WPS sees shares drop despite strong 2Q

Heath E. Combs, Don Hogsett, July 29, 2002

West Point, GA — When Wall Street says "show me," it's usually talking about what a company is going to do, not what it's already done. And with that dictum in mind, anxious investors trashed WestPoint Stevens stock last week, slamming it down by more than 40 percent in value, to $1.60 a share, when the textiles giant reported stronger than expected sales and earnings for the second quarter, but then lowered its sales and profit forecast for the second half of the year, citing an uncertain economic outlook.

It should have been a red-letter day for the major mill, with smiles all around, when it recorded a second-quarter profit of $2.0 million, recovering from a year-ago loss of $17.5 million. And in even more good news, WestPoint reported that sales jumped up a double-digit pace, increasing by 11.9 percent, to $449.6 million from $401.7 million last year.

And there was more good news to go around. Margins were up substantially; operating costs were whittled down; long-term debt and interest expense were both reduced modestly; and the company boosted its cash position.

What was not to like? Clearly, the outlook for the second half. Rattling already jittery investors, and sending its stock into free-fall, WestPoint hoisted a yellow caution flag and reduced its sales and earnings forecast for the second half of the year citing "general uncertainty about retail demand for the latter part of 2002."

Revising earlier guidance to analysts, WestPoint lowered its forecast for earnings per share to $0.35 to $0.40 from an earlier forecast of $0.45 to $0.50 a share. And the sales target was lowered to 2 percent to 4 percent growth from an earlier estimate of 4 percent.

That was all that it took to jar antsy investors, whose nerves were already jangled by a tumbling stock market, a rash of accounting scandals and an uncertain outlook for consumer spending and retail sales. Taking their chips off and locking in their profits after an earlier run-up in share price over the past few months, investors battered WestPoint shares down by 40.7 percent in value, or $1.10 a share, to a level of $1.60 a share in unusually heavy volume. By 1 p.m. last Wednesday, the day WestPoint announced its earnings, better than 1.6 million shares had changed hands, more than three times the average daily trading volume. Adding insult to injury, it all took place on a day when the stock market finally reversed course, and the Dow was climbing up by more than 150 points.

Was the market over-reacting? "No, I don't think so," said Jeff Stewart, a high-yield textiles and apparel analyst at Wachovia Securities, Charlotte, NC. "I think the stock had a high valuation based on strong earnings prospects and improving margins going into next year. So when they took down their estimates, it sent out a really bad signal, especially after insiders had been selling off their stock during the quarter. I think it indicates that if business doesn't improve, and they can't improve their margins and generate more cash, they might have trouble refinancing their debt if they can't do better than this."

Stewart commented, "So, no, I don't think people over-reacted. I think they may have over-reacted on the positive side when they ran the stock up on the promise of stronger earnings and margins moving into 2003."

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