Byline: Scott Malone

NEW YORK — Linda Wachner faced the music Thursday, and the song she heard from irate shareholders was filled with sour notes.
Warnaco officials, including chairman and chief executive officer Wachner, spoke only briefly at their annual meeting in Manhattan before turning the floor over for stockholders’ comments. They got an earful.
Among shareholders’ complaints voiced at the hour-long parley, held at the St. Regis Hotel:
Shares of the Warnaco Group Inc. are trading at a quarter of the peak they reached 1 1/2 years ago, and the stock is underperforming on other financial measures. For example, its price-to-earnings ratio is around 6.
Despite financial underperformance, Wachner has continued to be quite well paid, remaining in the ranks of the top-compensated ceo’s in the apparel industry.
The reason for this discrepancy, some shareholders alleged, is that the board and, most important, its compensation committee are not tough enough on Wachner.
“I’m very troubled by the financial performance of the company, by the actions of the board and of the compensation committee,” said Leon G. Cooperman, an investor, who, when Warnaco’s proxy was filed, held a 7.3 percent stake in the New York-based firm.
Cooperman expressed astonishment that Warnaco’s stock has underperformed the peer group it sets for itself in its proxy statement, which includes the bankrupt Fruit of the Loom. However, Warnaco’s stock has fared better than FTL, which has been delisted by the New York Stock Exchange. Part of the problem, he suggested, lies in the company’s relationship with the financial community.
“We have very rarely met the expectations of Wall Street,” he said, “which I believe are set by the company.”
Noting the stock’s dramatic fall over the past 18 months or so, he said, “The chart of this stock looks terminal to me.”
In response, Wachner said most apparel issues have suffered in recent months.
“Stocks in our industry have plummeted,” she said. “We’re in that group.”
On Thursday, Warnaco shares closed at 10 9/16, up 5/16, on the NYSE, off their 52-week high of 30 5/8. The 52-week low was 9 1/8.
Investors’ ire aside, in a nearly unanimous vote, shareholders approved the three directors nominated by the board, including Wachner and independent directors Stuart Buchalter and Andrew Galef.
In the fourth quarter of 1999, ended Jan. 1, Warnaco reported net income of $2.7 million, or 5 cents per share, compared with a $31.8 million loss. Sales were $605.7 million, up 10.5 percent. For the year, earnings were $97.8 million, or $1.75 a share, compared with a $32.2 million loss. Sales were $2.1 billion, up 8.4 percent.
The company plans to release first-quarter results today.
Another stockholder, Arthur M. Friedman of Woodmere, N.Y., who said he and his family hold about 20,000 shares of the company, complained about Wachner’s continued high levels of compensation, despite the stock’s slide.
He noted that, in 1998, Wachner was paid more than prominent U.S. ceo’s like Sanford I. Weill of Citigroup Inc., Michael D. Eisner of The Walt Disney Co. and Stephen M. Case of AOL Time Warner Inc.
Wachner’s 1999 pay dropped by more than half, to $7.7 million from $17.2 million, after the company elected to award her no bonus. According to filings with the Securities and Exchange Commission, that figure came in behind Weill, though still ahead of Eisner and Case.
“Ceo’s make huge money when their stocks do well. This I can understand,” Friedman said. “How can the board justify these huge payments to Mrs. Wachner?”
He suggested that, to feel her share of investors’ pain, Wachner should exercise some of her options which are currently “under water” — a move that would lose her money.
“If you want to participate in the success,” he said, “you should participate in the failure.”
Wachner noted that her options are exercisable at prices of 25 to 30.
“Let’s hope that we get there,” Friedman said, to which Wachner shot back, “Nobody hopes that more than we do.”
Speaking for the compensation committee, director Joseph Califano urged investors not to underestimate the importance of the committee’s decision not to award bonuses to Wachner or the firm’s other top executives.
“We thought this was a firm decision,” he said. He also noted that, when Warnaco acquired Authentic Fitness — a company that Wachner also helmed — last year, she turned down her $1.1 million salary and possible 200 percent bonus for that post.
“We think Mrs. Wachner has provided extraordinary leadership to this company,” he said. “You have to look at the history of this company. Sure [the stock] is down in the $10 area now, but this company started out as a highly leveraged initial public offering, and it is now investment grade.”
Cooperman, one of the agitated investors, was not satisfied by this response.
“Markets are efficient. Our stock is at 10 1/4 and doesn’t rally when the market goes up,” he said. “There is something wrong with the market’s perception of us. You can’t stick your head in the ground.”
He also complained about the behavior of management and directors at the meeting, noting, “There is not one forward-looking comment here.”
Cooperman later stormed out of the meeting.
Investor Friedman also complained that the board was not strong enough in directing Wachner, and said, “It’s a farce, this board of directors.”
Another investor, who identified himself as John Howden, complained about the company’s large debt.
“We’re now sitting at $1 billion-plus in long-term liabilities,” he said. “There is nothing anywhere in the annual report or anywhere else that explains why we continue to buy other companies when we can’t even run what we have right now.”
William Finkelstein, senior vice president and chief financial officer, noted that as recently as three years ago, the company’s long-term debt was only $300 million. He said Warnaco has recently racked up debt because of major acquisitions, including ABS by Allen B. Schwartz and Authentic Fitness, and noted that those acquisitions increased cash flow.
Also at the meeting, a number of representatives of socially conscious investment organizations spoke on behalf of a shareholder proposal that the company provide more information on its labor-monitoring efforts.
“The sweatshop issue and global labor conditions in general continue to attract a lot of attention,” said Karen Leahy, analyst with Citizens Funds. “As shareholders, our concerns are the negative repercussions for Warnaco.”
Another speaker, Rev. David M. Schilling, director of global corporate-accountability programs at the Interfaith Center on Corporate Responsibility, noted, “One of the things that is being asked of companies is to become more transparent.”
Stanley Silverstein, vice president, general counsel and secretary, said Warnaco believes it has adequate labor-monitoring programs in place. He added that the company could hurt its business by providing detailed information on its wages and sourcing practices to the public.
“Like it or not, we are involved in a very competitive industry,” he said. “We will not share specific information about specific factories. We don’t believe it is necessary or appropriate.”
The proposal did not distract most of the two-to-three-dozen participants in the meeting from the stock issue and was voted down.
Another shareholder asked Wachner about the company’s controversial move to sell Calvin Klein underwear to J.C. Penney Co. Inc. That decision managed to rankle certain key accounts, namely Dillard’s and May, who either eliminated or cut back on the brand.
But Wachner responded, “It’s doing very well. It has not hurt my business in the U.S. arena.”
She also said that the move is necessary, given the ongoing consolidation of the department store sector. When she took over the business in the mid-Eighties, she said, the company had 2,800 department and specialty store doors to call on. “Of that 2,800 doors, today there are 1,700,” she said. “It’s important that we keep growing our business.”