For the fourth quarter, Warnaco Inc.'s net revenues declined 3.2% to $362.5 million from $374.4 million in the year-ago quarter, primarily due to swimwear sales not meeting expectations, fewer than anticipated replenishment orders in intimate apparel and sportswear and the company's inability to meet demand for certain intimate apparel product offerings.
Gross profit was $127.0 million, or 35.0% of net revenues, compared to $125.4 million, or 33.5% of net revenues, for the fourth quarter of fiscal 2004. The previously mentioned sourcing improvements, reduced mark-downs and a favorable international sales mix drove a 150 basis point improvement in gross profit margin. In particular, the company's Intimate Apparel Group recorded a 490 basis point improvement in gross profit margin.
Selling, general and administrative (“SG&A”) expenses were $106.3 million, or 29.3% of net revenues, compared to $99.5 million, or 26.6% of net revenues, for the prior year period. The year over year increase in SG&A expenses includes (i) $3.4 million at the Swimwear Group, primarily related to marketing, new product launches and an increased investment in Ocean Pacific(R), (ii) $2.6 million in marketing expense at the Intimate Apparel Group and (iii) $1.1 million in selling and administrative expenses related to the growth in the company's operations in Asia.
Higher gross profit was more than offset by increased SG&A and pension expense, which resulted in operating income of $19.7 million compared to $32.4 million in the fourth quarter of fiscal 2004. Higher than anticipated SG&A expense and lower than anticipated revenues and gross margin associated with logistics difficulties at the company's Dutch distribution facility (which the company believes have since been resolved) negatively affected operating income by approximately $9.0 million. Additionally, operating income for the fourth quarter of fiscal 2005 includes $1.0 million of pension expense compared to $7.8 million of pension income for the fourth quarter of fiscal 2004.
Net income was $9.4 million, or $0.20 per diluted share, compared to $16.2 million, or $0.35 per diluted share, for the fourth quarter of fiscal 2004. The company notes its tax rate in the quarter was 37.0% compared to 39.5% in the prior year period.
Fiscal Year Results
Net revenues grew 5.6% to $1.50 billion in fiscal 2005 from $1.42 billion in fiscal 2004. All three operating groups contributed to the revenue increase, led by the Sportswear Group, which recorded a 13.6% increase in net revenues. The company's Chaps brand, which continued its successful launch to the mid-tier channel of distribution in 2005, was the largest gainer with revenue growth in excess of 25%.
Gross profit was $509.6 million, or 33.9% of net revenues, for fiscal 2005 versus $473.0 million, or 33.2% of net revenues, for fiscal 2004. The 70 basis point improvement in gross profit as a percentage of net revenues was primarily driven by better sell through and reductions in low margin off price sales in the Intimate Apparel Group's core brands. Additionally, the company's Sportswear Group and international businesses contributed to the improvement in gross profit as a percent of net revenues.
SG&A expenses were $406.7 million, or 27.0% of net revenues, for fiscal 2005 compared to $378.5 million, or 26.6% of net revenues, for fiscal 2004. SG&A expense in 2005 includes an increase of approximately $12.0 million in the Swimwear Group primarily related to the launches of Michael Kors(R) and Calvin Klein swimwear as well as the vertical integration of a portion of the Ocean Pacific business. The increase in SG&A expense was also the result of approximately $11.0 million in expenses, primarily to support the company's growth in Europe and Asia. Additionally, enhancements to the company's employee benefits programs and the implementation of SAP's Apparel and Footwear Solution (an enterprise-wide software platform encompassing finance, sales and distribution and materials management) at the company's Swimwear Group led to increases in corporate expenses.
Operating income was $101.9 million for fiscal 2005 compared to $96.1 million for fiscal 2004. Operating income as a percentage of net revenues was flat relative to fiscal 2004. Softer than anticipated revenues combined with increases in investment in the business negatively affected operating income as a percentage of net revenues. Operating income includes $1.6 million of pension expense for fiscal 2005 compared to $6.8 million of pension income for fiscal 2004.
Net income was $52.1 million, or $1.11 per diluted share, a 22.4% increase over $42.5 million, or $0.93 per diluted share, for fiscal 2004. A more favorable tax rate (36.9% for fiscal 2005 compared to 40.3% for fiscal 2004) as well as a decrease in loss from discontinued operations (net of taxes) contributed to the improvements in net income.
Foreign currency translation did not have a material effect on fourth quarter or fiscal 2005 results.
The company noted the following balance sheet highlights as of December 31, 2005:
Cash and cash equivalents were $164.2 million, compared to $65.6 million of cash and cash equivalents at January 1, 2005. On January 31, 2006, the company used approximately $70.8 million of cash (net of cash acquired) in connection with the closing of the acquisition of certain Calvin Klein businesses, as discussed above. At the same time, in connection with and to finance a portion of the purchase price for the acquisition, the company borrowed $180.0 million under a new term loan facility due 2013. The company also assumed approximately $45.0 million of debt of the newly acquired entities.
Inventories were $326.3 million, down from $335.7 million at January 1, 2005, as the result of improved inventory and working capital management.
Commenting on the results, Larry Rutkowski, Warnaco's Chief Financial Officer, stated, “We ended the year with a strengthened balance sheet, which reflects gains in net income and the success of our initiatives aimed at improving inventory turns and our collection cycle. For 2006, for our pre-acquisition businesses, we would anticipate (i) revenue growth similar to 2005, (ii) a gross margin increase of at least 100 basis points, and (iii) double-digit growth in our operating margin percentage (assuming minimal pension expense in 2006). For the combined companies, we expect (i) revenue growth in 2006 to be at least in the low 20 percent range, (ii) double digit improvements in the operating margin percentage over the prior year (assuming minimal pension expense in 2006), and (iii) the transaction to be accretive to our earnings per share.”
“Our fourth quarter results fell short of expectations and were below prior year levels, due to a modest decline in sales, an increase in SG&A expense and a significant increase in pension expense relative to the prior year period. On a positive note, however, the substantial improvement in gross profit margin reflects lower costs as a result of our recent sourcing initiatives, as well as reduced mark-downs from retailers (in particular related to our Warner's(R) brand), and an increase in higher margin international sales as a percentage of total business,” said Joe Gromek, Warnaco's President and Chief Executive Officer. “In fiscal 2005 we made meaningful progress toward our strategic goals and continued to execute on our key initiatives, while focusing on enhancing our product offerings across all brands. In particular, we continued the successful launch of Chaps(R) to the mid-tier channel of distribution, improved the profitability in our core intimate apparel segment, grew revenues and profits in our existing Calvin Klein(R) jeans and underwear businesses and expanded the Company's retail and international platforms.”
Mr. Gromek continued, “We also recently closed the acquisition of the Calvin Klein jeans businesses in Europe and Asia and CK Calvin Klein 'bridge' sportswear business in Europe. This acquisition is consistent with our strategic focus of developing global lifestyle brands within our core competencies. We have combined under one roof the worldwide Calvin Klein jeans, underwear and swimwear businesses thereby enabling Warnaco to broaden its global reach, extend into new product categories and expand our retail business. We believe that this acquisition, combined with other recent actions taken, should position Warnaco for long-term growth.”
“As we begin 2006, we remain optimistic about the opportunities to develop our portfolio of powerful brands worldwide. Our focus is to grow our international presence and maximize the expansion potential of our Calvin Klein jeans and underwear businesses in Europe and Asia, while continuing to improve our existing businesses both domestic and abroad. We believe that the investments we are making in our brands, talent and infrastructure should result in a more powerful company positioned for sustainable growth in revenues and profits,” concluded Mr. Gromek.
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)
For the Fourth For the Fourth
Quarter Quarter
of Fiscal 2005 of Fiscal 2004
------------- -------------
(Unaudited) (Unaudited)
Net revenues $ 362,544 $ 374,417
Cost of goods sold 235,572 249,036
------------- -------------
Gross profit 126,972 125,381
Selling, general and administrative
expenses (a) 106,312 99,528
Pension expense (income) (a) 963 (7,774)
Restructuring expense 21 1,264
------------- -------------
Operating income 19,676 32,363
Other (income) loss 288 (170)
Interest expense, net 4,377 4,653
------------- -------------
Income from continuing operations
before provision for income taxes 15,011 27,880
Provision for income taxes 5,558 11,003
------------- -------------
Income from continuing operations 9,453 16,877
Loss from discontinued operations, net
of taxes (28) (630)
------------- -------------
Net income $ 9,425 $ 16,247
============= =============
Basic income per common share:
Income from continuing operations $ 0.21 $ 0.37
Income (loss) from discontinued
operations (0.01) (0.01)
------------- -------------
Net income $ 0.20 $ 0.36
============= =============
Diluted income per common share:
Income from continuing operations $ 0.20 $ 0.36
Income (loss) from discontinued
operations (0.00) (0.01)
------------- -------------
Net income $ 0.20 $ 0.35
============= =============
