The Warnaco Group, Inc. reported that net revenues for the fourth quarter ended January 1, 2005 were up 10.8% to $374.4 million from $338.0 million in the prior year period. Net revenues for the fourth quarter of fiscal 2004 include approximately $7.8 million related to the effect of favorable foreign currency exchange rates, primarily as a result of a strong euro and Canadian dollar.
Gross profit margin was up 270 basis points to 33.5% and operating margin rose to 8.6% of net revenues, versus 5.4% in the prior year period. The resulting net income was $16.2 million, or 35 cents per diluted share, compared to a loss of $4.7 million, or a loss of 10 cents per diluted share, in the prior year quarter.
“Strong fourth quarter results contributed to a successful year for Warnaco,” commented Joe Gromek, Warnaco’s President and Chief Executive Officer. “The strategies we embarked on led to strong sales growth in the second half of the year and importantly, provide us with positive momentum as we begin 2005. Once again, our operating platform, including a diverse portfolio of products and brands, multi-channel distribution strategy and expanded geographic presence, enabled us to achieve our targeted goals.”
“We are also pleased with the new initiatives implemented during the year, including the expansion of Chaps(R), the acquisition of Ocean Pacific and the continued product extension, geographic expansion and roll-out of Calvin Klein(R) underwear retail stores,” Mr. Gromek continued. “We believe these undertakings, together with the efforts to increase profitability in our Calvin Klein jeans unit, position us for growth across all our business segments this year.”
Mr. Gromek concluded, “We are very proud of our over 10,000 associates around the globe, whose energy and commitment contributed to our success in 2004. Their dedication and efforts support our optimism for 2005 and beyond.”
Like many other public companies, including those in the retail and apparel industry, the Company has reviewed its accounting practices in light of the clarification regarding existing generally accepted accounting principles (“GAAP”) for lease accounting set forth by the Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”) on February 7, 2005. After consultation with its independent auditors, and because of the SEC’s recently stated position, management and the Audit Committee of the Board of Directors determined that the Company’s methods of accounting for rent during construction periods and leasehold improvements funded by landlord reimbursements, in each case, primarily related to the Company’s New York headquarters office lease which commenced May 2003, are not consistent with GAAP.
Accordingly, and consistent with disclosures by a number of public companies regarding restatements in connection with this clarification, the Company will correct this error in its consolidated financial statements for the second, third and fourth quarters of fiscal 2003, resulting in a decrease in operating income of $2.0 million. This correction did not result in a restatement of any period in fiscal 2004 as the impact on these periods was nominal. The results discussed in this release reflect this restatement. As the correction relates solely to accounting treatment and reclassifications, the resulting adjustments will not affect the historical timing of payments under the leases or historical and future net cash flows.
For the fourth quarter, net revenues increased $36.4 million, or 10.8%, to $374.4 million from $338.0 million in the prior year quarter. Revenue gains across all three operating groups (Swimwear, Sportswear and Intimate Apparel) contributed to the improved results. Net revenues for the fourth quarter of fiscal 2004 include approximately $7.8 million related to the effect of favorable foreign currency exchange rates, primarily as a result of a strong euro and Canadian dollar.
Gross profit was $125.4 million, or 33.5% of net revenues, compared to $104.0 million, or 30.8% of net revenues, for the fourth quarter of fiscal 2003. Continued demand for the Company’s products resulted in better full price selling and contributed to the 270 basis point improvement in gross profit margin for the fourth quarter of fiscal 2004. Gross profit for the fourth quarter of fiscal 2004 includes approximately $5.0 million related to the effect of favorable foreign currency exchange rates, primarily as a result of a strong euro and Canadian dollar.
Selling, general and administrative (“SG&A”) expenses were $98.9 million, or 26.4% of net revenues, compared to $84.5 million, or 25.0% of net revenues, for the prior year period. SG&A does not reflect the benefit of $7.1 million recorded in the fourth quarter of fiscal 2004 and $6.5 million recorded in the fourth quarter of fiscal 2003, in each case, related to gains in the Company’s pension plan, which the Company presents separately. Fourth quarter SG&A expenses include $5.2 million of investments in new product marketing and launches along with $2.0 million related to professional costs associated with Sarbanes-Oxley compliance and an internal control review conducted in connection with the Company’s previously announced settlement with the SEC. SG&A expenses also include $2.7 million related to the effect of unfavorable foreign currency exchange rates, primarily as a result of a strong euro and Canadian dollar.
Restructuring expenses for the fourth quarter of fiscal 2004 were $1.3 million, consisting primarily of employee and facility related expenses associated with the Company’s Intimate Apparel Group, compared to $7.8 million for the fourth quarter of fiscal 2003, related primarily to costs associated with the US Intimate Apparel division’s transition to an outsourced operating model.
Operating income rose to $32.4 million, or 8.6% of net revenues, from $18.2 million, or 5.4% of net revenues, in the fourth quarter of fiscal 2003. Increased revenues and profitability across the Company’s three operating groups contributed to the improved results.
Net income increased to $16.2 million, or $0.35 per diluted share, for the fourth quarter of fiscal 2004, compared to a net loss of $4.7 million, or a loss of $0.10 per diluted share, for the fourth quarter of fiscal 2003. Higher revenues and gross margin, in addition to lower restructuring expenses, contributed to these improvements, and offset losses in the Company’s intimate apparel fashion brands.
For fiscal 2004, net revenues were $1.42 billion versus $1.3 billion for the eleven month period ended January 3, 2004. Income from continuing operations was $46.9 million, or $1.02 per diluted share, versus $18.2 million, or $0.40 per diluted share, for the eleven month period. Net income was $42.5 million, or 93 cents per diluted share, up from a loss of $0.2 million, or $0.00 per diluted share, for the eleven month period ended January 3, 2004.
The following information for fiscal 2004 compared to Full Year Fiscal 2003 is, with respect to Full Year Fiscal 2003, presented on an adjusted combined basis.
Net revenues grew 3.6% to $1.42 billion in fiscal 2004 from $1.37 billion for Full Year Fiscal 2003. All three operating groups contributed to this increase, with Swimwear, Sportswear and Intimate Apparel delivering revenue gains of 5.3%, 3.4% and 2.7%, respectively. The Company’s Chaps, Calvin Klein underwear and Speedo(R) brands were standouts within their segments, while the intimate apparel core brands remained challenged with a decline in fiscal 2004 revenues from Full Year Fiscal 2003. Net revenues for fiscal 2004 include approximately $35.5 million related to the effect of favorable foreign currency exchange rates, primarily as a result of a strong euro and Canadian dollar.
Gross profit was $473.0 million, or 33.2% of net revenues, for fiscal 2004 compared to $435.0 million, or 31.6% of net revenues, in Full Year Fiscal 2003. Improvements in the Sportswear Group’s performance, due largely to a more favorable sales mix in the Chaps and Calvin Klein jeans businesses, contributed to the 160 basis point improvement. Gross profit for fiscal 2004 includes approximately $16.7 million related to the effect of favorable foreign currency exchange rates, again primarily as a result of a stronger euro and Canadian dollar.
SG&A expenses were $377.9 million, or 26.5% of net revenues, for fiscal 2004 versus $351.7 million, or 25.6% of net revenues, for Full Year Fiscal 2003. SG&A does not reflect the benefit of $6.2 million recorded in fiscal 2004 and $6.5 million recorded in Full Year Fiscal 2003, in each case, related to gains in the Company’s pension plan, which the Company presents separately. Included in SG&A for fiscal 2004 is an incremental $12 million of marketing expense. This investment was made to support the Company’s key brands as well as new product launches. In addition, SG&A was negatively affected by $5.6 million of expenses related to professional costs associated with Sarbanes- Oxley compliance and an internal control review conducted in connection with the Company’s previously announced settlement with the SEC. SG&A expenses include approximately $6.1 million related to the effect of unfavorable foreign currency exchange rates, primarily as a result of a strong euro and Canadian dollar.
Restructuring expenses for fiscal 2004 were $5.1 million compared to $19.1 million for Full Year Fiscal 2003. For both periods, the costs were primarily related to the continuation of activities commenced in prior periods associated with the US Intimate Apparel division’s transition to an outsourced operating model and the consolidation of certain distribution and warehousing facilities.
Operating income rose to $96.1 million, or 6.8% of net revenues, for fiscal 2004 compared to $29.0 million, or 2.1% of net revenues, for Full Year Fiscal 2003. Higher revenues and gross profit, combined with lower restructuring and reorganization expenses and the absence of amortization of sales order backlog, contributed to these superior results.
Income from continuing operations was $46.9 million, or $1.02 per diluted share, for fiscal 2004, versus a loss of $3.6 million, or a loss of $0.08 per diluted share, in Full Year Fiscal 2003.
Net income was $42.5 million, or $0.93 per diluted share, versus a loss of $22.5 million, or a loss of $0.50 per diluted share, for Full Year Fiscal 2003.
The Company noted the following balance sheet highlights as of January 1, 2005:
Cash and cash equivalents were $65.6 million, a 22.7% increase over the $53.5 million of cash and cash equivalents at January 3, 2004, notwithstanding the approximately $40 million used in the third quarter of fiscal 2004 to complete the acquisition of Ocean Pacific.
Inventories rose to $335.7 million from $279.8 million at January 3, 2004. The increase in inventories is primarily to support 2005 sales orders for the Company’s Swimwear Group, demand for Calvin Klein jeans and expanded distribution of the Company’s licensed Chaps brand.
Commenting on the results, Larry Rutkowski, Warnaco’s Chief Financial Officer, stated, “We are pleased with our fiscal 2004 results, which were in line with our previously stated annual goals. Revenues grew modestly, our gross margin expanded 160 basis points, SG&A expenses were in line with industry averages and we delivered a double-digit increase in operating margin percentage. We are also pleased that Moody’s recently upgraded the rating on our senior unsecured notes due 2013, to B1 from B2 with a positive outlook, which we believe reflects our positive achievements to date and our strong financial condition.”
Mr. Rutkowski continued, “Regarding our forward guidance, our three year goals, on a comparable basis, on balance and over time, are for: (i) continued positive sales momentum with no less than high single digit 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.”
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)
For the Fourth For the Fourth
Quarter Quarter
of Fiscal 2004 of Fiscal 2003
(a) (b)
(Unaudited) (Unaudited)
Restated
Net revenues $374,417 $337,963
Cost of goods sold 249,036 233,985
Gross profit 125,381 103,978
Selling, general and
administrative expenses 98,894 84,464
Pension income (7,140) (6,488)
Restructuring items 1,264 7,836
Operating income 32,363 18,166
Other income (170) (585)
Interest expense, net 4,653 4,966
Income from continuing
operations before
provision for income taxes 27,880 13,785
Provision for income taxes 11,003 3,632
Income from continuing
operations 16,877 10,153
Loss from discontinued
operations, net of income taxes (630) (14,810)
Net income (loss) $16,247 $(4,657)
Basic and diluted income (loss) per
common share:
Income from continuing operations $0.37 $0.22
Loss from discontinued operations (0.01) (0.33)
Net income (loss) $0.36 $(0.11)
Diluted income (loss) per common share:
Income from continuing operations $0.36 $0.22
Loss from discontinued operations (0.01) (0.32)
Net income (loss) $0.35 $(0.10)
THE WARNACO GROUP, INC.
NET REVENUES AND OPERATING INCOME BY BUSINESS UNIT
(Dollars in thousands)
(Unaudited)
Quarter
For the Fourth For the Fourth
Quarter of Quarter of Increase %
Net revenues: Fiscal 2004 Fiscal 2003(b) (Decrease) Change
Intimate Apparel Group $160,543 $146,016 $14,527 9.9%
Sportswear Group 131,826 117,333 14,493 12.4%
Swimwear Group 82,048 74,614 7,434 10.0%
Net revenues $374,417 $337,963 $36,454 10.8%
