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Warnaco’s New Plan: Independent Firm Aims to Be a Player

NEW YORK — The Warnaco Group’s plan of reorganization, filed early Tuesday, may serve to put the company and its assets in play, but its chief executive believes it makes it a "player" in the high-stakes apparel business once...

NEW YORK — The Warnaco Group’s plan of reorganization, filed early Tuesday, may serve to put the company and its assets in play, but its chief executive believes it makes it a “player” in the high-stakes apparel business once again.

According to Tony Alvarez, Warnaco’s ceo since last November, the company’s restructured balance sheet puts it in a perfect position to take advantage of opportunities resulting from the lackluster retail environment.

“The [reorganization] plan is structured to withstand an awful economic cycle and still enable us to be a player when the cycle comes back up. This company is poised to now reverse roles where there are candidates to either steal market share from, in terms of additional doors, or buy as others have maintained their heavy debt loads. We will be the poacher, not the poachee,” Alvarez said.

The plan, which calls for Warnaco to exit as a stand-alone firm, was filed on Tuesday in Manhattan bankruptcy court. According to the plan documents, Warnaco has an enterprise value of $800 million, or $750 million for the operations plus $50 million in cash. The company, upon emergence from Chapter 11 by the end of January 2003, will hold $265 million in debt, which includes the new senior subordinated notes, plus its borrowings under an exit financing facility. Warnaco will finalize the terms and select its exit lender within the next two months.

Warnaco filed Chapter 11 on June 11, 2001.

Excluding the cash and debt from the $800 million, actual company equity is $485 million. The newly issued common stock is expected to trade initially on the Pink Sheets before moving over to the New York Stock Exchange once it’s met certain criteria. About 10 percent, or $10 million, of the new shares will be reserved for management incentive stock grants. Warnaco’s existing common stock will be extinguished, leaving owners of its old shares with nothing but memories.

The plan — already supported by creditors but awaiting court approval — provides for pre-petition lenders, essentially its bankers, to receive cash payments of $101 million, newly issued senior subordinated notes in the amount of $200 million, and 96.26 percent of newly issued common stock in a reorganized Warnaco, with the stock valued at $457.2 million.

Holders of allowed unsecured claims will receive 2.55 percent of the newly issued Warnaco stock, worth $12.1 million. Holders of certain preferred securities issued by affiliate Designer Finance Trust, a company set up to buy Designer Holdings and the Calvin Klein Jeanswear operation, will receive 0.60 percent of the new Warnaco shares, worth about $2.9 million.

To be sure, there are still reports swirling that a valuation of the company could spur parties interested in buying assets to finally cough up final offers, as opposed to before, when many were hoping to buy at significantly reduced prices.

VF Corp., for one, has expressed interest in parts of the Warnaco operation. A VF Corp. spokeswoman said Tuesday that the company had no comment on Warnaco specifically, but added, “We continue to be interested in adding brands to our portfolio.”

While rare, the idea isn’t that far-fetched. Fruit of the Loom filed its reorganization plan in March 2001, then languished in bankruptcy court proceedings until a Delaware bankruptcy court in January 2002 approved Berkshire Hathaway’s $835 million acquisition of its operating assets.

Alvarez, who’s led Warnaco’s turnaround charge as ceo, said, “When you are in Chapter 11, you are always in a position where if someone comes up and expresses interest, you have to evaluate what is the possible offer. People have been looking at us since September 2001. Our constituents have determined that the best value is for Warnaco to emerge as an independent company.”

Alvarez was quick to note that after months of discussions, companies have had chances to convince Warnaco and its creditors that their proposals would give the constituents greater value. They haven’t done so, according to executives at Warnaco.

The documents filed with the bankruptcy court include its disclosure statement, which includes a liquidation analysis of the company. Under the analysis, liquidation of the company would result in $546.7 million in proceeds. After wind-down expenses and professional fees, just $424.2 million in net cash would be available to creditors.

The company’s interest payments in 2001 were $123 million but would have been $220 million had the company not filed for bankruptcy protection, according to Jim Fogarty, chief financial officer. In 2003, with an improved balance sheet, interest payments are expected to reach $29 million.

That low debt service makes the company a player, Alvarez said: “We are not a highly leveraged company. This company can invest, do acquisitions and market the brand.”

A search committee, with the assistance of executive search firm Heidrick & Struggles, is working on finding a replacement for Alvarez and Fogarty, both of whom will return to turnaround firm Alvarez & Marsal. Alvarez, who had expected the turnaround to last another year, will leave with an incentive bonus package that includes $1.95 million in cash, senior subordinated notes worth $940,000 and 0.59 percent of the newly issued stock, worth $2.8 million, in addition to compensation already received.

The company has hired executive search firm Spencer Stuart to identify candidates for the board of reorganized Warnaco.

Creditors, it would seem, are bullish on Warnaco’s prospects. Its earnings before interest, taxes, depreciation, amortization and reorganization costs on a pro forma basis are expected to reach $120 million for 2002, with earnings ramping up on the same basis to $150 million in 2003, Alvarez said.

The ceo said much of the work has been accomplished since January, with the strengthening of the depth of the firm’s management team. Among the recently named divisional heads at Warnaco are John Kourakos for sportswear, Roger Williams for Authentic Fitness and Tom Wyatt for intimate apparel. Alvarez said they are also among the candidates under consideration for his ceo post.

Alvarez was mum about former ceo Linda J. Wachner, who left the company in November when he was chief restructuring officer. He declined comment on the difficulties of restructuring the firm during that time period, acknowledging only that “I had one role during her tenure and another different role after her departure.”

If Alvarez had little to say about Wachner, the former ceo and current board member had even less to share. A spokesman said she had no comment on the plan filing or on her current board membership. Her claim for $25.1 million in severance is still outstanding, but Alvarez said he expects the bankruptcy judge to make a ruling on the claim before the company exits Chapter 11.

There are clear signs of a turnaround at Warnaco in recent quarters. Last November, the company owed the banks $170 million under their debtor-in-possession facility, and finished the year with $21 million in EBITDAR (earnings before interest, taxes, depreciation, amortization and restructuring costs). On Tuesday, when the firm filed its reorganization plan, Warnaco owed nothing under the DIP, which has been paid down, and has $65 million in cash, according to Alvarez. EBITDAR for 2002 is expected to be $120 million.

Much of the improvement stems from at least one new strategic policy, selling in to its retail customers only what they are able to sell through.

“The old philosophy was one of push-in, where the more the retailer sells, the more chances that the consumer would buy,” Alvarez said. “However, then we would get dilution of our gross margins and get hit with chargebacks and markdowns.

“Our new philosophy involves a tighter sell-in, which gives us a better sell-through,” he added. “Retailers love it because they’re getting faster turns and they want us to keep doing it this way. I believe that this philosophy is a good thing for all of us as we all are fighting for dollars. We all have to find a way to get customers to buy.”

He noted that price shouldn’t be the only motivator, and that there should not be so many sales periods at retail. Warnaco, like many apparel giants, has a no-return policy, and its margins have been enhanced by the new sales strategy. “If our inventories are clean, our sell-throughs strong, it is difficult for our retail partners to say to us, ‘We need support,’” the ceo said.

Another improvement for Warnaco is an increase in communication between the company and its licensing partners. So far, sales of Calvin Klein jeans and intimates for women are “flying out,” while Speedo remains strong. The CK jeans and underwear lines are each in 300 new doors, with Dillards relaunching the intimates label. Kohl’s, which already sells Speedo, has added more offerings from the line, Warnaco executives said.

Alvarez noted that there is nothing precluding existing board members from assuming new terms in a reorganized Warnaco, even with 96.2 percent of equity in the hands of secured lenders.

Executives at Calvin Klein Inc. and Polo Ralph Lauren, the licensor of Warnaco’s Chaps by Ralph Lauren line, declined comment.