Kellwood Company Sales from continuing operations for the third quarter decreased 12.5% to $587 million, as compared to $671 million last year. Net earnings for the third quarter were $16.2 million or $0.60 per diluted share. For the third quarter, on an ongoing basis, excluding the impairment, restructuring charges, repatriation tax benefit and losses from businesses that the Company has plans to exit:
- Net sales totaled $549 million, declining $70 million from $619 million
in the third quarter of fiscal 2004; - Net earnings were $17.1 million, or $0.64 per diluted share.
By segment, on an ongoing basis for the third quarter sales were down 11% in women's sportswear to $346.6 million and down 19% in men's sportswear sales to $131.6 million. This was partially offset by a 6% increase in other soft goods sales to $71.2 million.
Mr. Skinner stated, “Our third quarter results were in line with our expectations. During the quarter we made solid progress toward meeting our restructuring and brand goals. We announced the sale of our David Brooks and Dotti brands with the remaining work on our other businesses targeted for sale or closure going smoothly. We were pleased to report that our third quarter restructuring charge was $20 million below our forecast, and we believe that upon completion of the restructuring program, costs will be well within the $225 million charge we announced in August.
“Regarding our brand initiatives, we were equally pleased to have attracted top industry talent to Kellwood this quarter,” Mr. Skinner added. “Earlier this week, we announced a new Vice President of Design for Calvin Klein Women's Better Sportswear and earlier in the third quarter we announced two key hires in our Sag Harbor division, a President of Sales and Marketing and a Vice President of Design. Finally, we have upgraded the talent for our re-launch of O' Oscar by adding both a new President and Vice President of Design. We believe we will benefit greatly from the knowledge and expertise that each of these executives has in the apparel industry, complementing the work that is already underway. While we recognize that the retail environment remains challenging, we believe we are positioned to meet our fourth quarter goals and remain committed to a strategy that results in improved performance and enhances shareholder value in the near and long term.”
Kellwood ended the quarter with considerable liquidity. At October 29, 2005, cash and marketable securities increased by $52 million to $261 million from $209 million, at October 30, 2004.
Under Kellwood's share buyback program, the company repurchased 2.2 million shares through October 29, 2005 at an average price of $24.99 per share completing approximately 80% of the Board approved program. The Company repatriated $90 million of foreign earnings in the third quarter as part of the 2004 American Jobs Creation Act.
Sales from continuing operations for the first nine months of fiscal 2005 were $1.714 billion, declining 7% from $1.833 billion in the first nine months of fiscal 2004. For the first nine months of fiscal 2005, on an ongoing basis, (excluding the impairment, restructuring and related non-recurring charges, repatriation tax benefit and losses from businesses that the Company plans to exit) net sales totaled $1.591 billion, declining 7% from $1.704 billion in the first nine months of fiscal 2004.
The Board of Directors declared a regular quarterly dividend of $0.16 per common share, payable December 23, 2005 to shareholders of record December 12, 2005.
Kellwood Company has determined that its methods used at a regional accounting center to accrue for freight, duty and agents' commission costs related to imports of goods resulted in the understatement of liabilities. The Company identified this issue after the regional accounting center was centralized into the Company's financial services operations in St. Louis and subsequent review of accounting processes. The accounting error caused an understatement of cost of goods sold in prior periods, resulting in a cumulative overstatement of net income of approximately $5 million as of July 30, 2005. As a result, the Company plans to restate its financial statements for the first two quarters of fiscal 2005 and prior fiscal years, including 2002, 2003 and 2004. The Company also plans to record a $2.5 million (after tax) liability for a Death Benefit program previously deemed immaterial as of January 31, 2004. The restatement for both of these items is expected to reduce net income in the first two quarters of 2005 by less than $0.01 per share. Previously issued financial statements for the first two quarters of 2005 and fiscal years 2002, 2003 and 2004 and related auditors' reports should not be relied upon until the restatement is complete.
The Company anticipates completing its review of the effects of the restatement on the year-to-date results for 2004 and 2005 prior to filing its Quarterly Report on Form 10-Q for the period ended October 29, 2005 by the extended filing date of December 13, 2005. The Company expects to file amended Forms 10-QA for the first two quarters of 2005 and an amended Form 10- KA for fiscal 2005 in January 2006.
The decision to restate prior financial statements based on these matters was made by the Company on December 1, 2005, upon recommendation of the Audit Committee. The Company has discussed this with its independent registered public accounting firm.
The Company is in process of reviewing the circumstances underlying the restatement and has enhanced its procedures for the recording of freight, duty and agents' commissions. The Company is in the process of evaluating whether this accounting error was the result of a material weakness in its internal control over financial reporting.
For the fourth quarter, the Company estimates sales of approximately $525 million, which includes $50 million in discontinued/exited businesses, as compared to actual sales of $592 million in the fourth quarter last year. Net loss for the fourth quarter of fiscal 2005 is currently expected to approximate $(38.0) million, or $(1.47) per diluted share. On an ongoing basis and prior to restructuring and non-recurring charges, the Company expects fourth quarter sales of approximately $475 million versus $480 million last year and net earnings of approximately $5.9 million, or $0.23 per diluted share, in-line with prior guidance. (See table below). While downward pressure on gross margins is anticipated in the fourth quarter, a lower share count and a net reduction in non-operating expenses are expected to offset the impact on ongoing net earnings per share.
For the fiscal 2005 year, the Company expects sales of about $2.35 billion, which includes $288 million in discontinued/exited businesses. This compares to actual fiscal 2004 sales of $2.56 billion. The Company's current sales guidance for the year includes sales from divisions and brands that will be exited or restructured. Sales for Kellwood's ongoing operations are forecasted to be approximately $2.07 billion versus $2.2 billion last year. The Company anticipates that fully diluted shares will approximate 27.1 million for fiscal 2005.
KELLWOOD COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(Amounts in thousands, except per share data)
Three Months Ended
10/29/2005
Net sales by segment:
Women's Sportswear $353,660
Men's Sportswear 162,600
Other Soft Goods 71,200
Total net sales 587,460
Costs and expenses:
Cost of products sold 461,148
Selling, general and
administrative expenses 87,567
Amortization of intangible
assets 2,572
Impairment, restructuring and
related non-recurring charges 8,669
Interest expense, net 5,831
Other (income) and expense, net (408)
Earnings before income taxes 22,081
Income tax provision (7,119)
Net earnings from continuing
operations 14,962
Net earnings (loss) from
discontinued operations,
net of tax 1,226
Net earnings $16,188
Weighted average shares outstanding:
-- Basic 26,739
-- Diluted 26,799
Earnings per share -- basic:
Continuing operations 0.56
Discontinued operations 0.05
Net Earnings $0.60
Earnings per share -- diluted:
Continuing operations 0.56
Discontinued operations 0.05
Net Earnings $0.60
The following table summarizes net sales, operating earnings(1), net earnings and earnings per share from Kellwood's ongoing business units, exited business units and non-recurring charges included in continuing operations.
September 1, 2005 Guidance
Operating
Net Sales Earnings(1) Net Earnings Diluted EPS
Continuing Operations:
Ongoing Operations $555,000 $33,000 $15,600 $0.57
Exited Businesses and
Non-Recurring
Charges 39,000 (14,800) (10,550) (0.39)
Amortization of
Intangibles(2) - (3,900) - -
Total Continuing
Operations $594,000 $14,300 $5,050 $0.18
The following table summarizes net sales, operating earnings(1), net earnings and earnings per share from Kellwood's ongoing business units, exited business units and non-recurring charges included in continuing operations.
December 1, 2005 Guidance
Operating
Net Sales Earnings(1) Net Earnings Diluted EPS
Continuing Operations:
Ongoing Operations $476,300 $17,700 $5,900 $0.23
Exited Businesses and
Non-Recurring
Charges 23,600 (52,200) (36,500) (1.42)
Amortization of
Intangibles(2) - (2,500) - -
Total Continuing
Operations $499,900 $(37,000) $(30,600) $(1.19)
