Warnaco Retained at Neutral - Analyst Blog


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We recently reiterated our Neutral recommendation on Warnaco Group Inc. ( WRC ), a manufacturer and seller of intimate apparel, sportswear and swimwear products. Earnings of 90 cents a share in the first quarter of 2012 missed both the Zacks Consensus Estimate as well as the year-ago quarter results by 2 cents and 20 cents, respectively.

However, the upcoming Olympics event and the expected boost in Sportswear segment under the flagship brand Speedo are anticipated to pull up revenues in the near future.

The company commands a portfolio of well-recognized flagship brands like Calvin Klein, Speedo, Chaps, Warner's and Olga. Most of the trademarks are either owned or licensed in perpetuity and generate a significant portion of the company's revenue. Calvin Klein is Warnaco's most important brand, and has generated double-digit revenue growth for several years.

Keeping the upcoming Olympic Games in view, Speedo, the flagship brand of the Swimwear group, recently launched their Team Speedo collection, a new line of deck wear and team apparel inspired by their biggest swimming stars. This is expected to boost sales in fiscal 2012.

Push Positive, an innovative new product for women's Calvin Klein underwear, which is to be launched in fall 2012, should also boost the segment's revenue.

Warnaco's products are highly competitively priced. As the Intimate Apparel/Innerwear industry is highly competitive and very price sensitive, Warnaco could pose serious threat to Hanesbrands Inc. ( HBI ), which is now focusing more on premium brands and is raising prices in these categories.

This strategy looks risky as consumers with a preference for non-premium brands are shifting from Hanesbrands' high priced apparels to Warnaco's more competitively priced brands.

Moreover, Warnaco has reorganized its management structure. A new position of Chief Merchandising Officer for Calvin Klein Jeans and Calvin Klein Jeans Accessories was formed for designing, product development, merchandising and marketing for these global businesses across all channels and geographies. This reorganization will bolster the presence of the iconic brand across the globe, which is expected to boost the company's overall sales in the near future.

However, the high cost of cotton is crippling margins and hampering performance of the company. Moreover, high dependence on international sales makes the company vulnerable to global economic headwinds.

Austerity measures taken up by the European Union to combat the economic crisis in the region has affected the margins and earnings of the company and suppressed sales in the wholesale segment for several quarters. Moreover, softer results in Korea are also affecting revenues from Asia for the past few quarters.

Currently, Warnaco carries a Zacks #3 Rank (short term Hold rating).

HANESBRANDS INC (HBI): Free Stock Analysis Report
WARNACO GRP INC (WRC): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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