Kellwood Company net sales for the second quarter totaled $474.5 million, as compared to $488.2 million last year. Net earnings from continuing operations for the second quarter were $7.5 million, or 29 cents per diluted share, versus a net loss of $6.9 million, or 25 cents per diluted share, last year. Included in net earnings from continuing operations for the current quarter were restructuring and related non-recurring costs of $1.6 million (after tax), or $0.06 per diluted share associated with the Company’s previously announced strategic restructuring initiatives.

Total net earnings for the second quarter were $7.2 million, or $0.28 per diluted share, versus a net loss of $78.9 million, or $2.84 per diluted share, last year. Included in total net earnings for the second quarter was a net loss from discontinued operations of $0.3 million, or $0.01 per diluted share, versus a net loss of $72.0 million, or $2.59 per diluted share, last year.

For the second quarter, on an ongoing basis (continuing operations excluding the restructuring and related non-recurring charges), net sales were $474.5 as compared to $488.2 million last year. Net earnings were $9.1 million, or $0.35 per diluted share, compared to $6.0 million, or $0.22 per share last year and exceeded our earlier guidance of $8.0 million, or $0.30 per share. Included in the net earnings for the current quarter was $0.5 million before tax, $0.3 million after tax, or $0.01 per diluted share, of stock option expense related to the adoption of FAS 123R “Share-Based Payment,” a new accounting pronouncement requiring the expensing of stock- based compensation.

Net earnings and earnings per share on an ongoing basis exceeded last year in spite of lower sales, due to an increase in gross profit as a percent of sales, tighter expense control, and higher interest income. By segment, on an ongoing basis, women’s sportswear sales were down 4% and men’s and other soft goods were flat with last year. The decrease in sales of women’s sportswear was due principally to cutbacks in Spring/Summer open-to-buy for some of the Company’s legacy brands. The Company has identified and is implementing initiatives to revitalize these brands with these efforts expected to result in better profitability during the second half of the fiscal year.

Second quarter gross profit as a percentage of sales exceeded last year due to a reduction in the need to liquidate surplus inventory. Interest income exceeded last year due to higher short term interest rates and a $110.8 million increase in cash resulting from the successful execution of Kellwood’s restructuring plan and the continued improvement in the management of working capital.

Mr. Skinner stated, “Our second quarter results were in line with our earlier guidance for sales and operating earnings. We achieved better performance compared to last year from several of our brands including Calvin Klein Women’s Better Sportswear, Koret®, Baby Phat® by Kimora Lee Simmons, and Gerber®. We continue to believe that the new team and business processes we put in place last Fall will result in improved product performance at retail this Fall and beyond. As we begin the Fall 06 retail season, we are pleased that our inventory levels at retail and at wholesale look to be at reasonable levels.”

Net sales for the first six months totaled $991.3 million, as compared to $1,041.7 million last year. Net earnings from continuing operations for the first six months were $9.7 million, or $0.38 per diluted share, versus $8.2 million, or $0.29 per diluted share, last year. Included in net earnings from continuing operations for the current six-month period were restructuring and related non-recurring costs of $4.4 million (after tax), or $0.17 per diluted share associated with the Company’s previously announced strategic restructuring initiatives.

Total net earnings for the first six months were $16.4 million, or $0.63 per diluted share, versus a net loss of $67.1 million, or $2.40 per diluted share, last year. Included in total net earnings for the first six months were net earnings from discontinued operations of $6.6 million, or $0.26 per diluted share, versus a net loss of $75.3 million, or $2.69 per diluted share, last year. Results of discontinued operations in the first six months include a $6.3 million reversal of an allowance for tax exposures no longer deemed necessary.

For the first six months, on an ongoing basis, (continuing operations excluding the restructuring and related non-recurring charges), net sales were $991.3 as compared to $1,041.8 million last year. Net earnings were $14.2 million, or $0.55 per diluted share, compared to $21.1 million, or $0.76 per share last year. Included in the net earnings for the current six-month period is $3.4 million before tax, $2.1 million after tax, or $0.08 per diluted share, of stock option expense related to the adoption of FAS 123R “Share Based Payment.”

Net earnings and earnings per share on an ongoing basis for the first six months were below last year due to lower sales and a 70 basis point drop in gross profit as a percent of sales. The Company was effective in controlling SG&A expenses which were reduced from the prior year. In addition, interest income rose as compared to the first six months. Sales for the current six- month period were lower, as anticipated, due to consolidations at retail and a decrease in orders for certain legacy brands. Gross margins for the current six-month period were below last year due to actions taken earlier this year to move seasonal inventory and enhance the quality and fashion level of our products. The Company was successful in reducing the cost of liquidating surplus inventory.

Kellwood ended the quarter with considerable liquidity and a strong financial position. Inventory totaled $240 million, or 55 days supply, a reduction of $16 million from $256 million, or 54 days supply at the end of the second quarter of fiscal year 2005. Total debt increased $42 million to $512 million versus $470 million last year due to borrowings by our Asian operations.

Guidance

Mr. Skinner stated, “As we begin the second half of the year, we remain confident with the execution of our plans for improved performance of the Calvin Klein Women’s Better Sportswear, Sag Harbor®, and O Oscar brands, which will continue into 2007 and beyond. We are very pleased with the response from the retailers to the new Calvin Klein line and our order position for Fall delivery. Retailers are very supportive of the actions that we have taken in Sag Harbor to modernize our product and aggressively market the brand via our new Christie Brinkley association. However, there is a desire on their part to see Fall sell through at retail of Sag Harbor before committing significant increases in their open-to-buy. As a result, while maintaining our earnings per share guidance of $1.75 which includes higher operating profit margins and levels of interest income, our operating earnings are now expected to be below our earlier guidance due to lower sales.”

Third Quarter

For the third quarter of fiscal 2006, the Company expects net sales of approximately $520 million, as compared to actual sales from ongoing operations of $549 million in the third quarter of last year. Sales of women’s sportswear are expected to be lower than last year while sales of men’s sportswear and other soft goods are anticipated to be higher.

Operating earnings (gross profit less selling, general & administrative expense before amortization of intangible assets and expensing stock options) from ongoing operations in the third quarter are forecasted to be in the range of $33 million, or flat with last year. Net earnings from ongoing operations in the third quarter of fiscal 2006 are estimated to be approximately $18.0 million, or $0.69 per diluted share, inclusive of $0.5 million before tax, $0.3 million after tax, or $0.01 per diluted share of stock option expense. This compares to net earnings from ongoing operations of $17.1 million, or $0.64 per share, in the third quarter of 2005.

Total Year

For the fiscal 2006 year, the Company expects net sales to be in the range of $1.970 billion. This compares to actual sales from ongoing operations of $2.065 billion in fiscal 2005.

On an ongoing basis, net earnings for fiscal 2006 continue to be estimated in the range of $45 million, consistent with fiscal 2005 net earnings from ongoing operations of $45.6 million. Also on an ongoing basis, fiscal 2006 diluted earnings per share continue to be estimated at approximately $1.75 per diluted share, which compares to actual earnings per diluted share of $1.68 in fiscal 2005. The Company is forecasting operating earnings (gross profit less selling, general & administrative expense before amortization of intangible assets and expensing stock options) from ongoing operations in the range of $95.0 million versus $99.7 million last year. The Company expects to achieve higher levels of interest income due to increased cash balances and higher short-term investment rates than originally anticipated. The Company’s fiscal 2006 forecast includes $4.3 million before tax, $2.8 million after tax, or $0.11 per diluted share of stock option expense related to the adoption of FAS 123R “Share-Based Payment.”

    KELLWOOD COMPANY AND SUBSIDIARIES
    CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
    (Amounts in thousands, except per share data)


                               Three Months Ended         Six Months Ended
                             7/30/2005    7/29/2006    7/30/2005    7/29/2006
    Net sales by segment:
      Women's Sportswear      $285,786     $273,991     $623,289     $578,419
      Men's Sportswear         119,069      116,859      248,054      250,225
      Other Soft Goods          83,341       83,641      170,400      162,700
      Total net sales          488,196      474,491    1,041,743      991,344

    Costs and expenses:
      Cost of products sold    388,764      374,930      818,978      786,504
      Selling, general and
       administrative expenses  82,247       79,179      174,118      168,394
      Stock option expense           -          468            -        3,409
      Amortization of
       intangible assets         2,789        2,582        5,570        5,064
      Impairment, restructuring
       and related non-recurring
       charges                  37,027        2,510       37,027        6,916
      Interest expense, net      5,911        3,774       12,545        7,865
      Other (income) and
       expense, net               (332)        (175)        (508)      (1,342)
    (Loss) earnings before
     income taxes              (28,210)      11,223       (5,987)      14,534

    Income taxes               (21,290)       3,741      (14,178)       4,819

    Net (loss) earnings from
     continuing operations      (6,920)       7,482        8,191        9,715

    Net (loss) earnings from
     discontinued operations   (72,013)        (316)     (75,305)       6,644

    Net (loss) earnings       $(78,933)      $7,166     $(67,114)     $16,359

    Weighted average shares
     outstanding:

      Basic                     27,812       25,700       27,785       25,661

      Diluted                   27,812       25,842       27,943       25,814

    (Loss) earnings per share:
      Basic:
        Continuing operations   $(0.25)       $0.29        $0.29        $0.38
        Discontinued operations  (2.59)       (0.01)       (2.71)        0.26

        Net (loss) earnings     $(2.84)       $0.28        (2.42)        0.64

      Diluted:
        Continuing operations   $(0.25)       $0.29        $0.29        $0.38
        Discontinued operations  (2.59)       (0.01)       (2.69)        0.26

        Net (loss) earnings     $(2.84)       $0.28       $(2.40)       $0.63