NEW YORK — Retail consolidation took a toll on Warnaco Group Inc.’s first-quarter results, but the $1.5 billion apparel firm is banking on the growth of its Calvin Klein business to shore up its fiscal footing.
Joseph Gromek, chairman and chief executive officer, said on a conference call with analysts Tuesday that, going forward, Calvin Klein products would generate “more than 50 percent” of Warnaco’s revenue.
“As we look ahead, we believe our growth initiatives will bring greater diversity and strength to Warnaco,” Gromek said on the call. “To this point, with the addition of the acquired Calvin Klein businesses, we estimate that almost 40 percent of our annualized revenues will be generated from international businesses. This is the fastest-growing and most profitable segment of our company.”
Warnaco said it was on track to deliver at least a 20 percent sales gain for 2006 as well as improved operating margins, because of the international Calvin Klein business it acquired from Florence-based Fingen this year for 240 million euros, or about $291 million at current exchange. The company said it anticipated continued strength in this business, which brought in $60 million in revenues and $6.1 million in operating income for February and March.
For the quarter ended April 1, net income fell to $16.1 million, or 34 cents a diluted share, from $29.4 million, or 64 cents a share, in the same period last year on sales that gained 6.1 percent to $466.3 million from $439.5 million.
Gromek said the company’s three business segments (intimates, sportswear and swimwear) “continued to feel the effects of retail consolidation.” During the conference call’s question-and-answer session, Gromek said the “effects [of retail consolidation] will be ongoing into the second quarter, and in some businesses, the impact is now.” Shares of the company closed the day down 10.4 percent to $20.43 in Nasdaq trading.
In addition to consolidation, Warnaco said profits were dragged down by the costs associated with shipping disruptions caused when it implemented a new inventory control system in its swimwear business.
“While the investment in our infrastructure created disruption in the quarter, we believe that this implementation positions us for increased efficiencies and productivity in the future,” Gromek said.
Quarterly results also were hampered by a shift “in certain sportswear sales from the first half of this year into the latter half of this year,” he said.
For the quarter, gross margins surged 170 basis points because of strong profits from its core intimates offerings as well as the acquired Calvin Klein business.
In late January, Warnaco said it completed the acquisition of Calvin Klein jeans and accessories in Europe and Asia, which also includes the ck Calvin Klein bridge line of sportswear and accessories, also in Europe. The business is based in Florence, with Gaetano Sallorenzo serving as president and ceo.
“The acquired businesses had revenues of about $250 million (based on average exchange rates) for fiscal 2005 and are expected to be accretive to Warnaco’s earnings this year,” the company said in a statement on Jan. 31. On Tuesday’s call, the company reiterated that the business would be accretive to its earnings this year.
Gromek said this year the company will expand the Calvin Klein jeans business “as we capitalize on the strength of our Calvin Klein underwear business.”
During the quarter, the sportswear group reported a 30 percent revenue gain to $170 million, while operating income dropped to $10 million from $15 million in the previous year. Frank Tworecke, president of the group, said the Chaps brand (in North America) was down about $1 million year-over-year to $47 million.
“For the quarter, we experienced high-single-digit revenue growth in our two primary channels of distribution; department stores and midtier,” Tworecke said on the conference call. “These increases were offset by a reduction of revenues in our secondary channels of distribution.”
Tworecke said the Chaps brand had a “strong response” among consumers to the company’s spring assortment. For the Calvin Klein America’s jeans business, Tworecke said sales — excluding the acquisition — were down $15 million as the business was affected by a shift in warehouse club sales to the second half of the year. There was also a planned reduction in off-price sales, he said, as well as the exiting of the Choice business that weighed down results.
“In the bottoms category, our seasonal styles and fabrics have had strong consumer response in the quarter,” Tworecke said. “Rip offs and tool fabrics in both tops and shorts had strong sell-throughs at retail. The continued effects of exiting the Choice business, retail consolidation and declines at all prices sales are expected to lower annual revenue.”
Still, Tworecke said he expected to improve operating profits year-over-year.
In the swimwear segment, Roger Williams, president of the group, said on the call that net sales fell 9 percent to $143 million with operating income dropping to $16 million from $34 million in the prior year.
“Clearly, this is a major disappointment for us,” Williams said. “We are working to fix any outstanding issues, having already taken many corrective measures to ensure that we ship complete and on time going forward.”
Gromek said the intimates business posted a gain of 1 percent to $154 million during the quarter, with operating margins rising 28 percent.