CHARGES REDUCE MOVIE STAR NET

Byline: Arnold J. Karr

NEW YORK — Charges taken to close its retail division and consolidate distribution operations pulled Movie Star’s net income down to just above break even in the second quarter.
In a statement, Mel Knigin, president and chief executive officer, said: “By closing our retail operation and consolidating our distribution, we will be positioned for more profitable revenue growth.”
The New York-based producer of intimate apparel and sleepwear reported net income of $124,000, or 1 cent a diluted share, for the three months ended Dec. 31. This compares with income of $2 million, or 13 cents, in the prior-year quarter.
Results for the most-recent quarter include a $1 million charge in connection with the company’s closure of its distribution facility in Virginia, operations of which will be shifted to its Mississippi facility. They also incorporate a $731,000 loss, excluding a $15,000 tax benefit, for the disposal of Movie Star’s retail stores. The retail loss allows for a write-down of assets to their estimated market value, a loss on the fulfillment of lease obligations, the costs of disposal and future operating losses.
Second-quarter results, as well as those for the six months, include a $348,000 extraordinary gain, net of related costs and taxes, on purchases of senior notes and subordinated debentures. The gain on similar transactions during the second quarter and first half of 1999 was $150,000.
Excluding this myriad of special items, net income for the second quarter would have been $1.5 million, or 10 cents a diluted share, 15.9 percent lower than the prior-year level of $1.8 million, or 11 cents.
Net sales in the quarter, excluding those of discontinued operations, were $19.9 million, 1.5 percent below the $20.2 million recorded in the 1999 quarter.
Knigin said that all retail operations will be exited by the end of March and the transfer of all distribution functions to Mississippi by the end of April.
As it shifted its sourcing to offshore markets, Movie Star had discontinued production in its Virginia facility.
“After we stopped sewing in Virginia, we had a fixed overhead that all went into shipping,” Thomas Rende, chief financial officer, told WWD Tuesday. “That pushed our SG&A [selling, general and administrative] costs proportionately higher.”
The loss of Wards as a major account also took a bite out of the quarter’s results, Rende said. However, the shift to nearly total overseas production helped gross margins for continuing operations to grow, to 29.5 percent in the most-recent quarter from 28.3 percent in the 1999 period.
Imports now account for more than 98 percent of sales at Movie Star, with the remaining domestic production earmarked for special programs shipped to major accounts, Rende said.
“The move offshore is pushing our margins up,” he noted, “but that’s been offset by the fact that we’re also building an overseas infrastructure for better control of production and shipping.
“Our focus — and our biggest increases — is on intimate apparel and we expect sales increases to flow faster to the bottom line as a result,” Rende added.
With its departure from the Virginia facility, which is now up for sale, Movie Star will ship all merchandise from either its Mississippi distribution center or its other one in Pennsylvania.
The discontinuation of Movie Star’s retail operation should also be a profit enhancer, he noted.
“Comparable-store sales had been trending down and the competition had been building up, leaving us with nothing but downside risks,” Rende said. “It was still marginally profitable, but we’re closing it up before it’s in a position to hurt us.”
Movie Star’s stores had declined in number in the past year, to six from 28. Even prior to accelerated closures, sales volume dropped to $8.3 million last year from $9.5 million in the prior year and $10.6 million in fiscal 1998.
The withdrawal from the retail business also should free up capital for the company, which reduced long-term debt to $8.8 million from $20.6 million in March 1999.
Rende said the company is actively seeking refinancing options to accommodate the maturity of its senior notes, on Sept. 1, and subordinated debentures on Oct. 1.
In the six months, net income was halved to $1.4 million, or 9 cents a diluted share, from $2.8 million, or 18 cents. Excluding extraordinary charges and gains, income would have been $2.8 million, or 18 cents, versus $2.5 million, or 16 cents, in the year-ago period.
Sales for the first half were down 1.6 percent, to $37.1 million from $37.7 million, in the first six months of the prior fiscal year. Gross margin increased to 30.5 percent this year from 27.9 percent in the year-ago period.
The company said that it is relocating its executive and administrative offices to a new space at 1115 Broadway here from their current location at 136 Madison Avenue. Its showrooms remain at 180 Madison Avenue.

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