November 9, 2009 - Warnaco Group (WRC-NYSE) together with its subsidiaries, designs, sources, markets, licenses, and distributes intimate apparel, sportswear, and swimwear worldwide. It provides sportswear for men, women, and juniors, such as jeans,knit and woven shirts, tops, and outerwear; intimate apparel, including bras, panties, sleepwear, loungewear, shape wear, and daywear for women, and underwear, briefs, boxers, T-shirts, loungewear, and sleepwear for men; and swimwear for men, women, juniors, and children comprising swim accessories and fitness and active apparel.

As of January 3, 2009, it operated 902 Calvin Klein retail stores worldwide consisting of 88 full price free-standing stores, 83 outlet free-standing stores,1 on-line store, and 730 shop-in-shop/concession stores, as well as 1 Speedo on-line store. It also had 586 Calvin Klein retail stores operated by third parties under retail licenses or franchise and distributor agreements. The company was founded in 1874 and is based in New York, New York.

Here's what caught my eye about WRC: revenues stalled but earnings continually improve. Example: in 2006, sales were $1.827 billion, then in 2007, they were $1.822 billion. Last year, they improved to $2.065 billion, but this year, analysts see the total at $1.97 billion. Then next year, expect $2.06 billion. While sales are somewhat stuck, earnings follow a better pattern: in 2006, $1.57. In 2007, $2.26, then $2.66 last year. This year, consensus from 7 analysts is for $2.77, then $3.14 in 2010, both new records. Management has done a good job for shareholders as this economy hurts the top line.

The stock did very well up until the third quarter of last year. At the time, it traded at its all-time high of $53.90. But then it hit the wall, or maybe the wall hit it. In any case, investors got scared and dumped the stock, driving it all the way down to $12.22 a share in November of last year. It's rallied since then and reached $45.75 on September 29 of this year. It's about 10% below that now. Can it fully recover and reach new highs?

The Calvin Klein line is the big seller internationally. In Europe, the underwear division is doing very well whereas in most other continents, its the jeans division that sells the most product. The opportunities for growing the brand through cross-selling and taking advantage of its already in-place distribution capabilities bodes well for further market penetration internationally.

The company is also revving up its retail stores, the ones it owns. Management wants revenues from these operations to grow from the current level of 21% to 30% within 5 years, half of it to come from international sales. With that planned growth, the company is expanding retail square footage by 20% a year, a rate that should be exceeded this year at the current rate of store openings. Same store sales, in the second quarter, advanced by 1.2% when compared to a quarter last year that saw same store sales rocket by 22%. For the September quarter, analysts believe comparable sales will show an increase of 3.3%. Most retailers have decreases this year.

Some lines, such as Chaps in the mid-tier levels, have more expansion possibilities including denim offerings and other product extensions. However, swimwear (Speedo) and intimate apparel have just about reached market saturation. Management is focusing on improving profits from these divisions by more efficient processing, distribution and better inventory contols.

More numbers: Fourth quarter profits are estimated at 56 cents a share, well above the 29 cents in the fourth quarter of last year. Look for $1.01 in the first quarter, a little ahead of the $1.00 of this year's first period. Market Cap is $1.9 billion. Forward P/E is 13.25. Price to book is 2.22. Book value is $18.86 a share. Operating margin for the last 12 months was 8.02% while Profit margin was 3.3%. There's $177.6 million in cash which is $3.91 a share. Total debt is $221.94 million or about 16% of capital. Current ratio is 2.6. Beta is a high 1.67. There are 45.42 million shares outstanding. Insiders own 1.18%. Institutions own almost 100% of the float. There is no dividend.

Look deeper into Warnaco. Management delivered good earnings in a tough economic climate. Record earnings are forecast for this year and next. Maybe the old highs will be broken. But watch out for the value of the dollar. It could adversely affect earnings if it gets too strong and makes U.S. made goods more expensive overseas.

- Company Web site: www.warnaco.com

Ted Allrich