Warnaco, Inc. reported that second quarter net revenues fell 9% to $455.9 million and declined 0.5% in constant dollars compared to the prior year quarter. Constant dollar growth in the companys international businesses largely offset domestic declines, much of which related to a shift in timing of sales into the first quarter. Ongoing expansion of the companys Calvin Klein businesses contributed to double digit growth, in constant currency, in Asia and Latin America.
Gross margin decreased 320 basis points to 41% of net revenues. Gross margin was said to be adversely affected by currency exchange rates, a more promotional environment as well as a shift in revenue mix favoring lower-margin businesses.
SG&A expense declined 16% to $145.6 million. SG&A as a percent of net revenues decreased 260 basis points to 32% of net revenues. The decrease reflects the benefit from currency exchange rates and the companys expense reduction initiatives partially offset by increased expense related to the opening of additional retail stores.
Operating income was $40.7 million, or 9% of net revenues, down 17%, compared to $48.9 million, or 10% of net revenues, in the prior year quarter. Operating income for the second quarter of fiscal 2009 and 2008 was adversely affected by $2.1 million and $5.7 million, respectively, of restructuring charges and pension expense.
The company recorded income from continuing operations of $18.4 million, or 40 cents per diluted share, compared to $26.5 million, or 56 cents per diluted share, in the prior year period. Income from continuing operations for the second quarter of fiscal 2009 included a tax charge of $2.5 million, or 5 cents per diluted share, primarily related to the correction of prior period tax provisions, resulting in an effective tax rate of 41% in the quarter.
Income from continuing operations, on an adjusted basis (excluding costs related to restructuring expenses, pension expense, certain tax related items and other items), as detailed in the accompanying schedules, was 48 cents per diluted share compared to 70 cents per diluted share in the prior year period.
The impact of foreign currency exchange rates decreased fiscal 2009 second quarter net revenues, gross profit, SG&A and operating income by approximately $45.0 million, $23.2 million, $15.3 million and $7.7 million, respectively, and decreased income from continuing operations by approximately 15 cents per diluted share.
“The ongoing success of our strategies to grow our Calvin Klein® businesses globally, increase our international presence and expand our direct-to-consumer channel led to a solid quarter for Warnaco,” stated Joe Gromek, Warnacos president and CEO. “While overall revenues in constant dollars were flat, international revenues in constant dollars rose 8% led by double digit growth in Asia and Latin America. We continue to capitalize on the significant opportunity that exists for our Calvin Klein businesses outside the U.S., and our international revenues, in constant dollars, now account for approximately 53% of total company revenues. Our direct-to-consumer business recorded positive comparable store sales, we opened 43 new locations during the quarter and we remain on track to grow 2009 square footage by 24%, or an additional 120,000 square feet.”
Mr. Gromek continued, “As we begin the second half of the year, we remain encouraged about our business prospects and have therefore increased our annual guidance range. Our team has been successful implementing our expense reduction initiatives and managing inventory and, while we expect challenges related to the economy and currency to continue, we are confident in our ability to achieve our goals. We expect 2009 to represent another year of solid accomplishments for Warnaco and increased value for our shareholders.”
Swimwear
Swimwear Group net revenues, whihc includes the Speedo brand business in the U.S., fell 9% to $74.2 million and were down 6% on a constant currency basis. Timing shifts of certain sales and a challenging economic environment were the primary factors affecting Swimwear Group net revenues. Operating income increased to $8.2 million, compared to $7.7 million in the prior year quarter, and operating margin gained 160 basis points to 11% of Swimwear Group net revenues. Continued focus on inventory management and reductions in SG&A expense drove the improved operating margins.
Sportswear
Sportswear Group net revenues fell 10% to $223.5 million and were flat on a constant currency basis. Operating income decreased to $13.6 million, or 6% of Sportswear Group net revenues. Sportswear results, in the quarter, were adversely affected by currency exchange rates, the timing shift in membership club sales as well as a more promotional environment, partially offset by reductions in SG&A related to the companys cost cutting initiatives. Outside the United States, the company continued to grow its Calvin Klein Jeans business, through new geographies and an expanded retail effort.
Intimate Apparel
Intimate Apparel Group net revenues fell 8% to $158.1 million and were up 1% on a constant currency basis. Operating income decreased to $27.0 million, or 17% of Intimate Apparel Group net revenues. Currency exchange rates, timing shifts of certain sales and the challenging economic environment adversely affected net revenues of the Calvin Klein Underwear wholesale business, but were partially offset by the continued global expansion of Calvin Klein Underwears retail initiative. The Intimate Apparel Groups core brands, Warners® and Olga®, recorded a 400 basis point improvement in operating margin, despite a 2% decline in net revenues, as a result of disciplined execution and expense control.
Balance Sheet
Cash and cash equivalents at July 4, 2009 rose to $177.6 million compared to $154.5 million at July 5, 2008. At quarter-end, borrowings under the companys domestic revolver had been repaid and net debt was $44.3 million compared to $146.3 million in the prior year quarter.
Accounts receivable, net, decreased to $281.4 million at July 4, 2009 from $310.9 million at July 5, 2008.
Net inventories were down 8% to $291.6 million at July 4, 2009 compared to $316.3 million at July 5, 2008. The company is comfortable with the quality of its inventories and continues to conservatively plan the business.
“We were pleased with our second quarter results given considerable headwinds driven by unfavorable currency, weak economies around the world and the timing shift of certain sales into our first quarter,” commented Larry Rutkowski, Warnacos Executive Vice President and Chief Financial Officer. “Our cash generation and strong balance sheet permit us to continue to invest in our growth as we seek to gain market share and better position ourselves for the remainder of this year and beyond.”
For fiscal 2009, on an adjusted basis (excluding restructuring expense and certain tax related items and assuming minimal pension expense):
The company now anticipates net revenues will decline 7% -9% and expects constant dollar net revenues to decline 0%-2%.
Based on recent currency exchange rates, the company now expects diluted earnings per share from continuing operations in the range of $2.60 – $2.75
The companys prior guidance was for net revenue declines in the range of 9%-12% and diluted earnings per share from continuing operations of $2.50 – $2.66 per share
The accompanying tables provide a reconciliation of expected diluted earnings per share from continuing operations, on a GAAP basis (and based on recent currency exchange rates) of $2.38 – $2.49 per diluted share (assuming minimal pension expense), to the adjusted fiscal 2009 outlook above.
