The following discussion provides information and analysis of our results of operations for the 13 and 26 week periods ended July 4, 2009 (hereinafter referred to as the "second fiscal quarter of 2009" and the "first fiscal six months of 2009," respectively) and the 13 and 27 week periods ended July 5, 2008 (hereinafter referred to as the "second fiscal quarter of 2008" and the "first fiscal six months of 2008," respectively) and our liquidity and capital resources. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements included elsewhere herein.

Executive Overview

We design, contract for the manufacture of and market a broad range of women's collection sportswear, suits and dresses, casual sportswear and jeanswear for women and children, and women's footwear and accessories. We sell our products through a broad array of distribution channels, including better specialty and department stores and mass merchandisers, primarily in the United States and Canada. We also operate our own network of retail and factory outlet stores and several e-commerce web sites. In addition, we license the use of several of our brand names to select manufacturers and distributors of women's and men's apparel and accessories worldwide.

During 2009 to date, the following significant events took place:

º as a result of the January 2009 amendments to our revolving credit facility, Standard & Poor's downgraded our senior unsecured debt ratings from BB- to B+ on January 6, 2009, and Moody's downgraded our senior unsecured debt ratings from Ba2 to Ba3 on January 8, 2009;
º on April 1, 2009, we commenced a cash tender offer to purchase any and all of our outstanding 4.250% Senior Notes due 2009 (the "2009 Notes"), as well as a consent solicitation to amend the indenture governing our 2009 Notes, our 5.125% Senior Notes due 2014 and our 6.125% Senior Notes due 2034, both of which were completed in May 2009;
º we decided to close approximately 240 underperforming retail stores by December 31, 2010;

Retail store closings

We began 2009 with 1,017 retail locations. During the fiscal six months ended July 4, 2009, we decided to close approximately 240 underperforming retail locations by the end of 2010, of which 48 closed during the period. We accrued $3.0 million of termination benefits and associated employee costs for approximately 1,045 employees, including both store employees and administrative support personnel. In connection with our decision to close these stores, we reviewed them for impairments in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." As a result of this review, we recorded $21.2 million of impairment losses on leasehold improvements and furniture and fixtures located in the stores to be closed. These costs are reported as selling, general and administrative expenses in the retail segment.

Critical Accounting Policies

Several of our accounting policies involve significant or complex judgements and uncertainties and require us to make certain critical accounting estimates. We consider an accounting estimate to be critical if it requires us to make assumptions about matters that were highly uncertain at the time the estimate was made. The estimates with the greatest potential effect on our results of operations and financial position include the collectibility of accounts receivable, the recovery value of obsolete or overstocked inventory and the fair values of both our goodwill and intangible assets with indefinite lives. Estimates related to accounts receivable affect our wholesale better apparel, wholesale jeanswear, wholesale footwear and accessories and retail segments. Estimates related to inventory and goodwill affect our wholesale better apparel, wholesale jeanswear, wholesale footwear and accessories and retail segments. Estimates related to intangible assets with indefinite lives affect our licensing, other and eliminations segment.

For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions given to our customers, allowances we provide to our retail customers to flow goods through the retail channels, and the possibility of non-collection due to the financial position of our customers. For inventory, we estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized through off-price channels. Historically, actual results in these areas have not been materially different than our estimates, and we do not anticipate that our estimates and assumptions are likely to materially change in the future. However, if we incorrectly anticipate trends or unexpected events occur, our results of operations could be materially affected.

We test our goodwill and our trademarks for impairment on an annual basis (during our fourth fiscal quarter) and between annual tests if an event occurs or circumstances change that would reduce the fair value of an asset below its carrying value. These tests utilize discounted cash flow models to estimate fair values. These cash flow models involve several assumptions. Changes in our assumptions could materially impact our fair value estimates, and material impairment losses could result where the estimated fair values of these assets become less than their carrying amounts. Assumptions critical to our fair value estimates are: (i) discount rates used to derive the present value factors used in determining the fair value of the reporting units and trademarks; (ii) royalty rates used in our trademark valuations; (iii) projected average revenue growth rates used in the reporting unit and trademark models; and (iv)

Results of Operations

Statements of Operations Stated in Dollars and as a Percentage of Total Revenues

(In millions)                 Fiscal Quarter Ended                 Fiscal Six Months Ended
                        ---------------------------------   -------------------------------------
                         July 4, 2009      July 5, 2008       July 4, 2009        July 5, 2008
                        ---------------   ---------------   -----------------   -----------------
Net sales               $ 793.4    98.7 % $ 820.2    98.9 % $ 1,672.9    98.7 % $ 1,783.6    98.8 %
Licensing income           10.3     1.3       9.0     1.1        21.8     1.3        20.5     1.1
Other revenues              0.2     0.0       0.2     0.0         0.3     0.0         0.7     0.0
                        - ----- - -----   - ----- - -----   - ------- - -----   - ------- - -----
Total revenues            803.9   100.0     829.4   100.0     1,695.0   100.0     1,804.8   100.0
Cost of goods sold        521.8    64.9     547.0    66.0     1,119.6    66.1     1,201.7    66.6
                        - ----- - -----   - ----- - -----   - ------- - -----   - ------- - -----
Gross profit              282.1    35.1     282.4    34.0       575.4    33.9       603.1    33.4
Selling, general and
administrative expenses   240.0    29.9     256.9    31.0       519.6    30.7       537.6    29.8
                        - ----- - -----   - ----- - -----   - ------- - -----   - ------- - -----
Operating income           42.1     5.2      25.5     3.1        55.8     3.3        65.5     3.6
Net interest expense
and financing costs        19.8     2.5       9.8     1.2        32.7     1.9        19.6     1.1
Loss and fees related
to repurchase of 4.250%
Senior Notes                2.0     0.2         -       -         2.0     0.1           -       -
Gain on sale of
interest in Australian
joint venture                 -       -       0.5     0.1           -       -         0.8     0.0
Equity in loss of
unconsolidated
affiliate                   0.2     0.0         -       -         0.5     0.0           -       -
                        - ----- - -----   - ----- - -----   - ------- - -----   - ------- - -----
Income before provision
for income taxes           20.1     2.5      16.2     2.0        20.6     1.2        46.7     2.6
Provision for income
taxes                       7.0     0.9       5.6     0.7         7.2     0.4        16.5     0.9
                        - ----- - -----   - ----- - -----   - ------- - -----   - ------- - -----
Net income              $  13.1     1.6 % $  10.6     1.3 % $    13.4     0.8 % $    30.2     1.7 %
                        - ----- - -----   - ----- - -----   - ------- - -----   - ------- - -----

Percentage totals may not add due to rounding.

Fiscal Quarter Ended July 4, 2009 Compared to Fiscal Quarter Ended July 5, 2008

Revenues. Total revenues for the second fiscal quarter of 2009 were $803.9 million, compared with $829.4 million for the second fiscal quarter of 2008, a decrease of 3.1%. Revenues by segment were as follows:

(In millions)                          Second         Second
                                       Fiscal         Fiscal
                                      Quarter        Quarter         Increase     Percent
                                      of 2009        of 2008        (Decrease )    Change
                                   - -------- --- - -------- --- - ---------- - ----------
Wholesale better apparel           $    202.7     $    235.0     $      (32.3 )     (13.7% )
Wholesale jeanswear                     221.2          172.2             49.0        28.5%
Wholesale footwear and accessories      185.9          215.6            (29.7 )     (13.8% )
Retail                                  183.8          197.5            (13.7 )      (6.9% )
Licensing and other                      10.3            9.1              1.2        13.2%
                                   - -------- --- - -------- --- - ---------- - ----------
  Total revenues                   $    803.9     $    829.4     $      (25.5 )      (3.1% )
                                   - -------- --- - -------- --- - ---------- - ----------

Wholesale better apparel revenues decreased $32.3 million, primarily due to reduced shipments of our Anne Klein, Jones New York Sport, Jones New York, Nine West and Jones New York Suit products primarily due to decreased consumer spending as a result of the general economic downturn, although we experienced decreased orders for nearly all better apparel product lines. Shipments of our Evan Picone suit and dress products increased based on the performance of these products at retail.

Wholesale jeanswear revenues increased $49.0 million. Shipments of our
l.e.i. products to Wal-Mart Stores Inc. ("Walmart") and increased shipments of private-label products due to expansion of private-label programs with several major customers were partially offset by reduced shipments of our Energie product line primarily as a result of the general economic downturn and an $11.0 million reduction in

Wholesale footwear and accessories revenues decreased $29.7 million. We experienced decreased orders for nearly all our footwear, handbag and accessories products primarily due to decreased consumer spending as a result of the general economic downturn. We also experienced a reduction in sales in our international business primarily due to the global economic conditions in Asia, Canada, Mexico and the bankruptcy of our former United Kingdom licensee.

Retail revenues decreased $13.7 million, primarily due to a 6.4% decline in comparable store sales ($11.7 million) resulting primarily from decreased consumer spending relating to current economic conditions, with the balance related to operating fewer stores in the current period. Comparable stores are those that have been open for a full year, are not scheduled to close in the current period and are not scheduled for an expansion or downsize by more than 25% or relocation to a different street or mall. A 10.8% decrease in comparable store sales for our footwear stores ($12.9 million) and a 4.4% decrease in comparable store sales for our apparel stores ($2.5 million) were partially offset by a 52.5% increase in our comparable e-commerce business ($3.7 million). We began the second fiscal quarter of 2009 with 1,005 retail locations and had a net decrease of 25 locations to end the period with 980 locations.

Revenues for the second fiscal quarter of 2008 include $0.2 million in the licensing and other segment of service fees charged to Barneys under a short-term transition services agreement entered into with Barneys at the time of the sale of Barneys. These revenues were based on contractual monthly fees as set forth in the agreement. The agreement ended in May 2008.

Gross Profit. The gross profit margin increased to 35.1% in the second fiscal quarter of 2009 compared with 34.0% in the second fiscal quarter of 2008.

Wholesale better apparel gross profit margins were 34.0% and 31.0% for the second fiscal quarters of 2009 and 2008, respectively. The increase was primarily due to the product mix and lower sales to off-price retailers in the current period.

Wholesale jeanswear gross profit margins were 25.9% and 24.2% for the second fiscal quarters of 2009 and 2008, respectively. The increase is primarily due to lower levels of off-price sales in the current period and costs in the prior period related to the repositioning of l.e.i. as an exclusive brand for Walmart and the discontinuance of certain other product lines.

Wholesale footwear and accessories gross profit margins were 24.6% and 24.4% for the second fiscal quarters of 2009 and 2008, respectively. The increase was primarily due to a reduction in discounting in our footwear business due to better inventory management and a reduction in shipments of our lower-margin international business, offset by additional discounting due to the current economic conditions and higher overhead unit costs due to lower volume in our costume jewelry business.

Retail gross profit margins were 53.8% for both the second fiscal quarters of 2009 and 2008.

Selling, General and Administrative Expenses. Selling, general and administrative ("SG&A") expenses were $240.0 million in the second fiscal quarter of 2009 and $256.9 million in the second fiscal quarter of 2008.

Wholesale better apparel SG&A expenses decreased $2.2 million, primarily due to a $2.4 million decrease in overhead costs in the current period (primarily distribution costs due to a lower volume of shipments), a $0.6 million decrease in postage costs and $1.3 million of other cost savings, offset by a $2.1 million effect from changes in the exchange rate between the U.S. Dollar and the Canadian Dollar.

Wholesale jeanswear SG&A expenses decreased $6.6 million, primarily due to a $4.3 million reduction in bad debt expense due to the bankruptcies of several customers in the prior period, a $1.6 million reduction in rent-related expenses due to the closing of certain facilities, a $1.1 million decrease in

Wholesale footwear and accessories SG&A expenses decreased $3.0 million, primarily due to a $2.3 million decrease in salary and benefit costs due to headcount reductions, a $0.9 million decrease in travel costs, a $2.9 million decrease in other administrative costs due to our cost-cutting initiatives, a $1.3 million decrease in style, design and sample costs and a $1.1 million decrease in advertising costs. These decreases were offset by $2.6 million of costs related to the bankruptcy of our United Kingdom footwear licensee and $2.9 million in restructuring costs in our wholesale jewelry business in the current period.

Retail SG&A expenses decreased $4.3 million, primarily due to a $2.4 million decrease in salaries and benefits due to operating fewer stores in the current period, a $1.5 million decrease in depreciation expense, a $0.9 decrease in occupancy costs and $1.3 million of other cost savings, offset by an additional $1.8 million in asset impairment and restructuring charges in the current period related to the closing of approximately 240 stores through the end of 2010.

SG&A expenses for the licensing, other and eliminations segment decreased $1.0 million, primarily due to changes in the exchange rate between the U.S. Dollar and the Canadian Dollar.

Operating Income. The resulting operating income for the second fiscal quarter of 2009 was $42.1 million, compared with $25.5 million for the second fiscal quarter of 2008, due to the factors described above.

Net Interest Expense. Net interest expense was $19.8 million in the second fiscal quarter of 2009, compared with $9.8 million in the second fiscal quarter of 2008. The increase was the result of: a $7.9 million write-off of deferred financing fees upon the termination of our prior revolving credit facility; lower interest income on our invested cash balances due to overall lower invested balances and lower interest rates in the current period; and higher amortization of deferred financing fees related to the amendment to our prior revolving credit facility on January 5, 2009 and our new secured revolving credit facility.

Income Taxes. The effective income tax rate was 35.0% and 34.3% for the second fiscal quarter of 2009 and 2008, respectively. The increase is primarily due to a greater impact of the foreign income tax differential relative to pre-tax income in 2009 than in 2008.

Net Income and Earnings Per Share. Net income was $13.1 million in the second fiscal quarter of 2009, compared with net income of $10.6 million in the second fiscal quarter of 2008. Diluted earnings per share for the second fiscal quarter of 2009 was $0.16, compared with $0.12 for the second fiscal quarter of 2008, on 2.4% fewer shares outstanding.

Fiscal Six Months Ended July 4, 2009 Compared to Fiscal Six Months Ended July 5, 2008

Revenues. Total revenues for the first fiscal six months of 2009 were $1.7 billion, compared with $1.8 billion for the first fiscal six months of 2008, a decrease of 6.1%. Revenues by segment were as follows:

                                        First          First
                                       Fiscal         Fiscal
                                          Six            Six
                                       Months         Months         Increase     Percent
(In millions)                         of 2009        of 2008        (Decrease )    Change
                                   - -------- --- - -------- --- - ---------- - ----------
Wholesale better apparel           $    494.4     $    566.4     $      (72.0 )     (12.7% )
Wholesale jeanswear                     449.5          392.8             56.7        14.4%
Wholesale footwear and accessories      404.3          468.2            (63.9 )     (13.6% )
Retail                                  325.0          356.3            (31.3 )      (8.8% )
Licensing and other                      21.8           21.1              0.7         3.3% )
                                   - -------- --- - -------- --- - ---------- - ----------
  Total revenues                   $  1,695.0     $  1,804.8     $     (109.8 )      (6.1% )
                                   - -------- --- - -------- --- - ---------- - ----------

Wholesale jeanswear revenues increased $56.7 million. Shipments of our
l.e.i. products to Walmart and increased shipments of private-label products due to expansion of private-label programs with several major customers were partially offset by reduced shipments of our Energie product line as a result of the general economic downturn and a $30.8 million reduction of shipments of product lines that we are discontinuing due to low long-term growth potential (including Jeanstar, Erika, Behold and Grane Girl).

Wholesale footwear and accessories revenues decreased $63.9 million. We experienced decreased orders for nearly all our footwear, handbag and accessories products primarily due to decreased consumer spending as a result of the general economic downturn. We also experienced a reduction in sales in our international business primarily due to the global economic conditions in Asia, Canada, Mexico and the bankruptcy of our former United Kingdom licensee.

Retail revenues decreased $31.3 million, primarily due to an 8.2% decline in comparable store sales ($26.3 million) resulting from decreased consumer spending relating to current economic conditions, with the balance related to operating fewer stores in the current period. A 12.7% decrease in comparable store sales for our footwear stores ($27.8 million) and a 7.0% decrease in comparable store sales for our apparel stores ($7.1 million) were partially offset by a 72.6% increase in our comparable e-commerce business ($8.6 million). We began 2009 with 1,017 retail locations and had a net decrease of 37 locations to end the period with 980 locations.

Revenues for the first fiscal six months of 2008 include $0.6 million in the licensing and other segment of service fees charged to Barneys under a short-term transition services agreement entered into with Barneys at the time of the sale of Barneys. These revenues were based on contractual monthly fees as set forth in the agreement. The agreement ended in May 2008.

Gross Profit. The gross profit margin increased to 33.9% in the first fiscal six months of 2009 compared with 33.4% in the first fiscal six months of 2008.

Wholesale better apparel gross profit margins were 34.8% and 33.2% for the first fiscal six months of 2009 and 2008, respectively. The increase was primarily due to the product mix and lower sales to off-price retailers in the current period.

Wholesale jeanswear gross profit margins were 24.6% and 22.7% for the first fiscal six months of 2009 and 2008, respectively. The increase is primarily due to lower levels of off-price sales in the current period and costs in the prior period related to the repositioning of l.e.i. as an exclusive brand for Walmart and the discontinuance of certain other product lines.

Wholesale footwear and accessories gross profit margins were 25.6% and 26.0% for the first fiscal six months of 2009 and 2008, respectively. The decrease was primarily due to additional discounting due to the current economic conditions and higher overhead unit costs due to lower volume in our costume jewelry business.

Retail gross profit margins were 49.9% and 51.6% for the first fiscal six months of 2009 and 2008, respectively. The decrease was primarily the result of higher levels of promotional activity in our stores due to the current challenging retail environment.

Selling, General and Administrative Expenses. SG&A expenses were $519.6 million in the first fiscal six months of 2009 and $537.6 million in the first fiscal six months of 2008.

Wholesale jeanswear SG&A expenses decreased $13.3 million, primarily due to a $7.1 million decrease in salary and benefit costs due to headcount reductions, a $4.4 million decrease in bad debt expense due to the bankruptcies of several customers in the prior period, a $3.4 million decrease in occupancy costs due to the closing of certain facilities, a $2.5 million decrease in depreciation and amortization expenses (due to accelerated depreciation in the prior period relating to discontinued brands) and $2.4 million of other cost savings, offset by $4.5 million of higher distribution costs due to higher unit shipments in the current period and $2.0 million of additional advertising costs to support the
l.e.i. product sold through Walmart.

Wholesale footwear and accessories SG&A expenses decreased $8.4 million, primarily due to a $6.8 million decrease in salary and benefit costs, a $1.9 million decrease in travel costs, a $1.2 million decrease in distribution costs, a $4.4 million decrease in other administrative costs due to our cost-cutting initiatives, a $2.1 million decrease in style, design and sample costs and a $2.0 million decrease in advertising costs. These decreases were offset by $2.9 million of costs related to the bankruptcy of our United Kingdom footwear licensee, $1.6 million in settlements of sales and use tax audits, $1.4 million in loss accruals related to certain leased property and $4.1 million in restructuring costs in our wholesale jewelry business in the current period.

Retail SG&A expenses increased $15.2 million, primarily due to $24.2 million in severance costs and asset impairments in the current period related to the closing of approximately 240 stores through the end of 2010 and a $1.0 million increase in consulting costs, offset by a $4.1 million decrease in salaries and benefits due to operating fewer stores in the current period, a $2.3 million decrease in administrative costs, a $1.9 million decrease in depreciation expense, a $1.2 million effect of changes in the exchange rate between the U.S. Dollar and the Canadian Dollar and $0.5 million of other expense decreases.

. . .