Warnaco Falls Shy by a Penny - Analyst Blog

Warnaco Group Inc. (WRC) registered fourth quarter 2011 adjusted earnings of 97 cents per share, which missed the Zacks Consensus Estimate by a penny. However, it exceeded the prior-year earnings of71 cents per share by 31%. For fiscal 2011, income per diluted share from continuing operations on an adjusted, non-GAAP, basis increased 11% to $3.96 compared with$3.57 in fiscal 2010. It also missed the Zacks Consensus estimate by a penny.

The upswing came on the back of success in Calvin Klein business. Additionally, expansion into emerging markets globally coupled with enhanced direct-to-consumer business also helped the company’s performance.

The adjusted earnings excludes restructuring expenses, pension expenses, tax related items and other items. On a GAAP basis, the company reported loss per diluted share from continuing operations of16 cents compared with income per diluted share from continuing operations of 61 cents in the prior-year quarter. 

Based on the fourth quarter, Warnaco continues to anticipate its fiscal 2012 adjusted earnings per share to be$4.20-$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 $3.64-$3.70 for fiscal 2012.

The current Zacks Consensus Estimate is pegged at$1.07 per share for the first quarter of 2012. The estimate for full year 2012 is $4.47.

Consolidated Revenue and Margins

Warnaco’s quarterly net sales climbed 4% to $614.7 million compared with $591.5 million in the prior-year period, driven by the company’s investment in the long-term growth strategies, which contributed4% of the Company’s international businesses, a 5% increase in the domestic business and a 14% gain in the direct to consumer net sales.

The Company’s non-Calvin Klein businesses went down 5% year on year. Growth in the Company’s Core Intimates business was offset by a decrease in the Company’s Chaps business, which declined primarily due to weaker demand in the moderate priced channel.

For fiscal 2011, the company reported 9.5% higher earnings of $2,513.5 million compared with the prior year.             

However, the increase in sales were driven mainly by Calvin Klein net revenues, which were up 12% compared with the prior year, fuelled by international and direct-to-consumer expansion. International net revenues were up 17% and direct-to-consumer revenues increased 28%. These increases were more than offset by the 3% reduction in U.S. net sales. Sales were short of the Zacks Consensus Estimate of $656 million.

A 2% increase in comparable store sales drove a substantial 28% year-over-year growth in direct-to-consumer net revenues for the fiscal year.

The segments of Sportswear, Intimate Apparel reported revenue gains of 1.7%and 8.7% respectively. However, the Swimwear group declined 2% year over year to $55,831 million in the quarter

Warnaco continues to expect its total net sales growth of 4%-6% in fiscal 2012 compared with the previous year.

Gross profit increased 5.4% to $267.8 million in the fourth quarter of, while gross margin declined 60 basis points to 44% on the back of increased product costs, increasing level of customer allowances and weak business environment in select markets, offsetting strong gross margins in the company’s Asian business.

Year-over-year, operating income has shrunk 112.1% to a negative $5,464 million, while operating margin contracted 850 basis points in the quarter to a negative 0.9%.

The foreign currency fluctuation led to a $59.0 million increase in net sales and a dip in reported income per diluted share from continuing operations of approximately 12 cents.

Other Financial Updates

The company exited the quarter with cash and cash equivalents of $232.5 million as on December 31, 2011, which was higher than $191.2 million as on January 1, 2011.

Inventories increased 13% to $350.8 million from $310.5 million, driven by the company’s expansion of direct-to-consumer business and rise in product costs.

For fiscal 2011, the Company purchased 4.3 million shares of its common stock for approximately $217.1 million pursuant to its share repurchase programs

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 rating for Warnaco.

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