The Warnaco Group, Inc. reported that third quarter net revenues rose 13% to $474.8 million compared to $419.6 million in the prior year period. Selling, general and administrative expenses (“SG&A”), as a percentage of net revenues, rose to 33% from 31% in the prior year quarter, and includes $7.8 million and $2.2 million, respectively, of expense related to restructuring and businesses to be discontinued. Operating income fell to $30.7 million from $37.3 million in the prior year quarter.
On an as adjusted basis, net revenues rose 13% to $472.6 million compared to $417.1 million in the prior year period and gross profit margin increased 200 basis points to 43% of net revenues compared to the prior year quarter. SG&A expenses, as a percentage of net revenues, rose to just over 31% from just under 31% in the prior year quarter, driven by the mix in business (favoring international and direct to consumer), as well as an incremental $2.0 million in marketing expense. Operating income increased 28% to $50.9 million, compared to $39.7 million in the third quarter of fiscal 2006.
Income from continuing operations was $11.4 million, or 24 cents per diluted share, compared to $25.8 million, or 55 cents per diluted share, in the prior year period and includes restructuring expense of $14.6 million and $0.10 million, respectively. The company reported net income of 10 cents per diluted share compared to 31 cents in the third quarter of fiscal 2006.
On an as adjusted basis, as detailed in the accompanying tables, income from continuing operations was $31.1 million, or 67 cents per diluted share, compared to $27.6 million, or 59 cents per diluted share, in the prior year quarter and net income increased to $20.0 million, or 43 cents per diluted share, from $14.6 million, or 32 cents per diluted share, in the prior year quarter.
The provision for income taxes was $11.0 million, or an effective tax rate of 49%, compared to $7.3 million, or an effective tax rate of 22%, for the prior year quarter. The higher effective tax rate is primarily related to restructuring expenses incurred during the quarter, which reduced the companys net income, but which did not result in a tax benefit to the company. The prior year quarters effective tax rate was favorably affected by the previously disclosed retroactive ruling from the Netherlands taxing authority.
The translation of foreign currencies, primarily as a result of a stronger euro and Canadian dollar, increased third quarter 2007 net revenues, gross profit and operating income by approximately $14.1 million, $7.5 million and $2.9 million, respectively, compared to the third quarter of fiscal 2006.
“The power of our brands and the diversity of our global business model are evident in the strong results of our ongoing business we reported today,” said Joe Gromek, Warnacos President and Chief Executive Officer. “Clearly, the successful execution of our key strategies to capitalize on the worldwide potential of our Calvin Klein businesses, expand our direct-to-consumer business and increase our international presence is the driving force behind the sustained positive performance of our business.”
“During the quarter, we recorded a double digit gain in revenues with all geographies contributing to this increase. Our international revenues for the first time represented more than half of our total business, driven by particular strength in Europe and Asia, and our strategy to expand our direct-to-consumer business is working. The global strength of our brands and product offerings led to a significant increase in both as adjusted gross margin and operating income.”
Mr. Gromek concluded, “The recently announced restructuring in our Swimwear Group exemplifies our teams commitment to creating shareholder value. With a continued focus on the significant opportunities that exist to maximize our powerful brands, we remain positive regarding the Companys prospects for the current year and beyond.”
Third Quarter Highlights
Segment Results
Sportswear
Sportswear Group revenues increased 14% to $265.1 million and operating income increased to $36.8 million, or 14% of Sportswear Group net revenues. The Calvin Klein jeans business continued its strong momentum at wholesale and retail, both internationally and domestically, recording a 21% increase in net revenues. While Chaps revenues fell 10%, its operating margin increased to 9% from 6% in the prior year quarter, driven by stronger gross profit margins and disciplined cost control.
Intimate Apparel
Intimate Apparel Group revenues rose 19% to $174.5 million and operating income increased to $33.4 million, or 19% of Intimate Apparel Group net revenues. Strong global growth in Calvin Klein Underwears wholesale and retail businesses drove the gains in both revenues and operating profit. Calvin Klein Underwear retail revenues grew approximately 35% as a result of new store openings and robust same store sales growth.
Swimwear
Swimwear Group revenues fell $5.0 million to $35.2 million. The operating loss was $29.6 million, including $16.6 million of restructuring expense, compared to an operating loss of $8.6 million in the prior year period. Speedo revenues were adversely affected by lower than anticipated membership club sales in the period. Additionally, sharp reductions in gross profit and higher SG&A expense, primarily due to restructuring costs related to previously announced initiatives, increased the quarterly loss.
Balance Sheet
Cash and cash equivalents at September 29, 2007 were $188.9 million compared to $113.4 million at September 30, 2006. During the nine month period ended September 29, 2007, the company used $30.5 million to repurchase its common stock under its 2005 Share Repurchase Program.
Inventories were $340.2 million at September 29, 2007, a 7% decline, compared to $366.5 million at September 30, 2006, primarily as a result of discontinued operations.
Fiscal 2007 Outlook
Based on the continued positive momentum in the business, the company is raising its guidance. For fiscal 2007, on an as adjusted basis (excluding businesses expected to be discontinued in 2008 and restructuring expenses), the company now expects net revenues to grow 11%-12% over as adjusted fiscal 2006 levels and expects diluted earnings per share from continuing operations in the range of $2.10 – $2.18 (assuming minimal pension expense).
| THE WARNACO GROUP, INC. | ||||||||||||||||||||||||
| CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS | ||||||||||||||||||||||||
| (Dollars in thousands, excluding per share amounts) | ||||||||||||||||||||||||
(Unaudited) | ||||||||||||||||||||||||
| As Reported | As Adjusted | |||||||||||||||||||||||
| Third Quarter | Discontinued | Restructuring | Taxation (d) | Third Quarter | ||||||||||||||||||||
| of Fiscal 2007 | Operations (b) | Charges (c) | of Fiscal 2007 (e) | |||||||||||||||||||||
| Net revenues | $ | 474,762 | $ | (2,141 | ) | $ | – | $ | – | $ | 472,621 | |||||||||||||
| Cost of goods sold | 282,783 | (5,608 | ) | (6,821 | ) | 270,354 | ||||||||||||||||||
| Gross profit | 191,979 | 3,467 | 6,821 | – | 202,267 | |||||||||||||||||||
| Selling, general and administrative expenses | 158,668 | (2,181 | ) | (7,788 | ) | 148,699 | ||||||||||||||||||
| Amortization of intangible assets | 2,997 | 2,997 | ||||||||||||||||||||||
| Pension income | (345 | ) | (345 | ) | ||||||||||||||||||||
| Operating income | 30,659 | 5,648 | 14,609 | – | 50,916 | |||||||||||||||||||
| Other expense | 419 | 419 | ||||||||||||||||||||||
| Interest expense | 9,177 | 9,177 | ||||||||||||||||||||||
| Interest income | (1,257 | ) | (1,257 | ) | ||||||||||||||||||||
Income from continuing operations before provision for income taxes | 22,320 | 5,648 | 14,609 | – | 42,577 | |||||||||||||||||||
| Provision for income taxes | 10,966 | 1,525 | (995 | ) | 11,496 | |||||||||||||||||||
| Income from continuing operations | 11,354 | 4,123 | 14,609 | 995 | 31,081 | |||||||||||||||||||
Loss from discontinued operations, net of taxes | (6,942 | ) | (a) | (4,123 | ) | |||||||||||||||||||
