The Warnaco Group Inc. is taking steps to reduce the costs and improve the profitability of its struggling European business.
The company said Monday that it is in the midst of a “comprehensive review of its European-based operations with the aim of better positioning the company for future growth and improved profitability.”
The move comes after several quarters of challenging business conditions in Europe as well as the loss of the CK Calvin Klein bridge apparel and accessories business in the region beginning next year. Difficulties in Europe, particularly the southern portion of the continent, overlapped with declines in the women’s Calvin Klein Jeans business, contributing to a 18.4 percent decline in Warnaco’s first-quarter earnings, to $35.9 million, as revenues pulled back 7 percent to $615.5 million.
RELATED STORY: Warnaco on Tack for $4B in 2016 >>
During the company’s conference call on May 3, Helen McCluskey, president and chief executive officer, told analysts that economic problems in southern Europe have “negatively affected our recent operating results but continue to be large and important markets for us. Our [first-quarter] operating margin in Europe was in the low-single digits. There’s certainly an opportunity for us to improve that and we’re working diligently against that and we expect to return that profitability to double digits over time.”
The international operating margin for 2011 was 13 percent. International revenues last year were up 15.4 percent to $1.5 billion from $1.29 billion in 2010, while operating profit dropped 27.2 percent, to $124.5 million from $171.1 million, but was essentially flat, at just over $176 million, when restructuring and special charges were excluded. European revenues last year rose 8.9 percent to $628.1 million but declined 13.2 percent, to $146.3 million, in the first quarter of 2012.
“Our Calvin Klein Jeans and Calvin Klein Underwear businesses are powerful and continue to resonate with European consumers,” McCluskey said Monday. “We expect these actions will enable the company to better execute against our strategic plans.”
More details about the European operating structure are expected when Warnaco reports its second-quarter results next month. Analysts expect earnings to drop to 65 cents a diluted share, excluding special charges, from 82 cents in the second quarter of 2011.
There’s a bit more urgency to the restructuring following the loss of the European CK business, which followed two years in which Warnaco failed to meet its sales minimums for the license. Calvin Klein Inc., owned by PVH Corp., will take over management of CK in Europe starting next year.
“Our transition out of the CK bridge required us to reevaluate our structure,” said a company spokeswoman. “Both macro- and microeconomic factors have adversely impacted our business and we’re looking at what needs to be done to right-size the business to successfully position it going forward.”
Shares of Warnaco closed Monday at $42.54, down 50 cents, or 1.2 percent.