The Warnaco Group, Inc. reported net revenues increased to $327.7 million for the third quarter of fiscal 2005, compared to $324.4 million for the third quarter of fiscal 2004. Swimwear group revenues outpaced the prior year period and offset slight revenue declines in the Sportswear Group and Intimate Apparel Group. The Sportswear Group's revenues were affected by the previously announced timing shift in certain Calvin Klein jeans membership club sales to the first half of fiscal 2005 and were mostly offset by double digit gains in Chaps revenues. Calvin Klein underwear revenues were up 9.9% while revenues in the remainder of the Intimate Apparel Group's businesses declined in part due to challenging comparisons as a result of the 2004 launch of J.Lo by Jennifer Lopez® lingerie. Net revenues for the third quarter of fiscal 2005 include approximately $1.6 million related to the translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar relative to the third quarter of fiscal 2004.
Gross profit rose 9.7% to $112.7 million, or 34.4% of net revenues, for the third quarter of fiscal 2005, compared to $102.7 million, or 31.6% of net revenues, for the third quarter of fiscal 2004. The marked improvement in gross profit resulted from the sourcing initiatives implemented in 2004 as well as lower off-price sales, especially in Warner's and Calvin Klein jeans. The increase in gross profit for the third quarter of fiscal 2005 includes approximately $0.7 million related to the translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar relative to the third quarter of fiscal 2004.
Selling, general and administrative expenses were $100.0 million, or 30.5% of net revenues, compared to $94.1 million, or 29.0% of net revenues, in the prior year quarter. SG&A in the quarter increased as a result of a $2.3 million increase in selling and marketing expenses primarily reflecting the full period effect and vertical integration of the Op® business (acquired in August 2004). In addition, SG&A was affected by $2.6 million related in part to the growth of the Calvin Klein underwear retail operation worldwide and the timing of expenses associated with the launch of Michael Kors® and Calvin Klein swimwear and Op swimwear and sportswear. Also affecting SG&A was $1.5 million associated with continued investment in systems infrastructure (primarily SAP) as well as planned enhancements to employee benefits programs. SG&A expenses for the third quarter of fiscal 2005 include approximately $0.2 million related to the translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar relative to the third quarter of fiscal 2004.
The company recorded a gain in restructuring items of $1.3 million for the third quarter of fiscal 2005 compared to an expense of $0.4 million in the prior year period. The gain was the result of a reversal of accruals associated with the 2004 consolidation of certain of the company's intimate apparel manufacturing facilities.
Operating income for the third quarter of fiscal 2005 climbed to $13.7 million, a 75.9% increase from the prior year period, and operating margin for the third quarter of fiscal 2005 increased 180 basis points to 4.2%.
Net income increased to $6.9 million, or 15 cents per diluted share, for the third quarter of fiscal 2005 compared to $1.6 million, or 3 cemts per diluted share, for the third quarter of fiscal 2004. The improvement in net income resulted primarily from the increase in gross profit, the gain in restructuring items, lower interest expense and lower tax expense due to a reduction in the company's income tax provision as a result of the filing of its 2004 tax returns.
Mr. Gromek continued, “As we enter the holiday season, we believe we are well positioned to achieve our operational and strategic goals. During the fourth quarter, we will begin shipping Michael Kors and Calvin Klein swimwear for the resort selling season and also expect to benefit from the launch of Op swimwear. We also anticipate continued positive momentum for our Calvin Klein and Chaps businesses. On the international front, our businesses remain strong and continue to contribute significantly to our overall profitability. In short, 2005 is shaping up to be a year of significant accomplishments for Warnaco.”
The company noted the following balance sheet highlights as of October 1, 2005:
Cash and cash equivalents were $152.0 million compared to $76.0 million at October 2, 2004. During the quarter the company purchased 9,151 shares of its common stock pursuant to its previously announced share repurchase program.
Inventories increased 2.6% to $312.6 million at October 1, 2005 from $304.6 million at October 2, 2004. The company believes its inventories are current and properly assorted going into the holiday season.
Commenting on the results, Larry Rutkowski, Warnaco's CFO, stated, “Our third quarter performance demonstrates the power of our diversified business model and disciplined inventory management. During the quarter, we advanced our global sourcing initiatives, which are expected to improve our cycle times going forward. We enter the fourth quarter with a strong balance sheet that provides us with the financial flexibility to continue to pursue our operational and strategic initiatives. We continue to drive toward our three year goals, on balance and over time, of: (i) high single-digit sales growth; (ii) gross margin increases on average of 100 basis points annually; (iii) competitive SG&A expense; and (iv) annual double-digit growth in operating margin percentage.”
