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Warnaco Group Inc. registered decent third quarter 2011 adjusted earnings of $1.07 per share, in-line with the Zacks Consensus Estimate. However, it exceeded the prior-year earnings $1.04 per share by 2.9%.

The adjusted earnings excludes restructuring expenses, pension expenses, tax related items and other items. Including these items, earnings came in at $1.13 per share versus 90 cents in the prior-year period, which included a tax benefit of approximately $8.6 million.

The upswing came on the back of success in Calvin Klein business, and expansion into emerging markets globally coupled with enhanced direct-to-consumer business.

Based on the third quarter, Warnaco continues to anticipate its fiscal 2011 outlook for adjusted earnings per share at $4.00-$4.15. Including one-time expenses and based on foreign currency exchange rates, Warnaco expects its reported earnings per share to be in the range of $4.08-$4.19 for fiscal 2011.

The current Zacks Consensus Estimate is $1.00 per share for the fourth quarter of 2011. The estimate for  full year 2011 is $4.02.

Consolidated Revenue and Margins

Warnaco’s quarterly net sales climbed 8% to $645.1 million compared with $596.8 million in the prior-year period, driven by the company’s investment in the long-term growth strategies, which contributed 10% to its worldwide Calvin Klein net sales, a 16% increase in the international net sales and a 31% gain in the direct to consumer net sales.

However, the increases were more than offset the 3% reduction in U.S. net sales. Sales were behind the Zacks Consensus Estimate of $656 million.

Square footage expansion of 35% and a 2% increase in comparable store sales drove a substantial 31% year-over-year growth in direct-to-consumer net revenues.

All the company’s segments of Sportswear, Intimate Apparel and Swimwear reported revenue gains of 6.2%, 11.1% and 7.2%, respectively.

Warnaco continues to expect its total net sales growth of 10%-12% in fiscal 2011.

Gross profit increased 4% to $279.7 million in the third quarter of 2011 while gross margin declined 170 basis points to 43% on the back of increased product costs, increasing level of customer allowances and weak business environment in select markets, offsetting strong gross margins in the company’s Asian business.

Year-over-year, operating income has shrunk 4.6% to $64.8 million while operating margin contracted 100 basis points in the quarter to 10%. The company faced declines in the U.S., Canada and Europe. However, the company’s Asia and Latin America businesses did well in the quarter.

The foreign currency fluctuation led to a $26.3 million increase in net sales and a $9.9 million increase in gross profits in the quarter.

Other Financial Updates

The company exited the quarter with cash and cash equivalents of $179.3 million at October 1, 2011, down from $213.4 million as on October 2, 2010.

Inventories increased 21% to $392.1 million from $324.4 million, driven by the company’s expansion of direct-to-consumer business and rise in product costs.

During the quarter, the company repurchased approximately 2.5 million shares for approximately $123.2 million.

Warnaco designs, sources, markets, licenses, and distributes a range of intimate apparel, sportswear, and swimwear worldwide. The company offers its products primarily under the Calvin Klein, Speedo, Chaps, Warner’s, and Olga brand names.

The company operates in a highly competitive apparel industry with tough competitors like Limited Brands, Inc. and Maidenform Brands, Inc. . Moreover, Warnaco depends on license agreements with third parties for generating a significant portion of its revenues, which have inherent risks.

Warnaco currently holds a Zacks #4 Rank, which translates into a short-term Sell rating. On a long-term basis, we provide a Neutral rating to Warnaco.

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