Warnaco Inc. (WRC) was founded in the late 1800s when two brothers, New York physicians Lucien and Ira Warner, became concerned about injuries and health problems suffered by women who wore the constricting undergarments of the day. They developed a corset that was softer and more flexible than the models then on the market, and a new industry was born. The Warner Brothers Corporation would later expand into brassieres, corselets and more. In the late Fifties Warner’s worked with DuPont (DFT) and its new Spandex fiber, Lycra, launching it into the next generation of intimate apparel powerhouses.
The Business Today
Many years, acquisitions, a leveraged buyout, and a bankruptcy later, Warnaco’s intimate apparel business now represents only about a third of total company sales, primarily through its Calvin Klein Underwear, Warner’s and Olga brands. The swimwear business, 11% of sales, down from almost 27% in 2004, is dominated by Speedo, but is also home to the Calvin Klein swimwear brand.
The sportswear business, led by Calvin Klein Jeans, is the company’s largest segment, at 52% of sales and 49% of profits last year, up from 32% and 30% in 2004, respectively. Also included in sportswear is Chaps, licensed to Warnaco by Polo Ralph Lauren (RL), which is sold primarily at Kohl’s (KSS) and a few traditional department stores. Chaps, together with the Warner’s and Olga core intimates wholesale businesses, comprise what the company calls its “heritage brands.”
Between 2003 and 2010, Warnaco sales grew 80% from $1.3 billion to $2.3 billion, making the Great Recession little more than a blip on Warnaco’s sales and income growth trajectories.
Growing Calvin Klein
The growth engine for the company has been Calvin Klein, now 75% of total sales. In addition to its ownership of the Calvin Klein Underwear brand, Warnaco has the long-term rights to Calvin Klein Jeans (the license to which it renewed with Phillips-Van Heusen (PVH), owner of Calvin Klein Inc, for another 40 years).
With the exception of minor slips in 2008 and 2009, sales and net income have grown every year since CEO Joe Gromek took over. Although first quarter 2011 earnings lagged last year due to rising costs, guidance for the rest of the year is positive, though it relies perhaps a bit too heavily on the ability to pass along some raw materials cost increases, an iffy proposition in this market. The company has a clean balance sheet with no long-term debt. The stock price, which is at around $56 these days, has drifted up by 80% over the past two years. A stock buyback program underway will help keep the stock price at attractive levels.
A couple of key questions come to mind regarding the future of Warnaco. First, as Speedo and core intimates become smaller parts of the business, will Warnaco keep them or divest of them? The company doesn’t have the worldwide rights to Speedo, and sales of the brand have little room to grow since efforts to expand into sportswear, fashion swimwear and other categories have so far failed. Second, will Phillips-Van Heusen, whose 2010 sales totaled $4.6 billion, try to do what Ralph Lauren has done, namely to buy back some or all of its licensees, such as Warnaco, G-III Apparel, Peerless, or others, to acquire full control over the product, marketing and distribution, not to mention profits? Warnaco is in the process of building a formidable global retailing infrastructure, one that could benefit P-VH in the establishment of a global Calvin Klein retail empire. Only time will tell, but we don’t rule out the possibility of a formidable merger somewhere down the road.