WARNACO SHARES SINK DESPITE NEW CREDIT AND BIG COST CUTTING

Byline: Vicki M. Young

NEW YORK — The Warnaco Group again revised its earnings expectations downward Thursday, and even word of new credit facilities, a 10 percent reduction in its workforce and other serious cost-cutting measures weren’t sufficient to ease Wall Street’s disappointment.
Shares of Warnaco hit yet another 52-week low, nose-diving 26.9 percent to 4 15/16 on news that it 52-week low, nose-diving 26.9 percent to 4 15/16 on news that it would report operating earnings between 26 cents and 36 cents, before charges and investment gains, far below Wall Street estimates of $1.74 a share.
The apparel manufacturer disclosed its earnings guidance in an announcement Thursday that it reached a refinancing agreement with its banks to amend and extend up to $2.9 billion of existing financing facilities through Aug. 12, 2002. The commitments came from holders of $1.7 billion of the company’s worldwide debt facilities, which include: The Bank of Nova Scotia, Salomon Smith Barney Inc., Citibank N.A., Morgan Guaranty Trust Co. of N.Y., Commerzbank A.G. and Societe Generale.
The agreements, which give Warnaco an additional $500 million trade credit facility and $600 million bridge loan, are set to close in September provided certain closing conditions are met. The current $500 million trade credit agreement and $600 million bridge loan facilities are set to mature in July and October, respectively.
Warnaco said that upon satisfaction of completion of the planned transactions, the company “will have no material debt maturing prior to August 2002.”
Of course, debt has long been an issue for the company. Warnaco had about $1.4 billion in outstanding total debt as of June 30, 2000. One analyst told WWD that the “gap in the debt to equity ratio is too big. The ratio is over 2 to 1.”
Warnaco also said it will need to take a $60 million to $70 million aftertax charge in the second quarter because of global operating initiatives recently launched. Warnaco said the initiatives will create an “annualized pretax savings estimated at $42 million per year going forward” and will begin to be “realized upon completion of the initiatives in the fourth quarter of 2000.”
But Wall Street — wary from frequent downward guidance — may not be buying into Warnaco’s lofty plans.
One analyst pointed out, “This is the fourth time management has guided us downward. In this case, this is not a small revision. The execution is just not there.”
Matthew Hershberg, equity analyst at Standard & Poor’s, said, “If they continue to do what they’re doing and become distracted by lawsuits, or by problems with materials or marketing or labor or any combination of the above, they are likely to have to file for bankruptcy at some point. The simple part is that it’s very difficult to imagine them performing well enough to be profitable going forward, despite the promises of management.”
Hershberg in June downgraded Warnaco to “avoid” from “hold,” in part because of the Calvin Klein lawsuit, reported in these columns, and because of Warnaco’s inability to turn their product into profits.
Another analyst commented, “I’ve heard that pitch before, but management can’t execute. Warnaco has a bad image on the Street because of the amount of debt on the books.”
David T. Shapiro, credit analyst at S&P, on Thursday placed Warnaco’s triple-“B”-minus corporate credit rating for the firm on its CreditWatch with negative implications. The double-“B”-rating on Designer Finance Trust’s preferred stock, guaranteed by Warnaco, was also placed on CreditWatch with negative implications.
According to Shapiro, he issued the CreditWatch listing because Warnaco said that the refinancing package would result in “higher interest expenses, which will further pressure credit measures that are already weak for the rating.”
Moody’s Investors Service, the other ratings agency, last month placed Warnaco on review for possible downgrade of its debt rating.
That move, which followed the Calvin Klein lawsuit, was based on Moody’s “concerns about Warnaco’s weaker-than-expected margins, due largely to a heavily promotional environment at retail,” the agency said at the time.
Both Moody’s and S&P noted that Warnaco has been affected by the loss of customers due to consolidation and bankruptcy.
Warnaco’s initiatives include:
Reduction of Warnaco’s worldwide employment workforce by 10 percent.
Consolidation of nine distribution centers into three central distribution centers in Europe. Consolidation of the Authentic Fitness and Warnaco manufacturing organizations.
Centralization of worldwide finance and manufacturing responsibilities, while maintaining sales and marketing business units in key countries.
Consolidation of manufacturing for intimate apparel through the closing of three manufacturing facilities and one cutting facility.
Can Linda Wachner, Warnaco’s chairman and chief executive officer, turn the company around? She still has her defenders among apparel industry observers.
Emanuel Weintraub, head of the retail consulting firm that bears his name, said, “I have a lot of confidence in Wachner. The issue is whether it has put itself in a position where it has stretched its financial hat and later on can’t go through the bumps. It would be a shame because Warnaco owns some good [brands], notwithstanding the Calvin Klein litigation which has to play out.
The problem is that a company could miss the mark for Wall Street and still be in good shape financially because of its cash flow. You also have to realize that the apparel sector is only getting 3 to 4 percent growth. Wall Street wants 10 percent. Where does a company get that 6 percent to satisfy the Street?”
One way for Warnaco to grow is through an acquisition. The company tried to do that, but was rejected by Calvin Klein, despite a $900 million bid. And despite the debt such an acquisition would bring, sources said it would have been a a strategic growth vehicle for Warnaco, which has had two straight years of earnings disappointments. And its heavy leverage makes it an unattractive candidate to be the target of an acquisition.

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