Kellwood Company net sales from continuing operations totaled $404.1 million, as compared to $397.0 million in the third quarter last year. Net loss from continuing operations was $5.9 million, or 23 cents per diluted share, versus a net loss of $1.5 million, or six cents per diluted share, last year.
Included in net loss from continuing operations for the current quarter were restructuring and other non-recurring charges of $9.9 million (after tax), or $0.38 per diluted share associated with the previously announced reorganization of the women's sportswear business, transformation of the Phat Farm men's business to solely a licensing model and streamlining of corporate functions. Net earnings from continuing operations for the third quarter last year included restructuring and other non-recurring charges of $12.1 million (after tax), or $0.47 per diluted share associated with the Company's completed 2005 strategic restructuring initiatives.
Total net loss was $1.1 million, or four cents per diluted share, versus net earnings of $8.1 million, or 31 cents per diluted share, in the third quarter last year. Included in total net loss for the third quarter were net earnings from discontinued operations of $4.9 million, or 19 cents per diluted share. Total net earnings for the last year third quarter included earnings from discontinued operations of $9.6 million, or 37 cents per diluted share.
For the third quarter, on an ongoing basis (continuing operations excluding the impairment, restructuring and other non-recurring charges), net sales were $404.1 million as compared to $397.0 million in the third quarter last year. Operating earnings for the third quarter were $17.4 million compared to $22.4 million, last year.
Net earnings on an ongoing basis were $4.0 million, or 15 cents per diluted share, compared to $10.6 million, or 41 cents per diluted share in the third quarter last year. Net interest expense totaled $7.0 million and reflected lower interest income on cash balances having utilized $311.9 million for the Hanna Andersson®, Royal Robbins®, Vince® and HOLLYWOULD acquisitions.
The third quarter tax rate from ongoing operations was 34.8% compared to 35.8% last year. The 2007 third quarter effective tax rate was lower than the Company's expected third quarter tax rate of 44% due to certain discrete state tax items that benefited diluted earnings per share by two cents.
“We are successfully executing on our strategic plan and believe that the financial targets we set out for the company are real and achievable,” stated Skinner. “Our third quarter results were on target with our expectations, driven by the positive performance of our key initiatives. During the quarter, we managed our business well, leading to continued growth in many of our brands and businesses, such as Vince, Baby Phat, XOXO, My Michelle and Gerber Childrenswear. At the same time, we strategically operated our women's mainstream business for profitability and cash flow. In addition, we advanced the objectives outlined in our women's sportswear reorganization, including announcing the consolidation of our Briggs New York and Koret divisions to New York and closure of two distribution centers. We also added and promoted key talent including Hope Brick as chief merchandising officer of our Lifestyle Alliance; Steve Powers as chief customer officer of our Lifestyle Alliance; Sandra Campos president of O Oscar, an Oscar de la Renta Company; and Wendy Chivian president of Calvin Klein women's sportswear. These individuals come to Kellwood with strong backgrounds, which should benefit us greatly as we execute our growth strategies.
“While we recognize the environment at retail remains difficult, we believe we have identified the right initiatives and strategies to achieve our financial goals,” Mr. Skinner continued. “We are transforming Kellwood into a brand focused marketing enterprise, which is expected to lead to sustained growth in sales at increased rates of profitability.”
Third Quarter Highlights From Ongoing Operations
Net sales of $404.1 million were slightly higher than last year. Organic sales growth was mainly realized from Gerber Childrenswear, XOXO®, My Michelle® and Candies juniors and girls businesses, as well as increased licensing revenues from Baby Phat®. The acquisitions of Vince, Hanna Andersson and Royal Robbins also led to improved sales in the quarter. This was offset by the anticipated impact of lower sales volumes of mainstream women's sportswear, including private label sales and the Phat Farm® men's wholesale business, the latter of which is being transitioned to a licensing model.
Gross profit as a percent of net sales rose by approximately 340 basis points to 27.4%, from last year. This increase was primarily driven by the acquisitions of Vince, Hanna Andersson and Royal Robbins, as well as improved performance of the XOXO juniors' brand. Both Women's Sportswear and Other Soft Goods segments achieved a higher gross profit as a percent of net sales compared to last year.
Selling, general and administrative costs increased to 23.1% of net sales primarily driven by the lower absorption of corporate overhead resulting from the Smart Shirts business being classified in discontinued operations, the acquisitions of Hanna Andersson and Royal Robbins, the addition of 17 new retail outlet stores since the third quarter last year as well as lower sales of mainstream women's sportswear. Actions to reduce costs resulting from the women's sportswear reorganization and streamlining of corporate functions are expected to positively benefit 2008 and beyond.
Operating earnings (gross profit less selling, general & administrative expense before stock option expense, amortization and impairment, restructuring and other non-recurring charges) as a percent of net sales decreased to 4.3% from 5.6% last year.
Other Soft Goods
Other Soft Goods segment, including all of KWD's outdoor brands, continued its strong performance in the third quarter of 2007 achieving a 56% increase in net sales to $127.8 million. Growth was realized from the acquisitions of Hanna Andersson and Royal Robbins and strong performance of Gerber Childrenswear. Operating earnings (gross profit less selling, general & administrative expense before stock option expense, amortization and impairment, restructuring and other non-recurring charges) grew 77% to $16.6 million in the third quarter of 2007. Operating earnings as a percent of net sales increased to 13.0% from 11.4% last year driven by the acquisitions of Hanna Andersson and Royal Robbins and continued positive performance and solid execution of Gerber Childrenswear.
Guidance
“Our management team is very focused on the successful execution of our brand building and cost savings strategic initiatives outlined in our five-year plan in early November. While we have just begun this process, we remain confident in executing these real and achievable actionable items and are on track to meeting our goals,” concluded Skinner.
Fiscal Year 2007
For the fiscal 2007 year, the Company continues to expect net sales from ongoing operations to range from $1.500 billion to $1.550 billion. This compares to actual net sales from ongoing operations of $1.514 billion in fiscal 2006.
On an ongoing basis, the Company continues to expect operating earnings (gross profit less selling, general & administrative expense before stock option expense, amortization and impairment, restructuring and other non-recurring charges) will approximate $68.0 million to $73.0 million versus $64.4 million last year. Net earnings for fiscal 2007 from ongoing operations are currently forecasted in the range of $17.0 million to $20.0 million versus $23.2 million last year. Also on an ongoing basis, fiscal 2007 diluted earnings per share continue to be estimated in the range of approximately 66 cents to 76 cents per diluted share. This compares to actual earnings per diluted share of 90 cents in fiscal 2006.
The Company now believes that the 2007 full year effective tax rate will approximate 39%.
The Company anticipates incurring approximately $28 million to $31 million in restructuring costs during the 2007 fiscal year in conjunction with the previously announced reorganization of women's sportswear, transformation of the Phat Farm men's business to solely a licensing model and streamlining of corporate functions.
Fiscal 2008 Guidance
For fiscal 2008, the Company continues to expect net sales from ongoing operations to be approximately $1.55 billion. This compares to its 2007 guidance for net sales from ongoing operations of approximately $1.500 billion to $1.550 billion. The Company is forecasting that operating earnings (gross profit less selling, general and administrative expense before stock option expense, amortization and impairment, restructuring and other non-recurring charges) from ongoing operations will approximate $92.0 million. This compares to the Company's 2007 guidance for operating earnings from ongoing operations of approximately $68.0 million to $73.0 million.
On an ongoing basis, net earnings for fiscal 2008 continue to be estimated at $32.0 million, as compared to the Company's 2007 guidance for net earnings from ongoing operations of approximately $17.0 million to $20.0 million. Also, on an ongoing basis, fiscal 2008 diluted earnings per share continue to be estimated at approximately $1.50, as compared to the Company's 2007 guidance for diluted earnings per share of approximately 66 cents to 76 cents.
The following table provides a rollforward of sales, operating earnings, net earnings and diluted earnings per share from our 2007 guidance from ongoing operations to our 2008 guidance from ongoing operations:
(Amounts in Millions, except per share amounts)
Operating Net Diluted
Sales Earnings(1) Earnings EPS
Adjusted Guidance
from Ongoing Operations
for FY2007 (mid-point of range) $ 1,525.0 $ 70.5 $ 18.5 $ 0.71 a)
Full year Royal Robbins and Hanna
Andersson excluding purchase accounting 38.0 6.5 – –
Transform Phat Farm men's business
to solely a licensing model (23.0) 9.0 5.5 0.21
Current $50 million stock
buyback authorization – – (1.5) 0.03 b)
Sub-total of completed and
approved actions 1,540.0 86.0 22.5 0.95
Stock buyback and debt retirement
with proceeds from sale of Smart Shirts – – 3.0 0.25 c)
2008 savings initiatives – net of
increased marketing expense – 8.0 5.0 0.24
Growth in Royal Robbins and
Hanna Andersson 25.0 3.0 1.5 0.06
Other existing businesses, driven
primarily by mainstream brands (15.0) (5.0) (3.0) (0.14)
Other items – – 3.0 0.14 d)
2008 Guidance from Ongoing
Operations $ 1,550.0 $ 92.0 $ 32.0 $ 1.50 e)
The Company anticipates incurring approximately $12 million to $14 million in restructuring costs during the 2008 fiscal year in conjunction with the previously announced reorganization of women's sportswear, transformation of the Phat Farm men's business to solely a licensing model and streamlining of corporate functions.
Long-Term Financial Plans
The Company continues to expect to achieve its long-term financial plans over the next five years (fiscal 2008 through fiscal 2012) inclusive of:
— Annual organic sales growth of 4% to 5%;
— Operating margins of 4.6% today increasing to 9% in 2012 for existing
businesses — excluding potential future acquisitions; and
— Earnings per share growth of at least 25% after significant 2008
increase — excluding potential future acquisitions.
