The Warnaco Group, Inc. reported fourth quarter net revenues rose 6% to $473.0 million from $447.6 million in the prior year period. Gross margin increased 60 basis points to 39% of net revenues, and selling, general and administrative expenses (“SG&A”) as a percentage of net revenues rose to 35% from 30% in the prior year quarter. SG&A includes approximately $3.4 million and $1.9 million of expense related to restructuring and certain businesses to be discontinued in fiscal 2008, respectively. Operating income was $26.1 million compared to $40.1 million in the prior year quarter.
On an adjusted basis, as detailed in the accompanying tables, net revenues rose 7% to $467.1 million from $437.2 million in the prior year period and gross margin increased 300 basis points to 42% of net revenues compared to the prior year quarter. SG&A, as a percentage of net revenues, rose to 34% from 30% in the prior year quarter, driven by the mix in business (favoring international and direct to consumer) as well as an incremental $4.8 million in marketing expense. Operating income decreased to $34.0 million from $37.4 million in the fourth quarter of fiscal 2006.
Income from continuing operations was $22.2 million, or 48 cents per diluted share, compared to $26.4 million, or 57 cents per diluted share, in the prior year period and includes pre-tax expense related to restructuring and pre-tax losses related to certain businesses to be discontinued in 2008 of $14.7 million and $1.0 million, respectively. Net income was 49 cents per diluted share compared to 41 cents per diluted share in the fourth quarter of fiscal 2006.
On an adjusted basis, income from continuing operations was $19.8 million, or 43 cents per diluted share, compared to $21.6 million, or 47 cents per diluted share, in the prior year quarter. Net income, which includes the effects of discontinued operations, was 42 cents per diluted share compared to 32 cents per diluted share in the prior year quarter.
The provision for income taxes was a credit of $3.8 million, primarily related to the calculation of the companys annualized tax rate and a benefit due to the release of valuation allowances related to the companys ability to recognize the benefit of certain deferred tax assets. On an adjusted basis, as detailed in the accompanying tables, the provision for income taxes was $6.6 million, or an effective tax rate of 25%, compared to $6.6 million, or an effective tax rate of 23%, for the prior year quarter. The company expects that its effective tax rate for 2008 will be in the range of 25%-27%.
The translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar, increased fourth quarter 2007 net revenues and operating income by approximately $19.8 million and $3.1 million, respectively, compared to the fourth quarter of fiscal 2006.
Sportswear Group revenues increased 10% to $245.7 million from $223.3 million in the prior year quarter, driven by significant revenue growth in the Companys global Calvin Klein jeans business offset by modest declines in Chaps revenues. Operating income was $16.6 million, or 7% of Sportswear Group net revenues, compared to $18.2 million, or 8% of Sportswear Group revenues, in the prior year quarter. Increased selling cost related to the retail expansion of Calvin Klein jeans, $4.5 million of incremental marketing expense and a timing shift in the sales of certain higher margin sportswear businesses adversely affected quarterly results.
Swimwear
Swimwear Group revenues decreased 29.8% tro $49.7 million compared to $70.8 million in the prior year quarter, due largely to lower than anticipated membership club sales. The Swimwear Groups operating loss was $17.9 million compared to operating income of $7.4 million in the prior year quarter. Operating results include approximately $14.0 million of restructuring expense associated with the Companys previously announced exit from its designer swim businesses (excluding Calvin Klein) and $6.0 million of one-time items directly related to the companys exit from owned manufacturing.
Joe Gromek, Warnacos President and Chief Executive Officer, commented, “We delivered strong results throughout fiscal 2007. Not only did we achieve significant revenue and earnings per share growth during the year, we also strategically positioned the Company to maximize our global growth opportunities in 2008 and beyond. In particular, we believe that our efforts to rationalize our portfolio will allow us to focus resources on our higher margin businesses, and capitalize on expansion opportunities on a global basis. We believe this is most apparent in our Calvin Klein businesses, where we have added categories and channels (including new direct to consumer initiatives) to our existing portfolio to support our continued growth.”
Mr. Gromek concluded, “We are off to a good start in 2008, and while no one is immune to macroeconomic trends, we believe our global business model and channel diversity will continue to differentiate us from our industry peers and will enable us to drive profitable growth and advance shareholder value in the near and long term.”
Fiscal 2007 Highlights
Net revenues rose 12% to $1.9 billion from $1.7 billion in the prior year. Gross margin increased 190 basis points to 40% of net revenues. SG&A, as a percentage of net revenues, rose to 33% from 31% in the prior year. SG&A includes $11.1 million and $8.2 million, respectively, of expense related to restructuring and certain businesses to be discontinued in fiscal 2008. Operating income increased to $137.0 million, or 7% of net revenues, from $119.0 million, or 7% of net revenues, in the prior year.
On an adjusted basis, as detailed in the accompanying tables, net revenues rose 13% to $1.8 billion from $1.6 billion in the prior year and gross margin increased 330 basis points to 42% of net revenues compared to the prior year. SG&A expenses, as a percentage of net revenues, rose to 32% from 31% in the prior year, driven by the mix in business (favoring international and direct to consumer), as well as an incremental $9.8 million in marketing expense. Operating income increased to $167.4 million, or 9% of net revenues, from $117.5 million, or 7% of net revenues, in fiscal 2006.
Income from continuing operations was $82.9 million, or $1.78 per diluted share, compared to $66.2 million, or $1.41 per diluted share, in the prior year and includes pre-tax expense related to restructuring and pre-tax losses related to certain businesses to be discontinued in 2008 of $32.6 million and $6.7 million, respectively. Net income was $1.70 per diluted share compared to $1.08 in fiscal 2006.
On an adjusted basis, as detailed in the accompanying tables, income from continuing operations was $105.5 million, or $2.26 per diluted share, compared to $65.1 million, or $1.39 per diluted share, in the prior year and net income was $2.04 per diluted share compared to $1.05 per diluted share in fiscal 2006.
The translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar, increased fiscal 2007 net revenues and operating income by approximately $52.4 million and $8.6 million, respectively, compared to fiscal 2006.
Balance Sheet
Cash and cash equivalents at December 29, 2007 were $191.9 million compared to $167.0 million at December 30, 2006. During the fourth quarter the company used approximately $25.0 million to repurchase approximately 634,000 shares of its common stock under its share repurchase plans and used approximately $20.0 million to reduce debt. For the year, the company repurchased 1.5 million shares of its common stock at an aggregate cost of approximately $55.0 million and used approximately $79.0 million to reduce debt.
Inventories were $332.7 million at December 29, 2007, an 18% decline, compared to $407.6 million at December 30, 2006, primarily as a result of discontinued operations. On a comparable basis, excluding inventories related to discontinued businesses and businesses to be discontinued in 2008, inventories were down 1% while adjusted 2007 revenues rose 13%.
Fiscal 2008 Outlook
For fiscal 2008, on an adjusted basis (excluding restructuring expenses), the company expects net revenues to grow 7% to 9% over comparable fiscal 2007 levels and expects diluted earnings per share from continuing operations in the range of $2.50 to $2.60 (assuming minimal pension expense).
The accompanying tables provide a reconciliation of expected revenue growth and expected diluted earnings per share from continuing operations, on a GAAP basis (7% to 9% and $2.18 to $2.25 per diluted share (assuming minimal pension expense), respectively), to the adjusted fiscal 2008 outlook above.
| CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS | |||||||||||||||||
| (Dollars in thousands, excluding per share amounts) | |||||||||||||||||
| (Unaudited) | |||||||||||||||||
As Reported | Restructuring Charges and | As Adjusted | |||||||||||||||
| Discontinued Operations (b) | Taxation (d) | ||||||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Net revenues | $ | 472,955 | $ | (5,842 | ) | $ | – | $ | – | $ | 467,113 | ||||||
| Cost of goods sold | 286,561 | (4,933 | ) | (11,328 | ) | 270,300 | |||||||||||
| Gross profit | 186,394 | (909 | ) | 11,328 | – | 196,813 | |||||||||||
| Selling, general and administrative expenses | 164,989 | (1,872 | ) | (3,401 | ) | 159,716 | |||||||||||
| Amortization of intangible assets | 3,120 | 3,120 | |||||||||||||||
| Pension income | (7,800 | ) | 7,800 | – | |||||||||||||
| Operating income | 26,085 | 963 | 6,929 | – | 33,977 | ||||||||||||
| Other expense | (600 | ) | (600 | ) | |||||||||||||
| Interest expense | 9,735 | 9,735 | |||||||||||||||
| Interest income | (1,473 | ) | (1,473 | ) | |||||||||||||
Income from continuing operations before provision for income taxes | 18,423 | 963 | 6,929 | – | 26,315 | ||||||||||||
| Provision for income taxes | (3,805 | ) | – | 10,357 | 6,552 | ||||||||||||
| Income from continuing operations | 22,228 | 963 | 6,929 | (10,357 | ) | 19,763 | |||||||||||
| Loss from discontinued operations, net of taxes | 714 | (a) | (963 | ) | (249 | ) | |||||||||||
| Net income | $ | ||||||||||||||||
