HUGE LOSS SLAMS WARNACO, AS WACHNER DOUBTS PROFITS FOR 2001

Byline: Vicki M. Young

NEW YORK — The early word from The Warnaco Group Inc. was that bad news was coming, but just how dismal wasn’t made clear until the final hours of business Thursday.
Warnaco said after the market closed that, with the addition of nearly $157 million in special items to its sea of red ink, its loss for the fourth quarter ended Dec. 31 came to $194.8 million, or $3.68 a share, versus the $569,000, or 1 cent a share, profit it logged in the final quarter of 1999, and that it was unlikely to see a profit this year.
Last quarter’s mammoth loss includes $27.7 million (or 52 cents a share) in restructuring and other charges, including those for legal expenses incurred as part of the now-resolved Calvin Klein litigation, and a reserve of $129.2 million (or $2.45 a share) for deferred tax asset valuation.
Excluding charges, the quarterly loss amounted to $37.9 million, or 71 cents a share, and the company noted that a combination of factors related to the weaker retail landscape — including chargeback reserves and writeoffs — accounted for 61 cents a share in losses.
Although consigned to the status of footnote, revenues for the quarter dropped 9.4 percent, to $546.3 million from $603.2 million in the prior-year quarter.
The company also said it would exit its licensed Fruit of the Loom bra business, is in negotiations with its lenders to secure permanent amendments to certain covenants to avoid a default and restate its Jan. 3, 1998 balance sheet, reducing equity by $26 million.
Making matters worse, Warnaco said that it is “not likely to return to profitability in 2001 principally on account of the retail slowdown and lower than forecast sales.”
While the company has brand strength through a portfolio of internationally recognized brands, Warnaco said in order to achieve profitability it must first complete its internal restructuring and strengthen its overall financial structure.
Shares of Warnaco closed Thursday at $1.60, up 30 cents, or 23.1 percent, in New York Stock Exchange trading. The stock has recovered 50 cents since hitting a new 52-week low of $1.10 on Wednesday.
The fourth-quarter deficit and additional adjustments put the loss for the year at $338.3 million, or $6.41 a share, versus net income of $97.8 million, or $1.72 a share. The number includes investment income of $25.9 million as well as charges of $173.6 million ($3.29 a share) for restructuring and other special items and $129.2 million ($2.45 a share) for the deferred tax asset valuation reserve. The $6.41 a share loss is reduced to $6.16 with the exclusion of the effect of accounting changes and to 91 cents with the further exclusion of special items. Revenues for the year increased 6.4 percent, to $2.25 billion from $2.11 billion.
The firm began the week with a Monday bombshell when it announced after the market closed that it was postponing Tuesday’s earnings release for two days and stating that its fiscal 2000 loss would be “substantially greater than the 30-cents-per-share loss it had previously estimated.” Consensus estimates among Wall Street analysts pegged the loss at 31 cents, according to First Call/Thomson Financial. Shares of the stock plummeted more than 60 percent Tuesday, to close at $1.55 in the first day of trading following Monday’s warning.
In a late afternoon conference call to Wall Street analysts, Linda J. Wachner, chairman and chief executive officer, called the retail environment in fiscal 2000 “difficult” and noted that as a result of the difficulties, the company was aggressive in its initiatives, which resulted in charges and restructuring that will give Warnaco “$100 million of annualized savings.”
Some of those difficulties include the decrease in retail doors because of bankruptcies and decreased sales in certain accounts due to lowered open-to-buy dollars.
To try to remedy the situation, Warnaco will continue to reduce head count in 2001 and close more unprofitable retail outlet sites — about 18 to 22 locations — and will continue to review assets and restructuring initiatives with the goal of strengthening its balance sheet, Wachner said.
The ceo didn’t rule out the possibility of a sale of assets. She explained that the company was examining, along with its banks, the possibility of an asset sale in order to reduce interest expenses and reduce costs in order to return to profitability. Investment banking firm UBS Warburg is helping Warnaco evaluate its assets.
Wachner tried to point to some positives, though, and told analysts that “we expect to return to profitability in 2002.” She said one initiative to that end is the implementation of a new computer system, which helped Warnaco clear out excess inventory and insure that it has the correct inventory and mix for its retail customers.
“We are ahead of the game in inventory. We expect it will decrease by $20 million to $40 million. We are on track,” Wachner said.
She added that the company is focusing on its core competencies. Intimate apparel is a strong business for Warnaco, the ceo said, along with swimwear. She specified that the Authentic Fitness acquisition has been “very good for us.” As for Calvin Klein jeans, “we know what we have to do there.” On Feb. 13, the company named Philip Terenzio chief financial officer, succeeding William Finkelstein, who became chief operating officer of the CK jeanswear and underwear operations.
Warnaco has faced a number of challenges in the past year. In addition to the now-settled Calvin Klein lawsuit, Warnaco and certain executives still are embroiled in several shareholder lawsuits seeking class-action status. And despite the difficult apparel and retail environment, Warnaco was successful in obtaining a new refinancing agreement last year with its banks to amend and extend the terms on a $2.56 billion line of credit.
Allan Ellinger of Marketing Management Group, a consulting firm, believes that Wachner can find a way to restore the company to profitability, but added that it won’t be easy because the challenges are greater, since it’s a public company and under constant scrutiny.
“Wall Street evaluates a business based on an increased revenue line and increased earnings line simultaneously. In the fashion industry, the two might not work in sync. Often, one is unable to grow the top line without sacrificing the bottom line,” he said.
Consultant Emanuel Weintraub also believes that a turnaround can be done.
“She knows the business and she’s focused on the business. All the brands under the Warnaco umbrella are terrific. I don’t think there’s anything that you could say is a dog. So the problem is that the financial issues got ahead of them, and the company will have to work those things down.”