Warnaco Misses, Up by a Penny - Analyst Blog

Warnaco Group Inc.’s (WRC) first-quarter 2011 earnings inched up by a penny from the year-ago period to $1.10 per share. It missed the Zacks Consensus Estimate of $1.27 per share by 13.4%.

Quarter in Detail

Net revenues increased 13% year over year to $662.2 million and was well above the Zacks Consensus Estimate of $658 million. The increase was primarily attributable to the execution of key strategies.

Revenues at the International business of Warnaco went up by 19%, fuelled by continued expansion into Asia, and Latin America, each reporting net revenue increase of more than  30% compared to the previous year.

Warnaco’s business posted highest growth in South America where it climbed up by 37.8% to $51.72 million from the year ago quarter. The segment Swimwear Group posted a year-over-year growth of 15.7% to $101.7 million.

The Company’s Heritage (non-Calvin Klein) businesses achieved 11% net revenue growth compared to the previous year, fuelled by double digit growth at both Chaps and Speedo, partially offset by a slight drop in Core Intimates.

Warnaco is reported to have been operating an additional 240,000 square feet of retail space compared to the prior year quarter, including approximately 50,000 square feet of new retail space opened or acquired this quarter.

Gross margin fell by 80 basis points from the year-ago period to 45% of net revenues. Higher gross margins in Asia and Latin America, was more than offset by a decline in European gross margins. Domestically, increased customer allowances, effects of higher product costs to an extent, particularly in the Sportswear segment, pulled down gross margins.

Selling General and Administrative expenses as a percent of net revenues increased 300 basis points to 34%, fuelled by the growth of the company’s direct-to-consumer business, which contributed about $24 million and an incremental $2 million as marketing investment compared with the prior-year quarter.

Operating income plummeted to $69.7 million from $79.5 million a year ago. Operating margin fell by 300 basis points to 10.5% of net revenues compared to the year ago quarter.

Warnaco exited the quarter with cash and cash equivalents of $174.1 million compared to $157.5 million a year ago. The Company spent $29.1 million to purchase 561,000 shares of its common stock under a share repurchase program

Guidance and Estimates

Management expects to benefit from appropriate price increases and realize positive operating leverage from the investments made in 2010 along with first quarter of 2011, positioning fiscal 2011 for another successful year for Warnaco and its stakeholders.

The company anticipates net revenues to grow 9% - 11% compared to fiscal 2010. Hence, it raised its guidance for adjusted diluted earnings per share from continuing operations to the range of $3.95 - $4.15 from the previous guidance of $3.85 - $4.05 for full year 2011.

The Zacks Consensus Estimate for fiscal 2011 is $4.10, up from $4.09 reported 7 days ago, after 1 analyst made positive revision. The Zacks Consensus Estimate for the quarter had been trending up in the run up to the earnings release, with 1 analyst raising its estimate in the last 7 days.

Our Take

Warnaco, which competes with Limited Brands Inc. (LTD) and Maidenform Brands Inc. (MFB), has strong international presence and ever expanding direct-to-consumer business, which is encouraging and should drive growth.

We currently have a Zacks #2 Rank on Warnaco shares, which translates into a short-term Buy rating.

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