Everlast Worldwide Inc. saw first quarter net revenues increase 20% to $10 million from $8.3 million in the same period in 2005. Growth in net revenue resulted from a 33% increase in sporting goods sales to a record $7 million, the second consecutive quarter of more than 30% year-over-year sales growth. Net licensing revenues for the first quarter of 2006 were $3 million, as compared to $3.1 million in the same period a year ago. In the first quarter of fiscal 2006, Everlast's net licensing revenues were impacted by the Company's decision not to renew its previous footwear license that was allowed to expire in December 2005, as well as an increase in licensing commissions resulting from the litigation settlement which requires the company to pay commissions to the former agent of Everlast during 2006.
In the first quarter of 2006, the company's gross margin was 44.5%, compared with 48.1% in the first quarter a year ago. The lower gross profit margin was primarily due to a change in revenue mix. This was driven by higher sporting goods sales, which have a lower gross margin than our revenue stream of licensing. However, the company's sporting goods gross margins did improve 330 basis points over the 2005 comparable period due to lower product costs, improved operational efficiencies and cost reductions in labor and overhead.
The company achieved an 83% increase in operating income to $1.5 million, while earnings from continuing operations and before interest, taxes, depreciation and amortization, adjusted for non-cash stock based compensation and warrant issuance costs, improved 27% to $1.7 million, as compared with $1.3 million reported in the same period a year ago. The increase in operating income and EBITDA was largely a result of increased net revenues and resulting gross margin dollars, along with a reduction in our operating expense ratio of 30% compared with 38.6% in the 2005 comparable period. The operating expense decrease was primarily achieved by lower general and administrative expenses along with a reduction in non-cash equity awards and amortization expense. In the first quarter of 2006, the company was required to adopt SFAS 123, Stock-Based Compensation, which resulted in a non-cash expense of $84,000. In addition, the company changed its accounting for the amortization of intangible assets and is no longer amortizing its trademark by $228,000 per quarter, based on the assessment that the Everlast trademark has an indefinite life.
Reported net income from continuing operations available to common stockholders was $2.5 million, or 69 cents per basic share and 64 cents per diluted share, as compared to a net loss of $(94,000), or 3 cents loss per basic and diluted share, in the 2005 comparable period. The 2006 first quarter results herein include the effects from the $2 million gain on the redemption of our Series A Preferred Stock and prepayment of related notes payable previously disclosed on February 8, 2006, that benefited our results of operations by 57 cents per basic share and 52 cents per diluted share. The 2005 comparable first quarter results include a loss from our discontinued components of $(320,000), or 10 cents per basic share and 9 cents per diluted share. Thus, from an ongoing continuing operations basis, the company earned 12 cents per basic and diluted share in the 2006 period, as compared to 7 cents and 6 cents basic and diluted earnings per share respectively in the 2005 comparable period.
Seth Horowitz, Chairman, President and Chief Executive of Everlast Worldwide Inc., said “Our first quarter operating results and balance sheet reflect the benefit from all of the strategic initiatives we have accomplished over the past eighteen months. I am pleased with the profitability we achieved for our stockholders, both with and without the $2 million gain on the redemption of our Series A Preferred Stock and prepayment of related notes. Our strong operating income and EBITDA were derived from a combination of record sporting goods revenues, improved gross margins on our sporting goods sales, and lower operating expenses. We have achieved these strong first quarter results, which met most of our internal goals and objectives, knowing our licensing revenues would be impacted by our decision to end sales of footwear with Footstar/Meldisco, we now have the opportunity to re-license this category for sales at a higher level of distribution in the months to come. In addition to partnering with the right footwear licensee, we continue to move forward into 2006 and beyond by gaining entry into two of the largest, emerging markets: India and China. While the retail infrastructure is limited in both countries, Everlast is looking for the right licensing partner in each country. Each licensee must be able to create its own retail environment, potentially creating Everlast concept shops, or have tremendous support from the existing retail infrastructure and the capability to build the brand in many product categories. We demand excellence in quality and a company dedicated to the success of Everlast.”
Mr. Horowitz continued, “Our first quarter sporting goods margins are already benefiting from the effects of our cost containment initiatives in the areas of manufacturing, importing and distributing our sporting goods products. Our gross margins will also continue to benefit from the strong top line growth we are experiencing. This quarter marks our second consecutive period of revenue growth greater than 30% year-over-year, a result of expanded distribution with our traditional sporting goods and mass retailers, along with new channels of distribution. One of the new distributors is Bed, Bath and Beyond, which will carry certain products in the Fall of 2006 for a holiday promotion offering. As we continue to monitor our cost structure and look at ways to reduce product costs, logistics and corporate overhead, our internally generated cash flows will continue to reduce our revolving line of credit and term facility debt service, which we have already benefited from in the first quarter of 2006. These benefits, in part, helped to achieve a working capital improvement of more than $4 million from December 2005.”
EVERLAST WORLDWIDE INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
2006 2005
(Unaudited) (Unaudited)
Net sales $ 6,967,000 $ 5,224,000
Net license revenues 3,003,000 3,100,000
Net revenues 9,970,000 8,324,000
Cost of goods sold 5,529,000 4,320,000
Gross profit 4,441,000 4,004,000
Operating expenses:
Selling and shipping 1,566,000 1,205,000
Stock based compensation and costs in
connection with warrant issuance 84,000 182,000
General and administrative 1,337,000 1,596,000
Amortization - 228,000
2,987,000 3,211,000
Income from continuing operations 1,454,000 793,0000
Other income (expense):
Gain on early extinguishment of preferred
stock and prepayment of notes payable, net 2,032,000 -
Interest expense and financing costs (668,000) (552,000)
Investment income 9,000 4,000
1,373,000 (548,000)
Income before provision for income
taxes from continuing operations 2,827,000 245,000
Provision for income taxes 343,000 19,000
Net income from continuing operations $2,484,000 $226,000
Loss from discontinued component, net of tax - ($320,000)
Net income (loss) available to common
stockholders $2,484,000 ($94,000)
Basic earnings per share from continuing
operations $0.69 $0.07
Diluted earnings per share from continuing
operations $0.64 $0.06
Basic loss per share from discontinued component - ($0.10)
Diluted loss per share from discontinued component - ($0.09)
Net basic earnings (loss) per share $0.69 ($0.03)
Net diluted earnings (loss) per share $0.64 ($0.03)
