Double-digit sales dip has WPS seeing red

Don Hogsett, November 4, 2002

West Point, GA — With sales falling off at a double-digit pace, and ringing up $10.3 million in new restructuring costs and $3.2 million in bad debt expense stemming from the Kmart bankruptcy, WestPoint Stevens recorded a third-quarter loss of $16.6 million, slipping back into the loss column after a $3.6 million year-ago profit.

With sales declining in every single product category in the midst of a widespread slowdown at retail, sales at the textiles giant dropped by 10.3 percent, to $460.5 million from $513. 1 million last year — an unnerving shortfall of $52.6 million.

Generating the deep quarterly loss, in addition to the sales decline, WestPoint recorded a $10.3 million charge as it reconfigured operations at one of its manufacturing plants, shifting from terry to basic bath to basic bedding production, and shut down some of its unprofitable retail stores. Both new restructuring moves, designed to save about $10 million a year, had been announced earlier, during September.

Taking another big hit, the major mill put up a $3.2 million bad-debt charge stemming from the bankruptcy of its single-biggest customer, Kmart, where it's a major supplier to the Martha Stewart Home program.

Even excluding all the one-time items, WestPoint recorded a loss in the quarter of $6.3 million, or $0.13 a share, almost twice the size of the deficit Wall Street and investors had been expecting. A consensus Wall Street forecast had pegged the pre-charge loss at about $0.07 cents a share.

But Wall Street seemed to shrug off all the bad news, or had already factored it into the share price, and in early trading last Friday morning, in the hours after the results were released, WestPoint stock had declined just a penny a share, to $0.78, a modest dip of 1.3 percent.

Squeezed thin by the one-time charges, average gross margin narrowed by 440 basis points, or 4.4 percentage points, more than offsetting the benefit of lower cotton costs.

Acting as a further drag on the bottom line, operating costs climbed sharply higher, rising by 8.7 percent, to $70.6 million from $65.0 million a year go. Hurt by the sagging sales, the expense ratio weakened by 260 basis points, or 2.6 percentage points, climbing to 15.3 percent of sales from 12.7 percent the prior year.

Providing some relief, WestPoint reduced its interest expense by 10.7 percent, to $33.7 million from $37.8 million last year, generating a cash savings of $4.1 million. But even after paying down part of its debt load and shedding some of the debt service, WestPoint was still paying about one dollar in interest expense for every 14 sales dollars.

Holcombe Green Jr., chairman and ceo, emphasized that even with the loss, "we are in compliance with all financial covenants and continue to have substantial liquidity."

Given the weak third quarter, WestPoint said it now expects to post a loss for all of this year of $0.10 to $0.15 a share "on flat to modestly up sales."

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