WARNACO SEES EARNING SHORTFALL

Byline: Thomas J. Ryan

NEW YORK — Warnaco Group stunned analysts and shareholders yet again Friday in warning that 2000 earnings would fall about 50 cents short of Wall Street estimates.
Clearance markdowns to reduce inventories, largely in intimate apparel, would reduce its earnings target for this year to $1.80 a share, Warnaco warned. Wall Street’s consensus estimate had been $2.33. In 1999, Warnaco earned $1.72 a share.
Shares of Warnaco fell 1 11/16 to 8 7/8, a new 52-week low. Its 12-month high of 30 5/8 was reached in August.
The profit warning came as Warnaco reported first-quarter earnings of 11 cents a share excluding nonrecurring items, well below the 40-cent consensus estimate.
But a previously announced pretax gain of $36.2 million on the sale of its investment in Interworld, an e-commerce developer, boosted net earnings by 24.8 percent, to $28.6 million, or 53 cents a share, from $22.9 million, or 39 cents, a year ago. The quarter also included severance costs of $6.5 million tied to cost-saving moves.
“We’re clearing our inventory and we’re getting ready for a very good year,” said Linda J. Wachner, chairman, president and chief executive, in a phone interview. Wachner asserted the firm “still had a very good quarter,” thanks to the timely sale of its stake in the e-commerce firm before investor sentiment soured on Internet stocks. “Give us a little credit for that,” Wachner quipped. Warnaco had invested in Interworld as part of its Speedo Web site launch.
Nonetheless, Wachner foresees a “tough year” and thus guided earnings forecasts down to work down inventory, which the firm told analysts ran between $25 million and $35 million above planned levels in intimate apparel and $8 million to $9 million above plan for Chaps.
Wachner said she expected many department stores would turn promotional, given a difficult spring. “Easter didn’t happen for department stores this year, and that was difficult,” Wachner said. She said Warnaco decided to use the significant cash gain from the Interworld sale to liquidate stale inventory to concentrate on hotter products, such as the June launch of the “Nothing But Curves” push-up bra.
“We believe we have a lot of best sellers and we’re going to have a great year,” said Wachner.
Analysts were clearly disappointed in the earnings revision, particularly considering that Warnaco had put up the red flag in late December, guiding 2000 estimates down to $2.40 from $2.76 at the time. A few on Friday cut estimates to $1.70 — 10 cents lower than Warnaco’s projection — to be on the safe side.
“It was a big surprise, and as an analyst, you never want to be caught off guard,” said Lorraine Miller at SunTrust Securities. “On the other hand, they are doing the right things strategically.”
“This is a year of transition,” said Dennis Rosenberg at C.S. First Boston. “They need to get their inventories in line and they seem to be making progress in that. But as a result, they aren’t going to do as well as they thought this year.”
Net revenues in the quarter climbed 36.7 percent to $607 million from $444.1 million, driven by acquisitions last year of swimwear maker Authentic Fitness Corp., the Chaps Canadian license and ABS by Allan Schwartz. Excluding $161 million in sales from the purchases, sales nudged up 0.4 percent. Warnaco had warned last year that its core sales would be slowed by chains that either declared bankruptcy, liquidated or were sold in 1999, including Upton’s, T. Eaton’s, Mercantile Stores, Filene’s Basement and Loehmann’s, as well as problems with new Mexican plants. Warnaco noted that, excluding discontinued operations — Marilyn Monroe and Valentino Ultimo — and the impact of a weakening euro, sales were up 2 percent.
By segment:
Intimate apparel’s EBITDA tumbled 45.3 percent to $26.1 million from $47.7 million, due to aggressive clearance markdowns. Sales eased 5 percent to $200 million. Discontinued businesses lowered sales by $2.2 million; lost accounts, by $8 million, and a weaker Euro, by $3.8 million. Sales of core Warner’s-Olga product slid 12.8 percent to $63.8 million and Lejaby fell 11.8 percent to $27.6 million, but Calvin Klein underwear increased 4.9 percent to $75.2 million.
Men’s-Sportswear’s EBITDA more than doubled to $69.9 million from $33.8 million as the addition of Authentic offset markdown pressures in Chaps and Calvin Klein junior jeans. Warnaco told analysts Chaps and CK jeans were seeing some impact from difficulties at Tommy Hilfiger. Sales jumped 72.2 percent to $358.9 million, with $132.2 million in sales from Authentic Fitness and $11.6 million from A.B.S. Excluding the acquisitions, sales gained 1.7 percent to $212 million. Chaps’s revenues increased 11.4 percent to $68.4 million, but Calvin Klein jeanswear’s sales dipped 3.2 percent to $137.6 million due to softness in juniors. However, backlogs in CK jeans and Chaps were up more than 20 percent each. Klein accessories leaped to $8.1 million from $3.8 million.
Retail, which includes the 139-unit Authentic Fitness chain and 102 Warnaco outlets, showed an EBITDA deficit of $9.2 million against $700,000 in income. Sales jumped 91.6 percent to $48.1 million, including $14.2 million from Authentic. Excluding Authentic, sales gained 35.1 percent due to significant inventory liquidations. Same-store sales at the Authentic Fitness chain rose 3.5 percent.
Warnaco told analysts its decision to sell Calvin Klein underwear to 300 of the higher-end doors of J.C. Penney was working out, offsetting sales lost when Dillard’s dropped the line. Warnaco said it was opening 10 new CK underwear stores in the next six months, while the six stores in the Far East and two in London are seeing strong sell-throughs.
Warnaco said the Speedo division was performing well and receiving publicity from the Olympics in Sydney and a new Fatskin swimsuit. Catalina is selling well at Wal-Mart and Polo swimwear was up two-fold.
Analysts were miffed that Warnaco hadn’t issued a warning about the first-quarter earnings, raising again the criticism that Warnaco doesn’t communicate well with Wall Street. Warnaco told analysts it didn’t know the full impact of its inventory issues in December, and planned to hold an analysts’ meeting this June.
Leslie McCall at Brown Bros. Harriman said Warnaco’s main problems were the “inventory overhang” and most businesses were on plan. Factories are running more efficiently and new systems will allow Warnaco to better track inventory flow, she added.
“I think if they just finish the year with the inventories clean and turn in a couple of quarters without surprises, people will remember that they do have a strong underlying business and a smart management team,” said McCall.
Inventory at the end of the first quarter was $734.7 million, virtually flat with $734.4 million at yearend, and Warnaco said its goal was to hit $675 million by yearend. Excluding acquired businesses, inventories were up 14.7 percent, an improvement from being up 30.2 percent at the end of 1999. The inventory markdowns eroded gross margins, to 29.9 percent from 34.7 percent.
Debt grew to $1.35 billion at the quarter’s end from $616.8 million a year ago due to the Authentic purchase, and the goal is to reach $1.1 billion by 2000’s close.
SunTrust’s Miller said Warnaco must reach some of its goals before investors come back into the stock.
“Warnaco still controls some very attractive brands and has some significant market share,” said Miller. “But it’s a highly competitive environment and the stock is in a position more of having to show investors rather than people taking it on faith. But she’s [Wachner] done it before.”