Warnaco Swimwear Q3 Revenues Climb 7.2 Percent

Overall, Warnaco's revenues increased 8 percent, to $645.1 million, compared to the prior year quarter

Other highlights of  the quarter:

– International net revenues increased 16 percent compared to the prior year quarter

— Direct to consumer net revenues increased 31 percent, including a 2 percent increase in comparable store sales, compared to the prior year quarter

— Income per diluted share from continuing operations was $1.13 compared to $0.90 in the prior year quarter

— Income per diluted share from continuing operations on an adjusted, non-GAAP, basis was $1.07 compared to $1.04 in the prior year quarter (both of which exclude restructuring expenses, pension expenses, tax related items and other items)

— The company purchased approximately 2.5 million shares of its common stock for approximately $123.2 million pursuant to its share repurchase programs

The accompanying tables provide a reconciliation of actual results to the adjusted, non-GAAP, results.

The company believes it is valuable for users of the company's financial statements to be made aware of the adjusted financial information, as such measures are used by management to evaluate the operating performance of the company's continuing businesses on a comparable basis and to make operating and strategic decisions. In addition, the company uses performance targets based, in part, on non-GAAP income from continuing operations and non-GAAP operating income as a component of the measurement of certain employee incentive compensation.

“Our globally diverse operating model enabled us to deliver another solid quarter of revenue growth and achieve significant progress toward our long-term expansion goals,” said Joe Gromek, Warnaco's President and CEO. “Disciplined investment in our long-term growth strategies –maximizing our Calvin Klein businesses, expanding globally and growing our direct-to-consumer footprint –drove a 10 percent increase in our worldwide Calvin Klein net revenues, a 16 percent increase in our international net revenues and a 31 percent increase in our direct to consumer net revenues.”

“Total company net revenues grew 8 percent over the prior year quarter, led by powerful growth in Asia and Latin America, which more than offset an anticipated reduction in U.S. net revenues, primarily associated with the timing of shipments to certain value channels. Our direct-to-consumer growth was driven by increased square footage and positive comparable store sales. We ended the quarter with just over 1.0 million square feet of directly operated retail.”

“We again reported strong operating results in Asia and Latin America,” added Gromek. “And, despite difficult market conditions in parts of Europe and gross margin pressure in the U.S. market, we were able to maintain a double digit operating margin in the quarter.”

“Our Calvin Klein brand continues to resonate well with consumers globally, and we see significant opportunities to capitalize on this powerful brand equity, especially in emerging markets. As we move through the fourth quarter, we believe we are well positioned to deliver strong operating results. Looking ahead to fiscal 2012, our direct-to-consumer and international initiatives, together with lower input costs and supply chain efficiencies, are expected to drive gross margin and operating margin expansion. Accordingly, we remain confident in our strategies, which we believe have us poised to generate sustained long-term growth and enhance shareholder value.”

Fiscal 2011 Outlook

For fiscal 2011, on an adjusted, non-GAAP basis (excluding restructuring expense, certain tax related items and assuming minimal pension expense) and based on recent foreign currency exchange rates, the company continues to anticipate:

— Net revenues will grow 10 percent – 12 percent compared to fiscal 2010, and

— Adjusted income per diluted share from continuing operations in the range of $4.00 – $4.15.

Schedule 7 of the accompanying tables provides a reconciliation of expected income per diluted share from continuing operations, on a GAAP basis (assuming minimal pension expense and based on recent foreign currency exchange rates), of $4.08- $4.19 to the fiscal 2011 outlook above.

Third Quarter Highlights

Total company

Net revenues increased 8 percent to $645.1 million, compared to the prior year period. All three of the company's segments (Sportswear, Intimate Apparel and Swimwear) reported revenue gains, led by Intimate Apparel and Sportswear. International net revenues rose 16 percent (9 percent in constant dollars (see accompanying tables for discussion of constant currency financial information, a non-GAAP financial measure)) compared to the prior year quarter and more than offset a 3 percent decline in U.S. net revenues. Direct-to-consumer net revenue growth of 31 percent (21 percent in constant dollars), reflecting a 35 percent increase in square footage and 2 percent increase in comparable store sales, supported the company's international performance.

Gross profit increased 4 percent to $279.7 million compared to the prior year quarter while gross margin declined 170 basis points to 43 percent of net revenues. Increased product costs, a higher level of customer allowances and challenging business conditions, in select markets, adversely affected total company gross margin, offsetting strong gross margins in the company's Asian business.

SG&A expense increased 7 percent compared to the prior year quarter, to $212.0 million. However, as a percent of net revenue, SG&A declined 30 basis points to 33 percent. The dollar increase was driven primarily by the growth in the company's direct to consumer business, partially offset by a planned decrease in marketing expense (due to the timing of the company's product launches), as well as a year-over-year reduction in the accrual for performance based compensation expense. Also included in SG&A is approximately $7.2 million of restructuring expense (compared to $1.7 million in the prior year period) primarily related to the rationalization of select international operations, lease termination costs for certain retail stores and costs related to office and warehouse closures.

Operating income was $64.8 million, or 10 percent of net revenues, compared to $67.9 million, or 11 percent of net revenues, in the prior year quarter. Ongoing strength in the company's Asia and Latin America businesses partially offset declines in Europe, the U.S. and Canada. Income from continuing operations was $48.8 million, or $1.13 per diluted share, compared to $41.5 million, or $0.90 per diluted share, in the prior year quarter.

Income from continuing operations for the third quarter of fiscal 2011 includes a tax benefit of approximately $8.6 million, primarily associated with a reduction in the reserve for uncertain tax positions in certain foreign jurisdictions.

On an adjusted, non-GAAP basis (excluding restructuring expenses, pension expense, certain tax related items and other items), income from continuing operations was $46.1 million, or $1.07 per diluted share, compared to $47.9 million, or $1.04 per diluted share, in the prior year period.

The effective tax rate in the quarter was 18 percent and reflects the $8.6 million tax benefit described above. The company's adjusted non-GAAP effective tax rate in the quarter (excluding the $8.6 million tax benefit) was approximately 31.1 percent.

The effect of fluctuations in foreign currency exchange rates for the quarter increased net revenues, gross profit and SG&A by $26.3 million, $9.9 million and $13.2 million, respectively, compared to the prior year quarter and decreased income from continuing operations by approximately $3.9 million, or $0.09 per diluted share. 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 ended October 1, 2011, which is being filed with the Securities and Exchange Commission.

Balance Sheet

Cash and cash equivalents at October 1, 2011 were $179.3 million compared to $213.4 million at October 2, 2010. During the quarter the company used $123.2 million to purchase approximately 2.5 million shares of its common stock under its share repurchase programs.

Inventories at October 1, 2011 were $392.1 million, up $67.6 million (or 21 percent), compared to $324.4 million at October 2, 2010. Considerably higher product costs and an acceleration of the company's direct-to-consumer expansion contributed to the increase. While comfortable with the quality of its inventory, the company expects that year-end inventory will be better aligned with sales growth.

“In the quarter, we continued to use our strong balance sheet to invest in our long-term strategies. We also returned approximately $123.2 million of capital to our shareholders through share repurchases. These share repurchases, as well as a lower effective tax rate, compared to the prior year period, benefited our adjusted diluted earnings per share from continuing operations,” commented Larry Rutkowski, Warnaco's Chief Financial Officer.