stoppages by any Company suppliers or service providers or by the Company's union employees;o The impact of the anticipated elimination of quota for apparel products in 2005;o 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                                                                              36

Risks Associated with Acquisitions and New Product Lines and MarketsThe Company, as part of its growth strategy, from time to time acquires newproduct lines and/or enters new markets, including through licensingarrangements. These activities (which also include the development and launch ofnew product categories and product lines) are accompanied by a variety of risksinherent in any such new business venture, including the following:o Risks that the new product lines or market activities may require methods of operations and marketing and financial strategies different from those employed in the Company's other businesses;o Certain new businesses may be lower margin businesses and may require the Company to achieve significant cost efficiencies. In addition, these businesses may involve buyers, store customers and/or competitors different from the Company's historical buyers, customers and competitors;o Possible difficulties, delays and/or unanticipated costs in integrating the business, operations, personnel, and/or systems of an acquired business;o Risks that projected or satisfactory level of sales, profits and/or return on investment for a new business will not be generated;o Risks involving the Company's ability to retain and appropriately motivate key personnel of an acquired business;o Risks that expenditures required for capital items or working capital will be higher than anticipated;o Risks associated with unanticipated events and unknown or uncertain liabilities;o Uncertainties relating to the Company's ability to successfully integrate an acquisition, maintain product licenses, or successfully launch new products and lines; ando With respect to businesses where the Company acts as licensee, the risks inherent in such transactions, including compliance with terms set forth in the applicable license agreements, including among other things the maintenance of certain levels of sales, and the public perception and/or acceptance of the licensor's brands or other product lines, which are not within the Company's control.

The Company undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

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