Warnaco Inc. reported that second quarter net revenues increased 20.5% to $451.6 million, including $63.7 million in revenues from the CKJEA Business (Calvin Klein Jeans and related businesses in Europe and Asia).
Intimate Apparel Group net revenues increased 6.9% compared to the prior year, reflecting continued positive consumer response to Calvin Klein Underwear and Warner’s. Swimwear Group net revenues increased 17.6% compared to the prior year period driven by Speedo, Michael Kors(R) and Calvin Klein. Sportswear Group net revenues (excluding the CKJEA Business) declined 13.4%, reflecting among other things the significantly higher dilution at Chaps, the timing shift of certain sales to membership clubs to the second half of the year and a decline in off-price sales year over year. The increase in net revenues for the second quarter of fiscal 2006 includes approximately $2.5 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 2005.
Gross profit was $158.4 million, or 35.1% of net revenues, including $35.2 million in gross profit from the CKJEA Business, compared to $113.0 million, or 30.2% of net revenues, for the second quarter of fiscal 2005. The 490 basis point improvement in gross profit margin was the result of (i) the strong gross profit margins of the acquired CKJEA Business, (ii) improvements in Swimwear gross profit margins, and (iii) improved product mix and more full price sales from the Intimate Apparel Group partially offset by declines in Chaps gross profit margin due to an incremental $7.5 million in markdown allowances compared to the prior year period. Gross profit for the second quarter of fiscal 2006 includes 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 2005.
Selling, general and administrative (“SG&A”) expenses were $140.4 million, or 31.1% of net revenues, compared to $95.3 million, or 25.4% of net revenues, for the prior year quarter. The increase in SG&A included (i) $33.7 million from the CKJEA Business, (ii) $6.3 million of incremental Swimwear Group expense primarily related to continued investment in Ocean Pacific(R) brands and increased marketing and severance expense, (iii) $5.1 million resulting from an increased percentage of the company’s revenues generated from higher SG&A businesses, including international and retail; and (iv) $1.6 million of incremental corporate information technology expenses primarily associated with the implementation of the new systems infrastructure. SG&A was negatively affected by approximately $0.4 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 2005.
Amortization of intangible assets was $4.0 million, compared to $1.1 million in the prior year period, primarily due to an increase of $2.6 million in intangible assets associated with the acquisition of the CKJEA Business.
Operating income for the second quarter of fiscal 2006 was $14.0 million, including a loss of $1.0 million from the CKJEA Business, compared to $15.6 million in the prior year period. The strong operating profits from the Intimate Apparel Group were offset by disappointing results in the Sportswear Group, the seasonal weakness of the CKJEA Business and higher expenses in the Swimwear Group. Operating income for the second quarter of fiscal 2006 includes approximately $0.6 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 2005.
Other income was $0.8 million, compared to a loss of $0.9 million in the prior year quarter related primarily to foreign exchange rate gains on the current portion of inter-company loans denominated in foreign currencies.
Net interest expense increased to $9.4 million compared to $4.5 million in the prior year period. The $4.9 million increase is primarily the result of incremental indebtedness incurred in connection with the acquisition of the CKJEA Business.
Net income was $3.4 million, or 7 cents per diluted share, compared to $6.3 million, or 14 cents per diluted share, for the second quarter of fiscal 2005, which reflects the continued strength in Intimate Apparel substantially offset by the disappointing performance of the Sportswear Group.
WRNC notes that fiscal 2006 second quarter results include the operations of the Calvin Klein Jeans and related businesses in Europe and Asia (the “CKJEA Business”) which were acquired on January 31, 2006. Excluding the CKJEA Business, net revenues increased 3.5% to $387.9 million, compared to $374.7 million in the prior year quarter, and operating income was $15.0 million compared to $15.6 million in the prior year quarter. For the second quarter, net revenues from the CKJEA Business were $63.7 million and operating losses were $1.0 million (including $2.6 million of amortization expense).
“Contributions from certain pre-acquisition businesses and a smaller than expected loss at the CKJEA Business resulted in the better than anticipated second quarter results,” said Joe Gromek, Warnaco’s President and Chief Executive Officer. “The Intimate Apparel Group, led by Calvin Klein(R) Underwear and Warner’s(R), continued its positive momentum from the first quarter and delivered significant increases in gross profit and operating income. Speedo(R) also delivered strong sales growth and substantial improvements in profitability. Unfortunately, this positive performance was substantially offset by the poor performance of the Sportswear Group. Significantly higher dilution at Chaps(R) due to higher markdown allowances compared to the prior year period and the shift in timing of certain membership club sales negatively affected the Sportswear segment.”
Mr. Gromek continued, “We continue to believe the development of our global wholesale and retail platform positions us to achieve our long term revenue and operating income targets. Additionally, with the acquisition of the CKJEA Business, which is surpassing our performance expectations, we believe our international businesses, which generate operating margins well above the company average, will account for approximately 40% of our fiscal 2006 revenues.”
Restatement
As reported on August 8, 2006, the company will be restating its previously reported financial statements for its fiscal year ended December 31, 2005 and first fiscal quarter ended April 1, 2006. The restatements are required as a result of certain irregularities discovered by the company during the company’s second quarter closing review and certain other errors. The irregularities primarily relate to the accounting for certain returns and customer allowances at the company’s Chaps(R) menswear division. These matters were reported to the company’s Audit Committee, which engaged outside counsel, who in turn retained independent forensic accountants, to investigate and report to the Audit Committee. Based on information obtained in that investigation, and also to correct for an error which resulted from the implementation of the company’s new systems infrastructure at the Swimwear Group in the first quarter of fiscal 2006, and certain immaterial errors, the Audit Committee accepted management’s recommendation that the company restate its financial statements.
“We are deeply disappointed by what occurred at our Chaps menswear division,” concluded Mr. Gromek. “However, the investigation, which is now substantially complete, did not reveal any inappropriate activity outside of that division. In spite of what happened, Chaps remains an important brand in our portfolio with strong brand equity and consumer loyalty and we expect Chaps to contribute to Warnaco’s profitability in fiscal 2006 and beyond.”
The company noted the following balance sheet highlights as of July 1, 2006:
Cash and cash equivalents were $138.4 million, compared to $153.9 million of cash and cash equivalents at July 2, 2005, notwithstanding the approximately $70.8 million of cash (net of acquired cash) used in connection with the acquisition of the CKJEA Business on January 31, 2006.
In addition, during the quarter the company used approximately $12.2 million of cash to repurchase 675,000 shares of common stock under the company’s previously announced share repurchase program, at an average price of $18.05. Approximately 2.3 million shares remain authorized for repurchase under the share repurchase program. The share repurchase program may be modified or terminated by the company’s Board of Directors at any time.
Accounts receivable were $278.7 million, up from $204.2 million at July 2, 2005. Accounts receivable related to the CKJEA Business were $55.5 million. Receivables, excluding the CKJEA Business, were up 9.3% in the quarter.
Net inventories were $311.0 million, up from $277.3 million at July 2, 2005. Inventories at July 1, 2006 include $44.6 million of inventory of the CKJEA Business and a $6.5 million increase in Swimwear inventory, for which the company believes it is appropriately reserved. Excluding the CKJEA Business, inventories were down 3.9%, which reflects the company’s continued discipline related to planning and inventory management.
Fiscal 2006 Outlook
Larry Rutkowski, Warnaco’s Chief Financial Officer commented, “Although the restatement we announced on August 8, 2006 will lower fiscal 2005 results, our forward guidance continues to be based upon fiscal 2005 results prior to giving effect to the restatement. For the year we continue to expect our pre-acquisition business revenue growth to be in the low single digits. In addition, for our pre-acquisition businesses, we continue to expect at least a 100 basis point improvement in gross margin percentage and mid single digit percentage improvement in the operating margin percentage over the prior year (assuming minimal pension expense in fiscal 2006).”
Mr. Rutkowski concluded, “Overall, for the company (including the acquired CKJEA Business), we continue to expect (i) revenue growth in 2006 to be at least in the low 20 percent range; (ii) mid single digit percentage improvement in the operating margin percentage over the prior year (assuming minimal pension expense in fiscal 2006); and (iii) that the acquisition of the CKJEA Business will be accretive to Warnaco’s 2006 earnings per share.
THE WARNACO GROUP, INC.
NET REVENUES AND OPERATING INCOME BY BUSINESS UNIT
(Dollars in thousands)
(Unaudited)
Net revenues: Second Second
Quarter Quarter
of Fiscal of Fiscal Increase/
2006 2005 (Decrease) % Change
--------- ---------- ---------- ---------
Sportswear Group $167,622 (a) $120,073 $ 47,549 39.6%
Intimate Apparel Group 153,147 143,328 9,819 6.9%
Swimwear Group 130,816 111,278 19,538 17.6%
--------- ---------- --------- ---------
Net revenues $451,585 $374,679 $ 76,906 20.5%
======== ======== ========= =======
First Half First Half
of Fiscal of Fiscal %
2006 2005 Increase Change
--------- ---------- ---------- ---------
Sportswear Group $335,494 (a) $250,436 $ 85,058 34.0%
Intimate Apparel Group 306,850 295,103 11,747 4.0%
Swimwear Group 272,021 268,681 3,340 1.2%
--------- ---------- ---------- ---------
Net revenues $914,365 $814,220 $ 100,145 12.3%
======== ======== ========= =======
(a) Includes net revenues of $63,680 and $124,125 for the Second
Quarter and First Half of Fiscal 2006, respectively, related to the
CKJEA Business.
Second Second % of
Quarter % of Total Quarter Total
Operating income: of Fiscal Net of Fiscal Net
2006 Revenues 2005 (d) Revenues
--------- ---------- ----------------------
Sportswear Group (a) $ 2,499 (b) $ 12,175
Intimate Apparel Group (c) (c)
(a) 18,237 8,295
Swimwear Group (a) 1,554 1,928
-------- ---------
Group operating income
(e) 22,290 4.9% 22,398 6.0%
Unallocated corporate
expenses (8,286) -1.8% (6,109) -1.6%
Restructuring expenses - 0.0% (721) -0.2%
-------- -------- --------- -------
Operating income $ 14,004 3.1% $ 15,568 4.2%
======== ======== ========= =======
First % of
Half % of Total First Half Total
of Fiscal Net of Fiscal Net
2006 Revenues 2005 (d) Revenues
--------- ---------- ---------- ---------
Sportswear Group (a) $ 10,441 (b) $ 26,792
Intimate Apparel Group
(a) 34,050 (c) 20,394 (c)
Swimwear Group (a) 15,636 36,060
-------- ---------
Group operating income
(e) 60,127 6.6% 83,246 10.2%
Unallocated corporate
expenses (14,934) -1.6% (14,034) -1.7%
Restructuring expenses - 0.0% (727) -0.1%
-------- -------- --------- -------
Operating income $ 45,193 4.9% $ 68,485 8.4%
======== ======== ========= =======
(a) Includes an allocation of shared services expenses as follows:
Second Second First
Quarter Quarter First Half Half
of Fiscal of Fiscal of Fiscal of Fiscal
2006 2005 2006 2005
--------- ---------- ---------- ---------
Sportswear Group $ 5,024 $ 4,577 $ 10,015 $ 9,377
Intimate Apparel Group 3,165 2,931 6,308 5,880
Swimwear Group 4,739 3,875 9,357 7,805
