The Warnaco Group, Inc. saw overall company net revenues increase 4.4% to $465.1 million compared to $445.6 million in the prior year period and gross profit margin increased to 38.5% compared to 35.3% in the prior year quarter. Selling, general and administrative expenses, as a percentage of net revenues, rose to 33.1% from 30.7% in the prior year quarter, driven by the mix in business (favoring international and direct to consumer), as well as increased marketing and other investments. Operating income rose 32.7% to $22.2 million, or 4.8% of net revenues, from $16.7 million, or 3.8% of net revenues, in the second quarter of fiscal 2006.
Income from continuing operations was $13.7 million, or 29 cents per diluted share, compared to $5.5 million, or 12 cents per diluted share, in the prior year quarter and net income increased to $13.8 million, or 30 cents per diluted share, from $3.4 million, or 7 cents per diluted share, in the prior year quarter.
The quarter benefited from $6.3 million, or approximately 10 cents per diluted share (after-tax), of other income related primarily to net gains on the current portion of intercompany loans denominated in currency other than that of the foreign subsidiaries' functional currency. In addition, this quarter's results include approximately $3.3 million, or 5 cents per diluted share (after-tax), of restructuring charges related primarily to the previously announced initiatives undertaken in the company's Swimwear Group.
Mr. Gromek concluded, “We remain focused on developing our global platform and growing our business worldwide. We believe this approach will continue to differentiate Warnaco within the apparel industry and provide increased value for all Warnaco stakeholders. As we enter the second half of the year, we continue to see organic revenue opportunities and believe fiscal 2007 is shaping up to be a year of substantial growth for our Company.”
The tax rate for the second quarter was 31.0%, due in part to the correction of errors in prior period income tax provisions in the amount of $1.6 million associated with the company's foreign subsidiaries. These errors were not material to any prior period. The company continues to anticipate an effective tax rate for 2007 of approximately 29.0%.
The translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar, increased second quarter 2007 net revenues, gross profit and operating income by approximately $8.8 million, $4.3 million and $0.6 million, respectively, compared to the second quarter of fiscal 2006.
Sportswear
Revenues for the Sportswear Group increased 15.1% to $192.9 million and operating income increased to $19.0 million, or 9.8% of Sportswear Group net revenues. The Calvin Klein jeans businesses exceeded the company's expectations at retail and wholesale and the Chaps business, reversing a $4.6 million operating loss in the prior year quarter, reported operating profit of $2.8 million. For the acquired Calvin Klein jeans businesses, net revenues grew 23.2% and operating profit was $3.1 million, or 3.9% of net revenues, up from a loss in last year's second quarter. At Chaps, product improvement and lower dilution resulted in stronger gross profit margins, which drove the improvement in profitability.
Swimwear
Swimwear Group revenues were $111.8 million, a decline of 11.8% from the prior year quarter, with an operating loss of $5.5 million. The Swimwear Group's operating loss included $3.2 million of restructuring expenses related to the previously announced initiatives to improve profitability. Speedo's core competitive and accessories businesses continued to perform well; however, softness in the mid-tier and mass channels negatively affected revenues and profitability. Within its designer swim division, the company continues to evaluate opportunities to improve productivity and profitability, including an ongoing review of its manufacturing operations.
Balance Sheet
Cash and cash equivalents at June 30, 2007 were $163.1 million compared to $138.4 million at July 1, 2006. During the quarter, the company used $30.5 million to repurchase 911,548 shares of the company's common stock.
Inventories were $357.1 million at June 30, 2007, up from $311.0 million at July 1, 2006. The 14.8% increase is primarily related to the launch of Steel (the new Calvin Klein Underwear offering) as well as additional inventories to ensure appropriate service levels for the company's customers.
Fiscal 2007 Outlook
For fiscal 2007, the company now expects net revenues to grow 7% – 9% over fiscal 2006 levels and diluted earnings per share in the range of $1.90 – $2.00 (assuming minimal pension expense).
THE WARNACO GROUP, INC.CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)Second Second
Quarter Quarter
of Fiscal of Fiscal
2007 2006
———— ————
(Unaudited) (Unaudited)Net revenues $ 465,118 $ 445,562
Cost of goods sold 285,953 288,385
———— ————
Gross profit 179,165 157,177
Selling, general and administrative
expenses 153,727 136,572
Amortization of intangible assets 3,617 3,825
Pension expense (income) (407) 33
———— ————
Operating income (a) 22,228 16,747
Other income (6,323) (771)
Interest expense 9,542 10,501
Interest income (778) (1,084)
———— ————
Income from continuing operations before
provision for income taxes 19,787 8,101
Provision for income taxes 6,129 2,599
———— ————
Income from continuing operations 13,658 5,502
Income (loss) from discontinued
operations, net of taxes 119 (2,079)
———— ————
Net income $ 13,777 $ 3,423
============ ============Basic income per common share:
Income from continuing operations $ 0.30 $ 0.12
Income (loss) from discontinued
operations 0.01 (0.05)
———— ————
Net income $ 0.31 $ 0.07
============ ============Diluted income per common share:
Income from continuing operations $ 0.29 $ 0.12
Income (loss) from discontinued
operations 0.01 (0.05)
———— ————
Net income $ 0.30 $ 0.07
============ ============Weighted average number of shares
outstanding used in
computing income per common share:
Basic 45,146,246 46,082,333
============ ============Diluted 46,534,530 46,935,529
============ ============(a)Includes restructuring charges of $3,319 for the Second Quarter of
Fiscal 2007 primarily related to the closure of a goggle
manufacturing facility located in Canada and the rationalization
of the Company's swimwear workforce in Mexico and California.
