The Warnaco Group, Inc. third quarter net revenues increased 38.5% to $452.0 million for the third quarter of fiscal 2006, compared to $326.3 million for the third quarter of fiscal 2005.
Continued strength in the Intimate Apparel Group and an improvement in the Swimwear Group's revenues more than offset declines in revenues from the Sportswear Group's pre-acquisition businesses, and contributed to a 6.0% revenue increase for the Company's pre-acquisition businesses. The translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar, increased third quarter 2006 net revenues by approximately $4.9 million compared to the third quarter of fiscal 2005.
Gross profit rose to $177.8 million, or 39.3% of net revenues, for the third quarter of fiscal 2006, including $55.5 million in gross profit from the CKJEA Business, compared to $112.3 million, or 34.4% of net revenues, for the third quarter of fiscal 2005. The majority of the 490 basis point improvement in gross profit margin is attributed to the contributions from the CKJEA Business. Gross profit margin for the pre-acquisition businesses improved 100 basis points, driven by continued improvement in the Intimate Apparel Group's gross profit margins and increases in the Swimwear Group's gross profit margins. The translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar, increased third quarter 2006 gross profit by approximately $2.4 million compared to the third quarter of fiscal 2005.
Selling, general and administrative (“SG&A”) expenses were $141.0 million, or 31.2% of net revenues, compared to $95.0 million, or 29.1% of net revenues, in the prior year quarter.
Amortization of intangible assets increased to $2.7 million, compared to $1.2 million in the prior year period, primarily due to $1.5 million of amortization expense related to finite-lived intangible assets associated with the acquisition of the CKJEA Business.
Operating income for the third quarter of fiscal 2006 was $34.0 million compared to $17.0 million in the prior year period. An increase in the Sportswear Group operating income, driven largely by the CKJEA Business, and the continued momentum of Calvin Klein® Underwear more than offset seasonal losses in the Swimwear Group and approximately $2.8 million of expenses related to the businesses to be discontinued. The translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar, increased third quarter 2006 operating income by approximately $0.9 million compared to the third quarter of fiscal 2005.
Other income was $4.4 million, compared to $0.1 million in the prior year quarter related primarily to realized and unrealized foreign exchange rate gains related to inter company loans denominated in foreign currencies.
Net interest expense increased to $9.3 million compared to $4.1 million in the prior year period. The $5.2 million increase is primarily the result of incremental indebtedness incurred in connection with the acquisition of the CKJEA Business.
Loss from discontinued operations, net of taxes, was $0.17 per diluted share. This includes certain costs related to the sale of certain assets of the Ocean Pacific business.
Net income was $14.6 million, or 31 cents per diluted share, compared to $6.9 million, or 15 cents per diluted share, for the third quarter of fiscal 2005, which reflects contributions from the Sportswear Group (driven largely by the CKJEA Business), the ongoing success in the Intimate Apparel Group and a lower tax rate for the quarter.
The Company noted the following balance sheet highlights as of September 30, 2006:
Cash and cash equivalents were $113.4 million, compared to $152.0 million of cash and cash equivalents at October 1, 2005, notwithstanding the approximately $70.8 million of cash (net of acquired cash) used in connection with the acquisition of the CKJEA Business on January 31, 2006.
In addition, during the quarter the Company used approximately $11.0 million of cash to repurchase 525,000 shares of common stock under the Company's previously announced share repurchase program, at an average price of $20.85. Approximately 1.8 million shares remain authorized for repurchase under the share repurchase program, subject to certain limitations on repurchases under applicable debt instruments. The share repurchase program may be modified or terminated by the Company's Board of Directors at any time.
Accounts receivable were $310.0 million, up from $212.3 million at October 1, 2005. Accounts receivable related to the CKJEA Business were $86.4 million. Excluding the CKJEA Business, receivables were up 5.3% in the quarter in line with top line growth.
Net inventories were $366.5 million, up from $311.5 million at October 1, 2005. Inventories at September 30, 2006 include $49.9 million of inventory of the CKJEA Business. Excluding the CKJEA Business, inventories were up 1.7%.
As reported on October 31, 2006, the Company entered into an agreement to sell certain assets of its Ocean Pacific business for $54.0 million. The results for Ocean Pacific, excluding the operations of the Ocean Pacific women's and juniors swimwear business (which the Company will operate under a new three year license agreement), are categorized as “assets held for sale” and appear in discontinued operations.
In addition, the Company expects to discontinue over the next several months its Lejaby Rose®, JLO® by Jennifer Lopez Lingerie and Axcelerate® Activewear businesses. Although the results of these businesses are currently included in continuing operations, when the operations of each of these businesses has ceased, the results will be reflected in discontinued operations.
Collectively, for the nine months ended September 30, 2006, Ocean Pacific and the other businesses that the Company expects to discontinue over the next several months accounted for revenues of approximately $19.4 million and produced an operating loss of $17.0 million. Included in these results are $5.8 million of charges, taken in the third quarter, associated with discontinuance of these businesses.
Larry Rutkowski, Warnaco's Chief Financial Officer commented, “For the year, for the Company's continuing operations, we expect our pre-acquisition business revenue growth to be in the low single digits. In addition, for our pre-acquisition businesses, we expect at least a 100 basis point improvement in gross margin percentage and mid single digit percentage improvement in the operating margin percentage over the prior year (assuming minimal pension expense in fiscal 2006).”
“Overall, for the Company's continuing operations (including the acquired CKJEA Business), we expect for 2006 (i) revenue growth to be 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); and (iii) that the acquisition of the CKJEA Business will be accretive to Warnaco's earnings per share.”
Mr. Rutkowski concluded, “The elimination of investment expense associated with the Ocean Pacific brand and the planned discontinuation of certain underperforming businesses are expected to favorably affect our profitability going forward. These decisions will allow us to redeploy resources to those brands that best suit our key growth strategies.”
Schedule 1
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)
Third Quarter Third Quarter
of Fiscal 2006 of Fiscal 2005
-------------- --------------
(Unaudited) (Unaudited)
Net revenues (a) $ 452,025 $ 326,276
Cost of goods sold 274,272 214,024
-------------- --------------
Gross profit (b) 177,753 112,252
Selling, general and administrative
expenses (c) 141,003 95,045
Amortization of intangible assets (d) 2,695 1,222
Pension expense 5 200
Restructuring expense (income) 100 (1,251)
-------------- --------------
Operating income (e) 33,950 17,036
Other income (4,434) (60)
Interest expense, net (f) 9,261 4,145
-------------- --------------
Income from continuing operations
before
provision for income taxes 29,123 12,951
Provision for income taxes 6,632 3,895
-------------- --------------
Income from continuing operations 22,491 9,056
Loss from discontinued operations, net
of taxes (g) (7,930) (2,108)
-------------- --------------
Net income $ 14,561 $ 6,948
============== ==============
Basic income per common share:
Income from continuing operations $ 0.49 $ 0.20
Loss from discontinued operations (0.17) (0.05)
-------------- --------------
Net income $ 0.32 $ 0.15
============== ==============
Diluted income per common share:
Income from continuing operations $ 0.48 $ 0.19
Loss from discontinued operations (0.17) (0.04)
-------------- --------------
Net income $ 0.31 $ 0.15
============== ==============
Weighted average number of shares
outstanding used in computing income
per common share:
Basic 45,623,044 45,913,635
============== ==============
Diluted 46,465,593 46,835,235
============== ==============
