The Warnaco Group reported that Swimwear Group's revenues fell 5% to $30.2 million on a reported basis and were down 3% on a constant currency basis. The Swimwear Segment, which includes Speedo, reported an operating loss of $7.4 million, a 27% improvement compared to the prior year quarter. The operating loss includes a $3.6 million charge related to the recent FINA ruling, which banned the LZR Racer and similar swimsuits from competition.
Lower sales into the Sporting goods channel, as 2008 Olympic related sales did not recur in 2009, was the primary factor adversely affecting Swimwear Group net revenues.
Overall, Warnaco reported revenues fell 5%, and in constant dollars fell less than 1%, compared to the prior year quarter. Growth in almost every international region, which led to a 6% increase in constant dollars, helped to offset 10% domestic declines related to a shift in timing of membership club sales and continued economic challenges in the U.S. market. Ongoing expansion of the company's international Calvin Klein businesses, particularly in Europe, China and Central and South America, contributed to total international revenue growth in the mid-single digits, in constant currency.
Gross margin decreased 260 basis points to 44% of net revenues. Gross margin was adversely affected by currency exchange rates and a shift in revenue mix toward lower-margin businesses. Additionally, gross margin was adversely impacted by a $3.6 million charge related to the write-down of inventory associated with the company's LZR Racer and related swimsuits, after FINA's (competitive swimming's governing body) ruling banned the use of these suits in competition.
SG&A expense declined 19% to $165.7 million. SG&A as a percent of net revenues decreased 550 basis points to 32% of net revenues. The decrease reflects the ongoing benefit of the company's expense reduction initiatives and the effects of currency exchange rates, partially offset by increased expense related to the opening of additional retail stores. The prior year quarter also included approximately $15.0 million of currency related expense.
Operating income increased 26% to $60.3 million, or 12% of net revenues, compared to $48.0 million, or 9% of net revenues, in the prior year quarter. Operating income for the third quarter of fiscal 2009 and 2008 was adversely affected by $1.5 million and $4.2 million, respectively, of restructuring charges and pension expense.
The company's reported tax rate was 39.5% compared to 31.1% in the prior year quarter. The lower reported tax rate in the prior year period was due to a $6 million one-time tax benefit. The company's normalized tax rate was 33.9% for the quarter compared to 31.9% in the prior year quarter, reflecting a shift in earnings to jurisdictions with higher tax rates.
Income from continuing operations was $31.2 million, or $0.66 per diluted share, compared to $29.4 million, or $0.62 per diluted share, in the prior year period.
Income from continuing operations, on an adjusted basis (excluding costs related to restructuring expenses, pension expense and certain tax related items), as detailed in the accompanying schedules, was $0.75 per diluted share compared to $0.72 per diluted share in the prior year period.
The impact of foreign currency exchange rates negatively affected fiscal 2009 third quarter net revenues, gross profit, SG&A and operating income by approximately $22.1 million, $20.8 million, $7.6 million and $13.2 million, respectively, and decreased income from continuing operations by approximately $9.8 million, or $0.21 per diluted share.
In other segments, Sportswear Group net revenues fell 1% to $312.9 million on a reported basis, net revenues were up 4% on a constant currency basis. Operating income increased 21% to $48.5 million, or 16% of Sportswear Group net revenues. Sportswear results benefited from reductions in SG&A expense and reduced restructuring expense partially offset by a decline in gross profit, primarily the result of currency exchange rates. The company continued the global expansion of its Calvin Klein Jeans business, both at wholesale and retail, reporting international constant currency net revenue growth approaching 12%.
Intimate Apparel Group net revenues fell 11% to $177.8 million on a reported basis and were down 8% on a constant currency basis. Operating margin was 18% of Intimate Apparel Group net revenues, up 80 basis points compared to the prior year quarter. Currency exchange rates and a challenging domestic department store environment adversely affected net revenues of the Calvin Klein Underwear wholesale business, and were partially offset by the continued global expansion of Calvin Klein Underwear's retail initiative. The results of the Intimate Apparel Group's Core brands were adversely affected by decreased sales in the mid-tier channel (due to the prior year quarter benefiting from expanded distribution) and weaker department store replenishment related to the economy.
“Our strong third quarter results, in the midst of a challenging environment, reflect the continuing positive contribution of our long-term growth initiatives,” stated Joe Gromek, Warnaco's President and Chief Executive Officer. “During the quarter, our global expansion of Calvin Klein � continued as total international revenues rose 6% in constant currency over the prior year quarter, accounting for 61% of our total revenues. Also, our direct-to-consumer initiative continued to advance as we opened 40 new points of distribution and remain on track to grow square footage by over 20%, or an additional 120,000 square feet, this year. Our growth at wholesale and retail, coupled with expense and inventory management across all channels, contributed to a 280 basis point increase in operating margin and adjusted income per share from continuing operations that surpassed the prior year quarter.”
Gromek continued, “We are off to a strong start to the fourth quarter and are encouraged and optimistic about the prospects for growth as we end 2009 and move into 2010. As a result, we have raised our annual guidance. Our disciplined efforts to control expense and manage working capital have yielded great success with year-over-year inventory reductions of $34 million, contributing to cash on hand of $229 million, an increase of over $100 million. We are confident that our global platform together with this strong cash position and solid balance sheet will afford us significant opportunities to enhance shareholder value.”
Balance Sheet
Cash and cash equivalents at October 3, 2009 rose to $229.3 million compared to $122.9 million at October 4, 2008. At quarter-end the company had no borrowings under its revolvers and was in a net cash position of $20.4 million compared to a net debt position of $124.9 million in the prior year quarter.
Accounts receivable, net, were $326.4 million at October 3, 2009, virtually unchanged from $326.6 million at October 4, 2008.
Net inventories were down 11% to $281.2 million at October 3, 2009 compared to $315.6 million at October 4, 2008.
“We ended the third quarter in a strong financial position. Our disciplined execution and focus on net operational working capital, which is down $45 million compared to the prior year quarter, put us in a positive net cash position,” commented Larry Rutkowski, Warnaco's Executive Vice President and Chief Financial Officer. “We will continue to evaluate the best uses for our cash to drive shareholder value.”
