Warnaco Profit Up, Raises 2011 Guidance

The firm expects its retail operations to surpass 80 percent of operating income in the fourth quarter.

Expanding international and retail operations propelled The Warnaco Group Inc. to a 52 percent boost in second-quarter net income and prompted the company to raise guidance for the remainder of the year.

This story first appeared in the August 2, 2011 issue of WWD.  Subscribe Today.

Net income for the three months ended July 2 was $45.5 million, or $1.01 a diluted share, versus $29.9 million, or 65 cents, in the 2010 quarter. Adjusting for discontinued operations and special items, earnings per share was 82 cents, 7 cents above the analyst consensus estimate.

Paced by a 17.3 percent increase in sales of its sportswear group, to $286.3 million, overall revenues were up 13.9 percent to $591.4 million, nearly $10 million above the $581.5 million expected by analysts on average, from $519.3 million a year ago. Sportswear sales were up 10.5 percent on a constant currency basis. Intimate apparel rose 13.7 percent, 8.2 percent at constant currency, to $226.4 million, while swimwear rose 3.3 percent to $78.7 million and was ahead 1.2 percent excluding currency fluctuation.

“Our global Calvin Klein business grew 19 percent in the quarter, benefiting from international and direct-to-consumer expansion, led once again by Latin America and Asia,” said Joe Gromek, president and chief executive officer of the New York-based company. “Expanded square footage and a 7 percent increase in comparable-store sales contributed to a 38 percent increase in retail net revenues.”

Without disclosing their previous levels, Gromek told WWD that the firm expects its retail operations to grow to more than one-third of revenues and surpass 80 percent of operating income in the fourth quarter. “With gross margins in the high 60s, that’s obviously going to affect the company’s gross margin in a positive way,” he said.

He noted that sensitivity to price increases varied according to each market’s economic conditions. “In some places, like Brazil and Hong Kong, we’re not feeling it at all,” he said. Comps, he noted, were running at “double digits and above” in Germany, France and the U.K., but were down 5 percent and 6 percent, respectively, in Spain and Italy during the quarter.

Gromek cited “a more promotional environment and higher customer allowances” in certain of its U.S. and European wholesale businesses for a decline in corporate gross margin, which fell to 36.4 percent of sales from 36.9 percent despite a 12.4 percent boost in gross profit, to $258.3 million. In the year’s first half, gross margin was off 140 basis points to 35.4 percent of sales, but the full-year gross margin decline is expected to be about 30 basis points, helped by the shift towards retail.

International revenues grew 32 percent in the quarter but were down 4 percent in the U.S.

The company lifted its fiscal 2011 guidance to growth of 10 to 12 percent in revenues, compared to earlier guidance of a 9 to 11 percent jump. Guidance for EPS was narrowed to a range of $4 to $4.15 a diluted share, up from projections of $3.95 to $4.15.

First-half net income rose 14.9 percent to $89.5 million, or $1.97 a diluted share, from $77.9 million, or $1.67, as revenues picked up 13.2 percent to $1.25 billion from $1.11 billion.