Kellwood Company reported fourth quarter sales increased $71 million, or 14% to $592 million, versus $521 million last year due to a combination of organic growth of $53 million, or 10%, and the acquisition of Phat Fashions and Phat Farm, which provided $18 million of revenue in the fourth quarter. Phat Fashions and Phat Farm were acquired on February 3, 2004, and are being reported within the Men's Sportswear segment of the Company.
Each business segment contributed to the year-to-year growth in organic sales. Sales of Women's Sportswear increased 5 percent driven by the higher price point branded marketing initiatives put in place beginning in the last nine months of fiscal year 2003. Partially offsetting the growth from the new branded initiatives was a 10 percent year-to-year drop in sales for Kellwood's core moderately priced brands of Women's Sportswear. The Men's Sportswear business continued to enjoy robust and broad based year-to-year organic sales growth of 27 percent. Sales of Other Soft Goods were up 6 percent in the fourth quarter versus last year.
Net earnings from continuing operations for the fourth quarter of fiscal year 2004 decreased $6.3 million to $6.5 million, or $0.23 per diluted share versus $12.8 million, or $0.46 per diluted share last year due principally to a drop in gross profit as a percent of sales, and a $2.9 million year-to-year reduction in other income. Last year the Company received a $3.0 million acquisition breakup fee related to its offer to acquire Kasper A.S.L. which was purchased by another apparel company.
“Gross profit as a percent of sales in the fourth quarter decreased by 1.7 percentage points from 21.9 percent in fiscal year 2003 to 20.2 percent this year. The deterioration in gross profit as a percent of sales resulted from a combination of a weak and highly promotional women's sportswear market, along with some fashion missteps and merchandising assortment issues that we created. These factors resulted in having to provide a higher level of markdown assistance to the retailers for late Fall and Holiday product. Additionally, given the slowdown in the pace of consumer demand during Fall and Holiday, the retailers took a more cautious posture when ordering for Spring. As a result we experienced a higher level of off price sales.
“We did what was necessary to balance our inventory and production commitments for Spring product in keeping with the soft demand and anticipated cut backs in open-to-buy for the Spring season in the fourth quarter. We believe that the fashion and merchandise assortment issues have been addressed with our new Spring deliveries,” said Upbin.
Selling, General and Administrative expense in the fourth quarter increased by $10.7 million to $100.2 million, or 16.9 percent of sales versus $89.5 million, or 17.2 percent of sales last year. Approximately one half of the year-to-year increase in expense was from the new branded marketing initiatives previously discussed, and the other half related to the acquisition of Phat Fashions and Phat Farm on February 3, 2004.
Sales for the year grew by $209 million, or 9 percent to $2.556 billion, versus $2.346 billion last year. The increase in sales resulted from organic growth of $136 million, or 6 percent and $73 million from the acquisition of Phat Fashions and Phat Farm. The increase in organic sales came from a 6 percent increase in Women's Sportswear and a 14 percent increase in Men's Sportswear, partially offset by a 5 percent drop in Other Soft Goods.
Net earnings from continuing operations for the year decreased $2.5 million to $70.1 million, or $2.50 per diluted share, versus $72.6 million, or $2.68 per diluted share last year.
Kellwood ended fiscal year 2004 with a strong balance sheet and a superior liquidity position. Kellwood's total debt was $470 million, or 39.5 percent of total capital. During the year, the Company issued a new $200 million 3.50 percent convertible debenture. At year-end, the Company had $261 million of cash, and Kellwood's net debt position, total debt less total cash stood at 22.4 percent of net capital.
Sales for fiscal year 2005, which ends in January 2006, are expected to be in the range of $2.5 billion versus $2.556 billion in fiscal year 2004. Sales of Women's Sportswear in fiscal year 2005 are planned at approximately $1.4 billion, 6 percent below fiscal year 2004. Sales of Men's Sportswear are expected to grow 2 percent and be in the range of $650 million. Sales of Other Soft Goods are planned at approximately $450 million, up 7 percent from fiscal year 2004.
Net earnings for fiscal year 2005 are expected to be in the range of $68.5 million, or approximately $2.38 per diluted share versus $70.1 million, or $2.50 per share in fiscal year 2004.
Included in the results planned for 2005 are the newly required expensing of stock options ($3.0 million, before tax, which will be booked in the third and fourth quarters), and expense associated with the closing of our men's pants and jeans plant in Mexico ($2.3 million before tax) that will be booked in the first quarter. These expense items total $5.3 million before tax, $3.5 million after tax, or approximately $0.12 per diluted share.
Excluding these items, net earnings and earnings per share on a comparable basis planned for fiscal year 2005 are expected to be in the range of $72 million, or approximately $2.50 per diluted share.
“Kellwood's first quarter ends in April and largely encompasses the Spring shipping season. The retailers enjoyed a strong Spring selling season last year and are thus facing difficult comparisons for Spring 2005. Additionally, the Fall and Holiday 2004 selling seasons were weak even after aggressive and deep price discounting late in each season by our customers to stimulate demand. As a result of the environment and some fashion issues with some of our moderately priced brands of Women's Sportswear, our customers have ordered cautiously for Spring 2005,” added Upbin.
Based on orders for Spring delivery, Kellwood's sales in the first quarter of 2005 are expected to decrease by approximately $46 million, or 7 percent and be in the range of $640 million versus $686 million last year.
“We expect sales for the remaining three quarters to be either essentially flat or up modestly versus last year,” said Upbin.
Net earnings in the first quarter are planned to be in the range of $13 million, or approximately $0.45 per diluted share versus $25.0 million, or $0.90 per share last year. Included in the results forecasted for the first quarter is $2.3 million, or $0.05 per share of facilities realignment expense attendant with Kellwood's decision to close its pants and jeans plant in Mexico.
The year-to-year planned reduction in earnings on a comparable basis for the first quarter of fiscal year 2005 is largely due to lower sales and the resultant drop in gross profit. SG&A expense in the first quarter is expected to increase only modestly versus prior year.
“We expect net earnings, on a comparable basis, for the remaining three quarters to increase versus last year on flat to perhaps modest growth in sales due to an increase in Kellwood's operating margin. We expect year-to- year improvement in operating margin to begin in the second quarter and increase to slightly over one percentage point in the second half of the year. The year-to-year improvement in Kellwood's operating margin is expected to be driven by an increase in gross profit as a percent of sales, partially offset by a planned increase in SG&A expense as a percent of sales.
“We expect only modest increases in fiscal year 2005 in the level of amortization expense and net interest expense and a slight decrease in net other income. Kellwood's effective tax rate should remain relatively unchanged from last year. Diluted shares outstanding are expected to increase by approximately 750,000 shares,” added Upbin.
“We are obviously very disappointed with our fourth quarter fiscal 2004 and expected first quarter fiscal year 2005 results. It typically takes two seasons to get back on track in the fashion business. We got off track this past Fall and Holiday selling seasons and, as a result, the retailers have reduced their open-to-buy for some of our moderate priced brands for Spring 2005. The Company has taken the necessary corrective actions including upgrading design and merchandising talent to get back on track by Fall 2005 which will begin shipping in July,” said Upbin.
