The Warnaco Group, Inc. reported results for the second quarter ended July 2, 2005, in which net revenues increased to $374.7 million for the second quarter of fiscal 2005, compared to $332.1 million for the second quarter of fiscal 2004. Strength in the company's Sportswear Group and Intimate Apparel Group revenues offset a slight decline in revenues in the Swimwear Group. The Sportswear Group continued its strong performance from the first quarter, achieving revenue growth over the prior year quarter of over 30%, led by Chaps with growth in excess of 55% and continued positive momentum in Calvin Klein jeans. The Intimate Apparel Group delivered an 11.7% increase in net revenues over the prior year quarter, reflecting favorable consumer response to the Group's latest product offerings. Swimwear Group revenues declined slightly compared to the prior year quarter, primarily due to unfavorable weather conditions which resulted in a decline in shipments. The increase in net revenues for the second quarter of fiscal 2005 includes approximately $4.1 million related to the translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar relative to the second quarter of fiscal 2004.
Gross profit rose 9.2% to $113.0 million, or 30.2% of net revenues, for the second quarter of fiscal 2005, compared to $103.4 million, or 31.1% of net revenues, for the second quarter of fiscal 2004. Gross profit as a percentage of net revenues was primarily affected by a shift in product mix and expenses related to design and associated costs for the company's new launches, including Op, Calvin Klein swimwear, Michael Kors and Axcelerate engineered by Speedo. The increase in gross profit for the second quarter of fiscal 2005 includes approximately $1.6 million related to the translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar relative to the second quarter of fiscal 2004.
As a result of the company's continued focus on controlling costs, selling, general and administrative (“SG&A”) expenses as a percentage of net revenues improved 110 basis points, notwithstanding the company's continued support of its brands, including an additional $1.7 million investment in marketing over the prior year quarter. SG&A expenses also include approximately $1.2 million related to a $1.5 million pre-tax charge for a non- trade receivable (with the balance of $0.3 million recorded in restructuring items). SG&A expense in the period was also unfavorably affected by approximately $1.0 million related to the translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar relative to the second quarter of fiscal 2004.
Operating income for the second quarter of fiscal 2005 improved 21.7% to $15.6 million from the prior year period. Operating margin for the second quarter of fiscal 2005 increased 30 basis points to 4.2%.
Net income increased to $6.3 million for the second quarter of fiscal 2005 compared to $4.4 million for the second quarter of fiscal 2004. Higher revenues, better cost management and a lower tax rate contributed to the improvement in the current quarter.
Mr. Gromek continued, “For the balance of 2005, we are focused on improving gross margins and continuing to enhance the profitability of the company. We are excited by the reception of our recently launched Op, Michael Kors and Calvin Klein swimwear collections, which were presented at the Miami market in July. Additionally, we believe the momentum in Warner's demonstrates that this brand is on the right track.”
Mr. Gromek concluded, “I would also like to announce that our Board of Directors recently authorized a share repurchase program of up to three million shares of common stock.” The company notes that, in order to comply with the terms of applicable debt instruments (which contain certain limitations on repurchases), the company expects that purchases under the share repurchase program will be made over the course of the next three years.
Financial data as of and for the three- and six-month periods ended July 2, 2005 and July 3, 2004 can be found on Schedules 1, 1.1, 2 and 3 to this release.
The company noted the following balance sheet highlights as of July 2, 2005:
Cash and cash equivalents were $153.9 million compared to $162.7 million at July 3, 2004, notwithstanding the $40.0 million in cash used for the acquisition of Op in August 2004 and greater working capital needs.
Inventories increased 21.5% to $277.3 million at July 2, 2005 from $228.3 million at July 3, 2004. On a percentage basis, the majority of the increase reflects inventory to support the planned expansion of Chaps to the mid-tier channel, growth in the company's international businesses and increases in Swimwear Group inventory due to a challenging swimwear season.
Commenting on the results, Larry Rutkowski, Warnaco's Chief Financial Officer stated, “We are pleased with the company's performance in the second quarter. We continued to enhance shareholder value with a meaningful increase in earnings and a strong balance sheet at quarter-end. Inventories were up year-over-year; however, we expect inventories for the remainder of the year to be in line with prior year levels. We continue to drive toward our three year goals, on balance and over time, of: (i) no less than high single-digit sales growth; (ii) gross margin increases on average of 100 basis points annually; (iii) competitive SG&A expense; and (iv) annual double-digit growth in operating margin percentage.”
Schedule 1
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)
For the Second Quarter of
Fiscal 2005 Fiscal 2004
(Unaudited) (Unaudited)
Net revenues $374,679 $332,077
Cost of goods sold 261,708 228,645
Gross profit 112,971 103,432
Selling, general and
administrative expenses (a) 96,482 89,169
Pension expense 200 329
Restructuring items (a) 721 1,140
Operating income 15,568 12,794
Other (income) loss 882 (495)
Interest expense, net 4,524 4,985
Income from continuing operations
before provision for income taxes 10,162 8,304
Provision for income taxes 3,581 3,874
Income from continuing operations 6,581 4,430
Income (loss) from discontinued
operations, net of taxes (253) 12
Net income $6,328 $4,442
Basic and diluted income per
common share:
Income from continuing operations $0.14 $0.10
Income (loss) from discontinued
operations - -
Net income $0.14 $0.10
Weighted average number of
shares outstanding used in
computing income per common
share:
Basic 45,817,470 45,370,712
Diluted 46,408,883 46,623,704
(a) The Second Quarter of Fiscal 2005 includes a pretax charge of $1,528
of which $1,230 relates to the reserving of a non-trade receivable and
is recorded in selling, general and administrative expenses. The
remaining balance of $298 relates to assets sold in prior periods and
is recorded in restructuring items.
