Warnaco Planning Major China Push

Company also expects business to grow in Brazil.

The Warnaco Group Inc. is planning to quadruple its business in China in the next four years, to over $400 million, as it builds on its growing retail presence and avails itself of opportunities to do business directly in the world’s most populous market.

This story first appeared in the November 9, 2010 issue of WWD.  Subscribe Today.

Joe Gromek, president and chief executive officer of the New York-based apparel firm, told WWD that China is currently responsible for more than $100 million of Warnaco’s annual revenues and that figure is expected to grow to more than $150 million next year as sales expand and it takes over operations of two indigenous distributors. The company started the year with about 60 directly operated stores there, a figure that since has risen to about 100. There are an additional 250 points of sale in China currently generating wholesale revenue for the company, and conversion of those stores into directly operated units would accelerate sales growth and benefit gross margins as well.

In an interview following the release of the company’s improved third-quarter earnings late Monday, Gromek also singled out Brazil, where the company expects to grow from just under $100 million this year to about $120 million in 2011.

“Calvin Klein is one of the few global brands represented in a very major way in Brazil, and it doesn’t hurt that Calvin Klein himself is a celebrity there, or that Francisco Costa, our current designer, is himself Brazilian,” Gromek told WWD.

Warnaco also benefits from manufacturing most of its merchandise for the Brazilian market in that country, avoiding duties that would hurt margins and salability.

Gromek noted that China and Brazil generate the best and second-best operating income margins in the international arena for Warnaco.

In the quarter ended Oct. 2, the company benefited from a shift in its merchandise mix toward higher-margin retail operations, helping to offset increased costs for production and freight and exceeding analysts’ expectations in the process.

Net income grew 39.9 percent to $41.5 million, or 90 cents a diluted share, from $29.7 million, or 63 cents, in the year-ago quarter. Stripping out restructuring and other onetime items, EPS tallied $1.04, 9 cents better than the consensus estimate of 95 cents carried by Yahoo Finance.

Revenues grew 14.6 percent to $596.8 million from $520.9 million, including 12 percent growth in both the Calvin Klein and international businesses. While wholesale volume improved 12.7 percent to $454.1 million, retail sales shot up 21 percent to $142.7 million as same-store sales rose 9 percent.

Gromek said the third quarter was “the first time in recent memory that our legacy business grew faster than Calvin Klein.” That included 32 percent growth for Chaps and growth in the midteens for the core intimates business, including Olga and Warner’s.

Gross margin grew 120 basis points to 45.1 percent of sales from 43.9 percent a year ago.

Emphasizing that Warnaco buys finished products from its suppliers, rather than raw materials, Gromek said on the company conference call that sourcing costs are locked in for the first half of next year, with FOB costs up about 6 percent. “About 70 percent of that will be dealt with through selling prices,” he said, “and the balance with changes in our mix.”

The company boosted guidance for the year and now expects diluted EPS for continuing operations of $3.45 to $3.55, 5 cents higher than previously projected. Year-end revenues, earlier expected to rise between 9 percent and 11 percent, are now seen increasing 11 percent to 13 percent.

Shares of Warnaco rose 23 cents, or 0.4 percent, to $55.14 in trading before the earnings report Monday but pulled back about 1.4 percent in after-hours trading.

Elsewhere in the markets Monday, the S&P Retail Index slipped 0.2 percent, or 0.86 points, to 484.74. Among the industry’s decliners were Saks Inc., 2.4 percent to $11.83; The TJX Cos. Inc., 1.9 percent to $46.05, and AnnTaylor Stores Corp., 0.5 percent to $24.22.

The Dow Jones Industrial Average slipped 0.3 percent, or 37.24 points, to 11,406.84 as investors continued to digest the Federal Reserve’s decision last week to boost the economy by buying $600 billion in Treasury notes.