The Warnaco Group, Inc. posted net revenues of $466.3 million, up from $439.5 million in the first quarter of fiscal 2005. Gross margin was 37.4% of net revenues, compared to 35.7% in the first quarter of fiscal 2005.
Net income totaled $16.1 million, or 34 cents per diluted share, versus $29.4 million, or 63 cents per diluted share in the first quarter of fiscal 2005.
The results include approximately two months of operations of the Calvin Klein Jeans and related businesses in Europe and Asia, which were acquired on January 31, 2006. For the two month period, net revenues from the CKJEA Business were $60.4 million and operating income was $6.1 million.
“The strong performance of our Intimate Apparel Group and international businesses, including our newly acquired International Calvin Klein businesses, was overshadowed by a disappointing first quarter for our Swimwear Group, where disruptions caused by the implementation of a new systems infrastructure negatively affected shipping in the quarter, resulting in sales declines year over year and additional expense. The quarter was also negatively impacted by the effects of retail consolidation and a significant timing shift in certain sportswear sales from the first half of this year into the latter half of this year,” said Joe Gromek, Warnaco's President and Chief Executive Officer.
The company believes that revenue and operating income for the Swimwear Group fell short of targeted amounts by approximately $30.0 million and $10.0 million, respectively, during the quarter, primarily due to difficulties with the implementation of a new systems infrastructure and its effect on shipping, re-orders and order cancellations. The company has addressed many of the critical issues related to the new systems infrastructure and is working to complete the implementation at the Swimwear Group.
The Swimwear Group's gross profit margin was negatively affected by costs associated with the implementation of a new systems infrastructure, continued investments in Ocean Pacific and increased provisions for excess inventories.
Operating income for the first quarter of fiscal 2006 was $34.6 million, or 7.4% of net revenues, including $6.1 million of operating income from the CKJEA Business, compared to $52.9 million, or 12.0% of net revenues, in the prior year period. Increased sales and higher gross margins primarily driven by the recently acquired CKJEA Business and the Intimate Apparel Group's Core Brands were offset by the net effects of the challenges in the Swimwear Group, ongoing investment in Ocean Pacific and the timing of certain shipments in the Sportswear Group. Operating income for the first quarter of fiscal 2006 was also negatively affected by approximately $0.5 million related to the translation of foreign currencies, primarily as a result of a stronger dollar relative to the first quarter of fiscal 2005.
Net income was $16.1 million, or 34 cents per diluted share, compared to $29.4 million, or 63 cents per diluted share, for the first quarter of fiscal 2005. The decline is the result of the combined shortfall in pre-acquisition business revenues and gross profit coupled with the higher SG&A expense described above.
Fiscal 2006 Outlook
“While we are dissatisfied with our first quarter performance, the integration of the CKJEA Business is proceeding on plan, with those acquired businesses positively contributing to our first quarter operating results,” commented Larry Rutkowski, Warnaco's Chief Financial Officer. “Currently we expect second quarter 2006 operating results for our pre-acquisition businesses to be similar to those of last year. However, consolidated operating income is expected to decline significantly due to the effect of the CKJEA Business, which, on a stand alone unaudited basis, posted operating losses in excess of $6.0 million in the second quarter of 2005 due to its seasonal sales cycle. We also expect to incur incremental amortization and interest expense related to the acquisition.”
Mr. Rutkowski continued, “For the year, due to the effect of the system conversion on the Swimwear Group's financial performance, we now expect our pre-acquisition business revenue growth to be in the low single digits. In addition, for our pre-acquisition businesses, we continue to expect at least a 100 basis point improvement in gross margin percentage and we now expect mid single digit percentage improvement in the operating margin percentage over the prior year (assuming minimal pension expense in fiscal 2006), based on the declines in revenues and higher SG&A expenses. We have also identified several strategies to control future costs and intend to take specific actions to reduce our ongoing SG&A expenses.”
Mr. Rutkowski concluded, “Overall, for the company (including the acquired CKJEA Business), we now expect (i) revenue growth in 2006 to be at least in the low 20 percent range; (ii) mid single digit percentage improvement in the operating margin percentage over the prior year (assuming minimal pension expense in fiscal 2006); and (iii) that the acquisition of the CKJEA Business will be accretive to Warnaco's 2006 earnings per share.”
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)
For the For the
First First
Quarter Quarter
of Fiscal of Fiscal
2006 2005
----------- -----------
(Unaudited) (Unaudited)
Net revenues (a) $466,311 $439,541
Cost of goods sold 292,028 282,533
----------- -----------
Gross profit (b) 174,283 157,008
Selling, general and administrative
expenses (c)(d) 136,290 102,837
Amortization of intangible assets (e) 3,429 977
Pension expense (income) (d) (28) 271
Restructuring expense - 6
----------- -----------
Operating income (f) 34,592 52,917
Other loss (income) 2,096 (91)
Interest expense, net (g) 7,688 5,034
----------- -----------
Income from continuing operations before
provision for income taxes 24,808 47,974
Provision for income taxes 8,707 18,748
----------- -----------
Income from continuing operations 16,101 29,226
Income from discontinued operations, net of
taxes - 125
----------- -----------
Net income $16,101 $29,351
=========== ===========
Basic income per common share:
Income from continuing operations $0.35 $0.64
Income from discontinued operations - -
----------- -----------
Net income $0.35 $0.64
=========== ===========
Diluted income per common share:
Income from continuing operations $0.34 $0.63
Income from discontinued operations - -
----------- -----------
Net income $0.34 $0.63
=========== ===========
Weighted average number of shares outstanding used in
computing income per common share:
Basic 46,147,169 45,684,570
=========== ===========
Diluted 46,734,984 46,422,928
=========== ===========
(a)For the First Quarter of Fiscal 2006, includes net revenues of
$60,445 related to the CKJEA Business.
(b)For the First Quarter of Fiscal 2006, includes gross profit of
$33,889 related to the CKJEA Business.
(c)For the First Quarter of Fiscal 2006, includes selling, general
and administrative expenses of $25,831 related to the CKJEA
Business.
(d)Pension expense of $71 has been reclassified from selling,
general and administrative expenses to pension expense
(income) in the First Quarter of Fiscal 2005 to conform to the
current period presentation.
(e)For the First Quarter of Fiscal 2006, includes amortization of
intangible assets of $1,997 related to the CKJEA Business.
(f)For the First Quarter of Fiscal 2006, includes operating income
of $6,061 related to the CKJEA Business.
(g)For the First Quarter of Fiscal 2006, includes interest expense
of $2,708 related to the CKJEA Business.
THE WARNACO GROUP, INC.
NET REVENUES AND OPERATING INCOME BY BUSINESS UNIT
(Dollars in thousands)
(Unaudited)
For the
First
Quarter For the
of First
Net revenues: Fiscal Quarter of Increase/ %
2006 Fiscal 2005 (Decrease) Change
--------- ------------ ------------ ---------
Sportswear Group $169,872 (a) $130,363 $39,509 30.3%
Intimate Apparel
Group 153,703 151,775 1,928 1.3%
Swimwear Group 142,736 157,403 (14,667) -9.3%
--------- ------------ ------------ ---------
Net revenues $466,311 $439,541 $26,770 6.1%
========= ============ ============ =========
For the
First % of
Quarter For the Total
of First Net
Fiscal % of Total Quarter of Revenues
2006 Net Revenues Fiscal 2005(d) (d)
--------- ------------ ------------ ---------
Operating income:
Sportswear Group $9,503 (b) $14,617
Intimate Apparel
Group 15,613 (c) 12,099(c)
Swimwear Group 16,041 34,132
--------- ------------
Group operating
income 41,157 8.8% 60,848 13.8%
Unallocated
corporate expenses (6,565) -1.4% (7,925) -1.8%
Restructuring
expenses - 0.0% (6) 0.0%
--------- ------------ ------------ ---------
Operating income $34,592 7.4% $52,917 12.0%
========= ============ ============ =========
