IN LINE WITH FORECAST, WARNACO PROFITS DECLINE 44.4% IN QUARTER

Byline: Thomas J. Ryan

NEW YORK — Greater demand for its products and lower attrition among its accounts is expected to help Warnaco Group Inc. reverse a steep but anticipated drop in fourth quarter earnings, the company said Friday.
The disappointing results were in line with a forecast given at the close of December, when the firm said a combination of stores going out of business, start-up costs for a Mexican plant, markdowns at Calvin Klein juniors jeans, and the highly-promotional department store climate would cause earnings to slide about 35 cents below Wall Street estimates at the time.
The latest quarter also included a $9.8 million non-operating charge tied to consolidation of the Calvin Klein distribution consolidation.
In the quarter ended Jan. 1, Warnaco earned $2.7 million, or 5 cents a share, against a $31.8 million loss a year ago. The year-ago period included a $54.3 million charge for restructuring moves in the innerwear business and at Calvin Klein jeans, which was acquired in late 1998.
Excluding the charges, profits plunged 44.4 percent to $12.5 million from $22.4 million. Sales increased 10.5 percent to $605.7 million from $548 million.
In the full year, earnings reached $97.8 million, or $1.75 a share, against a loss of $32.2 million. The year-ago data include $69.1 million in special charges and a $46.3 million accounting charge. Excluding charges in each period, earnings grew 29.3 percent to $107.6 million from $83.2 million.
Sales advanced 8.4 percent to $2.1 billion from $1.95 billion.
“I think considering all the things that happened, it was a great year,” Linda J. Wachner, chairman, president and chief executive officer, told WWD. “We recovered from Y2K and changes in our customer base and we are poised and ready to have a terrific 2000.”
One quick benefit is a $37.3 million pretax gain to be notched in the first quarter from the sale of the substantial portion of its stake in Interworld Corp., an e-commerce developer. Warnaco said the firm bought a stake in Interworld as it was setting up Speedo.com. Warnaco sold 746,000 of its 843,000 shares in the last two weeks, and proceeds will be used to reduce debt.
Wachner also said many of Warnaco’s brands are performing better, with double-digit backlogs at Speedo, Calvin Klein jeans and Chaps by Ralph Lauren.
“CK underwear is doing excellently in Europe,” Wachner added, and A.B.S. by Allen Schwartz, acquired in September, “has been terrific.” A.B.S. should reach sales between $50 to $60 million this year, and sleepwear will debut later this year. A.B.S. by Allen Schwartz currently has about $11 million in orders.
Sell-throughs in core intimate apparel lines have picked up in the last week, and strong orders are coming in for a new Warner’s push-up bra.
“We didn’t have a lot of new product in Warner’s over the last year, so I think this year we’ll do very well,” said Wachner.
These gains are expected to offset sales lost to stores now out of business, including Upton’s and T. Eaton’s, which were liquidated, and Mercantile Stores, which was sold to Dillard’s in August 1998.
The lost customers reduced fourth-quarter sales by about $45 million, and also led to heavy markdowns used to clear leftover merchandise, Warnaco told analysts. Quarterly results of its three operating segments follows.
Intimate apparel’s EBITDA tumbled 59.4 percent in the quarter, to $26.4 million from $65 million, primarily due to about $30 million in markdowns due to lost customers and about $10 million in markdowns from disturbances caused by the startup of a Mexican plant. Sales gained 1.4 percent to $265 million, with an estimated $20 million lost to customers going out of business.
Sportswear’s EBITDA dropped 23.2 percent to $36.1 million from $47 million due to the $16 million pretax CK distribution center charge. Excluding the charge, EBITDA gained 10.9 percent to $52.1 million. Sales advanced 16.8 percent to $293.4 million, although $15 million was lost to customers exiting the market.
Outlet’s EBITDA fell to $2.2 million from $5.8 million due to markdowns used to clear merchandise. Sales jumped 32.8 percent to $47.4 million.
Warnaco noted that, according to NPD, its bra market share last year grew to 39 percent from 37.5 percent; panties, to 27.3 percent from 24.8 percent, and shapewear, to 24.5 percent from 21 percent.
“I think 2000 should be a recovery year for them,” said Lorraine Miller, an analyst at SunTrust Equitable Securities. “They’ve got some exciting growth opportunities with the new product innovations in intimate apparel, and Speedo and the CK sportswear also look very strong. At the end of the day they will continue to deliver a significant amount of cash flow that is expected to be used to pay down debt and repurchase stock.”
She said Warnaco should benefit from its efforts to lower its cost structure and solid demand for its brands.
CK jeans in the quarter grew to $165 million from $135 million. Men’s was stronger than women’s and girls’, but Miller said Warnaco was “very positive” about the overall outlook for the area, particularly in basic denim and shorts. Backlog at CK jeans is running ahead 21.2 percent.
“I think this year is going to be a transition year for them,” said Dennis Rosenberg at CS First Boston. “They still need to work through the inventory issues, but I think the corporate earnings will be better in 2000 than 1999 with a big part due to the inclusion of Authentic Fitness.” Authentic Fitness is expected get a big boost from the Olympics; about 90 percent of the swimmers will be wearing Speedo.
Warnaco vowed to cut $60 million in inventory this year, particularly in innerwear and CK jeans. Inventories in 1999 were trimmed to $614 million from $630 million. The firm also said it would concentrate on cost controls and improve the fill rate at its intimate apparel plants to more than 90 percent from 70 percent in 1999.
Shares of Warnaco rose 1/16 to 11 7/16 Friday on the New York Stock Exchange.

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