The Warnaco Group Inc. ( ) reported third quarter 2012 adjusted earnings of $1.15 per share, which beat the Zacks Consensus Estimate by a penny. Cost control, coupled with strong business by brands like Calvin Klein and Speedo led to the earnings beat. Earnings also grew 7.5% year over year from $1.07 per share.

Consolidated Revenue and Margins

Warnaco’s quarterly net sales slipped 5% from the prior-year quarter to $611.5 million. Net revenue, on a neutral currency basis, was flat year over year. The sales decline was a result of poor business in Sportswear and Intimate Apparel coupled with macroeconomic headwinds in the U.S. and Europe and unfavorable foreign currency translation. Sales missed the Zacks Consensus Estimate of $640.0 million.

Gross profit decreased 5% from the prior-year quarter to $267.0 million in the third quarter, while gross margin grew 30 basis points to 44% in the quarter owing to optimization of product costs, positive product mix and increase in efficiency. Operating income grew 4.7% year over year to $75.4 million. Adjusted effective tax rate increased 170 basis points from the prior-year quarter to 32.7% in the reported quarter.

Segment Details

Net sales in the Sportswear Group went down 5.7% year over year to $337.4 million in the third quarter. Net sales grew 0.2% on a constant currency basis. The segment reported a 9.5% year-over-year rise in operating income to $29.5 million, representing 8.8% of net revenue.

Intimate Apparel Group net sales declined 6.3% from the prior-year quarter to $232.2 million. Net sales declined 2.9% on a constant currency basis. Operating income of the Intimate Apparel Group segment grew 6.7% year over year to $41.2 million in the third quarter, representing 17.7% of net revenue.

Swimwear Group net sales went up 6.7% from the prior-year quarter to $42.0 million. Net sales climbed 9.2% on a constant currency basis. The segment’s operating loss widened by 8.5% to $429 million in the third quarter.

Other Financial Updates

The company exited the quarter with cash and cash equivalents of $311.0 million as of September 29, 2012 compared with $295.3 million as of June 30, 2012.

Inventories declined 1% from the prior-year quarter to $388.8 million in the third quarter of 2012.

Merger with PVH Corp.

On October 31, 2012, The Warnaco Group announced a merger agreement with PVH Corp. ( PVH - Snapshot Report ) . According to the agreement, PVH will acquire Warnaco for $2.9 billion and will gain the rights of Warnaco’s most popular brand, Calvin Klein. PVH Corp will benefit from the acquisition over the long term as its product portfolio will comprise some of the leading apparel brands. Over three years, PVH expects annual run rate synergies of $100 million from the acquisition. The merger is expected to close in early 2013.

Guidance

Based on third quarter 2012 results, Warnaco maintained its full year 2012 adjusted EPS outlook in the range of $4.00 – $4.15. Warnaco expects its reported earnings per share to be in the range of $2.97–$3.00 compared with its previous guidance of $2.94–$3.00 per diluted share. The Zacks Consensus Estimates for the fourth quarter and full year 2012 are pegged at $1.24 and $4.05 per share, respectively.

For 2012, Warnaco anticipates total revenue to be flat to down 2% year over year.

Warnaco is poised to benefit from the fact that its peer HanesBrands ( HBI - Analyst Report ) is focusing on premium brands and increasing prices in these categories while consumers prefer to opt for more competitively priced brands. This provides the company an edge over its peers. In addition, the new organizational structure of Warnaco is geared to increase productivity, which will position the company better in the international market. However, the high cost of cotton has been crippling the performance of the company for consecutive quarters. Moreover, the company’s high dependence on international sales makes it vulnerable to the macroeconomic and currency headwinds in the global economy.

We currently have Neutral recommendation on Warnaco. The stock carries a Zacks #3 Rank (short-term ‘Hold’ rating).