Warnaco Q3 Sales Up 15%; Swimwear Group Up 21%

 

The company said growth in Calvin Klein was complemented by robust growth in the company’s Heritage businesses. Compared to the prior year quarter, Chaps net revenue grew by 32% while Core intimates reported mid-teens growth. Both businesses continued to benefit from expanded distribution as well as positive consumer response to new product offerings. Gross margin increased 120 basis points, to 45% of net revenues, compared to the prior year quarter.

 

The company achieved higher gross margins partially from the expansion in its direct-to-consumer and international businesses, which more than offset the effects of increased product and transportation costs. Selling, general and administrative expense (SG&A) was $198.1 million, or 33% of net revenues (a 140 basis point increase compared to the prior year quarter).

 

The company’s expanded direct-to-consumer footprint, incremental marketing in support of the company’s growth initiatives, infrastructure costs and performance-based employee compensation were the largest components of the increase. Operating income increased 13% to $67.9 million compared to $60.3 million in the prior year quarter and includes an additional $3.3 million of restructuring expenses, certain acquisition and tax related items and other items compared to the prior year quarter. The company recorded income from continuing operations of $41.4 million, or 90 cents per diluted share in the quarter, compared to $31.2 million, or 66 cents per diluted share, in the prior year quarter. Income per diluted share from continuing operations, on an adjusted non-GAAP basis (excluding costs related to restructuring expenses, pension expense, certain acquisition and tax related items and other items), as detailed in the accompanying schedules, was $1.04 in the quarter compared to 74 cents in the prior year quarter. The effect of fluctuations in foreign currency exchange rates for the quarter reduced net revenues by $8.6 million and increased income per diluted share from continuing operations by approximately 8 cents. An additional discussion regarding the effects of fluctuations in foreign currency exchange rates on operating results can be found in the Company’s form 10-Q for the quarter, which will be filed with the Securities and Exchange Commission.

 

 

At Oct. 2, 2010, the company had net cash (cash and cash equivalents net of total debt) of $143.8 million, compared to $20.4 million at October 3, 2009. Cash and cash equivalents at Oct. 2, 2010 were $213.4 million, a decrease of $15.9 million, compared to $229.3 million at October 3, 2009.

 

During the quarter, the company used approximately $11.8 million of cash to purchase 247,000 shares of its common stock, under a share repurchase program. Accounts receivable, at Oct. 2, 2010 were $346.5 million, an increase of $20.1 million, or 6%, compared to $326.4 million at October 3, 2009, while the company’s net revenues grew 15%. Inventories at October 2, 2010 were $324.4 million, an increase of $43.2 million, or 15%, compared to $281.2 million at October 3, 2009.

 

The company is comfortable with the quality of its inventory and has improved its turn and aging compared to last year. The inventory increase is in line with the company’s growth expectations for the balance of the year and reflects the growth in the company’s direct to consumer platform, growth in its overall wholesale business and the need for sufficient inventory.

 

“Our powerful third quarter results speak to the continued success of our diversified global business model and our long-term growth strategies,” commented Joe Gromek, Warnaco’s Ppsident and CEO.

 

“Our global Calvin Klein® business grew 12% compared to the prior year quarter, bolstered by the continued success of Calvin Klein X Underwear, the launch of X Jeans and the launch of Calvin Klein Envy, coupled with the continued execution of our international and direct to consumer initiatives. Compared to the prior year quarter, net revenues of our international businesses grew 12%, driven by a 21% increase in our direct-to-consumer business.

 

Comparable store sales increased 9% in the quarter, with notable strength in Europe, Latin America and China. Our Heritage business, led by Chaps® and Core Intimates, delivered a very strong performance in the quarter, reporting a 24% increase in net revenues and significant growth in operating margin. We were particularly pleased with the growth in gross margins, which increased 120 basis points to 45%, and our ability to absorb the rising product and transportation costs affecting our industry. Our strong top line and gross margin growth, contributed to a 36% increase in diluted earnings per share from continuing operations over the prior year quarter.”

 

Gromek continued, “As we begin the fourth quarter, we are especially encouraged by our brand performance in the face of continuing macro-economic uncertainty in certain markets. We remain optimistic about our prospects for growth, both organic as well as through acquisitions, such as the recently announced acquisition of retail operations from our largest European franchise partner. Supported by our continued success and strong balance sheet, we will continue to make incremental investments in our business in the fourth quarter intended to support the long-term growth of our business and our continued creation of long-term shareholder value.”

 

 

The company is raising its 2010 earnings outlook. For fiscal 2010, on an adjusted non-GAAP basis (excluding restructuring expense, pension expense, cost related to repurchase of debt, certain acquisition costs and tax related items and other items):

 

•The company currently anticipates net revenues will increase 11-13% compared to fiscal 2009

•The company now expects diluted earnings per share from continuing operations in the range of $3.45 – $3.55, a 24% increase compared to fiscal 2009.

•The company’s prior guidance was for net revenue growth in the range of 9% – 11% compared to fiscal 2009 and diluted earnings per share from continuing operations in the range of $3.40 – $3.50.

Schedule 7 of the accompanying tables provide a reconciliation of expected diluted earnings per share from continuing operations, on a GAAP basis of $3.10 – $3.17 (assuming minimal pension expense), to the adjusted fiscal 2010 outlook above.