Kellwood Company reported sales for the first quarter increased $118 million, or 21 percent to $689 million, versus $571 million last year due to $20 million, or 4 percent organic sales growth, and $98 million from the acquisition of Gerber Childrenswear on June 25, 2002, and the acquisition of Briggs on February 4, 2003.
Net earnings for the quarter were strong increasing $6.4 million, or 45 percent to $20.8 million, or $0.78 per diluted share, versus $14.4 million, or $0.62 per share before business and facilities realignment costs. Net earnings as reported in the first quarter of last year were $8.6 million, or $0.37 per share.
Sales, excluding acquisitions, increased 4 percent, with organic growth coming from Women’s Sportswear and Men’s Sportswear. Sales of Women’s Sportswear increased $55 million, or 15 percent to $416 million, versus $361 million last year. The acquisition of Briggs provided $49 million of sales with organic growth of 2 percent. Our core brands (Sag Harbor(R), Koret(R), My Michelle(R) and Dorby(TM)) were up 8 percent with Sag Harbor and My Michelle being exceptionally strong. This increase was partially offset by lower private label volume and some erosion in our better-to-bridge price point brands.
Sales of Men’s Sportswear increased $38 million, or 42 percent to $127 million versus $89 million last year. The acquisition of Gerber Hosiery provided $13 million of sales with broad based organic sales growth of $25 million, or 28 percent.
Sales of Other Soft Goods increased by $27 million, or 22 percent to $147 million, versus $120 million last year. The acquisition of Gerber Apparel provided $36 million of growth, which was partially offset by an 8 percent drop in sales of intimate apparel and recreation products.
First quarter net earnings exceeded last year by $6.4 million, or 45 percent. This sharp increase resulted from the growth in sales and a 1.2 percentage point improvement in gross profit as a percent of sales. The first quarter gain is the fourth 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 contract production from the Western to Eastern Hemisphere, running more contractor production through Kellwood’s newly established trading company in Hong Kong, having less surplus and obsolete inventory to markdown, and the elimination of several non-competitive and underutilized manufacturing facilities in North America, Mexico and the Caribbean Basin.
Some of the year-to-year improvement in gross profit was offset by a $17.5 million increase in selling, general and administrative expense. The acquisitions of Gerber Childrenswear and Briggs accounted for $9.3 million of the increase. The remaining increase in spending was largely due to start-up spending for several new marketing initiatives, which will provide growth later in the year and in fiscal year 2004, and costs attendant with other consolidation efforts. Kellwood ended the quarter posting excellent results on both the income statement and balance sheet.
Total debt at the end of April was $307 million, down $23 million from April of last year and represented 34 percent of total capital, versus 42 percent last year. This is especially noteworthy given the Company’s acquisition of Gerber Childrenswear and Briggs during the past twelve months. The improvement in Kellwood’s capitalization resulted from an increase in free cash flow, improved working capital management, and $80 million of new equity issued in conjunction with the Gerber and Briggs acquisitions.
The economic and retail environments have been very tenuous since the beginning of the year and Kellwood has managed its inventory, accordingly. Inventory at the end of April, excluding acquisitions was down $30 million, or 11 percent from last year, and represented 69 days of supply versus 72 days last year. Rigorous inventory management is especially important in this difficult environment.
Kellwood enjoyed excellent sell-in for the important Spring selling season which began last January. Organic sales were up 6 percent in the fourth quarter of last year which was largely Spring 2003 merchandise. Shipments to the retailers in the first quarter of this year were also strong with organic growth of 4 percent.
Unfortunately, store traffic has been anemic since the beginning of the year. Unseasonably cold and wet Spring weather, a late Easter, war and terrorism concerns, and unemployment worries kept consumers at home. The seriousness of these issues can best be seen in the disappointing same store sales results for the leading retailers across every channel of distribution. Even the strongest and best positioned retailers, who until this year defied the malaise that has plagued every other retailer in America, finally have succumbed to the languishing economy and reluctant consumer.
As a result of these issues, the stores are now having to face a temporary glut of inventory for the first time in several quarters. This has resulted in somewhat more intense markdown pressure than the Company expected, but even more importantly, a reluctance to commit for Fall merchandise.
“At this time, we typically would have the important third quarter Fall shipping season approximately 90 percent booked. Because of the uncertainty of the environment and the consumer’s willingness to return to the shopping malls, the retailers have only committed for approximately 75 percent of their Fall open-to-buy. We are not concerned that it may take another 30 days before we finalize our Fall business, as there is sufficient global capacity available, and the textile mills and our contractors are hungry for business,” said Upbin.
Since the Company finalized its plan for fiscal year 2003 and provided sales and earnings guidance for Wall Street, Kellwood has entered into four new and very exciting licensing arrangements that will provide the foundation for growth in sales and earnings in fiscal year 2004. The four new marketing initiatives include XOXO(R) junior sportswear, Liz Claiborne(R) dresses and suits, Dockers(R) tops for women, and Run Athletics(TM) men’s activewear. These and other smaller initiatives require start-up costs this year beginning in the second quarter and will not produce a sufficient amount of revenue to yield a profit until next year. In the second quarter the Company will incur $3.0 million of costs, or $0.07 per share and no revenue.
The outlook for the second quarter calls for sales growth of 12-14 percent, or approximately $525 million, versus $463 million reported last year. The majority of the year-to-year growth will come from the acquisition of Briggs and Gerber Childrenswear along with organic sales growth of 1-2 percent. The Company expects net earnings to increase over 30 percent, or $0.9 to $1.8 million to approximately $5.3-$6.2 million, or $0.20-$0.23 per diluted share, versus $4.4 million, or $0.18 per share before facilities realignment costs. Net earnings as reported in the second quarter of last year were $3.9 million, or $0.16 per share.
Because of the weak economic and retail environment and the start-up costs relating to the four new marketing initiatives, the Company expects sales for the year to be in the range of $2.55 billion to $2.60 billion.
At the beginning of the year, the Company expected net earnings and earnings per share to be in the range of $72.0 to $74.0 million, or $2.70-$2.80 per share. For the reasons previously discussed, Kellwood now feels more comfortable at the lower end of the range, versus $51.7 million, or $2.08 per share before business and facilities realignment costs reported last year. Net earnings as reported for the prior fiscal year were $42.0 million, or $1.69 per share.
The Company held its forty-first Annual Shareowners meeting Thursday at its headquarters in St. Louis. Approximately 89 percent of the outstanding shares were represented either in person or by proxy. Directors standing for election this year were Kitty G. Dickerson, Jerry M. Hunter, Larry R. Katzen, and Janice E. Page. All were elected.
The Board of Directors declared a regular quarterly dividend of $0.16 per common share, payable June 20, 2003 to shareholders of record June 9, 2003.
KELLWOOD COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(Amounts in thousands except per share data)
Three Months Ended
5/3/2003 5/4/2002
Net sales by segment:
Women's sportswear $415,824 $361,161
Men's sportswear 126,708 89,102
Other soft goods 146,690 120,417
Total net sales 689,222 570,680
Costs and expenses:
Cost of products sold 550,186 463,794
Selling, general and administrative 97,006 79,495
Provision for realignment - 7,244
Amortization of intangible assets 2,845 725
Interest expense 6,452 6,839
Interest income and other, net 405 (564)
Earnings before income taxes 32,328 13,147
Income taxes 11,500 4,600
Net earnings $20,828 $8,547
