Kellwood Company Q1 net sales totaled $484.4 million, as compared to $493.8 million in the first quarter last year. Net earnings from continuing operations were $5.9 million, or 23 cents per diluted share, versus $1.1 million, or four cents per diluted share, last year. Included in net earnings from continuing operations for the quarter last year were restructuring and other non-recurring charges of $2.9 million (after tax), or $0.11 per diluted share associated with the Company's recently completed strategic restructuring initiatives.
Total net earnings were $7.4 million, or $0.28 per diluted share, versus $9.2 million, or $0.36 per diluted share, in the first quarter last year. Included in total net earnings for the first quarter were net earnings from discontinued operations of $1.4 million, or $0.06 per diluted share, versus $8.1 million, or $0.31 per diluted share, last year. Results of discontinued operations in the 2006 first quarter include a $6.3 million reversal of an allowance for tax exposures no longer deemed necessary due to the finalization of an open tax year.
For the first quarter, on an ongoing basis (continuing operations excluding the restructuring and other non-recurring charges), net sales were $484.4 million as compared to $493.8 million in the first quarter last year. Operating earnings (gross profit less selling, general & administrative expense before stock option expense, amortization and restructuring and other non-recurring charges) for the first quarter were $16.2 million compared to $14.3 million, last year — a 13% increase.
Net earnings on an ongoing basis were $5.9 million, or $0.23 per diluted share, compared to $3.9 million, or $0.15 per share. The tax rate from ongoing operations was 27.0% compared to 33.5% last year. We continue to believe the 2007 full year effective tax rate will approximate 33%. The impact of the difference between the tax rate for the first quarter of 27.0% and our expected annual effective tax rate of 33% on net earnings is $0.5 million, or $0.02 per diluted share. The first quarter rate is lower than our expected full year rate primarily due to the reversal of allowances for tax exposures for which the statutes expired during the quarter. Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (FIN 48) is effective this year and requires that certain tax matters, such as these reversals, be recorded as discrete items in individual quarters.
Net sales of $484.4 million were slightly lower than last year. Organic sales growth was mainly realized from Calvin Klein women's better sportswear, My Michelle® and XOXO® juniors and girls businesses and Gerber Childrenswear. The launch of O Oscar, an Oscar de la Renta Company, exclusively at Macy's, as well as the acquisition of Vince® also led to improved sales in the quarter. This was offset by the anticipated impact of lower sales volumes of certain private brands and Halmode dresses and suits along with a softer than expected women's bottoms business.
Gross profit as a percentage of net sales rose by approximately 200 basis points to 22.2%, partly reflecting a weak quarter last year. This increase was primarily driven by improved performance by many of the Company's brands led by Sag Harbor®, My Michelle, XOXO, Baby Phat® and Gerber Childrenswear as well as the acquisition of Vince. To a lesser extent, the increase in gross profit as a percent of net sales also included lower product costs related to improvements in sourcing. Each business segment achieved a higher gross profit as a percent of net sales compared to last year.
Selling, general and administrative costs increased approximately 150 basis points from last year to 18.8% due to the acquisitions of Vince and HOLLYWOULD, the addition of 19 new retail stores and activities to fund new or relaunched brand initiatives to support our future growth.
Operating earnings (gross profit less selling, general & administrative expense before stock option expense, amortization and restructuring and other non-recurring charges) as a percent of net sales rose by approximately 40 basis points from last year to 3.3%.
“We continue to make progress in the execution of our strategy as demonstrated by our first quarter results which reflect the fourth consecutive quarter of year-over-year improvement in gross margin and net earnings,” stated Mr. Skinner. “Gerber Childrenswear and Baby Phat continued to excel during the first quarter. In addition, Sag Harbor women's sportswear delivered improved sell through results at retail. Our juniors branded sportswear and dress businesses, consisting of My Michelle and XOXO, also performed well based on our ability to bring trend right product to market. While we recognize that we can still do better, Calvin Klein women's better sportswear showed improvement over the prior year in retail sell through. In addition, based on the initial learnings from consumer preferences, we have made adjustments to our O Oscar upcoming merchandise assortments and expect to see better results in the fall.”
Women's Sportswear net sales decreased 3% to $272.5 million in the first quarter of 2007. Organic sales growth was realized from Calvin Klein women's better sportswear and My Michelle and XOXO junior and girls businesses. Sales increases due to the launch of O Oscar as well as growth from the acquisition of Vince were offset by the anticipated impact of retail consolidations and lower sales volumes for certain private brands and Halmode dresses and suits. This along with a softer than expected women's bottoms business contributed to the sales decline compared to last year. Operating earnings (gross profit less selling, general & administrative expense before stock option expense, amortization and restructuring and other non-recurring charges) decreased $1.9 million to $12.9 million. Operating earnings as a percent of net sales declined to 4.7% from 5.3% last year. This decrease in operating earnings as a percentage of net sales is principally due to higher selling, general and administrative costs related to the addition of 19 new retail stores and new or relaunched brand initiatives to support our future growth, as compared to last year.
Net sales of Men's Sportswear decreased 4% to $128.4 million during the 2007 first quarter principally related to our Smart Shirts' private label business. Operating earnings (gross profit less selling, general & administrative expense before stock option expense, amortization and restructuring and other non-recurring charges) during the first quarter rose 9% to $6.2 million. Operating earnings as a percent of net sales improved to 4.9% from 4.3% last year largely due to the strong performance of Phat Fashions' Baby Phat brand.
Other Soft Goods continued to excel in the first quarter of 2007 achieving a 6% increase in net sales to $83.6 million. Growth was realized across the children's and specialty recreation product categories. Operating earnings (gross profit less selling, general & administrative expense before stock option expense, amortization and restructuring and other non-recurring charges) grew 29% to $9.0 million in the first quarter of 2007. Operating earnings as a percentage of net sales increased to 10.7% from 8.8% last year driven by the continued strong performance and execution of the Company's Gerber Childrenswear and American Recreation Products divisions.
Mr. Skinner stated, “The retail landscape has and will continue to change as a result of consolidation and the desire of our customers to have their own private brands or exclusive brands from their wholesale partners. Recognizing this changing environment, we developed and began implementing our five year corporate strategy last fall — to reinvigorate our core moderate business, expand into higher profile, better and above price point brands, connect more directly with consumers and utilize our operating infrastructure more efficiently to fund our growth. While not immune to this changing environment, we have confidence that the ongoing execution of our strategies will position our portfolio of brands for sustained growth in sales and profits.”
For the second quarter of fiscal 2007, the Company expects net sales of approximately $460 million to $470 million, as compared to actual net sales from ongoing operations of $459.6 million in the second quarter of last year. Net sales of Women's Sportswear and Men's Sportswear are expected to be slightly lower at $255 million and $115 million, respectively. Net sales of Other Soft Goods are anticipated to be higher at $95 million. Operating earnings (gross profit less selling, general & administrative expense before stock option expense, amortization and restructuring and other non-recurring charges) from ongoing operations in the second quarter are forecasted to range from $21 million to $22 million versus $21.0 million last year.
Net earnings from ongoing operations in the second quarter of fiscal 2007 are estimated to be approximately $9.5 million to $10.0 million, or $0.37 to $0.39 per diluted share. This compares to net earnings from ongoing operations of $9.5 million, or $0.37 per share, in the second quarter of 2006. The Company anticipates realizing a gain on the sale of a building in the second quarter of 2007 totaling $1.0 million after tax or $0.04 per diluted share. The effective tax rate for the second quarter is expected to be 38% compared to 33.5% last year. The impact of the difference between the tax rate for the second quarter of 38% and our expected annual effective tax rate of 33% on net earnings is $0.8 million or $0.03 per diluted share. The 2007 second quarter effective tax rate is higher than our expected annual effective tax rate of 33% due to discrete items which benefit the full year tax rate being recorded and anticipated in the first and fourth quarters under FIN 48.
During the second quarter of 2007, the Company announced that it would consolidate its warehouse operations by closing its Chico, California distribution center. Restructuring charges of approximately $4 million are expected to be incurred during the second and/or third quarters of 2007 and the Company anticipates realizing a pay back through operating efficiencies over approximately the next 18 months.
For the fiscal 2007 year, the Company continues to expect net sales from ongoing operations to range from $2.0 billion to $2.025 billion. This compares to actual net sales from ongoing operations of $1.962 billion in fiscal 2006.
On an ongoing basis, the Company also continues to anticipate that operating earnings (gross profit less selling, general & administrative expense before stock option expense, amortization and restructuring and other non-recurring charges) will approximate $100 million to $105 million versus $91.9 million last year. Net earnings for fiscal 2007 from ongoing operations are forecasted to range from $47 million to $49 million versus $42.5 million last year. Also on an ongoing basis, fiscal 2007 diluted earnings per share are estimated in the range of approximately $1.80 to $1.89 per diluted share. This compares to actual earnings per diluted share of $1.64 in fiscal 2006.
KELLWOOD COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Ended
4/29/2006 5/5/2007
Net sales $493,777 $484,447
Cost of products sold 394,108 377,017
Gross profit 99,669 107,430
Selling, general and administrative expenses 85,388 91,280
Stock option expense 2,941 327
Amortization of intangible assets 2,481 3,222
Restructuring and other non-recurring charges 4,406 -
Interest expense, net 4,092 4,788
Other income, net (1,154) (322)
Earnings before income taxes 1,515 8,135
Income taxes 438 2,197
Net earnings from continuing operations 1,077 5,938
Net earnings from discontinued operations 8,116 1,447
Net earnings $9,193 $7,385
Weighted average shares outstanding:
Basic 25,623 25,949
Diluted 25,785 26,117
Earnings per share:
Basic:
Continuing operations $0.04 $0.23
Discontinued operations 0.32 0.06
Net earnings $0.36 $0.28
Diluted:
Continuing operations $0.04 $0.23
Discontinued operations 0.31 0.06
Net earnings $0.36 $0.28
