Warnaco Reports Second Quarter Fiscal 2012 Results

The Warnaco Group, Inc. (NYSE: WRC) today reported results for the second quarter ended June 30, 2012.

For the second quarter:
  • Net revenues decreased 5%, to $563.9 million, compared to the prior year quarter.
  • Net revenues, in constant currency, were flat compared to the prior year quarter.
  • The Company incurred a $12.0 million impairment charge pertaining to the note receivable related to its 2008 sale of Lejaby® to Palmers Textil AG, referred to as the Lejaby impairment charge.
  • Income per diluted share from continuing operations was $0.23, compared to $1.01 in the prior year quarter.
  • Income per diluted share from continuing operations on an adjusted, non-GAAP basis was $0.72 compared to $0.82 in the prior year quarter (which excludes restructuring expense, pension expense, tax-related items and, for the current quarter, the Lejaby impairment charge).

The accompanying tables provide a reconciliation of actual results to the adjusted, non-GAAP results.

The Company believes it is valuable for users of the Company’s financial statements to be made aware of the adjusted financial information, as such measures are used by management to evaluate the operating performance of the Company’s continuing businesses on a comparable basis and to make operating and strategic decisions. In addition, the Company uses performance targets based, in part, on non-GAAP income from continuing operations and non-GAAP operating income as a component of the measurement of certain employee incentive compensation.

“Our second quarter results were in line with our projections. As expected, a positive performance in Asia and Latin America during the quarter offset softness in Europe and the U.S. Despite a decline in comparable store sales, reflecting challenging macroeconomic conditions, our Calvin Klein direct-to-consumer business was up 6% in constant currency, further validating our core international and retail expansion strategies. Speedo had a great quarter reflecting the benefit of our Olympic initiatives as well as the kickoff of our segmentation strategy, which will drive future growth for the brand. In addition, we continued to exercise disciplined control over our expenses while continuing to invest in our direct-to-consumer expansion. We took further action in Europe, as we previously announced, to position the business for improved operating performance over time,” commented Helen McCluskey, Warnaco’s President and Chief Executive Officer.

“We are making progress in reshaping our organization to reflect the consumer-centric vision I outlined earlier in the year. We are very excited about the caliber of talent we are attracting to our design and merchandising teams as we consolidate the group into New York. We are confident that we are taking the appropriate actions to ensure that these changes will have a significant benefit for the business over the long term.”

“In the near term, looking ahead to the second half, with good visibility to forward bookings and more favorable product costs, we expect second half net revenue and gross margin to increase and to meet our projections for the balance of 2012,” concluded McCluskey.

Adjusted Fiscal 2012 Outlook

For fiscal 2012, primarily based on the adverse effect of recent foreign currency exchange rates, the Company now anticipates:
  • Net revenues, on a reported basis, will be down 2% to flat (up approximately 2% - 4% based on constant currency) compared to fiscal 2011; and
  • Adjusted, non-GAAP, diluted earnings per share from continuing operations (excluding restructuring expense, pension expense and the Lejaby impairment charge) in the range of $4.00 - $4.15.

Schedule 7 of the accompanying tables provides a reconciliation of anticipated diluted earnings per share from continuing operations, on a GAAP basis of $2.94- $3.00 per diluted share (assuming minimal pension expense), to the adjusted, non-GAAP fiscal 2012 outlook above.

Prior guidance was for net revenue growth in the range of 0%-2% (and 2%-4% based on constant currency) compared to fiscal 2011 and adjusted, non-GAAP diluted earnings per share from continuing operations (excluding restructuring expense and pension expense) in the range of $4.00 - $4.25.

Second Quarter Highlights

Total Company

Net revenues fell 5% to $563.9 million, compared to the prior year period and were flat in constant currency. In the quarter, a 10% increase in Swimwear Group net revenues, fueled by a powerful performance from Speedo ® , were more than offset by declines in Sportswear and Intimate Apparel net revenues. Challenging market conditions, particularly in the U.S. and Europe, a more promotional environment and the unfavorable effects of fluctuations in currency exchange rates adversely affected the Company’s net revenues.

Gross margin decreased 130 basis points to 42% of net revenues, compared to the prior year period, due primarily to product cost inflation, increased customer allowances and the effects of currency fluctuations. Gross profit decreased 8% compared to the prior year quarter to $238.9 million. Selling, General & Administrative “SG&A” expense was down 2%, compared to the prior year quarter, to $199.3 million; however, as a percentage of net revenues, SG&A expense increased 110 basis points to 35% of net revenues. SG&A, in the quarter, was adversely impacted by approximately $13.1 million of restructuring expense as well as increased expense related to the Company’s growth in its direct-to-consumer square footage, which was more than offset by disciplined expense control related to its wholesale businesses and lower employee compensation and professional fees.

Operating income was $32.8 million, a decline of $19.8 million, or 38%, compared to the prior year quarter, and includes approximately $16.2 million of restructuring expense.

Other expense was $12.9 million compared to other income of $0.2 million in the prior year quarter. The increase was primarily due to an impairment charge to the Company’s receivables recorded in the quarter (related to a note issued by Palmers Textil AG in connection with the Company’s 2008 sale of the Lejaby business to Palmers) as the Company now expects that a portion of the receivable might not be collectible.

Income from continuing operations decreased to $9.6 million, or $0.23 per diluted share, compared to $45.6 million, or $1.01 per diluted share, in the prior year quarter. On an adjusted, non-GAAP basis (excluding costs related to restructuring expense, pension expense, the impairment charge related to the Palmer’s note and tax-related items), income from continuing operations was $30.2 million, or $0.72 per diluted share, compared to $37.0 million, or $0.82 per diluted share, in the prior year period.

The effect of fluctuations in foreign currency exchange rates for the quarter decreased net revenues, gross profit and SG&A by $27.2 million, $12.8 million and $11.9 million, respectively, compared to the prior year quarter and had an immaterial effect on income per diluted share from continuing operations. An additional discussion regarding the effects of fluctuations in foreign currency exchange rates on operating results can be found in the Company’s Form 10-Q, for the quarter ended June 30, 2012, which will be filed with the Securities and Exchange Commission.

The effective tax rate in the quarter was 42%, compared to 9% in the prior year quarter. The second quarter’s effective tax rate primarily reflects a year-to-date adjustment based upon a higher estimated annual effective tax rate, while the prior year quarter reflects the benefit of approximately $10 million related to the recognition of net operating losses in a foreign jurisdiction. The Company expects its full year Fiscal 2012 adjusted non-GAAP effective tax rate to be approximately 32.5%.

Balance Sheet

Cash and cash equivalents at June 30, 2012 were $295.3 million compared to $294.8 million at July 2, 2011. During the twelve month period ended June 30, 2012, the Company used more than $138.4 million to purchase 2.9 million shares of its common stock, under its Board authorized repurchase programs, including 200,000 shares purchased in the second quarter 2012, for approximately $8.8 million. The Company ended the quarter in a net cash position of $43.0 million.

Inventories at June 30, 2012 were $330.6 million, down $24.8 million (or 7%) compared to $355.4 million at July 2, 2011. Disciplined inventory management and fluctuations in foreign currency exchange rates more than offset inventory increases related to the expansion of the Company’s direct-to-consumer business as well as increased product costs. The Company remains comfortable with the quality of its inventory and expects inventory to decline through the remainder of fiscal 2012.

Conference Call Information

Stockholders and other persons are invited to listen to the second quarter fiscal 2012 earnings conference call scheduled for today, Monday, August 6, 2012, at 4:30 p.m. EDT. To participate in Warnaco’s conference call, dial (877) 692-2592 approximately five minutes prior to the 4:30 p.m. start time. The call will also be broadcast live over the Internet at www.warnaco.com. An online archive will be available following the call.

This press release was furnished to the SEC ( www.sec.gov) and may also be accessed through the Company’s internet website: www.warnaco.com.

ABOUT WARNACO

The Warnaco Group, Inc., headquartered in New York, is a leading global apparel company engaged in the business of designing, sourcing, marketing and selling men’s, women’s and children’s sportswear and accessories, intimate apparel, and swimwear under such owned and licensed brands as Calvin Klein®, Speedo®, Chaps®, Warner's® and Olga®. For more information, visit www.warnaco.com.

FORWARD-LOOKING STATEMENTS

The Warnaco Group, Inc. notes that this press release, the conference call scheduled for August 6, 2012 and certain other written, electronic and oral disclosure made by the Company from time to time, may contain forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve risks and uncertainties and reflect, when made, the Company's estimates, objectives, projections, forecasts, plans, strategies, beliefs, intentions, opportunities and expectations. Actual results may differ materially from anticipated results, targets or expectations and investors are cautioned not to place undue reliance on any forward-looking statements. Statements other than statements of historical fact, including, without limitation, future financial targets, are forward-looking statements. These forward-looking statements may be identified by, among other things, the use of forward-looking language, such as the words "believe," "anticipate," "estimate," "expect," "intend," "may," "project," "scheduled to," "seek," "should," "will be," "will continue," "will likely result," “targeted,” or the negative of those terms, or other similar words and phrases or by discussions of intentions or strategies.

The following factors, among others and in addition to those described in the Company's reports filed with the SEC (including, without limitation, those described under the headings "Risk Factors" and "Statement Regarding Forward-Looking Disclosure," as such disclosure may be modified or supplemented from time to time), could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by it: the Company's ability to execute its repositioning and sale initiatives (including achieving enhanced productivity and profitability) previously announced; deterioration in global or regional or other macroeconomic conditions that affect the apparel industry, including turmoil in the financial and credit markets; the Company's failure to anticipate, identify or promptly react to changing trends, styles, or brand preferences; the Company’s failure to use the most recent and effective advertising media to reach customers; further declines in prices in the apparel industry and other pricing pressures; declining sales resulting from increased competition in the Company’s markets; increases in the prices of raw materials or costs to produce or transport products; events which result in difficulty in procuring or producing the Company's products on a cost-effective basis; the effect of laws and regulations, including those relating to labor, workplace and the environment; possible additional tax liabilities; changing international trade regulation, including as it relates to the imposition or elimination of quotas on imports of textiles and apparel; the Company’s ability to protect its intellectual property or the costs incurred by the Company related thereto; the risk of product safety issues, defects or other production problems associated with the Company’s products; the Company’s dependence on a limited number of customers; the effects of consolidation in the retail sector; the Company’s dependence on license agreements with third parties including, in particular, its license agreement with CKI, the licensor of the Company’s Calvin Klein brand name; the Company’s dependence on the reputation of its brand names, including, in particular, Calvin Klein; the Company’s exposure to conditions in overseas markets in connection with the Company’s foreign operations and the sourcing of products from foreign third-party vendors; the Company's foreign currency exposure; unanticipated future internal control deficiencies or weaknesses or ineffective disclosure controls and procedures; the effects of fluctuations in the value of investments of the Company’s pension plan; the sufficiency of cash to fund operations, including capital expenditures; the Company recognizing impairment charges for its long-lived assets; uncertainty over the outcome of litigation matters and other proceedings; the Company's ability to service its indebtedness, the effect of changes in interest rates on the Company's indebtedness that is subject to floating interest rates and the limitations imposed on the Company's operating and financial flexibility by the agreements governing the Company's indebtedness; the Company’s dependence on its senior management team and other key personnel; the Company’s reliance on information technology; the limitations on purchases under the Company's share repurchase program contained in the Company's debt instruments, the number of shares that the Company purchases under such program and the prices paid for such shares; the Company’s inability to achieve its financial targets and strategic objectives, as a result of one or more of the factors described above, changes in the assumptions underlying the targets or goals, or otherwise; the inability to successfully implement restructuring and disposition activities; the Company’s inability to successfully transition its sourcing, design and merchandising functions related to Calvin Klein Jeans from Italy to New York; the failure of acquired businesses to generate expected levels of revenues; the failure of the Company to successfully integrate such businesses with its existing businesses (and as a result, not achieving all or a substantial portion of the anticipated benefits of such acquisitions); and such acquired businesses being adversely affected, including by one or more of the factors described above and thereby failing to achieve anticipated revenues and earnings growth.

The Company encourages investors to read the section entitled "Risk Factors" and the discussion of the Company's critical accounting policies under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Discussion of Critical Accounting Policies" included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as such discussions may be modified or supplemented by subsequent reports that the Company files with the SEC. The discussion in this press release is not exhaustive but is designed to highlight important factors that may affect actual results. Forward-looking statements speak only as of the date on which they are made, and, except for the Company's ongoing obligation under the U.S. federal securities laws, the Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
     
Schedule 1
THE WARNACO GROUP, INC.
     
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, excluding per share amounts)
(Unaudited)
 
Three Months Ended Six Months Ended
June 30, 2012 July 2, 2011 June 30, 2012 July 2, 2011
 
 
Net revenues $ 563,911 $ 591,387 $ 1,179,452 $ 1,253,548
Cost of goods sold   324,972     333,117     673,028     700,140  
Gross profit 238,939 258,270 506,424 553,408
Selling, general and administrative expenses 199,344 202,854 411,965 425,491
Amortization of intangible assets 6,850 3,126 9,549 6,285
Pension income   (55 )   (309 )   (109 )   (621 )
Operating income 32,800 52,599 85,019 122,253
Other loss (income) 12,894 (215 ) 12,625 (859 )
Interest expense 4,645 3,460 9,094 6,156
Interest income   (1,001 )   (810 )   (1,874 )   (1,556 )
Income from continuing operations before provision
for income taxes and non-controlling interest 16,262 50,164 65,174 118,512
Provision for income taxes   6,822     4,598     22,813     28,414  
Income from continuing operations before non-controlling interest 9,440 45,566 42,361 90,098
Income (loss) from discontinued operations, net of taxes   (9 )   (63 )   3,025     (564 )
Net income 9,431 45,503 45,386 89,534
Less: Net loss attributable to the non-controlling interest   (185 )   -     (146 )   -  
Net income attributable to Warnaco Group   9,616     45,503     45,532     89,534  
 
Amounts attributable to Warnaco Group common shareholders:
Income from continuing operations, net of taxes $ 9,625 $ 45,566 $ 42,507 $ 90,098
Income (loss) from discontinued operations, net of taxes   (9 )   (63 )   3,025     (564 )
Net income $ 9,616   $ 45,503   $ 45,532   $ 89,534  
 
Basic income per common share:
Income from continuing operations $ 0.23 $ 1.03 $ 1.03 $ 2.03
Income (loss) from discontinued operations   -     -     0.07     (0.01 )
Net income $ 0.23   $ 1.03   $ 1.10   $ 2.02  
 
Diluted income per common share:
Income from continuing operations $ 0.23 $ 1.01 $ 1.01 $ 1.99
Income (loss) from discontinued operations   -     -     0.07     (0.02 )
Net income $ 0.23   $ 1.01   $ 1.08   $ 1.97  
 
Weighted average number of shares outstanding used in
computing income per common share:
Basic   40,962,008     43,622,535     40,746,295     43,757,202  
Diluted   41,551,860     44,458,373     41,505,033     44,698,317  
   
Schedule 2
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
   
June 30, 2012 December 31, 2011 July 2, 2011
 
ASSETS
Current assets:
Cash and cash equivalents $ 295,346 $ 232,531 $ 294,802
Accounts receivable, net 283,370 322,976 320,416
Inventories 330,571 350,835 355,384
Other current assets   159,118   158,288     166,333
Total current assets 1,068,405 1,064,630 1,136,935
 
Property, plant and equipment, net 127,950 133,022 130,566
Intangible and other assets   522,173   550,198   596,787
TOTAL ASSETS $ 1,718,528 $ 1,747,850   $ 1,864,288
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 46,399 $ 47,513 $ 12,673
Accounts payable and accrued liabilities 304,293 354,452 344,591
Taxes 14,206 43,238 23,589
Liabilities of discontinued operations   -   6,797     3,433
Total current liabilities 364,898 452,000 384,286
Long-term debt 206,360 208,477 210,631
Other long-term liabilities 171,974 174,973 232,448
Redeemable non-controlling interest 15,200 15,200 -
Total stockholders' equity   960,096   897,200     1,036,923
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,718,528 $ 1,747,850   $ 1,864,288
 
NET CASH AND CASH EQUIVALENTS (NET DEBT) $ 42,587 $ (23,459 ) $ 71,498
         
Schedule 3
 
THE WARNACO GROUP, INC.
NET REVENUES AND OPERATING INCOME BY SEGMENT
(Dollars in thousands)
(Unaudited)
 
 
 
Net revenues: Three Months Ended Three Months Ended Increase / % Constant $
June 30, 2012 July 2, 2011 (Decrease) Change % Change (a)
Sportswear Group $ 265,028 $ 286,289 $ (21,261 ) -7.4 % -1.2 %
Intimate Apparel Group 212,126 226,443 (14,317 ) -6.3 % -2.7 %
Swimwear Group   86,757     78,655     8,102   10.3 % 11.9 %
Net revenues $ 563,911   $ 591,387   $ (27,476 ) -4.6 % 0.0 %
 
Three Months Ended % of Group Three Months Ended % of Group
June 30, 2012 Net Revenues July 2, 2011 Net Revenues
Operating income (loss):
Sportswear Group (b), (c) $ (11,283 ) -4.3 % $ 15,957 5.6 %
Intimate Apparel Group (b), (c) 25,993 12.3 % 34,470 15.2 %
Swimwear Group (b), (c) 13,645 15.7 % 10,705 13.6 %
Unallocated corporate (c), (d)   4,445   na   (8,533 ) na
Operating income $ 32,800   na $ 52,599   na
 
Operating income as a percentage of
total net revenues   5.8 %   8.9 %
 
(a) Reflects the percentage increase (decrease) in net revenues for the Three Months Ended June 30, 2012, compared to the Three Months Ended July 2, 2011, assuming foreign-based net revenues for the Three Months Ended June 30, 2012 are translated into U.S. dollars using the same foreign currency exchange rates that were used in the calculation of net revenues for the Three Months Ended July 2, 2011. See Schedule 6a.
 
(b) Shared services expenses included in the operating income of the business groups are as follows:
Three Months Ended Three Months Ended
June 30, 2012 July 2, 2011
Sportswear Group $ 7,556 $ 6,970
Intimate Apparel Group $ 5,703 $ 4,992
Swimwear Group $ 2,891 $ 2,435
 
(c) Includes restructuring charges and other exit costs as follows:
Three Months Ended Three Months Ended
June 30, 2012 July 2, 2011
Sportswear Group $ 11,986 $ 1,974
Intimate Apparel Group 3,223 1,480
Swimwear Group 806 1,187
Unallocated corporate   197     313  
$ 16,212   $ 4,954  
 
 
(d) For the Three Months Ended June 30, 2012 compared to the Three Months Ended July 2, 2011, primarily reflects decreases in employee compensation, decreases in other general administrative and professional fees, and decreases in foreign exchange gains.
         
Schedule 3a
 
THE WARNACO GROUP, INC.
NET REVENUES AND OPERATING INCOME BY SEGMENT
(Dollars in thousands)
(Unaudited)
 
 
 
Net revenues: Six Months Ended Six Months Ended Increase / % Constant $
June 30, 2012 July 2, 2011 (Decrease) Change % Change (a)
Sportswear Group $ 565,831 $ 625,760 $ (59,929 ) -9.6 % -6.0 %
Intimate Apparel Group 435,003 447,437 (12,434 ) -2.8 % -0.4 %
Swimwear Group   178,618     180,351     (1,733 ) -1.0 % 0.1 %
Net revenues $ 1,179,452   $ 1,253,548   $ (74,096 ) -5.9 % -3.1 %
 
Six Months Ended % of Group Six Months Ended % of Group
June 30, 2012 Net Revenues July 2, 2011 Net Revenues
Operating income (loss):
Sportswear Group (b), (c) $ 2,300 0.4 % $ 54,557 8.7 %
Intimate Apparel Group (b), (c) 55,947 12.9 % 65,007 14.5 %
Swimwear Group (b), (c) 28,482 15.9 % 24,773 13.7 %
Unallocated corporate (c), (d)   (1,710 ) na   (22,084 ) na
Operating income $ 85,019   na $ 122,253   na
 
Operating income as a percentage of
total net revenues   7.2 %   9.8 %
 
(a) Reflects the percentage increase (decrease) in net revenues for the Six Months Ended June 30, 2012 compared to the Six Months Ended July 2, 2011, assuming foreign-based net revenues for the Six Months Ended June 30, 2012 are translated into U.S. dollars using the same foreign currency exchange rates that were used in the calculation of net revenues for the Six Months Ended July 2, 2011. See Schedule 6b.
 
(b) Shared services expenses included in the operating income of the business groups are as follows:
Six Months Ended Six Months Ended
June 30, 2012 July 2, 2011
Sportswear Group $ 14,589 $ 13,843
Intimate Apparel Group $ 10,870 $ 9,701
Swimwear Group $ 5,598 $ 5,225
 
(c) Includes restructuring charges and other exit costs as follows:
Six Months Ended Six Months Ended
June 30, 2012 July 2, 2011
Sportswear Group $ 15,677 $ 3,624
Intimate Apparel Group 6,251 2,922
Swimwear Group 827 4,264
Unallocated corporate   47     633  
$ 22,802   $ 11,443  
 
 

(d) For the Six Months Ended June 30, 2012 compared to the Six Months Ended July 2, 2011, primarily reflects decreases in restructuring charges, decreases in employee compensation, decreases in other general administrative and professional fees, and decreases in foreign exchange gains.
     
Schedule 4
 
THE WARNACO GROUP, INC.
NET REVENUES AND OPERATING INCOME BY REGION
(Dollars in thousands)
(Unaudited)
 
By Region: Net Revenues
Three Months Ended June 30, 2012 Three Months Ended July 2, 2011 Increase / (Decrease) % Change   Constant $ % Change (a)
United States $ 247,827 $ 250,645 $ (2,818 ) -1.1 % -1.1 %
Europe 107,728 128,093 (20,365 ) -15.9 % -7.1 %
Asia 116,432 113,785 2,647 2.3 % 4.9 %
Mexico and Central and South America 61,978 62,132 (154 ) -0.2 % 18.3 %
Canada (b)   29,946     36,732     (6,786 ) -18.5 % -14.5 %
Total $ 563,911   $ 591,387   $ (27,476 ) -4.6 % 0.0 %
 
 
Operating Income (loss)
Three Months Ended June 30, 2012 % of Net Revenues Three Months Ended July 2, 2011 % of Net Revenues Increase / (Decrease) % Change  
United States (c) $ 20,751 8.4 % $ 34,043 13.6 % $ (13,292 ) -39.0 %
Europe (c) (17,159 ) -15.9 % (8,088 ) -6.3 % (9,071 ) -112.2 %
Asia (c) 14,243 12.2 % 18,604 16.4 % (4,361 ) -23.4 %
Mexico and Central and South America (c) 6,861 11.1 % 13,044 21.0 % (6,183 ) -47.4 %
Canada (c) 3,659 12.2 % 3,529 9.6 % 130 3.7 %
Unallocated corporate (c), (d), (e)   4,445   na   (8,533 ) na   12,978   152.1 %
Total $ 32,800   5.8 % $ 52,599   8.9 % $ (19,799 ) -37.6 %
 
 
 
(a) Reflects the percentage increase (decrease) in net revenues for the Three Months Ended June 30, 2012, compared to the Three Months Ended July 2, 2011, assuming foreign-based net revenues for the Three Months Ended June 30, 2012 are translated into U.S. dollars using the same foreign currency exchange rates in the calculation of net revenues for the Three Months Ended July 2, 2011. See Schedule 6a.
 
(b) The decrease in net revenues for the Three Months Ended June 30, 2012 compared to the Three Months Ended July 2, 2011 is primarily due to the closure of outlet stores during Fiscal 2011.
 
(c) Includes restructuring charges and other exit costs as follows:
Three Months Ended June 30, 2012 Three Months Ended July 2, 2011
United States $ 7,358 $ 1,589
Europe 8,192 797
Asia 96 -
Canada 158 2,255
Mexico and Central and South America 210 (1 )
Unallocated corporate   198     314  
Total $ 16,212   $ 4,954  
 
 
 

(d) Includes expense of $346 during the Three Months Ended June 30, 2012 in connection with the Company's decision to consolidate its sourcing/design/merchandising functions related to Calvin Klein Jeans, which are currently located in both Europe and New York, entirely to New York. These costs are recorded in "unallocated corporate expenses" and not in the Sportswear Group.
 

(e) For the Three Months Ended June 30, 2012 compared to the Three Months Ended July 2, 2011, primarily reflects decreases in employee compensation, decreases in other general administrative and professional fees, and decreases in foreign exchange gains.
 
Schedule 4a
   
THE WARNACO GROUP, INC.
NET REVENUES AND OPERATING INCOME BY REGION
(Dollars in thousands)
(Unaudited)
 
By Region: Net Revenues
Six Months Six Months

 

Ended June 30,

Ended July 2,
Increase /

Constant $

2012

2011
(Decrease) % Change

% Change (a)
United States $ 496,236 $ 535,788 $ (39,552 ) -7.4 % -7.4 %
Europe 254,040 296,562 (42,522 ) -14.3 % -9.1 %
Asia 254,195 240,561 13,634 5.7 % 6.5 %
Mexico and Central and South America 115,081 113,850 1,231 1.1 % 14.5 %
Canada (b)   59,900     66,787     (6,887 ) -10.3 % -7.3 %
Total $ 1,179,452   $ 1,253,548   $ (74,096 ) -5.9 % -3.1 %
 
 
Operating Income (loss)
Six Months

 
Six Months

 

 

Ended June 30,

% of Net

Ended July 2,

% of Net

Increase /

2012

Revenues

2011

Revenues

(Decrease)
% Change
United States (c) $ 50,400 10.2 % $ 76,153 14.2 % $ (25,753 ) -33.8 %
Europe (c) (19,022 ) -7.5 % (2,512 ) -0.8 % (16,510 ) -657.2 %
Asia (c) 40,337 15.9 % 45,046 18.7 % (4,709 ) -10.5 %
Mexico and Central and South America (c) 8,962 7.8 % 19,986 17.6 % (11,024 ) -55.2 %
Canada (c) 6,052 10.1 % 5,664 8.5 % 388 6.9 %
Unallocated corporate (c), (d), (e)   (1,710 ) na   (22,084 ) na   20,374   92.3 %
Total $ 85,019   7.2 % $ 122,253   9.8 % $ (37,234 ) -30.5 %
 
 
 
(a) Reflects the percentage increase (decrease) in net revenues for the Six Months Ended June 30, 2012 compared to the Six Months Ended July 2, 2011, assuming foreign-based net revenues for the Six Months Ended June 30, 2012 are translated into U.S. dollars using the same foreign currency exchange rates that were used in the calculation of net revenues for the Six Months Ended July 2, 2011. See Schedule 6b.
 
(b) The decrease in net revenue for the Six Months Ended June 30, 2012 compared to the Six Months Ended July 2, 2011 is primarily due to the closure of outlet stores during Fiscal 2011.
 
(c) Includes restructuring charges and other exit costs as follows:
Six Months Ended June 30, 2012 Six Months Ended July 2, 2011
United States $ 8,191 $ 4,626
Europe 11,306 1,766
Asia 96 -
Canada 2,385 4,352
Mexico and Central and South America 778 67
Unallocated corporate   46     632  
Total $ 22,802   $ 11,443  
 
 
 

(d) Includes expense of $346 during the Six Months Ended June 30, 2012 in connection with the Company's decision to consolidate its sourcing/design/merchandising functions related to Calvin Klein Jeans, which are currently located in both Europe and New York, entirely to New York. These costs are recorded in "unallocated corporate expenses" and not in the Sportswear Group.
 
(e) For the Six Months Ended June 30, 2012 compared to the Six Months Ended July 2, 2011, primarily reflects decreases in restructuring charges, decreases in employee compensation, decreases in other general administrative and professional fees, and decreases in foreign exchange gains.
  Schedule 5
   
THE WARNACO GROUP, INC.
NET REVENUES AND OPERATING INCOME BY CHANNEL
(Dollars in thousands)
(Unaudited)
 
By Channel: Net Revenues

 

Three Months
Three Months

 

Ended June 30,

Ended July 2,
Increase /

Constant $

2012

2011
(Decrease) % Change

% Change (a)
Wholesale $ 391,973 $ 417,251 $ (25,278 ) -6.1 % -2.5 %
Retail   171,938   174,136     (2,198 ) -1.3 % 5.9 %
Total $ 563,911 $ 591,387   $ (27,476 ) -4.6 % 0.0 %
 
 
Operating Income (loss)

 

Three Months
Three Months

Ended June 30,
% of Net

Ended July 2,
% of Net Increase /

2012
Revenues

2011
Revenues (Decrease) % Change
Wholesale (b), (c) $ 22,152 5.7 % $ 42,387 10.2 % $ (20,235 ) -47.7 %
Retail (b), (c) 6,203 3.6 % 18,745 10.8 % (12,542 ) -66.9 %
Unallocated corporate (c), (d), (e)   4,445 na   (8,533 ) na   12,978   152.1 %
Total $ 32,800 5.8 % $ 52,599   8.9 % $ (19,799 ) -37.6 %
 
 
 
(a) Reflects the percentage increase (decrease) in net revenues for the Three Months Ended June 30, 2012, compared to the Three Months Ended July 2, 2011, assuming foreign-based net revenues for the Three Months Ended June 30, 2012 are translated into U.S. dollars using the same foreign currency exchange rates in the calculation of net revenues for the Three Months Ended July 2, 2011. See Schedule 6a.
 
(b) For the Three Months Ended June 30, 2012 and the Three Months Ended July 2, 2011, wholesale operating income includes an intercompany profit of $6,372 and $4,730, respectively, related to certain inventories sold by the retail business to end consumers. Conversely, for the Three Months Ended June 30, 2012 and the Three Months Ended July 2, 2011, retail operating income includes an intercompany charge of $6,372 and $4,730, respectively, related to these inventories.
 
(c) Includes restructuring charges and other exit costs as follows:

 

 

Three Months Ended

Three Months

June 30, 2012

Ended July 2, 2011
Wholesale $ 9,246 $ 3,334
Retail 6,768 1,307
Unallocated corporate   198   313  
Total $ 16,212 $ 4,954  
 
 
 

(d) Includes expense of $346 during the Three Months Ended June 30, 2012 in connection with the Company's decision to consolidate its sourcing/design/merchandising functions related to Calvin Klein Jeans, which are currently located in both Europe and New York, entirely to New York. These costs are recorded in "unallocated corporate expenses" and not in the Sportswear Group.
 
(e) For the Three Months Ended June 30, 2012 compared to the Three Months Ended July 2, 2011, primarily reflects decreases in employee compensation, decreases in other general administrative and professional fees, and decreases in foreign exchange gains.
 
Schedule 5a
   
THE WARNACO GROUP, INC.
NET REVENUES AND OPERATING INCOME BY CHANNEL
(Dollars in thousands)
(Unaudited)
 
By Channel: Net Revenues

Six Months

Six Months

 

Ended June 30,

Ended July 2,
Increase /

Constant $

2012

2011
(Decrease) % Change

% Change (a)
Wholesale $ 828,491 $ 911,335 $ (82,844 ) -9.1 % -7.0 %
Retail   350,961     342,213     8,748   2.6 % 7.1 %
Total $ 1,179,452   $ 1,253,548   $ (74,096 ) -5.9 % -3.1 %
 
 
Operating Income (loss)

Six Months

Six Months

Ended June 30,
% of Net

Ended July 2,
% of Net Increase /

2012
Revenues

2011
Revenues (Decrease) % Change
Wholesale (b), (c) $ 77,048 9.3 % $ 118,058 13.0 % $ (41,010 ) -34.7 %
Retail (b), (c) 9,681 2.8 % 26,279 7.7 % (16,598 ) -63.2 %
Unallocated corporate (c), (d), (e)   (1,710 ) na   (22,084 ) na   20,374   92.3 %
Total $ 85,019   7.2 % $ 122,253   9.8 % $ (37,234 ) -30.5 %
 
 
 
(a) Reflects the percentage increase (decrease) in net revenues for the Six Months Ended June 30, 2012, compared to the Six Months Ended July 2, 2011, assuming foreign-based net revenues for the Six Months Ended June 30, 2012 are translated into U.S. dollars using the same foreign currency exchange rates in the calculation of net revenues for the Six Months Ended July 2, 2011. See Schedule 6b.
 
(b) For the Six Months Ended June 30, 2012 and the Six Months Ended July 2, 2011, wholesale operating income includes an intercompany profit of $17,132 and $15,218, respectively, related to certain inventories sold by the retail business to end consumers. Conversely, for the Six Months Ended June 30, 2012 and the Six Months Ended July 2, 2011, retail operating income includes an intercompany charge of $17,132 and $15,218, respectively, related to these inventories.
 
(c) Includes restructuring charges and other exit costs as follows:

 

 

Six Months Ended

Six Months Ended

June 30, 2012

July 2, 2011
Wholesale $ 12,765 $ 9,504
Retail 9,991 1,307
Unallocated corporate   46     632  
Total $ 22,802   $ 11,443  
 
 
 
(d) Includes expense of $346 during the Six Months Ended June 30, 2012 in connection with the Company's decision to consolidate its sourcing/design/merchandising functions related to Calvin Klein Jeans, which are currently located in both Europe and New York, entirely to New York. These costs are recorded in "unallocated corporate expenses" and not in the Sportswear Group.
 
(e) For the Six Months Ended June 30, 2012 compared to the Six Months Ended July 2, 2011, primarily reflects decreases in restructuring charges, decreases in employee compensation, decreases in other general administrative and professional fees, and decreases in foreign exchange gains.
 
Schedule 6
THE WARNACO GROUP, INC.

NON-GAAP MEASURES
(Dollars in thousands, excluding per share amounts)
(Unaudited)
     
The Warnaco Group, Inc.'s ("Warnaco Group" and, collectively with its subsidiaries, the "Company") reported financial results are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). The reported operating income, income from continuing operations and diluted earnings per share from continuing operations reflect certain items which affect the comparability of those reported results. Those financial results are also presented on a non-GAAP basis, as defined by Regulation S-K Section 10(e) issued by the Securities and Exchange Commission to exclude the effect of these items. The Company’s computation of these non-GAAP measures may vary from others in its industry. These non-GAAP financial measures are not intended to be, and should not be, considered in isolation from, or as a substitute for, the most directly comparable GAAP financial measure to which they are reconciled, as presented in the following table:
 
Three Months Ended* Six Months Ended*

June 30,
July 2, June 30, July 2,

2012
2011 2012 2011
(Dollars in thousands, except per share amounts)
 
 
Operating income, as reported (GAAP) $ 32,800 $ 52,599 $ 85,019 $ 122,253
Restructuring charges and other exit costs (a) 16,212 4,954 22,802 11,443
Pension income (b)   (55 )   (309 )   (109 )   (621 )
Operating income, as adjusted (non-GAAP) (e) $ 48,957   $ 57,244   $ 107,712   $ 133,075  
 
 

Income from continuing operations attributable to Warnaco Group common
shareholders, as reported (GAAP) $ 9,625 $ 45,566 $ 42,507 $ 90,098
Restructuring charges and other exit costs, net of income tax (a) 11,755 3,402 16,424 7,720
Pension income, net of income tax (b) (21 ) (184 ) (42 ) (381 )
Lejaby loan receivable (c) 12,040 - 12,040 -
Taxation adjustment (d)   (3,204 )   (11,788 )   (3,346 )   (10,137 )

Income from continuing operations attributable to Warnaco Group common

shareholders, as adjusted (non-GAAP) (e)
$ 30,195   $ 36,996   $ 67,583   $ 87,300  
 
 

Diluted earnings per share from continuing operations attributable to Warnaco Group common

shareholders, as reported (GAAP)
$ 0.23 $ 1.01 $ 1.01 $ 1.99
Restructuring charges and other exit costs, net of income tax (a) 0.28 0.07 0.39 $ 0.16
Pension income, net of income tax (b) - - - -
Lejaby loan receivable (c) 0.29 - 0.29 -
Taxation adjustment (d)   (0.08 )   (0.26 )   (0.08 )   (0.22 )

Diluted earnings per share from continuing operations attributable to Warnaco

Group common shareholders, as adjusted (non-GAAP) (e)
$ 0.72   $ 0.82   $ 1.61   $ 1.93  
 
*See footnotes on following page.
 
Schedule 6 (cont.)
THE WARNACO GROUP, INC.
NON-GAAP MEASURES
(Dollars in thousands, excluding per share amounts)
(Unaudited)
 
a) For all periods presented, this adjustment seeks to present operating income, income from continuing operations attributable to Warnaco Group common shareholders, and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders without the effects of restructuring charges and other exit costs. The income tax rates used to compute the income tax effect related to this adjustment correspond to the local statutory tax rates of the reporting entities that incurred restructuring charges and other exit costs.
 
b) For all periods presented, this adjustment seeks to present operating income, income from continuing operations attributable to Warnaco Group common shareholders, and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders without the effects of pension income. The income tax rates used to compute the income tax effect related to this adjustment correspond to the local statutory tax rates of the reporting entities that recognized pension income.
 

c) For the Three and Six Months Ended June 30, 2012, this adjustment seeks to present income from continuing operations attributable to Warnaco Group common shareholders and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders without the effects of the adjustments to the loan receivable related to the Company's discontinued Lejaby business. These adjustments were recorded in other income/expense within income from continuing operations on the Company's Consolidated Condensed Financial Statements. The reporting entity that recorded this adjustment has a 0% local statutory tax rate.
 
d) For the Three and Six Months Ended June 30, 2012 and the Three and Six Months Ended July 2, 2011, this adjustment reflects an additional amount required in order to present income from continuing operations attributable to Warnaco Group common shareholders and diluted earnings per share from continuing operations attributable to Warnaco Group common shareholders at the Company’s forecasted normalized tax rates for the fiscal year ending December 29, 2012 ("Fiscal 2012") (32.5%) and the fiscal year ended December 31, 2011 ("Fiscal 2011") (33.2%), respectively. The Company’s forecasted normalized tax rates for both Fiscal 2012 and Fiscal 2011 exclude the effects of restructuring charges and other exits costs, pension income and certain tax adjustments related to either changes in estimates in prior period tax provisions or adjustments for certain discrete tax items. Adjustments for discrete items reflect the federal, state and foreign tax effects related to: 1) income taxes associated with legal entity reorganizations and restructurings; 2) tax provision or benefit resulting from statute expirations or the finalization of income tax examinations; and 3) other adjustments not considered part of the Company's core business activities. In addition, this adjustment for Fiscal 2011 excludes the effect of a benefit of $10,900 recorded during the Three and Six Months Ended July 2, 2011 associated with the recognition of net operating losses in a foreign jurisdiction resulting from the successful petition of that country’s taxing authority.
 
e) The Company believes it is valuable for users of its financial statements to be made aware of the non-GAAP financial information, as such measures are used by management to evaluate the operating performance of the Company's continuing businesses on a comparable basis and to make operating and strategic decisions. Management believes such non-GAAP measures will also enhance users' ability to analyze trends in the Company's business. In addition, the Company uses performance targets based on non-GAAP operating income and diluted earnings per share from continuing operations as a component of the measurement of incentive compensation.
     
Schedule 6a
 
THE WARNACO GROUP, INC.
SUPPLEMENTAL SCHEDULE
NET REVENUES ON A CONSTANT CURRENCY BASIS
(Dollars in thousands)
(Unaudited)
 
Three Months Ended June 30, 2012
GAAP Impact of Foreign Non-GAAP (Note 1)
As Reported Currency Exchange Constant Currency
By Segment:
Sportswear Group $ 265,028 $ (17,712 ) $ 282,740
Intimate Apparel Group 212,126 (8,223 ) 220,349
Swimwear Group   86,757   (1,277 )   88,034
Net revenues $ 563,911 $ (27,212 ) $ 591,123
 
 
By Region:
United States $ 247,827 $ - $ 247,827
Europe 107,728 (11,254 ) 118,982
Asia 116,432 (2,964 ) 119,396
Mexico and Central and South America 61,978 (11,531 ) 73,509
Canada   29,946   (1,463 )   31,409
Total $ 563,911 $ (27,212 ) $ 591,123
 
 
Note 1:
The Company is a global company that reports financial information in U.S. dollars in accordance with GAAP. Foreign currency exchange rate fluctuations affect the amounts reported by the Company when it translates its foreign revenues into U.S. dollars. These rate fluctuations can have a significant effect on reported operating results. As a supplement to the Company's reported operating results, the Company presents constant currency financial information, which is a non-GAAP financial measure. The Company uses constant currency information to provide a framework to assess how its businesses performed excluding the effects of changes in foreign currency exchange rates. Management believes this information is useful to investors to facilitate comparisons of operating results and better identify trends in the Company's businesses.
 

To calculate the increase in segment revenues on a constant currency basis, net revenues for the current year period for entities reporting in currencies other than the U.S. dollar are translated into U.S. dollars at the average exchange rates in effect during the comparable period of the prior year (rather than the actual exchange rates in effect during the current year period).
 
These constant currency performance measures should be viewed in addition to, and not in isolation from, or as a substitute for, the Company's operating performance measures calculated in accordance with GAAP. The constant currency information presented may not be comparable to similarly titled measures reported by other companies.
     
Schedule 6b
 
THE WARNACO GROUP, INC.
SUPPLEMENTAL SCHEDULE
NET REVENUES ON A CONSTANT CURRENCY BASIS
(Dollars in thousands)
(Unaudited)
 
 
Six Months Ended June 31, 2012
GAAP Impact of Foreign Non-GAAP*
As Reported Currency Exchange Constant Currency
By Segment:
Sportswear Group $ 565,831 $ (22,321 ) $ 588,152
Intimate Apparel Group 435,003 (10,579 ) 445,582
Swimwear Group   178,618   (1,951 )   180,569
Net revenues $ 1,179,452 $ (34,851 ) $ 1,214,303
 
 
By Region:
United States $ 496,236 $ - $ 496,236
Europe 254,040 (15,680 ) 269,720
Asia 254,195 (1,885 ) 256,080
Mexico and Central and South America 115,081 (15,294 ) 130,375
Canada   59,900   (1,992 )   61,892
Total $ 1,179,452 $ (34,851 ) $ 1,214,303
 
 
 
* See Note 1 on Schedule 6a.
    Schedule 7
 
THE WARNACO GROUP, INC.
SUPPLEMENTAL SCHEDULE - FISCAL 2012 OUTLOOK
(Unaudited)
 
 
NET REVENUE GUIDANCE Percentages
     
Estimated increase in net revenues for Fiscal 2012 compared to levels in Fiscal 2011
GAAP basis -2.00% to 0.00%
Non-GAAP basis (constant currency) (a) 2.00% to 4.00%
 
 
EARNINGS PER SHARE GUIDANCE (based on recent exchange rates) U.S. Dollars
Diluted income per common share from continuing operations      
GAAP basis (assuming minimal pension expense / income) $ 2.94 to $ 3.00
Restructuring charges and other exit costs (b) 0.77 to 0.86
Adjustment of Lejaby loan receivable (c) 0.29 to 0.29
As adjusted (non-GAAP basis) (d) $ 4.00 to $ 4.15
 
 
(a) To calculate the expected increase in net revenues on a constant currency basis, expected net revenues for Fiscal 2012 for entities reporting in currencies other than the U.S. dollar have been translated into U.S. dollars at the average exchange rates in effect during Fiscal 2011.
 
(b) Reflects between $32 million to $35 million of estimated restructuring charges (net of an income tax benefit of between $13 million and $15 million) primarily related to the consolidation of certain international operations, the reorganization of the Company's management structure, the closure of facilities or retail stores, the exit of CKJ.com and the transition of the Company's CK/Calvin Klein "bridge" businesses back to Calvin Klein, Inc.
(c) Reflects $12.0 million of expenses related to the adjustment of the loan receivable in connection with the Company's Lejaby discontinued business. The reporting entity that recorded this adjustment has a 0% local statutory tax rate. Such adjustment was recorded in other income/expense within income from continuing operations.
 
(d) The Company believes it is useful for users of its financial statements to be made aware of the "As Adjusted" (non-GAAP) forecasted diluted income per common share from continuing operations as this is one of the measures used by management to evaluate the operating performance of the Company's continuing businesses on a comparable basis. The Company believes that this non-GAAP measure will also enhance users’ ability to analyze trends in the Company’s business. In addition, the Company uses performance targets based, in part, on this non-GAAP measure as a component of the measurement of employee incentive compensation. Management does not, nor should investors, consider this non-GAAP financial measure in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Copyright Business Wire 2010

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