Apparel company Warnaco
Former shareholders may see irony in this acquisition. The company had settled a very public battle with Calvin Klein in early 2001. In June of the same year, Warnaco, a former Wall Street darling, filed for bankruptcy. It emerged from court protection in February 2003. It's also ironic that the company will use a new credit facility to partially fund the purchase; as you may have guessed, debt contributed to Warnaco's earlier chapter 11 filing.
The acquired assets are expected to produce $240 million in revenue in 2005, which values the deal at 1.2 times sales. Warnaco shares trade for 0.7 times sales, which might help to explain the debt- and cash-based payment in lieu of a share exchange.
A portfolio full of premium-priced products bodes well for Warnaco's trailing annual operating margins of 7.6%, which still fall below the industry average of 8.1%. For that matter, competitor VF
Another bright sign: The company is implementing SAP software, for a closer look at the factors driving its profitability and cost structures. Smarter management decisions from this detailed data, combined with premium-priced products, present the promise of improved profits and higher-than-average operating margins.
Since emerging from bankruptcy, the company's stock has more than doubled. Prior to today's announcement, analysts expected earnings to grow 20% a year for the next five years. The stock is reasonably priced at 20.8 times trailing earnings.
The stock looks like a keeper, with plenty of room for operational improvement. But before jumping in, investors should remember that the company has tax-loss carry-forwards that will keep its earnings multiple looking more favorable than those of its full-tax-paying brethren for years to come.