Kellwood Fiscal Q4 Earnings Up 58% on Flat Sales

Kellwood Company reported sales from continuing operations for the fourth quarter ended January 31 were flat with prior year at $521 million.

As previously announced in November, Kellwood completed the sale of its Domestic and European Hosiery operations. During the fourth quarter, the Company also made the decision to discontinue the True Beauty by Emme(R) operation including the termination of the related license agreement. Accordingly, both the Hosiery and True Beauty businesses are treated as discontinued operations.

Fourth quarter net earnings from continuing operations were strong; increasing $3.1 million, or 33 percent to $12.8 million, or $0.46 per diluted share, versus $9.7 million, or $0.38 per diluted share last year, before business and facilities realignment costs. Net earnings from continuing operations in the fourth quarter of last year including business and facilities realignment costs were $8.4 million, or $0.33 per diluted share.

Net earnings in the fourth quarter this year including discontinued operations increased $4.9 million, or 58 percent, to $13.3 million, or $0.48 per diluted share, versus $8.4 million, or $0.33 per diluted share last year.

Sales from continuing operations of Women's Sportswear increased $17 million, or 6 percent, due to the acquisition of Briggs. Men's Sportswear sales from continuing operations increased $3 million, or 3 percent. Finally, Other Soft Goods sales decreased $19 million, or 16 percent, due to loss of certain low margin private label programs.

The improvement in net earnings from continuing operations for the fourth quarter came principally from the acquisition of Briggs and a 1.9 percentage point improvement in gross profit as a percent of sales. The fourth quarter increase in gross margin is the seventh consecutive quarter in which Kellwood has been able to post a year-to-year improvement in its gross profit percent. This is especially noteworthy given the current economic conditions, and continued sales price deflation at both retail and wholesale. The Company has been able to improve its gross margin due to more competitive sourcing resulting from shifting more contract production from the Western to Eastern Hemisphere, and running more contractor production through Kellwood's recently established trading company in the Far East.

Gross margins were also bolstered by the retailers carrying less inventory this year and the performance of Kellwood's brands, which resulted in less end of season markdowns. Finally, margins were enhanced by improved sales mix, and having less surplus and obsolete inventory to liquidate as a result of the Company's focus on reducing inventory levels.

Selling, general and administrative expense for the fourth quarter increased $9.5 million due to increased spending to underwrite several new marketing growth initiatives and SG&A expense attendant with the acquisition of Briggs. Spending on the remaining business was essentially flat with last year.

Sales from continuing operations for the year were $2,346 million, up $180 million, or 8 percent, from $2,167 million last year. Sales of Women's Sportswear were up 7 percent, Men's Sportswear up 19 percent, and Other Soft Goods up 2 percent.

Net earnings from continuing operations for the year increased 43 percent to $72.6 million, or $2.68 per share on a diluted basis, versus $51.0 million, or $2.05 per diluted share last year, before business and facilities realignment costs. Net earnings from continuing operations for last year including business and facilities realignment costs were $41.3 million, or $1.66 per diluted share.

Net earnings for the year including discontinued operations increased $29.1 million, or 69 percent, to $71.1 million, or $2.62 per diluted share, versus $42.0 million, or $1.69 per diluted share last year.

Kellwood ended the year with a very strong balance sheet. Total debt at January 31, 2004 was $275 million, down $31 million from last year and represented 29.9 percent of total capital versus 35.3 percent last year. Strong free cash flow and excellent working capital management enabled the Company to end the year with $179 million of cash and time deposits. Subsequent to this year-end, Kellwood acquired Phat Fashions and exercised their option to buy back the Phat Farm men's sportswear license for a total cash purchase price of $140 million.

For fiscal year 2004, which ends in January 2005, sales are planned to be approximately $2.6 billion — up $255 million, or 11 percent. The increase is made up of significant organic growth along with approximately $65 million from the Phat Fashions and Phat Farm(R) acquisition. The organic growth will be driven by several new and exciting branded marketing initiatives. The new marketing initiatives include Calvin Klein(R), IZOD(R), XOXO(R), O Oscar(TM), Lucy Pereda(TM) sportswear, Liz Claiborne(R) dresses and suits, Dockers(R) Tops for women, Run Athletics(TM) and Def Jam University(TM) men's sportswear. The year-to-year sales growth from the exciting new branded marketing initiatives will accelerate as the year unfolds with the majority of the growth coming in the second half of the year. Additionally, the revenue from Phat Farm(R) men's sportswear will not commence until the Fall selling season.

Each year the Company examines the need to eliminate certain brands, private label programs and products from its broad and diversified portfolio due to volume levels, pricing, and margins that are no longer acceptable. Additionally, Kellwood's customers may change their merchandising strategies which can result in the loss of business. These factors collectively will result in a planned $75 million drop in volume in 2004, which will largely impact the first half of 2004.

Because of these factors, sales growth driven by the new marketing initiatives, will accelerate in excess of 10 percent in the second quarter with year-to-year growth of approximately 15 percent in the second half of the year.

Net earnings from continuing operations in fiscal year 2004 are expected to increase by approximately $17 million, or 23 percent, and be in the range of $88-$90 million, or $3.15 – $3.25 per diluted share, versus $72.6 million, or $2.68 per diluted share, reported in fiscal year 2003.

The year-to-year improvement in net earnings and earnings per share in fiscal year 2004 is expected to come from sales growth of $255 million, continued improvement in gross profit as a percent of sales due largely to a change in sales mix to higher priced branded business replacing lower priced and lower margin private label business, licensing income from Phat Fashions, and sourcing more product through Kellwood's recently established trading company (Kellwood Trading Limited) in the Far East. These factors should result in over one half of one percent improvement in Kellwood's EBITDA as a percent of sales.

All of the improvement will come from gross margin as selling, general and administration expense as a percent of sales will increase due principally to the new marketing initiatives and the acquisition.

The year-to-year gain in (EBITDA) as a percent of sales is expected to occur in each quarter of the year driven by an improvement in gross profit as a percent of sales. The increase in EBITDA dollars will be partially offset by an estimated $5 million increase in amortization of intangible assets resulting from the acquisition of Phat Fashions and Phat Farm(R), a $5 million increase in depreciation expense, and a $6 million increase in interest expense as the Company plans to do a long- term financing sometime during the first half of the year.

Finally, average diluted outstanding shares will increase by approximately 800,000 shares in 2004 to 27.9 million shares.

Kellwood's first quarter ends in April and largely encompasses the Spring shipping season. The outlook for the first quarter calls for sales to be essentially flat with last year and in the range of $675 million. Growth from the new branded marketing initiatives will be offset by a planned reduction in low margin private label business and Wal-Mart's decision to no longer carry the Kathie Lee(R) brand of sportswear and dresses.

Net earnings from continuing operations are expected to increase by $3-$4 million, or 16 percent, to $24-$25 million, or approximately $0.85-$0.88 per diluted share, versus $21.1 million, or $0.80 per diluted share last year.

The growth in net earnings in the first quarter will come from nearly a full percentage point improvement in EBITDA as a percent of sales. This improvement will be driven by higher gross margin branded business partially offset by an increase in SG&A expense in relation to sales. Average diluted shares are expected to increase by 1.0 million shares to 27.6 million shares in the first quarter of 2004.

The Board of Directors declared a regular quarterly dividend of $0.16 per common share, payable March 26, 2004 to shareholders of record March 15, 2004.

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

                            Three Months Ended       Twelve Months Ended
                         1/31/2004     2/1/2003     1/31/2004     2/1/2003
    Net sales by segment:
      Women's Sportswear  $308,192     $291,217   $1,406,296   $1,313,407
      Men's Sportswear     110,231      107,360      472,442      395,452
      Other Soft Goods     102,721      122,057      467,743      457,695
      Total net sales      521,144      520,634    2,346,481    2,166,554

    Costs and expenses:
      Cost of products
       sold                405,408      415,040    1,845,202    1,733,560
      Selling, general and
       administrative
       expenses             91,034       81,552      357,639      324,438
      Provision for
       realignment               -        1,727            -       12,086
      Amortization of
       intangible assets     2,222        1,777        9,532        5,775
      Interest expense       6,180        6,414       25,051       27,884
      Interest (income) and
       other, net           (3,160)       1,720       (1,418)         (50)

    Earnings before income
     taxes                  19,460       12,404      110,475       62,861

    Income taxes             6,665        4,038       37,838       21,598

    Net earnings from
     continuing operations  12,795        8,366       72,637       41,263

    Net earnings (loss)
     from discontinued
     operations                526           76       (1,552)         747

    Net earnings           $13,321       $8,442      $71,085      $42,010

    Earnings (loss) per share:
      Basic:
        Continuing operations $.48         $.33        $2.74        $1.68
        Discontinued
         operations            .02          .00         (.06)         .03
        Net earnings          $.50         $.33        $2.68        $1.71

      Diluted:
        Continuing operations $.46         $.33        $2.68        $1.66
        Discontinued
         operations            .02          .00         (.06)         .03
        Net earnings          $.48         $.33        $2.62        $1.69