Lower manufacturing levels and tough FOREX conditions have led to Tefron Ltd reporting a fall in revenues and earnings per share in the second quarter.

The apparel and active wear producer said that second quarter revenues were US$40.6m, representing an 18.3% decrease from second quarter 2006 revenues.

The decrease in revenues in the quarter was due to a reduction in sales of active-wear and intimate apparel during the quarter. This reduction was partly offset by a slight increase in sales of swimwear, the company said.

Second quarter gross margin was 14.0%, compared with a gross margin of 21.7% in the second quarter of 2006. Operating income totalled $1.0m (2.5% of revenues), compared with $6.6m (13.4% of revenues) in the second quarter of 2006.

"The decline in gross and operating margins in the second quarter was primarily due to the lower revenue and manufacturing levels in the quarter. In addition, the significant devaluation of the US Dollar versus the New Israeli Shekel, as well as the previously identified price reductions in older collections of Tefron's intimate apparel product line also impacted margins," a statement said.

Income from continuing operations was $0.8m, compared to $4.5m, in the second quarter of 2006.

Yos Shiran, CEO of Tefron, said: "Our second quarter results were in line with our updated expected financial results which we outlined in our announcement a month ago. Our active-wear sales were significantly reduced in the second quarter mainly due to a delay in orders. Our intimate apparel product line sales were also down in the second quarter mainly due to a reduction in sales to Victoria's Secret of older Cut & Sew collections which have been under continuous price pressure since the beginning of the year. Additionally, we have been informed by Victoria's Secret that they intend to gradually transfer their sourcing of an old Cut & Sew cotton program to India beginning next year. We do not expect this to have a material impact on our 2008 intimate apparel revenues and profitability."

Shiran continued: "For the third quarter, we expect active-wear and intimate apparel sales to decline compared to the third quarter of last year. Seasonally, swim-wear revenues are the lowest in the third quarter, and accordingly we expect overall revenues in the third quarter to be below those of last year. We believe the lower revenue level will lead to a net loss of around $1m in the third quarter. However, given our expectations for improved active-wear sales in the fourth quarter mainly due to positive indications received from Nike for increased 'next generation' product orders, and a seasonally stronger quarter for swimwear sales, we expect a strong improvement in sales and margins in the fourth quarter compared to the second quarter of 2007."