Warnaco Beats, Guides Higher - Analyst Blog

Warnaco Group Inc. (WRC) registered decent second quarter 2011 earnings of 82 cents per share that shot up by 15.49% from 71 cents posted in the year-ago period. Earnings also exceeded the Zacks Consensus Estimate of 74 cents by 10.81%.

The upswing came on the back of success in Calvin Klein business, and expansion into emerging markets globally coupled with enhanced direct-to-consumer business. However, the top-line results were partially offset by unfavorable results in U.S. and European businesses.

Based on the results posted in the second quarter 2011, Warnaco raised its fiscal 2011 outlook to $4.00-$4.15 per share from its previously announced estimate of $3.95-$4.15.

The current Zacks Consensus Estimate is $1.24 cents for the third quarter of 2011. The estimate for the full year 2011 is $4.02.

Consolidated Revenue and Margins

Warnaco’s quarterly net sales climbed 14% to $591.4 million compared with $519.3 million in the prior-year period, driven by strong 19% year-over-year growth in Calvin Klein business, but partially offset by average performance of U.S. and European business. However, the sales were behind the Zacks Consensus Estimate of $672 million.

For the second quarter 2011, the Sportswear segment reported maximum growth in net sales, followed by Intimates. International net revenues contributed more than 32% to the company’s net revenue growth powered by strong Calvin Klein business.

Square footage expansion and a 7% increase in comparable store sales drove a substantial 38% year-over-year growth in direct-to-consumer net revenues.

Warnaco forecasts total net sales growth of 10%–12% in the fiscal 2011, up from the previously announced target of 9%-11%.

Year-over-year, operating income has shrunk 4.9% to $52.6 million while operating margin contracted 200 basis points in the quarter, primarily due to the decline in top line in U.S. and Europe. Increased promotional environment and higher customer allowances adversely affected gross margin.

Selling, General and Administrative expenses went up by 18% compared to the corresponding quarter in the prior year, primarily due to incremental selling and distribution costs ($25 million) mainly associated with the expansion of the company’s direct-to-consumer business.

Other Financial Updates

The company exited the year with cash and cash equivalents of $294.8 million at July 2, 2011, up from $172.9 million as on July 3, 2010.

Inventories increased to $355.4 million from $277.6 million, driven by the company’s expansion of direct-to-consumer business and growth in  the company’s wholesale business.

At quarter-end, the company had approximately 2.4 million shares remaining under its 2010 share repurchase program.

In June, 2011 the company announced the completion of a senior secured term-loan offering of $200 million. The debt is scheduled to mature in 2018.  Warnaco will pay interest at a floating rate of 1% bearing a fixed margin of 2.75%. The company plans to use the term loan proceeds for general corporate purposes, which include funding internal growth and acquisitions, repaying revolving credit borrowings and repurchasing common stock.

Our Take

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 holds a Zacks #4 Rank, which translates into a short-term Sell rating.

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