Kellwood Company reported sales for the fourth quarter increased 14 percent to $537 million, versus $470 million last year due to a combination of 6 percent organic growth and the acquisition of Gerber Childrenswear on June 25, 2002.
Net earnings for the quarter were strong at $8.4 million, or $0.33 per share, versus a net loss of $(3.1) million, or $(0.14) per share last year on a diluted basis. Included in net earnings for the current quarter are costs of $2.0 million before tax ($1.3 million after tax, or $0.05 per share) for business and facilities realignments, which were previously announced. Excluding these costs, net earnings were $9.7 million, or $0.38 per share, significantly exceeding expectations. Management believes that it is appropriate to exclude these costs when analyzing the year-to-year change in earnings for the fourth quarter and total year, which is discussed later. The realignment costs incurred in fiscal year 2002 are one time in nature and thus mask the true year-to-year comparative results of the Company.
Sales, excluding acquisitions, increased 6 percent, versus prior year with organic growth coming from Men’s Sportswear and Intimate Apparel. Sales of Women’s Sportswear were essentially flat with last year at $295 million in a market that was down 12 percent from prior year during the most recent three- month period. Men’s Sportswear sales in the fourth quarter increased $40 million to $121 million. The acquisition of Gerber Hosiery provided $13 million of the year-to-year increase in sales. Organic sales growth of $27 million, or 33 percent was across a broad range of new brands and private label programs. Sales of Other Soft Goods increased by $31 million to $122 million due to the acquisition of Gerber Children’s Apparel. Sales of Intimate Apparel increased 8 percent due to new and growing private label programs and new brands, while sales of Recreation Products fell 11 percent below last year due to a very weak specialty store market.
Fourth quarter net earnings, before facilities realignment costs, exceeded last year by $12.9 million, or $0.52 per share. This increase is the result of a 3.5 percentage point improvement in the Company’s gross margin due to improved sourcing, lower markdown expense and the acquisition of Gerber Childrenswear, partially offset by spending on new marketing programs.
Sales for the year were $2.2 billion, down $77 million, or 3 percent from $2.3 billion reported last year. Excluding the acquisition of Gerber Childrenswear on June 25, 2002, sales for the year were down $192 million, or 8 percent, but ahead of plan.
Sales of Women’s Sportswear decreased $198 million, or 13 percent in a market that was down 8 percent for the year. The dress market was exceptionally weak in 2002 with most retailers cutting their open-to-buy for the category by 25 percent. Approximately 24 percent of Kellwood’s Women’s Sportswear business is dresses; one half of the year-to-year drop in Kellwood’s Women’s Sportswear sales was in the dress category. Sales of Men’s Sportswear were exceptionally strong in a difficult market growing $82 million, or 24 percent to $430 million. The acquisition of Gerber Hosiery contributed $35 million of sales growth, with organic growth of $47 million, or 14 percent. Sales of Other Soft Goods increased by $39 million, or 9 percent, due to the acquisition of Gerber Children’s Apparel which provided $80 million of revenue. Sales of Intimate Apparel were down $19 million, or 9 percent, but ahead of plan, and sales of Recreation Products were down $22 million, or 11 percent, from last year in line with plan for the year.
Net earnings for the year were $42.0 million, or $1.69 per share, on a diluted basis versus $37.7 million, or $1.65 per share last year. Included in net earnings for the current fiscal year is a provision for business and facilities realignment of $15.0 million before tax ($9.7 million after tax, or $0.39 per share) which was announced in the first quarter. Excluding these costs, in spite of lower sales, net earnings for the year increased $14.0 million, or 37 percent to $51.7 million, or $2.08 per diluted share. This strong performance resulted from higher gross margins, lower interest expense, the acquisition of Gerber Childrenswear and a change in accounting for goodwill.
The Company ended the quarter with a very strong balance sheet. As a result of aggressive working capital management, total cash and time deposits at the end of January were $212 million, versus $69 million as of January 31, 2002. Total debt of $306 million was down $28 million from January 2002 and represented 35 percent of total capital.
On February 4, 2003 Kellwood acquired Briggs for a total purchase price of $140 million ($128 million of cash and $12 million of stock). The cash component of the purchase price was paid out of surplus cash.
During the first quarter of fiscal year 2002, Kellwood completed its analysis of its sourcing and distribution infrastructure to better align the Company with the new business environment. The cost of this realignment was first announced and discussed on March 7, 2002 and was estimated to be in the range of $15 million before tax, and $9.7 million after tax, or $0.39 per share. The need for this realignment stemmed from the significant changes in the global market for piece goods and apparel production. At the same time, the downturn in retail and consumer demand for apparel resulted in some excess capacity in Kellwood’s warehousing and distribution network. Of the $15 million total cost, $13.0 million pretax was booked in the first nine months ($8.4 million after tax, or $0.34 per share) which included $2.6 million charged to cost of sales and $10.4 million recorded as Provision for Realignment. In the fourth quarter, $2.0 million pre-tax was booked ($1.3 million after-tax, or $0.05 per share) which included $0.3 million charged to cost of sales and $1.7 million recorded as Provision for Realignment.
As the Company moves into a new fiscal year, action has already been taken to streamline Kellwood’s operating and warehousing and distribution infrastructure and improve the competitiveness of the Company’s sourcing. The Company has closed all of its domestic and most of its Western Hemisphere sewing operations and has moved more of its sourcing to contractors in the Far East to benefit from lower costs and enhanced flexibility.
Kellwood is on very solid footing from both a financial and operational standpoint. The steps already taken should enable the Company to continue to improve its operating margin and its return on capital during the current difficult environment. Additionally, Kellwood has already invested in several new marketing initiatives to help insure that the Company continues to benefit from organic sales growth in 2003 and 2004. The Company began seeing the benefits of these initiatives during the fourth quarter of last year. Finally, fiscal year 2003 will be bolstered from owning Gerber Childrenswear for a full year and the acquisition of Briggs on February 4, 2003.
For fiscal year 2003, which ends in January 2004, sales are expected to be approximately $2.6 billion — up $400 million, or 18 percent, coming evenly throughout the year. The sales plan for 2003 calls for organic growth of approximately $120 million or 5-6 percent with sales from Briggs and owning Gerber for a full year contributing approximately $280 million.
Net earnings, in fiscal year 2003 are expected to increase by 45 percent and be in the range of $73-$76 million, or $2.70 – $2.80 per share, versus $51.7 million, or $2.08 per share, reported in fiscal year 2002 on a diluted basis before costs for business and facilities realignment.
The year-to-year improvement in net earnings and earnings per share in fiscal year 2003 is expected to come from sales growth of $400 million, continued improvement in gross profit as a percent of sales due largely to changes in sourcing and the actions taken last year to streamline Kellwood’s operating infrastructure, and leveraging SG&A spending due to the growth in the business. These factors should result in approximately a full percentage point improvement in Kellwood’s operating earnings (gross profit less SG&A expense) as a percent of sales. Most of the year-to-year gain in operating earnings as a percent of sales is expected to occur during the first half of the year driven largely by an improvement in gross profit as a percent of sales. The increase in operating earnings will be partially offset by an estimated $6-$7 million increase in amortization of intangible assets resulting from owning Gerber Childrenswear for a full year and the acquisition of Briggs, and a $5 million increase in interest expense.
The Company is considering issuing $75-$125 million of long-term debt mid year due to the current and expected growth in the business resulting from both internal marketing initiatives and acquisitions.
Finally, diluted outstanding shares will increase by approximately 2 million shares in 2003 to 27 million shares due principally to the stock issuances for the acquisitions of Gerber Childrenswear and Briggs being outstanding for a full twelve months.
Kellwood’s first quarter ends in April and largely encompasses the Spring shipping season. With the increasing prospect of war, the rising cost of energy, lack of job creation in the economy, and drop in consumer confidence, retailers across every channel of distribution have approached the upcoming season very cautiously. This buying mentality does not come as a surprise as we have geared the Company and its business model and financial plan to cope with, and in accordance with the reality of the current geopolitical environment.
Therefore, the outlook for the first quarter calls for sales to increase by 17-18 percent to approximately $670 million, versus $571 million last year due largely to acquisitions along with organic sales growth in the range of 2 percent.
The Company expects net earnings to increase by 37 percent to approximately $19-$20 million, versus $14.4 million last year. The Company expects earnings per share to be in the range of $0.72-$0.75 per share, versus $0.62 per diluted share reported last year before costs for business and facilities realignment. The growth in earnings will be driven by the acquisition of Briggs and Gerber Childrenswear, increased organic sales and a 1.5 percentage point improvement in gross profit as a percent of sales. Diluted shares outstanding the first quarter of 2003 will be approximately 26.8 million shares, versus 23.2 million last year. Other risks to achieving the results planned for the first quarter and fiscal year are the duration of any pending war with Iraq and the potential for wide spread terrorist attacks in the United States.
The Board of Directors declared a regular quarterly dividend of $0.16 per common share, payable March 28, 2003 to shareholders of record March 17, 2003.
KELLWOOD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(Amounts in thousands except per share data)
Three Months Ended Twelve Months Ended
2/1/2003 2/2/2002 2/1/2003 2/2/2002
Net sales by segment:
Women's sportswear $294,598 $298,135 $1,316,789 $1,514,815
Men's sportswear 120,633 81,031 430,225 347,822
Other soft goods 122,058 90,828 457,695 419,126
Total net sales 537,289 469,994 2,204,709 2,281,763
Costs and expenses:
Cost of products sold 425,887 389,034 1,748,434 1,836,753
Selling, general and
administrative 86,636 77,491 345,739 341,672
Provision for realignment 1,727 0 12,086 0
Amortization of intangible
assets 1,841 2,132 5,839 9,383
Interest expense 6,417 7,058 27,892 34,823
Interest income and other,
net 1,739 824 9 (1,198)
Earnings before income taxes 13,042 (6,545) 64,710 60,330
Income taxes 4,600 (3,400) 22,700 22,600
Net earnings $8,442 $(3,145) $42,010 $37,730
