The Warnaco Group, Inc., the parent of Speedo, saw net revenues fall 4.4% to $445.9 million in the fourth quarter. The company, which also produces Calvin Klein jeans and underwear, showed an operating loss was $12.0 million in the period, which included $32.4 million of pension expense.

For the year, net revenues were $2.1 billion, up 13.5% from the prior year. Gross margin increased 340 basis points from the prior year to 45.0% of net revenues. Operating income was $140.3 million and operating margin decreased 110 basis points to 7.0% of net revenues. Income per diluted share from continuing operations was $1.07 compared to $1.86 in fiscal 2007, and includes costs related to pension expense, restructuring expenses, certain tax related items and other items of $1.59 and 38 cents per diluted share, respectively (on an adjusted, non-GAAP basis, excluding these items, income per diluted share from continuing operations was $2.66 for fiscal 2008 compared to $2.24 for fiscal 2007).

For the year, net cash flow from continuing operations was $151.9 million and net debt declined by $79.0 million to $96.1 million.

For the fourth quarter, net revenues were $445.9 million, down 4.4% from the prior year quarter. Net revenues, on a constant currency basis, rose 4.5% compared to the prior year quarter. Gross margin increased 250 basis points from the prior year quarter to 42.0% of net revenues.

For the quarter, the company's operating loss was $12.0 million, and includes $32.4 million of pension expense. Income per diluted share from continuing operations was a loss of 27 cents compared to income of 44 cents in the prior year quarter, and includes costs of 56 cents and a gain of 2 cents, respectively, related to pension expense, restructuring expenses, certain tax related items and other items (on an adjusted, non-GAAP basis excluding these items, income per diluted share from continuing operations was 29 cents compared to 42 cents for the prior year quarter.)

Joe Gromek, Warnaco�s President and CEO, commented, �Fiscal 2008 represented another year of important progress for Warnaco and we are pleased with our results, particularly in light of the recent economic downturn. Powerful growth in our Calvin Klein businesses and continued improvement in the performance of our heritage businesses contributed to these results.�

�Our geographic diversification, powerful Calvin Klein business and focused execution enabled us to capitalize on our growth opportunities while navigating through the challenges of global economic uncertainty and currency volatility,� Gromek continued. �As we begin fiscal 2009, our long-term business strategy remains unchanged. Our goal is to continue to grow our Calvin Klein businesses, capitalize on our international opportunities and expand our direct to consumer channel, while continuing to focus on enhancing profitability within our heritage businesses. Additionally, in response to current economic conditions and significant currency headwinds, we have taken actions to streamline our operations. These actions should enable us to achieve cost reductions of approximately $70 million (which equate to approximately $0.90 per diluted share), as we strive to achieve profit levels in 2009 comparable to 2008. However, we will continue to direct our capital and resources to our most compelling opportunities to maximize profitability, including our direct to consumer expansion.�

�Looking forward, we have powerful brands, a strong balance sheet, a solid infrastructure and a seasoned team and expect to leverage our strengths to increase our market share and enhance shareholder value,� concluded Gromek.

Fiscal 2009 Outlook

Global economic turmoil and foreign currency volatility present a considerable challenge for forecasting future results. For fiscal 2009, on an adjusted basis (excluding restructuring expense and assuming minimal pension expense), the company anticipates net revenues will decline 2% – 5%, on a constant currency basis, compared to fiscal 2008. Based on current exchange rates, the impact of foreign currency exchange relative to the U.S. dollar is expected to further lower anticipated net revenues by 7% to 9%, with expected diluted earnings per share from continuing operations in the range of $2.40 – $2.66.

The accompanying tables provide a reconciliation of expected diluted earnings per share from continuing operations, on a GAAP basis and based on current exchange rates of $2.15- $2.39 per diluted share (assuming minimal pension expense), to the adjusted fiscal 2009 outlook above.

Fiscal 2008 Highlights

Total Company

Net revenues rose 13.0% on a constant currency basis and rose 13.5% on a reported basis to $2.1 billion and gross margin increased 340 basis points to 45.0.% of net revenues. Operating income was $140.3 million, including $31.6 million of pension expense, compared to income of $143.7 million, including $8.8 million of pension income, in the prior year.

The company recorded income from continuing operations of $50.2 million, or $1.07 per diluted share, compared to $86.9 million, or $1.86 per diluted share, in the prior year. Operating income for fiscal 2008 was adversely affected by $66.9 million of pension and restructuring expense, compared to $23.5 million for fiscal 2007.

On an adjusted, non-GAAP basis, as detailed in the accompanying tables, income from continuing operations was $124.7 million, or $2.66 per diluted share, compared to $104.6 million, or $2.24 per diluted share, in fiscal 2007.

The company�s effective tax rate was 54.0% compared to 26.0% for fiscal 2007. The effective tax rate was adversely affected by restrictions on the deductibility of certain restructuring expense and discontinued operations as well as repatriation of the proceeds from the divestiture of the Lejaby business. The adjusted non-GAAP effective tax rate was approximately 32.0%, compared to 25.0% for fiscal 2007. The increase in the adjusted tax rate reflects the shift in earnings from lower to higher taxing jurisdictions. A reconciliation of the reported to adjusted rate can be found in the accompanying tables.

The impact of foreign currency exchange rates increased fiscal 2008 net revenues by approximately $10.6 million and decreased income from continuing operations by 15 cents per diluted share.

Segment Results

Sportswear

Sportswear Group net revenues increased 17.4% to $1.1 billion and operating income was $88.7 million, or 8.0% of Sportswear Group net revenues, compared to $97.9 million, or 10.4% of Group net revenues in fiscal 2007. Operating results were adversely affected by approximately $27.8 million of restructuring expenses primarily related to the Company�s exit of the Calvin Klein Collection business.

Swimwear

Swimwear Group net revenues increased 2.6% to $260.0 million. Operating income was $11.5 million, or 4.4% of Swimwear Group net revenues, a $36.0 million improvement from fiscal 2007. Focused execution and a $25.9 million reduction in restructuring expense contributed to the improved results.

Fourth Quarter Highlights

Total Company

Net revenues were up 4.0% on a constant currency basis and fell 4.4% on a reported basis to $445.9 million. Gross margin increased 250 basis points to 42.0% of net revenues. The company recorded an operating loss of $12.0 million, compared to income of $27.3 million in the prior year quarter. Operating income for the fourth quarter of fiscal 2008 was adversely affected by $36.9 million of pension and restructuring expense, compared to $6.4 million for the fourth quarter of fiscal 2007.

The company recorded a loss from continuing operations of $12.4 million, or 27 cents per diluted share, compared to income from continuing operations of $20.4 million, or 44 cents per diluted share, in the prior year quarter.

On an adjusted, non-GAAP basis, as detailed in the accompanying tables, income from continuing operations was $13.3 million, or $0.29 per diluted share, compared to $19.3 million, or 42 cents per diluted share, in the prior year period.

The company�s adjusted non-GAAP effective tax rate in the quarter was approximately 32.0%, compared to 25.0% in the prior year quarter. The increased tax rate reflects the shift in earnings from lower to higher taxing jurisdictions.

The impact of foreign currency exchange rates decreased fourth quarter net revenues by approximately $41.6 million and decreased income from continuing operations by 18 cents per diluted share.

Segment Results

Sportswear

Sportswear Group net revenues decreased 3.8% to $236.5 million and operating income was $3.8 million, or 1.6% of Sportswear Group net revenues, down from $16.3 million, or 6.6% of Group revenues in the prior year period. Net revenue and operating income particularly in the Company�s retail and wholesale Calvin Klein businesses were adversely affected by the impact of foreign currency exchange rates.

Swimwear

Swimwear Group net revenues increased 5.4% to $46.2 million and the Group had an operating loss of $0.8 million, a sharp improvement compared to the prior year period�s loss of $16.0 million. Operating results benefited from an increase in gross profit compared to the prior year period and an $11.0 million reduction in restructuring expense.

Balance Sheet

Cash and cash equivalents at Jan. 3, 2009 were $147.6 million compared to $191.9 million at Dec. 29, 2007.

For the year ended Jan. 3, 2009, net cash flow from continuing operations was $151.9 million. During the year the company used approximately $16.0 million to repurchase approximately 940,000 shares of its common stock under its share repurchase plan. Net debt as of Jan. 3, 2009 was $96.1 million, a $79.0 million reduction from Dec. 29, 2007.

Inventories were $326.3 million at Jan. 3, 2009, a 1.9% decline, compared to $332.7 million at Dec. 29, 2007, due to the impact of foreign currency exchange rates.

THE WARNACO GROUP, INC. 
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
As Reported Restructuring As Adjusted
Fourth Quarter Charges and Taxation (b) Fourth Quarter
of Fiscal 2008 Pension (a) of Fiscal 2008 (c)
Net revenues $ 445,922 $ $ $ 445,922
Cost of goods sold 257,763 (758 ) 257,005
Gross profit 188,159 758 188,917
Selling, general and administrative expenses 165,624 (3,766 ) 161,858
Amortization of intangible assets 2,107 2,107
Pension expense 32,430 (32,430 )
Operating income (loss) (12,002 ) 36,954 24,952
Other expense (income) (1,136 ) (1,136 )
Interest expense 6,191 6,191
Interest income (607 ) (607 )
Income (loss) from continuing operations before
provision for income taxes and minority interest (16,450 ) 36,954 20,504
Provision (benefit) for income taxes (4,636 ) 11,197 6,561
Income (loss) from continuing operations before minority interest

About The Author

Thomas J. Ryan

Thomas J. Ryan Senior Business Editor | SGB Media tryan@sgbonline.com | 917.375.4699

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