NEW YORK — Soft sales and weak margins depleted third-quarter profits at Hampshire Group Ltd., but the sale of a real estate subsidiary dropped the bottom line below the break-even point.

This story first appeared in the November 10, 2003 issue of WWD. Subscribe Today.

However, the divestiture also cleared the way for possible acquisitions in the near future, according to chairman and chief executive Ludwig Kuttner.

For the three months ended Sept. 27, Hampshire posted a net loss of $865,000, or 18 cents a diluted share, versus net income of $9 million, or $1.86 a share, in the year-ago period. Net income from continuing operations fell 44.9 percent, to $4.9 million from $8.8 million, while the loss from the discontinued subsidiary was $5.7 million against income of $210,000 in the year-ago period.

Sales fell 11.1 percent to $97 million from $109.1 million.

“Sales were lower than expected because of a highly competitive retail market,” said Kuttner of the Anderson, S.C.-based sweater and sportswear supplier, in a statement. “Gross margins continue to be negatively impacted by higher allowances granted to customers.”

Kuttner’s view of the current season is mixed. “We are encouraged by strong fourth-quarter bookings in women’s sweaters, offsetting weakness in related separates and men’s sweaters, but we remain cautious with respect to yearend results because of the retail market environment,” he said. “Our team continues to focus on quality and service to our customers.”

In an interview, Kuttner said Hampshire recently had seen “a little improvement in the related separates field, and I think that men’s will come back a little later. Still, this year isn’t going to be good for the industry. When things are tough, men tend to fall into replacement buying. That’s not as true for women, but all consumers are waiting for sales these days.”

Some of the reductions in revenues would enhance earnings in the long run, he noted. “Everybody loves the top line, including me, but the top line that loses money just doesn’t make sense,” he said. “There were some private label programs that didn’t make money for us and some other things that were very high risk.”

Kuttner said the firm “has controlled costs all along, and we have a relatively flexible cost structure.” However, he noted, costs were elevated by new product initiatives.

As reported, Hampshire last month sold its investment subsidiary to K Holdings LLC, a company controlled by Kuttner, and the common stock of K to an investor group including Kuttner. At the time, Hampshire estimated it would incur a loss of about $6.5 million from the two transactions.

In releasing its third-quarter earnings, Hampshire reiterated that the sale of the subsidiary “will allow the company to focus solely on its apparel business.”

The sale removed about $13 million of debt from Hampshire’s balance sheet and left it eager to purchase. “We’re very actively looking into acquisitions,” Kuttner said. “Either it’s a company that complements our business and gives us synergies, or it’s a company that could benefit from our management, infrastructure, sourcing ability and other strengths.

“The idea is that 1 plus 1 not add up to 2, but more like 2 1/2.”

He declined to identify potential acquisitions.

For the nine months, Hampshire had a net loss of $715,000, or 15 cents a diluted share, versus net income of $9.6 million, or $1.99 a share. Income from continuing operations fell 51 percent to $4.6 million from $9.5 million. Revenues receded 1.8 percent to $180.2 million from $183.5 million.

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