Kellwood Company net sales totaled $516.4 million, as compared to $520.0 million in the third quarter last year. Net earnings from continuing operations were $5.5 million, or 21 cents per diluted share, versus $7.9 million, or 29 cents per diluted share, last year. Included in net earnings from continuing operations for the current quarter were restructuring and other non-recurring costs of $12.1 million (after tax), or $0.47 per diluted share versus $7.4 million (after tax), or $0.28 per diluted share, last year associated with the Company's previously announced strategic restructuring initiatives.
Total net earnings were $8.1 million, or 31 cents per diluted share, versus $16.2 million, or 60 cents per diluted share, in the third quarter last year. Included in total net earnings for the third quarter were net earnings from discontinued operations of $2.6 million, or $0.10 per diluted share, versus $8.3 million, or $0.31 per diluted share, last year.
On an ongoing basis (continuing operations excluding the restructuring and other non-recurring charges), net sales were $516.4 million as compared to $522.4 million in the third quarter last year. Net earnings were $17.6 million, or $0.68 per diluted share, compared to $15.3 million, or $0.57 per share last year and exceeded guidance of $16.8 million, or $0.64 per share. Also, included in the net earnings for the current quarter were $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.
The increase in gross profit as a percent of net sales combined with higher interest income and a lower effective tax rate enabled net earnings and earnings per share on an ongoing basis to exceed last year despite slightly lower sales. Gross profit as a percentage of sales improved by 0.9 percentage points from last year primarily due to improved performance by many of the Company's brands at retail, which resulted in lower markdown allowances and reduced cost of liquidating surplus inventory. Interest income exceeded last year due to higher short term interest rates and a $141.9 million increase in cash reflecting the successful execution of Kellwood's restructuring plan. Restructuring costs for the current quarter included $10.8 million in after tax charges for certain contractual obligations that were planned to be expensed as they were paid in the future. These contracts were amended during the third quarter and in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 45-3, “Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners”, these obligations were recorded in the current quarter.
Mr. Skinner stated, “Our third quarter results demonstrate that the strategies we began implementing last year are beginning to take hold. To this end, we focused on revitalizing our legacy brands and streamlining our business processes to be more responsive to the needs of our retailers and the demands of our consumers. Sag Harbor's Fall-to-date performance at retail has been solid. While still a work in progress, Calvin Klein women's better sportswear results improved from previous quarters. As we begin the Holiday 2006 retail season, we are encouraged. We have confidence in our merchandising and marketing plans.”
On an ongoing basis, Women's Sportswear net sales declined 8% to $293.7 million in the third quarter of 2006 principally due to cutbacks in Fall open-to-buy for some of the Company's legacy brands and consolidations at retail. Operating earnings were flat with last year despite the lower sales volume with operating earnings as a percentage of net sales increasing to 7.8% for the third quarter compared to 7.2% last year. This rise is principally due to improved performance of our brands at retail including Sag Harbor, Briggs, XOXO and Napa Valley sportswear, and David Meister and Liz Claiborne dresses. This resulted in lower markdown allowances and reduced cost of liquidating surplus inventory compared to last year. The Company remains encouraged by its results to date and initiatives to revitalize Women's Sportswear brands.
Net sales of Men's Sportswear increased 7% to $140.7 million during the 2006 third quarter with growth being achieved across most of the Company's brands and product categories. Operating earnings during the third quarter were flat with last year results.
Other Soft Goods posted excellent results in the third quarter of 2006 achieving a robust double-digit growth with net sales up 15% to $82.0 million. Growth was realized across all major children and recreational product categories with Gerber Childrenswear continuing to execute exceptionally well. Operating earnings grew a healthy $2.9 million to $9.4 million in the third quarter of 2006 and operating earnings as a percentage of net sales jumped more than two percentage points to 11.4% from 9.1% last year. This improvement is largely due to higher sales volume while controlling selling, general and administrative expenses at their previous levels.
Net sales for the first nine months totaled $1,469.8 million, as compared to $1,515.6 million last year. Net earnings from continuing operations for the first nine months were $14.5 million, or $0.56 per diluted share, versus $14.7 million, or $0.53 per diluted share, last year. Included in net earnings from continuing operations for the current nine-month period were restructuring and other non-recurring costs of $16.5 million (after tax), or $0.64 per diluted share versus $33.4 million (after tax), or $1.21 per diluted share, last year associated with the Company's previously announced strategic restructuring initiatives.
Total net earnings for the first nine months were $24.4 million, or $0.95 per diluted share, versus a net loss of $50.9 million, or $1.85 per diluted share, last year. Included in total net earnings for the first nine months were net earnings from discontinued operations of $9.9 million, or $0.38 per diluted share, versus a net loss of $65.6 million, or $2.38 per diluted share, last year. Results of discontinued operations in the first nine months include a $6.3 million reversal of an allowance for tax exposures no longer deemed necessary.
For the first nine months, on an ongoing basis (continuing operations excluding the restructuring and other non-recurring charges), net sales were $1,469.8 as compared to $1,518.0 million last year. Net earnings were $31.1 million, or $1.20 per diluted share, compared to $35.0 million, or $1.27 per share last year. Included in the net earnings for the current nine- month period is $3.9 million before tax, $2.4 million after tax, or $0.09 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 nine months were below last year due to lower sales. Sales for the current nine- month period were lower, as anticipated, due to a decrease in orders for certain legacy brands and consolidations at retail. Gross margin for the current nine-month period was essentially flat with the prior period. The Company was effective in reducing SG&A expenses from the prior year while at the same time making investments to support the revitalization of the Company's legacy brands. In addition, interest income rose as compared to the first nine months of last year. The Company's effective tax rate was 32% for the current period versus 31.2% for the prior period.
Mr. Skinner, stated, “We continue to execute our corporate strategy which calls for reinvigorating our core moderate business, expanding into higher profile, upscale better and above price point brands, connecting more directly with consumers and utilizing our operating infrastructure more efficiently to fund our growth. Accomplishments to date from the successful execution of our strategic plan include our current quarter results and consumer response to the revitalization of some of our legacy brands. We expanded our portfolio of higher profile better plus price point brands with the acquisition of Vince, securing the Calvin Klein women's bridge sportswear license, and scheduling the relaunch of O Oscar for Spring 2007. We are confident that the actions that we are taking will continue to result in year-to-year improvement in our operating results for the near and long-term.”
For the fourth quarter of fiscal 2006, the Company expects net sales of approximately $450 million, as compared to actual net sales from ongoing operations of $446 million in the fourth quarter of last year. Net sales of women's sportswear are expected to be lower than last year while net 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 fourth quarter are forecasted to approximate $23 million versus $16.1 million last year. Net earnings from ongoing operations in the fourth quarter of fiscal 2006 are estimated to be approximately $11.0 million, or $0.43 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 $6.2 million, or $0.24 per share, in the fourth quarter of 2005.
For the fiscal 2006 year, the Company now expects net sales from ongoing operations to approximate $1.920 billion versus our earlier guidance of $1.890 billion. This compares to actual net sales from ongoing operations of $1.964 billion in fiscal 2005.
On an ongoing basis, the Company continues to believe that operating earnings (gross profit less selling, general & administrative expense before amortization of intangible assets and expensing stock options) will approximate $90.0 million versus $92.6 million last year. Net earnings for fiscal 2006 from ongoing operations will be approximately $42.0 million versus $41.3 million last year. Also on an ongoing basis, fiscal 2006 diluted earnings per share are estimated at approximately $1.63 per diluted share. This is consistent with our earlier guidance as purchase accounting and lower interest income associated with the Vince acquisition will be offset by a lower effective tax rate. This compares to actual earnings per diluted share of $1.52 in fiscal 2005. 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 STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
10/29/2005 10/28/2006 10/29/2005 10/28/2006
Net sales $519,962 $516,397 $1,515,564 $1,469,822
Cost of products sold 417,203 402,621 1,199,894 1,159,779
Gross profit 102,759 113,776 315,670 310,043
Selling, general and
administrative expenses 80,169 82,227 246,814 243,229
Stock option expense - 468 - 3,877
Amortization of intangible
assets 2,572 2,628 8,143 7,692
Impairment, restructuring
and other non-recurring
charges 2,941 19,041 39,968 25,957
Interest expense, net 5,831 3,613 18,376 11,478
Other income, net (389) (614) (882) (1,937)
Earnings before income
taxes 11,635 6,413 3,251 19,747
Income taxes 3,756 892 (11,416) 5,202
Net earnings from
continuing operations 7,879 5,521 14,667 14,545
Net earnings (loss) from
discontinued operations 8,309 2,554 (65,592) 9,890
Net earnings (loss) $16,188 $8,075 $(50,925) $24,435
Weighted average shares
outstanding:
Basic 26,739 25,722 27,434 25,682
Diluted 26,799 25,834 27,559 25,820
Earnings (loss) per share:
Basic:
Continuing operations $0.29 $0.21 $0.53 $0.57
Discontinued operations 0.31 0.10 (2.39) 0.39
Net earnings (loss) $0.61 $0.31 $(1.86) $0.95
Diluted:
Continuing operations $0.29 $0.21 $0.53 $0.56
Discontinued operations 0.31 0.10 (2.38) 0.38
Net earnings (loss) $0.60 $0.31 $(1.85) $0.95
