CIT, the large specialty lender that has been walloped by the sub prime mortgage mess, has stopped approving credit for about $40 million in orders to Mervyns, a struggling sunbelt department store chain, Fortune has learned.

The development is yet another example of how Wall Street’s problems are impacting Main Street. As the credit crunch snakes its way through the economy, banks are growing stingier with lending. Among the casualties are Talbots and Sears, which both saw credit lines suspended in recent weeks. At the same time, debt-laden consumers are curtailing what they spend at the mall, resulting in dozens of bankruptcy filings, including those of furniture makers Bombay and Levitz as well as gadget retailer Sharper Image.

The result is a squeeze for retailers unlike any in recent history. The most vulnerable are those like Mervyns, which was already on shaky ground before the economy turned south. Since former parent Target (TGT) sold the company in 2004 to a group of private equity firms that include Sun Capital Partners and Cerberus Capital, Mervyns has found itself under siege.

There have been massive layoffs, store closings and management upheaval. In March, Mervyns hired John Goodman, a former Levi Strauss executive known for turning around the Dockers brand, as its chief executive, the third person to hold that post in as many years.

As a private company, Mervyns no longer reports financial data. According to the research firm Hoovers, Mervyns, based in Hayward, Calif., had $2.5 billion in sales in 2007. Most of its stores are located in sunbelt states that have been hit hard by the housing meltdown. “Mervyns has not been performing well,” said one source.

While other large lenders, Wells Fargo (WFC) and Milberg among them, have not curtailed credit to Mervyns’ suppliers, “the action by CIT is causing them to take a closer look,” this person said.

CIT (CIT) is one of the largest lenders to Seventh Avenue firms. Its ill-fated foray into sub-prime mortgages — which has forced the lender to sell assets and draw down credit lines — has weighed on those in the fashion industry that depend on CIT’s ability to extend credit.

Without a guarantee from CIT, small and mid-sized firms are loath to ship directly to retailers, especially troubled ones, for fear of not being paid. It was unclear how much of CIT’s belt tightening was the result of its own financial troubles, as opposed to a growing concern over Mervyns health.

CIT spokesman Curt Ritter declined to comment on the firm’s relationship with Mervyns or other retailers.

Mervyns Chief Financial Officer Chuck Kurth also declined to comment specifically on the company’s relationship with suppliers or financial partners.

But he did say that only one-fifth of Mervyns business is done through specialty lenders like CIT, known in industry parlance as factors. The rest of the retailer’s merchandise comes directly from large companies like Nike and Levi Strauss. As such, Kurth added, “we are very comfortable with our liquidity position.”

Designer Kenneth Cole, who has been seeking to relinquish day-to-day operations of the company he founded to a seasoned leader, on Tuesday appointed Jill Granoff, a highly respected cosmetics and apparel executive to the position of chief executive.

The move signals a sharp change in management style for Cole, 54, who has held the position of CEO and chairman of Kenneth Cole Productions since its inception in 1982, and is known as a notorious micro-manager. As the company, with $510 million in sales, has struggled in recent years, the need to bring in an outsider with deep operational experience took on greater urgency. Cole launched a formal search for someone to succeed him as CEO five months ago, and personally called Granoff, 46, who had been a division vice president at Liz Claiborne, to offer her the job. He will remain chairman and chief creative officer.

Fortune broke the news that Cole was looking for a CEO in November.

Company founders can be especially difficult to work for, especially someone like Cole who for years has had cart blanche to run his company according to his own ideas. Although Kenneth Cole Productions went public in 1994, Cole remains the controlling shareholder with 47 percent of the Class A stock and all of the Class B stock, which carry 10 votes per share. The company’s most recent president, Joshua Schulman, left in July after six months on the job. Although his predecessor Paul Blum held the post for 15 years, he was said to be president in name only. Cole was known for making most of the decisions, from the height of a heel to the length of a skirt, himself.

In hiring Granoff, Cole has shown a willingness to pull back from day-to-day decision making to focus on the creative and strategic vision of the company, including his hallmark of clever advertising. He has also turned to someone who has had experience working with company founders. At Liz Claiborne, where Granoff had been executive vice president of direct brands, she worked closely with the founders of Juicy Couture and Lucky Brand Jeans. Previously, as chief operating officer of Victoria’s Secret Beauty, Granoff worked with Les Wexner, founder of parent company Limited Brands. She also did a stint at Estee Lauder, where her duties were intertwined with the Lauder family.

Her departure is a blow to Liz Claiborne, which has been undergoing a major restructuring. Granoff helped to bring discipline to the burgeoning Juicy Couture, Lucky and Kate Spade brands, which, along with Mexx, are considered the company’s growth drivers. Liz Claiborne is not expected to replace her, meaning that the direct brands will report to CEO William McComb.

At Kenneth Cole, Granoff, who will also join the board, will face considerable challenges when she starts her new job on May 5. An attempt by the company to make its shoe and apparel lines more luxurious and upscale has so far hit snags. Last year, Kenneth Cole had $7.1 million in net income, down from $26.8 million a year earlier. The stock, which traded as high as $27 a year ago, is now languishing around $17.45.

Nautica has shut its women’s sportswear division.

Traditionally known for its men’s casual clothing with a nautical theme, Nautica introduced a line of women’s sportswear in 2006. But the clothing never gained traction and fell victim to the sluggish sales environment of the department stores in which it was sold.

The withdrawal from the women’s sportswear market underscores larger problems at Nautica, which has been owned by the VF Corporation since 2003. Once considered a powerhouse in men’s clothing, along with Tommy Hilfiger and Polo Ralph Lauren, Nautica has listed badly in recent years as new competitors like Ted Baker and Sean John have taken market share. An attempted revitalization in 2005 fell flat and executives are now working on yet another revival aimed at bringing Nautica closer to its heritage of classic styles with a modern twist.

To bolster its management ranks, Nautica CEO Denise Seegal in September hired Karen Murray, formerly of Liz Claiborne, as president of men’s sportswear. Also newly on board is Creative Director Mirian Lamberth — the first to hold that position since founder David Chu left the company in 2004.

Nautica notified its employees and business partners of its decision to close the women’s division last week. In a statement e-mailed to FORTUNE, VF said the decision would allow the company to “focus our resources on continuing to build our men’s, licensed and direct-to-consumer businesses.” Nautica will continue to sell women’s apparel in select company-operated retail stores, and will still make women’s swimsuits and pajamas.

Nautica has traditionally had a tough time cracking the women’s market. Soon after VF bought the company, it closed its women’s jeans business.

For more evidence of economic woes beyond Wall Street, look no further than Main Street. J.C. Penney (JCP) today warned that first quarter earnings and sales will come in well below expectations, becoming the latest in a string of retailers to ratchet down guidance.

What is remarkable is how quickly the business has deteriorated. As of Jan. 1, Thomson Financial had predicted year-over-year first quarter earnings growth of 8 percent for consumer stocks, which in addition to retailers, also include homebuilders and auto companies. Today, that prediction of growth has been replaced by one of contraction. Thomson now expects the group to report an 8 percent drop. Excluding homebuilders, which account for a large chunk of the swing, earnings are still expected to shrink by 2 percent.

Take J.C. Penney. Just over one month ago, the company predicted first quarter earnings of 75 cents to 80 cents. New guidance issued today pegs that amount at 50 cents a share. The earnings free fall is mainly the result of plummeting sales. For March, sales at stores open at least a year are now expected to fall by double-digits, compared with a prediction of a low-single-digit drop back in February.

“Consumer confidence is at a multi-year low,” said Myron Ullman, III, chairman and chief executive of J.C. Penney. “J.C. Penney counts half of American families as its customers, and they are feeling macro-economic pressures from many areas, including higher energy costs, deteriorating employment trends and significant issues in the housing and credit markets.”

As of midday, shares of JCP had plunged $2.84 cents, or 7 percent, to $37.68, helping to drag down the broader S&P Retail Index.

JCP isn’t the only retailer to see its customers curtail spending. For every time a consumer-related company has raised forecasts this year, there have been more than three instances of guidance reductions, according to Thomson Financial. That compares with a ratio of 1-to-2 for the broader S&P 500. Retailers that have reduced their earnings outlook include Wal-Mart (WMT), TJX Companies (TJX), Kohl’s, (KSS) Nordstrom (JWN) and Limited Brands (LTD) — though none of those downwardly revised earnings estimates were as big as J.C. Penney’s. And retailers still have another month to go before they can close the books on the first quarter, meaning that a further tempering of expectations is likely.

“On the surface, discretionary spending was awful last year,” said David Dropsey, senior research analyst with Thomson Financial. “But if you dug beyond the homebuilders, it was clear that retailers, restaurants and hotels were doing okay. This year, the curb on spending seems to be much broader based.”

The big question is whether checks set to arrive in consumers’ mailboxes in about two months as part of a government financed stimulus package, will have the desired effect. Goldman Sachs analyst Adrianne Shapira expects second half sales to pick up as consumers start spending that money, which could total as much as $1,000 to $2,000 per family. She also points out, in a research note published Friday, that the first quarter contributes the least amount to full-year sales. That makes the period the most susceptible to earnings shortfalls if sales miss expectations.

Not everyone is a big believer that the government issued checks will provide the necessary magic bullet. “While the economic stimulus package may provide some temporary benefit, we expect the continuation of a difficult environment over the course of 2008,” Ullman said. Better to temper expectations now than later.

Perry Ellis (PERY), which earlier this year bought the Laundry label from Liz Claiborne, is in talks to bring back the brand’s founder, designer Shelli Segal, Fortune has learned.

The discussions with Segal are part of a broader plan to revive the label, known for its dresses, which underwent a series of changes following Liz Claiborne’s 1999 acquisition. Headquarters were moved from Los Angeles to New York, and following Segal’s split from the company in 2007, the name was changed to Laundry By Design from Laundry by Shelli Segal.

Sales of Laundry merchandise today are estimated at $30 million, down from $100 million when Liz Claiborne acquired the brand.

Perry Ellis President Oscar Feldenkreis told Fortune that he is moving the Laundry studio back to L.A. to recapture the label’s California heritage. He has also hired a new design team, many of who, including Claudia Cordic, worked for Laundry as part of the original team. Perry Ellis also plans to change the company’s name back to Laundry by Shelli Segal and relaunch the label for the holiday season. “I’ve met with Shelli and we are talking to her about coming back as a consultant,” Feldenkreis said. Segal was not immediately reachable for comment.

The moves by Perry Ellis are part of a broader trend in fashion, where companies ranging from Gap to Lord & Taylor are wooing big-name designers to try to revive ailing brands.

Don’t expect Gap Inc. (GPS) to return to growth in 2008.

That was the between-the-lines message from CEO Glenn Murphy, who delivered fourth quarter results on Thursday. “We know at some point, this business has to show improvement on the top line,” Murphy told analysts on a conference call after the markets closed. But Murphy made clear that the company’s priority for 2008 was to grow profits by better managing costs.

That strategy has so far delivered results for Gap, the $16 billion owner of the Gap, Old Navy and Banana Republic chains that once defined casual dressing before losing its way earlier this decade. Fourth quarter profit rose to $265 million, or 35 cents a diluted share, compared with $219 million, or 27 cents, the year earlier, largely because inventory and other expenses were kept in check. Gap’s inventory per square foot, for instance, was down by 15% at the end of the fourth quarter, compared with the same period a year ago.

The results pushed Gap shares higher by $1.15, or nearly 6 percent, to $20.60 in after hours trading.

But cost reductions and better expense management can only take Gap so far. If the San Francisco-based retailer is ever to emerge from the funk of the last few years, it will need to start growing sales. Fourth-quarter sales fell 5% to $4.68 billion, compared with $4.92 billion a year ago. Sales at stores open at least a year were down 3% in the period, compared with a 7% drop the prior year. The recently-completed fourth quarter contained one less week of sales than did the same period a year ago, partially accounting for some of the fall-off.

Gap does not provide sales guidance, but CFO Sabrina Simmons said that the challenging economic environment would make it more difficult for the company to grow comparable store sales this year.

As a result, Gap is proceeding cautiously with capital expenditures, which are expected to total $500 million this year, down from $682 million in 2007. The company plans to open 100 stores, mainly abroad, and close 85 locations, most of them Gap stores. In the United States, the company said it intends to be very “selective” about opening new stores, and is looking instead at making existing locations more profitable.

One way to keep investors happy in the absence of growth is to buy back stock. The company spent $613 million to repurchase 30 million shares in the fourth quarter, and authorized a new $1 billion buyback. Of that amount, about $158 million will be repurchased from the Fisher family, which founded Gap in 1969 and collectively owns slightly more than one-third of the company’s outstanding shares. Gap also said it would increase its annual dividend by 6% to 34 cents a share.

The company’s Gap and Old Navy brands are undergoing the biggest changes. Gap recently parted ways with Old Navy president Dawn Robertson over what Murphy called “philosophical” differences on how to move the brand forward. Current marketing did not focus enough on the brand’s value message, an imbalance that Murphy said he hopes to have adjusted by the back-to-school shopping season.

That is about the time that Old Navy’s newly installed creative director, the designer Todd Oldham, will start to have an impact on merchandise in the stores. A few months later, in the fall, designer Patrick Robinson’s new looks for Gap will start to hit store shelves. If the designers’ clothes connect with consumers, Gap stands to win big. Given its tighter expense structure, even the slightest improvement in same-store sales would provide a boost to the bottom line.

For now, however, Murphy is keeping expectations low. Gap and Old Navy have tried to reinvent themselves several times in the last few years to no avail. “It would be easy for us to get ourselves too excited too soon,” Murphy said.

If Eddie Lampert wants to compare Sears Holdings (SHLD) to the Super-Bowl-winning New York Giants, as he did in a quarterly letter to shareholders released today, he should try a different playbook.

Like the Giants, who stumbled through much of the early season, Sears has performed dismally this year. Sears today reported that fourth-quarter profit plunged 47% to $426 million, or $3.17 a diluted share, compared with $811 million, or $5.27 a share. Domestic sales at stores open at least a year fell 4% at Sears and 5.2% at Kmart in the period. Despite increased promotional activity to markdown goods, inventory continued to rise, up 1% compared with the prior year, according to Morgan Stanley analyst Gregory Melich.

Unlike the Giants, who were able to regroup for an upset championship win, Sears shows no signs of turning the corner anytime soon. Notably, January sales were the weakest of the quarter. “Extrapolating January trends leads us to believe that top line shortfalls are likely to continue (at least into 1Q),” wrote Adrianne Shapira of Goldman Sachs in a note to clients.

Sears shares declined 36 cents to $101.24 in morning trading. Though that’s well off a 52-week-high of $195, some analysts said the shares have further to fall. Melich of Morgan Stanley considers a fairer price to be in the mid-$70-range.

“Like Eli Manning,” wrote Lampert (who happens to be a Jets fan), referring to the Giants MVP quarterback, “we know what it’s like to be underestimated and questioned, but we intend to keep working on our game to achieve our full potential.”

So far Lampert has focused on the blocking and tackling of retailing — expense management, markdown discipline and systems — without addressing the bigger picture: What does Sears stand for today, and why should consumers shop there instead of competitors like Best Buy (BBY), Target (TGT) or Wal-Mart (WMT)? Each of those competitors has a clear mission. Best Buy is the place for electronics, Target is fashion at a price, and Wal-Mart is everyday low prices. What is Sears?

Until that question is answered, it’s no wonder that Lampert considers big investments in Sears’ stores to be a losing proposition. In the letter to shareholders, he made the case that he could get a better return simply by keeping the money in cash.

Much about the company’s future will depend on who Sears hires to replace outgoing chief executive Aylwin Lewis, who was let go in January as part of a broader strategy to shake up the company by dividing it into five business units.

Sears’ ability to attract Eli-Manning-like talent is complicated by Lampert’s involvement in the company as chairman and largest shareholder. Though Lampert has suggested he would relinquish oversight of day-to-day operations, reports suggest otherwise. According to the Chicago Tribune, for example, candidates who have been contacted about the CEO job are worried they may not have the freedom to make unfettered decisions without Lampert playing Monday-morning quarterback. And that could mean another losing season for Sears.

Someone’s in the kitchen with Martha: celebrity chef Emeril Lagasse.

After searching for an acquisition for years, Martha Stewart Living Omnimedia (MSO) on Monday said it bought the rights to Lagasse’s television programming, cookbooks, website, licensed kitchen products and food such as the Bam! B-Q sauce, spices and marinades. The agreement excludes Lagasse’s 11 restaurants and corporate offices.

The deal, for $45 million in cash plus $5 million in stock, marks the first time Stewart has deigned to share the spotlight with another celebrity inside her company and is a solid step toward diversifying away from her omnipotent presence. As Fortune reported last month, MSO has been looking to bring another tastemaker into the fold. The company has held talks in recent months with the designer Cynthia Rowley and Jonathan Adler, known for his home décor, but both deals unraveled.

Investors applauded the move pushing shares up $1.06, or 17.29 percent, to $7.19.

But before getting too carried away, it’s worth noting that the Emeril Lagasse business, like so many of MSO’s other new ventures, is still tiny. The company generated just $14 million in 2007 revenue.

Meanwhile, it’s unclear how some of MSO’s other initiatives are performing, notably the launch of a home line at Macy’s. Morgan Joseph analyst David Kestenbaum noted in a report to clients published Tuesday that MSO has so far failed to provide any clear-cut evidence of the launch’s success at a time when Macy’s is struggling with sub-par sales and store closures.

MSO has an even bigger problem looming this year in the form of Kmart royalties, which are expected to drop to $20 million from $65 million.

“Given the uncertainty of ramping up nascent initiatives in a difficult operating environment, we are downgrading to hold until we can see more clarity on Martha Stewart in 2008,” Kestenbaum wrote.

Gap’s ongoing attempts to right itself suffered a further setback Tuesday, when it said the president of its Old Navy chain would leave the company effective immediately.

Though the decision appears to have been mutually arrived at by the Old Navy president, Dawn Robertson, who had been in the job less than 16 months, and Gap’s (GPS) Chief Executive Glenn Murphy, her departure shows that the specialty apparel retailer still has a long way to go to turn itself around.

Robertson, 52, known for her high-energy management and even higher sense of style, made some progress breathing new life into Old Navy by upping the fashion quotient, speeding up merchandise deliveries and jettisoning its trademark campy advertisements in favor of sleeker marketing.

Despite those improvements, Robertson has so far failed to deliver the bump in sales and traffic counts that Murphy is looking for, suggesting that she may have overreached in her broader vision to reposition Old Navy away from its roots as a discount store for the family and make it more appealing to twenty-something shoppers looking for fashion at a price. “A lot of strategies were put in place under Dawn, and so far the results are mixed,” said Gap spokeswoman Stacy MacLean. “We were disappointed with fall and holiday.”

MacLean said Robertson’s departure was not just motivated by a lack of financial progress but also included other factors, such as cultural fit. Sources said the Robertson and Murphy differed philosophically over how to run the company.

Robertson is known for a strong personality that can be infectious and motivating — “like a cheerleader on steroids,” said one person who has worked with her– but also difficult to contain. Her preference for designer clothing, Gucci and Chanel are favorites, may also have contrasted with the more laid-back style of Gap’s San Francisco headquarters, where khakis and button downs are the norm.

Asked whether Old Navy would stick with Robertson’s strategy, MacLean said the company planned to move forward with some elements of the plan and proceed more cautiously with others. “We think a faster pipeline is in the interest of our customers,” she said, referring to Robertson’s initiative to speed up the delivery of merchandise to stores. “But we do not want to alienate our core customers in any way.”

In late January, Old Navy hosted a fashion show in New York to introduce the press to its new image. Designer Todd Oldham, whom Robertson had hired as creative director, edited the line, which included safari themes. Many of the updated looks are just hitting stores now, leading some observers to wonder whether Robertson was given enough time to achieve her goals. Because of long lead times, it is often difficult to affect a turnaround in retailing in less than two years.

The shakeup at Old Navy, largely unexpected by Wall Street analysts, is the latest in a series of management changes aimed at improving sales at Gap, which in addition to Old Navy also operates the Gap and Banana Republic chains. Gap shares lost 47 cents, or 2.39 percent, to close at $19.23 Tuesday.

Former CEO Paul Pressler was let go in January 2007, just three months after he hired Robertson, who had previously served as a managing director of Myer, an Australian department store chain. Marka Hansen was moved from her post atop Banana Republic to run the Gap division, and one of her deputies, Jack Calhoun, was placed in charge of Banana Republic in October. Gap today named Tom Wyatt, a seasoned apparel executive, who joined the company in 2006 and was most recently running its outlet division, as the interim head of Old Navy while it searches for a permanent replacement.

Robertson was to receive an annual salary of $900,000 (she was paid $242,308 for the three months she worked during fiscal 2007) plus a signing bonus of $300,000. Though Robertson’s contract calls for repayment of the bonus if she were to leave voluntarily within two years, MacLean, the Gap spokesman, said the company has no plans to recoup the money.

Analysts seemed divided over what Robertson’s departure would mean for Old Navy, with some worrying that too much change could be troublesome for the chain. “When you are on a course, and then all of a sudden you correct and go in another direction, that can be a negative too,” said Christine Chen of Needham & Co.

A rescue of Fortunoff by the owner of Lord & Taylor could breath much-needed capital and a fresh merchandising perspective into the retailer of home furnishings and jewelry.

Mired in family mismanagement that was compounded by a 2004 buyout by the private equity firms Trimaran Partners and Kier Group, Fortunoff has failed to keep up with the times. The retailer’s home furnishing assortments are a hodgepodge of Country French, antique-like woodwork and modern styles. In jewelry, Fortunoff has lost ground to department stores that have done a better job reaching out to a broader cross section of the public — with costume jewelry, branded designer jewelry, vintage and one-of-a-kind pieces.

What Fortunoff still has is it’s name. And that is what interests Richard Baker, chief executive of NRDC Equity Partners, which in 2005 bought Lord & Taylor, the once-grand department store chain that has been trying (and succeeding) to regain its luster. NRDC also owns the down-at-the heels home goods retailer Linens ‘N Things, which is struggling to make a comeback. No one can accuse Baker, 42, of shying away from a challenge.

Just like Lord & Taylor is repositioning itself more upstream — it has added over 160 new designers, including Juicy Couture, Cole Haan and Stuart Weitzman — Baker, according to sources, sees an opportunity to brush the cobwebs from the Fortunoff name. The talks with Fortunoff, which were first reported by The New York Times, were independently confirmed by Fortune.

One idea is to sell Fortunoff-branded merchandise in Lord & Taylor stores. While promising, such a combination only makes sense once the Fortunoff name is rehabilitated — and that could take years. At the moment, some industry observers said they considered Fortunoff too down market for the position to which Lord & Taylor aspires, just under Saks and Neiman Marcus and on par with Bloomingdale’s and Nordstrom.

Baker is nothing if not ambitious. In addition to the acquisitions made by NRDC, Baker has started a separate company called Creative Design Studios, which has made deals with designers such as Charles Nolan and Cynthia Steffe to create merchandise for Lord & Taylor stores, and possibly other retailers. He has also raised $400 million for more deals through a Special Purpose Acquisition Vehicle. Baker’s partners in NRDC are his father Robert Baker, who founded National Realty & Development Corp., a major developer of shopping centers, and Lee Neibart and Bill Mack of Apollo Real Estate Advisors.

If all this seems like a lot for a retailing neophyte to handle (Baker cut his teeth in the real estate business with his Dad), consider that one of Baker’s greatest strengths may be his willingness to admit when he doesn’t know the answer — and an ability to find someone who does. At a recent gathering of retail executives, Baker jokingly asked for advice about how to get through the current economic downturn. “I realize I’m the novice in the room,” Baker said. “So I’m hoping all of you will call me tomorrow and give me your thoughts on how to get through this recession, because it’s my first one as a retailer.”

Speaking last night at a black tie dinner to raise scholarship funds for would-be fashion designers, Macy’s (M) Chief Executive Terry Lundgren joked that the more than $1.3 million raised by the group, called the Young Menswear Association, would help to foot the end-of-the-season bill that retailers typically put to manufacturers, known, in industry terms, as markdown money. “And if that’s not enough,” Lundgren continued, “we’ll pass around hats and take up a collection.”

The comments elicited laughs from the attendees, who included executives from some of the largest apparel manufacturers, including Polo Ralph Lauren, Liz Claiborne, Phillips Van-Heusen and Perry Ellis. But it’s doubtful that anyone is laughing this morning, following the release of December same-store sales results from major retailers. In an anemic season overall, department stores, as a group, were the worst performing category, showing a collective year-over-year decline for the month of 6.7 percent, according to Thomson Financial.

Department stores tend to be the biggest culprits when it comes to markdown money, a widespread practice of “asking” vendors to kick in more cash at the end of a season to cover the cost of goods that failed to sell at full price. Of course, asking is a polite term — manufacturers rarely refuse such requests, especially when a company is as large as Macy’s. (In referring to Lundgren, the designer Kenneth Cole, who was honored at last night’s dinner, jokingly said, “I’ve known Terry a long time, back when he only controlled half the industry.”)

This morning, Macy’s reported a 6.5 percent drop in December same-store sales, not as big a decline as some of its competitors — but big enough that manufacturers will surely feel the pain.

Liz Claiborne Chief Executive William McComb has been taking it on the chin for his efforts to remake the struggling apparel manufacturer. Critics have lashed out at everything from McComb’s handling of an important relationship with the Macy’s department store chain to his efforts to sell 16 of Liz Claiborne’s 36 apparel brands. Not all of the censure is fair.

Take the case of the apparel brands put up for sale. Detractors have argued that McComb’s decision to publicly put these brands on the block in July effectively branded them “losers” and allowed them to whither while buyers were sought. They have also complained that the auction, which was handled by boutique investment bank Centerview Partners, was conducted in a sloppy manner, with information often slow in coming and sometimes inaccurate.

While the auction process has arguably not gone as well as expected — Liz has decided to keep at least one of the brands and is closing another presumably because buyers were scarce or bids did not meet expectations — it’s hard to place all the blame with McComb. In fact, it’s becoming increasingly clear that McComb, who was named CEO in October 2006, inherited a company that, as one analyst said, “was in much worse shape than we thought.”

Consider the following: When Liz Claiborne bought C&C California, which makes contemporary women’s sportswear, in January 2005, it valued the company at $47 million, according to a press release issued at the time. Liz Claiborne announced today that it has reached an agreement to sell C&C California, along with another brand Laundry by By Design, to Perry Ellis for a combined total of $37 million in cash. Laundry, meanwhile, has $30 million in annual sales, according to Perry Ellis — that’s down from $80 million in October 1999, when Liz Claiborne acquired the brand, previously known as Laundry by Shelli Segal. A large part of the sales decline is attributable to Liz Claiborne’s decision earlier this year to discontinue Laundry’s sportswear line and focus solely on dresses, a strategy that Perry Ellis is likely to reverse. Either way, neither brand appears to have flourished under Liz Claiborne — a problem that largely predates McComb.

Liz Claiborne also said today that it would keep Enyce, a maker of urban clothing, and close the Sigrid Olsen brand. Still to come is news on five other labels, Dana Buchman, Ellen Tracy, Kensie, Mac & Jac and Prana. As Fortune has reported, a deal is in the final stages of negotiations for Ellen Tracy.

Going forward, investors will focus on the performance of Liz Claiborne’s remaining brands: Juicy Couture, Lucky Brand Jeans, Kate Spade, Mexx and the namesake Liz Claiborne line. While it remains uncertain whether growth at these brands will be enough to lift Liz Claiborne’s sagging stock price, one thing is becoming clearer: McComb inherited a lot of the problems he is facing today.

There has been a lot written recently about the upcoming initial public offerings of several fashion brands, including Tommy Hilfiger, Prada and Salvatore Ferragamo. None of these deals are a fait accompli. In fact, with the market for new issues slowing slightly in the fourth quarter of 2007, when 72 companies went public compared with 84 during the same period the prior year, “fashion houses are going to have to work twice as hard to convince the markets that there is more to their story than brand recognition,” said David Menlow, founder of IPO Financial Network, which tracks new issues.

Furthermore, it remains unclear whether some of these companies will get the valuations their founders and principal shareholders think they deserve. Prada CEO Patrizio Bertelli has famously cancelled plans to go public on three previous occasions — partially because his expectations didn’t match up with the value the market was giving his company, according to a person familiar with the situation.

That said, fashion houses who can show strong sales and profit growth will find no shortage of investor interest. “What it comes down to is the fundamental financial performance of each company,” Menlow said. “The name alone won’t be enough.”