The company incurred a $12.0 million impairment charge pertaining to the note receivable related to its 2008 sale of Lejaby® to Palmers Textil AG, referred to as the Lejaby impairment charge.
Income per diluted share from continuing operations was 23 cents, compared to $1.01 in the prior year quarter, while income per diluted share from continuing operations on an adjusted, non-GAAP basis was 72 cents compared to 82 cents in the prior year quarter (which excludes restructuring expense, pension expense, tax-related items and, for the current quarter, the Lejaby impairment charge).
“Our second quarter results were in line with our projections. As expected, a positive performance in Asia and Latin America during the quarter offset softness in Europe and the U.S. Despite a decline in comparable store sales, reflecting challenging macroeconomic conditions, our Calvin Klein direct-to-consumer business was up 6 percent in constant currency, further validating our core international and retail expansion strategies. Speedo had a great quarter reflecting the benefit of our Olympic initiatives as well as the kickoff of our segmentation strategy, which will drive future growth for the brand. In addition, we continued to exercise disciplined control over our expenses while continuing to invest in our direct-to-consumer expansion. We took further action in Europe, as we previously announced, to position the business for improved operating performance over time,” commented Helen McCluskey, Warnaco’s President and Chief Executive Officer.
“We are making progress in reshaping our organization to reflect the consumer-centric vision I outlined earlier in the year. We are very excited about the caliber of talent we are attracting to our design and merchandising teams as we consolidate the group into New York. We are confident that we are taking the appropriate actions to ensure that these changes will have a significant benefit for the business over the long term.”
“In the near term, looking ahead to the second half, with good visibility to forward bookings and more favorable product costs, we expect second half net revenue and gross margin to increase and to meet our projections for the balance of 2012,” concluded McCluskey.
Adjusted Fiscal 2012 Outlook
For fiscal 2012, primarily based on the adverse effect of recent foreign currency exchange rates, the company now anticipates:
- Net revenues, on a reported basis, will be down 2 percent to flat (up approximately 2 percent - 4 percent based on constant currency) compared to fiscal 2011; and
- Adjusted, non-GAAP, diluted earnings per share from continuing operations (excluding restructuring expense, pension expense and the Lejaby impairment charge) in the range of $4.00 - $4.15.
Prior guidance was for net revenue growth in the range of 0 percent-2 percent (and 2 percent-4 percent based on constant currency) compared to fiscal 2011 and adjusted, non-GAAP diluted earnings per share from continuing operations (excluding restructuring expense and pension expense) in the range of $4.00 - $4.25.
Second Quarter Highlights
Net revenues fell 5 percent to $563.9 million, compared to the prior year period and were flat in constant currency. In the quarter, a 10 percent increase in Swimwear Group net revenues, fueled by a powerful performance from Speedo®, were more than offset by declines in Sportswear and Intimate Apparel net revenues. Challenging market conditions, particularly in the U.S. and Europe, a more promotional environment and the unfavorable effects of fluctuations in currency exchange rates adversely affected the company’s net revenues.
Gross margin decreased 130 basis points to 42 percent of net revenues, compared to the prior year period, due primarily to product cost inflation, increased customer allowances and the effects of currency fluctuations. Gross profit decreased 8 percent compared to the prior year quarter to $238.9 million. Selling, General & Administrative “SG&A” expense was down 2 percent, compared to the prior year quarter, to $199.3 million; however, as a percentage of net revenues, SG&A expense increased 110 basis points to 35 percent of net revenues. SG&A, in the quarter, was adversely impacted by approximately $13.1 million of restructuring expense as well as increased expense related to the company’s growth in its direct-to-consumer square footage, which was more than offset by disciplined expense control related to its wholesale businesses and lower employee compensation and professional fees.
Operating income was $32.8 million, a decline of $19.8 million, or 38 percent, compared to the prior year quarter, and includes approximately $16.2 million of restructuring expense.
Other expense was $12.9 million compared to other income of $0.2 million in the prior year quarter. The increase was primarily due to an impairment charge to the company’s receivables recorded in the quarter (related to a note issued by Palmers Textil AG in connection with the company’s 2008 sale of the Lejaby business to Palmers) as the company now expects that a portion of the receivable might not be collectible.
Income from continuing operations decreased to $9.6 million, or 23 cents per diluted share, compared to $45.6 million, or $1.01 per diluted share, in the prior year quarter. On an adjusted, non-GAAP basis (excluding costs related to restructuring expense, pension expense, the impairment charge related to the Palmer’s note and tax-related items), income from continuing operations was $30.2 million, or 72 cents per diluted share, compared to $37.0 million, or 82 cents per diluted share, in the prior year period.
The effect of fluctuations in foreign currency exchange rates for the quarter decreased net revenues, gross profit and SG&A by $27.2 million, $12.8 million and $11.9 million, respectively, compared to the prior year quarter and had an immaterial effect on income per diluted share from continuing operations. An additional discussion regarding the effects of fluctuations in foreign currency exchange rates on operating results can be found in the company’s Form 10-Q, for the quarter ended June 30, 2012, which will be filed with the Securities and Exchange Commission.
The effective tax rate in the quarter was 42 percent, compared to 9 percent in the prior year quarter. The second quarter’s effective tax rate primarily reflects a year-to-date adjustment based upon a higher estimated annual effective tax rate, while the prior year quarter reflects the benefit of approximately $10 million related to the recognition of net operating losses in a foreign jurisdiction. The company expects its full year Fiscal 2012 adjusted non-GAAP effective tax rate to be approximately 32.5 percent.
Balance Sheet
Cash and cash equivalents at June 30, 2012 were $295.3 million compared to $294.8 million at July 2, 2011. During the twelve month period ended June 30, 2012, the company used more than $138.4 million to purchase 2.9 million shares of its common stock, under its Board authorized repurchase programs, including 200,000 shares purchased in the second quarter 2012, for approximately $8.8 million. The company ended the quarter in a net cash position of $43.0 million.
Inventories at June 30, 2012 were $330.6 million, down $24.8 million (or 7 percent) compared to $355.4 million at July 2, 2011. Disciplined inventory management and fluctuations in foreign currency exchange rates more than offset inventory increases related to the expansion of the company’s direct-to-consumer business as well as increased product costs. The company remains comfortable with the quality of its inventory and expects inventory to decline through the remainder of fiscal 2012.
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