Kellwood Company reported sales for the second quarter increased $64 million, or 14 percent to $527 million, versus $463 million last year due to 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 $2.3 million, or 52 percent to $6.7 million, or $0.25 per diluted share, versus $4.4 million, or $0.18 per diluted share before business and facilities realignment costs. Net earnings as reported in the second quarter of last year were $3.9 million, or $0.16 per diluted share.
Each of Kellwood's business segments contributed to the year-to-year increase in sales for the second quarter. Sales of Women's Sportswear increased $25 million, or 9 percent due to the acquisition of Briggs. Men's Sportswear sales were especially strong increasing $24 million, or 25 percent. Finally, sales of Other Soft Goods increased $15 million, or 15 percent due to the acquisition of Gerber Children's Apparel.
The improvement in net earnings came from increased sales, and a seven tenths of one percentage point improvement in gross profit as a percent of sales.
The second quarter increase in gross margin is the fifth 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 of its 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, consolidating warehousing and distribution, 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 $10.9 million increase in selling, general and administrative expense. The acquisition of Gerber Childrenswear and Briggs accounted for $7.0 million of the increase. The remaining increase was due to start-up spending for several new marketing initiatives, which will provide growth later in the year and in fiscal year 2004. Excluding these items, the Company continues to do an excellent job of controlling SG&A expenditures.
Sales in the first half were $1,216 million, up $182 million, or 18 percent from $1,034 million reported last year, and essentially on plan. Sales of Women's Sportswear were up 13 percent, Men's Sportswear up 33 percent, and Other Soft Goods up 19 percent.
Net earnings for the first half increased 47 percent to $27.5 million, or $1.03 per share on a diluted basis, versus $18.7 million, or $0.78 per diluted share last year before business and facilities realignment costs. Net earnings as reported for the six-month period last year were $12.5 million, or $0.52 per diluted share.
Kellwood ended the quarter with a very strong balance sheet. Total debt at August 2, 2003 was $303 million, down $19 million from last year and represented 33 percent of total capital versus 37 percent last year. This is especially noteworthy given the Company's acquisition of Briggs on February 4, 2003. The improvement in Kellwood's capitalization resulted from an increase in free cash flow, improved working capital management, and $12 million of new equity issued in conjunction with the Briggs acquisition.
The economic and retail environment has been very difficult since the beginning of the year and Kellwood has managed its inventory accordingly. Inventory at August 2, 2003, excluding acquisitions was down $57 million, or 14 percent from last year, and represented 63 days of supply versus 70 days last year. Rigorous inventory management is especially important in this tenuous economic environment.
Looking ahead to the second half and total fiscal year, three factors make it necessary to slightly reduce the sales and earnings forecast for the fiscal year.
The first factor is that the Company has received lower than expected bookings for its Fall and Holiday business, which largely ships in the third quarter. Orders came in approximately $30 million below the expectation in May. Approximately one half of the drop in volume was due to JC Penney and Kohl's not repeating two promotional item programs serviced by Sag Harbor(R) and Koret(R), which turned out to be very disappointing for our customers and Kellwood. The other half of the drop in volume was largely due to loss of some low margin private label programs. As a result, Kellwood now expects sales for the year to be in the range of $2,525 million, an increase of $320 million, or 15 percent from $2,205 million last year.
Secondly, Kellwood entered into two new major licensing arrangements during the quarter that will provide additional foundations for growth in 2004 on top of several exciting new brands and growth initiatives announced earlier in the year. The two new licensed brands in the Company's portfolio are Calvin Klein(R) women's sportswear and Def Jam University(TM) urban sportswear. These new initiatives will add very little volume in the second half of the year but will involve start-up spending of approximately $0.07 per share for the remainder of the fiscal year. When the Company provided earnings guidance for the year in May, the Calvin Klein(R) and Def Jam University(TM) marketing initiatives were not included in its forecast.
Finally, management has made the decision to discontinue the European Hosiery business and will begin reporting European Hosiery (including the cost of discontinuance) as a discontinued operation in the third quarter. The annual sales of the business have fallen to $10 million and the operating loss this year is considerably higher than planned, and higher than it was last year. Offsetting these losses will be an anticipated net gain from the attempted purchase of the Kasper business out of bankruptcy (break up fee net of related expenses).
Kellwood acquired Gerber Childrenswear on June 25, 2002 in order to provide a new platform for growth and a foothold in the $27 billion market for children's apparel. Gerber's Hosiery Division (men's athletic socks) was included but was not regarded as a core business.
Management decided to realign the European Hosiery business by consolidating the two Irish manufacturing/warehousing operations and exploring the outsourcing of manufacturing. Changes in the European economy since the acquisition have made the business not viable, even with the realignment.
As the result of lower forecasted sales, the start-up costs attendant with two new marketing initiatives previously discussed, and the increasing loss from the European Hosiery business net of the anticipated gain from the Kasper transaction, the Company now expects net earnings for the year, before the European Hosiery discontinuance costs but including its operating loss, to be in the range of $70.0-$72.0 million, or $2.60-$2.65 per diluted share versus $51.7 million, or $2.08 per diluted share before business and facility realignment costs reported last year. Net earnings as reported for last year were $42.0 million, or $1.69 per diluted share.
The Company is in the process of identifying the costs to discontinue the European Hosiery operations. At this time, Kellwood estimates that the after tax discontinuance cost will not exceed $7.5 million and will be booked during the third and fourth quarters.
The outlook for the third quarter which ends in October calls for sales to be in the range of $670-$680 million increasing 7 percent from $633 million reported last year due to the acquisition of Briggs.
Net earnings for the third quarter are forecasted to increase 20 percent and be in the range of $28-$29 million, or $1.05-$1.10 per diluted share. This increase results from acquisitions and the many profit enhancement initiatives previously discussed. Last year, net earnings were $23.3 million, or $0.90 per diluted share before costs for business and facilities realignment. Net earnings as reported in the third quarter of last year were $21.1 million, or $0.82 per diluted share.
Kellwood is pleased with the anticipated results for 2003, recognizing that the Company is in a very challenging time at retail and in general and the fact that the Company is spending approximately $8.5 million pre tax, or $.20 per diluted share on new initiatives. These initiatives were announced subsequent to the start of the current fiscal year.
The Company is encouraged by the recent signs that indicate a turn for the better in the economy, employment, consumer confidence and activity at retail. Hopefully the pick up in comp store sales and sell through rates the Company has seen during the past few weeks will continue into the Fall. This favorable trend will not likely benefit Kellwood during the third quarter as the Company does relatively little reorder or stock replenishment business, and has been very cautious in producing additional inventory in anticipation of increased consumer demand. However, as the Company looks forward to the beginning of the Spring 2004 shipping season, which begins in January or Kellwood's fourth quarter, there could be potential for some upside.
KELLWOOD COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Ended Six Months Ended
8/2/2003 8/3/2002 8/2/2003 8/3/2002
Net sales by Segment:
Women's sportswear $291,764 $267,056 $707,588 $628,216
Men's sportswear 121,064 97,070 247,772 186,172
Other soft goods 113,961 99,220 260,651 219,638
Total net sales 526,789 463,346 1,216,011 1,034,026
Costs and expenses:
Cost of products
sold 418,787 372,221 968,973 836,015
Selling, general
and administrative 88,280 77,420 185,286 156,915
Provision for
realignment - - - 7,244
Amortization of
intangible assets 2,087 1,330 4,932 2,055
Interest expense 6,206 7,072 12,658 13,911
Interest income
and other, net 1,104 (724) 1,509 (1,287)
Earnings before
income taxes 10,325 6,027 42,653 19,173
Income taxes 3,639 2,100 15,139 6,700
Net earnings $6,686 $3,927 $27,514 $12,473
Basic Earnings
per Share: $0.25 $0.16 $1.05 $0.53
Diluted Earnings
per Share: $0.25 $0.16 $1.03 $0.52
