In the money: Charges impair Warnaco recovery plan
The revamp of apparel group Warnaco’s operations – in terms of both channels and regions – has been hindered by external factors including one-off charges and currency fluctuations.
The US company’s second quarter results showed a marked downturn in profits – falling 79% to US$9.6m – but a one-off charge of $12m related to the 2008 sale of lingerie brand Lejaby was a major factor.
On an underlying basis, net income was $30.2m, compared to $37m for the same period last year, with this year’s result also affected by unfavourable currency rates.
But gross margin was also down, falling 130 basis points to 42% of net revenues thanks to a combination of product cost inflation, increased customer allowances and those currency fluctuations.
The good news came in swimwear, and Speedo in particular, which capitalised on the opportunity presented by the London Olympics to push up the division’s revenues by 10%.
“Speedo had a great quarter, reflecting the benefit of our Olympic initiatives, as well as the kick-off of our segmentation strategy, which will drive future growth for the brand,” said company president and CEO Helen McCluskey.
But sportswear and intimate apparel dragged down the company’s overall performance, thanks to what Warnaco called “challenging market conditions” in the US and Europe in particular.
The negative factors persuaded Warnaco to lower its full-year forecasts: where previously the company had predicted revenue growth of 0-2% and earnings per share of $4.00-4.25, now those figures have dropped to flat to minus 2% and $4.00-4.15 respectively.
In conversation with analysts, McCluskey maintained that Warnaco was still making good progress in transforming its business, reflecting what she described earlier in the year as her “consumer-centric vision”.
She told analysts: “Our core strategies of international expansion and direct-to-consumer growth continue to serve us well.
“Growth in emerging markets offset declines in Europe and the US, and growth in retail compensated for a decrease in wholesale revenue.”
In the second quarter, revenues in Asia rose 5%, while Latin America was up 18% – a welcome boost, given the 7% sales decline in Europe.
However, even here Warnaco scented some grounds for optimism, pointing to positive trends in northern and eastern Europe, and Germany and Benelux in particular; while Russia experienced double-digit growth.
“Despite near-term challenges in the region, Europe remains an important market and is expected to be a key contributor to our long-term growth,” McCluskey said.
However, there are still some negative signs in the company’s core business, with comparable store sales down slightly in the second quarter and underlying earnings per share from continuing operations dropping to 72 cents from 82 cents last year.
“Despite a decline in comparable store sales, reflecting challenging macroeconomic conditions, our Calvin Klein direct-to-consumer business was up 6% in constant currency, further validating our core international and retail expansion strategies,” McCluskey pointed out.
The results follow a Warnaco announcement in July that it was conducting a comprehensive review of its European business, which is likely to mean a restructuring, cost-saving measures and operating efficiencies.
That’s designed to increase profitability and, for the company at large, to increase its attractiveness to investors following a 15% dip in its stock price during 2012 alone.
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