Zacks_Analysts' Blog : Warnaco Beats Estimate, Ups Guidance - Analyst Blog

Warnaco Group Inc. (WRC) reported third quarter 2010 earnings of $1.04 per share, beating the Zacks Consensus Estimate of 95 cents per share. Earnings per share (EPS) increased 40.5% year-over-year and 46.5% sequentially.

Quarter In Detail

Net revenues increased 14.6% year-over-year to $596.8 million and was well above the Zacks Consensus Estimate of $581 million. The increase was primarily attributable to the 21% increase in company’s direct-to-consumer business.

Increase in the net revenues was also helped by 12% year-over-year increase in its Calvin Klein business. Calvin Klein contributed for 79% of the net revenue.

Expansion in direct-to-consumer and international business led to a 120 basis points, year-over-year, increase in gross margin to 45%. Management cited the expansion of the direct-to-consumer strategy, marketing in support of the company’s growth initiatives, infrastructure costs and employment compensation on performance basis as the main components for the rise in gross margins.

Operating income increased 12.6% from prior year quarter to $67.9 million.

As on October 2, 2010 Warnaco had a net cash of $143.8 million and increased $123.4 million from the prior-year quarter. Cash and cash equivalents were $213.4 million and decreased $15.9 million year-over-year. Warnaco had spend approximately $11.8 million of cash to purchase 247, 000 shares of its common stock, under a share repurchase program, in the quarter.

Guidance and Estimates

The company has performed well under the uncertain macro-economic condition and management expects to carry forward the growth into the following quarter and has raised its guidance for fiscal year 2010.

Management raised the net revenue guidance for 2010 to be 11%-13% from a previous guidance of 9%-11%. The company also expects the EPS from continuing operations to be in the range of $3.45-$3.55. The previous guidance was in the range of $3.40-$3.50. Zacks Consensus Estimate had estimated the EPS to be $3.52 for 2010. This estimate was raised from a previous estimate of $3.46 after 6 analysts giving positive revisions and none lowering their estimates.

Zacks Consensus Estimate for next year is $4.07; up from $3.98 thirty days ago, after 5 analysts gave positive revisions and one analyst lowered his or her estimate. The Zacks Consensus Estimate for the quarter had been trending up in the run up to the earnings release, with 5 analysts raising estimates in the last 30 days.

Our Take

Warnaco's strong international presence is encouraging and should drive growth. However the highly competitive apparel industry concerns us.

We currently have a Zacks #3 Rank on Warnaco shares, which translates into a Hold rating on short-term basis.