Warnaco Guides Down After Dismal 2Q

Zacks

Warnaco Group Inc. (WRC) reported second quarter 2012 adjusted earnings of 72 cents per share, which surpassed the Zacks Consensus Estimate of 65 cents by 10.8%. Cost control coupled with strong business by brands like Calvin Klein and Speedo enabled the earnings beat. However, earnings were short of the prior-year earnings of 82 cents per share by 12.2%.

The adjusted earnings excludes restructuring expenses of 28 cents, and the impairment charge for the note receivable related to the  sale of Lejaby to Palmers Textile AG in 2008 of 29 cents. It also included a benefit of 8 cents. On a GAAP basis, the company reported earnings per diluted share from continuing operations of 23 cents compared with $1.01 in the prior-year quarter. 

Consolidated Revenue and Margins

Warnaco’s quarterly net sales slipped 5% to $563.9 million compared with $591.4 million in the prior-year period. The sales decline was a result of poor business in Sportswear and Intimate Apparel coupled with macroeconomic headwinds in U.S. and Europe and unfavorable foreign currency translation. The sales missed Zacks Consensus estimate of $574.0 million.

Gross profit decreased 8.0% to $238.9 million in the second quarter from $258.3 in the prior-year quarter, while gross margin declined 130 basis points to 42.4% in the quarter owing to increased product costs, increasing level of customer allowances and weak business environment in select markets. Operating income declined 38.0% year on year to $32.8 million.

Segment by Details

The Sportswear Group segment manufactures and sells premium priced men’s, women’s and children’s jeanswear, sportswear and accessories, which are marketed under well-known brands like Calvin Klein and Chaps. The segment’s net sales went down 7.4% year over year to $265.0 million in the second quarter compared with $286.3 million in the year ago period. Net sales declined 1.2% on a constant currency basis. The segment reported an operating loss of $11.3 million, representing a negative 4.3% of net revenue compared with an operating income of $15.9 million or 5.6% of net revenue in the prior-year quarter.  

The Intimate Apparel Group manufactures and sells upper moderate to premium priced intimate apparel and other products for women, and premium priced men’s underwear and loungewear, which are marketed under brands like Calvin Klein Underwear, Warner’s, Olga, Olga’s Christina, Body Nancy Ganz and Bodyslimmers. Net sales at Intimate Apparel Group declined 6.3% to $212.1 million compared with $226.4 million in the prior-year quarter. Net sales declined 2.7% on a constant currency basis. Operating income of the Intimate Apparel Group segment came down to $25.9 million in the second quarter, representing 12.3% of net revenue compared with operating income of $34.5 million or 15.2% of net revenue in the prior-year quarter. 

The Swimwear Group manufactures and sells premium priced swimwear, swim accessories and related products, which are marketed under brands like Speedo, Calvin Klein and Lifeguard. Net sales at Swimwear Group went up 10.3% to $86.7 million compared with $78.6 million in the prior-year quarter. Net sales climbed 11.9% on a constant currency basis. The segment’s operating income also increased to $13.7 million in the second quarter, representing 15.7% of net revenue compared with operating income of $10.7 million or 13.6% of net revenue in the prior-year quarter. 

Other Financial Updates

The company exited the quarter with cash and cash equivalents of $295.3 million as on June 30, 2012, compared to $294.8 million in the prior year quarter.

Inventories came down to $330.6 million in the second quarter from $355.4 million in the prior year quarter.

Guidance

Based on the second quarter 2012 results, Warnaco lowered its full year 2012 outlook to a range of $4.00 - $4.15 from the previously announced guidance of $4.00-$4.25. Including one-time expenses and based on foreign currency exchange rates, Warnaco expects its reported earnings per share to be in the range of $2.94-$3.00 per diluted share compared to previous guidance of $3.32-$3.40 for full year 2012.

The current Zacks Consensus Estimate is $1.21 per share for the third quarter and for full year 2012 the estimate is pegged at $4.03.

For 2012, Warnaco anticipates total revenue growth to be flat to up 2% year over year.

Warnaco designs, sources, markets, licenses, and distributes a range of intimate apparel, sportswear, and swimwear worldwide. The company offers its products primarily under the Calvin Klein, Speedo, Chaps, Warner’s, and Olga brand names.

The company operates in a highly competitive apparel industry with tough competitors like Limited Brands, Inc. (LTD) and Maidenform Brands, Inc. (MFB). Moreover, Warnaco depends on license agreements with third parties for generating a significant portion of its revenues, which have inherent risks.

Warnaco currently holds a Zacks #3 Rank, which translates into a short-term Hold rating. On a long-term basis, we have a Neutral recommendation on Warnaco.

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